Who should own firms?

There’s one aspect of the collapse of Rover that hasn’t gotten anything like the attention it deserves – it undermines the traditional case for capitalist ownership and control of firms.

This case, associated with Armen Alchian and Harold Demsetz, starts from the premise that capital is specific to the firm – because it has few alternative uses – whilst labour is a general resource, which can be employed in many places.

If this premise is correct, then providers of capital should own the firm. This is because they stand to lose most if the firm fails, whereas workers can walk away to similar jobs. Capital owners therefore have the strongest incentive to maximize the value of the firm. As Armen Alchian said in The New Palgrave: A Dictionary of Economics:

A firm…is a group of firm-specific and some general inputs bound by constraining contracts, producing a non-decomposable end-product value. As a result, the activities and operation of the team will be most intensively controlled and monitored by the firm-specific input owners, who gain or lose the most from the success or failure of the firm…In a corporation the resources owned by the stock-holders are those the values of which are specific to the firm.

In Rover’s case, this story was just false. What the Phoenix four brought to Rover was a £427 million interest-free loan from BMW. Money is the archetype of a general input.

By contrast, it is Rover workers who put up the firm-specific input – because many of them will find it hard to transfer their skills to other jobs. And Rover workers have lost much more from the collapse than the Phoenix four.

By Alchian and Demsetz’s logic, therefore, Rover workers should have owned Rover – because they, not the Phoenix four, “lose the most from the…failure of the firm.”

Now, my question is: how far does this lesson extend outside Rover, to other firms? Two things suggest the answer is: very far.

First, in most publicly quoted firms, workers stand to lose more from failure than shareholders. This is because it’s easy to diversify shareholdings, but difficult to diversify human capital investments. Most of us have to put all our human capital eggs into one basket – one employer - but we can spread our equity risks easily.

Second, car firms are stereotypical old-economy firms in which physical capital matters than human capital. Most of us have therefore had a presumption that these should be owned by capitalists whereas it’s human capital-intensive firms (like law practices) that are, and should be, worker-owned. Perhaps we should revise this presumption.

If so, we face a troubling possibility. Maybe billions – trillions – of pounds of assets in capitalist economies are owned and controlled by people who are not the most efficient controllers.

Please, prove me wrong…

Comments

[Snafu]

I don't believe that the collapse of Rover undermines the traditional case for capitalist ownership and control of firms at all. If Rover workers had the most to lose from the collapse, shouldn't they have been the ones demanding investment in new models and taking pay cuts if car sales prices had to be trimmed to make Rover more competitive?

I think your underlying assumption is that workers should work collectively to maximise their firm's wealth whilst I suggest they still wish to maximise indiviual wealth. I think you also underestimate the ability of workers either to retrain far quicker than capital can be re-employed elsewhere or to seek work elsewhere in a similar role. Otherwise what you are calling for is a return to the "job for life" culture.

[Ian]

"Otherwise what you are calling for is a return to the "job for life" culture."

I agree, the assumption that Rover workers are losing long-term salary payments is not the same as the "most to lose". Salaried staff only "lose" as much as their contracted salary period stipulates, what happens afterwards is not within the realm of the company or its capital, the investment period of a worker is very short term (about a month).

[Rob]

Didn't J.K. Galbraith write something about the way that managerial structures in most large companies tended to divorce ownership from control, and that this was a bad thing, some time ago? I'd be interested to know what you think about that, having mostly forgotten what he said, and not being an economist.

[snafu]

I also suggest that if workers have very task specific skills, their employer will reward them with higher pay. This serves two purposes, an indication through the market that their skills are valued, but also a "superprofit" to the employee to balance the risk that such a unique skill set may have limited or no value to another employer.

[Kevin Carson]

snafu,

To the extent that it's a free market outcome, the "jobs for life" culture isn't necessarily a bad thing. State intervention to subsidize accumulation, R&D, and vo-tech education has (arguably) led to more skill- and capital-intensive forms of production, more technological unemployment, and faster rates of innovation, than would have occurred in a free market. If that is so, then some portion of our present job insecurity is state-subsidized.

Rob,

I believe Galbraith considered that a good thing. He regarded the "technostructure" of managers and engineers as more "progressive" than the old owner-entrepreneurs.

[Snafu]

Kevin

I'm not saying that a "job for life" is inherently bad, I just don't believe it's inherently good either and shood not be assumed to be a good thing.

You seem to make a good case for state-subsidized job insecurity, faster rates of innovation and more productive resources as there is higher technological unemployment. As far as I am concerned, that should mean the whole economy is richer than it otherwise would be as goods are cheaper to produce. For those who are technologically unemployed, I would expect them to be absorbed into industries where capital cannot readily be employed such as construction and tourism.