Ownership in question

In one of those sort of pieces that so annoys Paul Sagar, Adam Lent says we need an economy which “allows a variety of ownership structures”. But everyone agrees that this is desirable. And, indeed, we already have such an economy.
What Adam’s driving at here is a more specific question. It’s: does corporate ownership flow to the people or structures best able to control the company?
There are (at least) four reasons, several of them related, to fear not:
1. Over-confidence. In theory, firms will be owned by the people who know best how to manage them, because such people will pay most for them. In practice, though, ownership flows not to those who know best, but to those who think they know best - that is, to those who are most over-confident about their abilities. Back in 1986, Richard Roll argued that takeovers were motivated by hubris (pdf) rather than pure rationality.  The fact that mergers earn roughly zero returns corroborates this theory.
2. Capital constraints. Why does the Glazer family own Manyoo rather than people who know or care about running a football club? A big reason is that they were able to borrow heavily whilst others, who perhaps would be more effective owners, were unable or unwilling to. In this context, it’ll be interesting to see if Manyoo fans can raise the cash to buy out the Glazers.
3. Path dependency. By far the best predictor of by whom or by how a company will be owned next year is simply who and by how it is owned his year. Ownership structures are path-dependent. This might be because what was efficient last year will be efficient this. But it might instead be that inefficiencies persist because people lack the energy or imagination or incentives to change them. There are, after all, countless possible forms of ownership and control. Can we really be sure that all these forms have been considered for every company? Even Hayek thought there was potential for improvement here. In The Fatal Conceit (p35), he wrote:

The institutions of property, as they exist at present, are hardly perfect…Cultural and moral evolution do require further steps if the institution of several property [his term for private property - CD] is in fact to be as beneficial as it can be.

4. Externalities. The market for corporate control contains unpriced externalities. This is a big lesson of the banking crisis. Both shareholders and bankers were happy to have banks owned by dispersed shareholders who exercised no effective control. This arrangement, however, imposed enormous costs onto the rest of us, in the form of recession and bail-out.
This, though, mightn’t be the only form of social cost. Some might argue that debt-financed ownership imposes a social cost by reducing tax revenues. Or perhaps owners who can only maximize profits by cutting costs are, in effect, imposing a burden upon tax-payers who must pay unemployment benefit.
Herein, I think, lies one of the greatest divides between left and right. The left claims that these are significant problems, whilst the right accords them less importance.
For a long time, though, this debate was a quiet one. However, the main lesson of the financial crisis is that ownership matters more than people thought - not just for equality, but for efficiency too. So the debate should get louder.
Another thing: Apparently, Brown will put co-ops “at the heart of the Labour manifesto.” This is despite the fact that his entire time in office - the top-down target-driven public services and the fawning over business leaders - has been based upon a flat rejection of co-operative principles. Who said he was inflexible?

Comments

[Luis Enrique]

so ... we have an economy that does allow for a variety of ownership structures, but people are of the opinion that the ownership structure we actually observe are not ideal, and presumable these people also choose not to interpret the rarity of cooperatives and such like as revealing these forms of ownership are not successful in practice, but instead blame some mechanisms within financial capitalism for maintaining the status quo and preventing these form of ownership from flourishing, confident in the belief they would flourish if these constraints were removed.

so, what are these constraints, and how do we remove them? What is the policy intervention that will unleash the potential of alternative forms of ownership, without merely consisting of a subsidy for these forms of ownership that will increase their prevalence regardless of merit.
[I still think you exaggerate the role of ownership in recent financial implosion]

[Luis Enrique]

although of course if you really believe, say, cooperatives are superior to other forms of ownership, I suppose you can simply cut them a taxation break and watch them grow.

[william]

"3. Path dependency. By far the best predictor of by whom or by how a company will be owned next year is simply who and by how it is owned his year."

... or it could be just that ownership tends to change over longer timescales than one year.

[Paul Sagar]

To be fair to Paul Sagar, he did end his angry post with calls for people to look at ownership structures more.

And Adam Lent is doing that, albeit in a confused manner.

[reason]

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