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February 23, 2007



A part of Private Equity is the venture capital type that you mention - purchasing companies so as to align shareholder and manager interests better.

Isn't another important part also short term (one to two year) investments with a view to a quick exit - often a listing, i.e. a return to the inefficiency? I hate to mention Qinetiq in this context - oh, damn, I did.

Perhaps the answer is simply for shareholders to be more active - it's a hoary old chestnut, but you can't beat Warren Buffet's buy-and-hold philosophy in this regard. (www.berkshirehathaway.com)

Incidentally, I wonder who else has read his recent comments on investing in PetroChina - I think it provides some rather good answers to those questioning the ethicality of investing in companies whose affiliates operate in dubious circumstances.

Link below.

Marcin Tustin

Yes. But then, that's why I've been arguing that we need to reform property rights to allow workers to compulsarily buy companies, and parts of companies.


Pete - it's not rational for small shareholders to be more active, because of the classic problem of collective action. The costs of being active are high (it's hard work), but the benefits of better management accrue to all shareholders. So everyone's got an incentive to free ride.


Surely capitalism can't be defined as narrowly as "large companies owned by many shareholders" - I would have thought that you could have a capitalistic economy entirely consisting of private equity companies, or worker owned cooperatives, as long as they were competing with each other for profit. After all, isn't are most legal partnerships worker owned, and they seem pretty capitalistic to me.

Mark Wadsworth

How this private equity works is they buy up under-priced plc's, refinance and re-jig them, run them properly for a couple of years and then float them off again at a much higher price.

So being taken private is a bit like going into hospital - the "buccaneers" and "locusts" are only doing their job properly if they can re-float the plc later on for a higher price.


In short: no,


Mark Wadsworth has it right, and Robert Peston's article is horribly misleading. The threat of a take-over bid is the only thing that keeps managers honest - it's the true reason for the astounding success of shareholder-corporations.


I'm not sure that worker ownership would be any better for large companies. I would say that private equity "works" because it places the financial reins in the hands of a small number of people with a direct interest in the performance of the company.

In publically-owned companies, the ownership is too dilute for any single or group of owners to really do anything (although to an extent, the big pension companies have some influence).

For a company with a few dozen employees, worker ownership could well be the "best" scheme. Once you get in to many hundreds or thousands of owners, I think you hit the dilution problem again.


Chris - I take your point about small shareholders. But most shares in publicly-owned companies are controlled by institutional investors - such as the pension and insurance companies - as Sam mentioned. Not owned 100%, sure, but controlled - enough to pass ordinary resolutions and choose which directors to appoint.

Incidentally, I believe that Buffett's shareholdings are principally via his insurance companies. So clearly at least one responsible insurance manager/owner sees it as being worth their while to invest in an unofficial (breathe the word) 'partnership' with their investees.

The less talented and responsible may invest more riskily and free-ride more, of course, but that's a separate matter. Being active shouldn't necessarily mean getting involved in the daily management - just supporting good management where it occurs.


What are you all actually talking about?

There's no forthcoming "death of capitalism" or "post-capitalism". As far as I can see, there will always be big and small companies. And the big ones will always be so big that they need to seek funds from many many shareholders.

Glenn Athey

a better example to prove your thesis is comparing family owned firms to publicly owned/ or private equity owned ones.

I think there's evidence out there which suggests privately owned (family or individual) firms are better performers...


Chris - property rights don't just change becuase they are inefficient. They change because people with different interests challenge the prevailing power. Feudal property rights didn't work for the merchant classes in Europe, so they forced a change. Our own civil war and similar uphevals in Europe were part of that process. Changing the nature of property rights means that some people lose out, so they don't usually go down without a fight.

Capitalism will only die, or change into something else, when enough people perceive that it is in their interests to destroy it

Kevin Carson


Coincidentally, actual economy of scale for most goods probably peaks out at (at most) a few dozen workers. The large firms of thousands of workers exist less for productive efficiencies, than because they are better suited to rent-seeking and to exercising control over "intellectual property" [sic].

A counterpart to worker self-management would be to disintegrate the vertically integrated corporation and replace it with contractual relations between worker-managed firms.

Incidentally, Chris, I've been thinking of your quasi-new institutionalist remarks on labor-intensive production being better suited (for agency reasons) to worker self-management. It seems to me that labor presents far more agency problems than any other factor, at *any* degree of capital intensiveness. Indeed, capital intensiveness is often chosen less out of inherent efficiency than out of a need to reduce agency problems by substituting capital for labor.

Worker-managed firms are far more efficient in terms of monitoring costs. A capitalist firm typically requires three times as many foremen and supervisors as its cooperative counterpart in the same industry.


purchasing companies so as to align shareholder and manager interests better

Pablo Podhorzer

Could worker cooperatives be more efficient than their capitalist counterpart? Of course they could, at least in theory (and that's a theory that I expect to help to build). David Schweickart waken me to the importance of X-ineficciency, derived from the need of control inside a bureaucratic capitalist organization.

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