Hicks & Gillett: ownership in question

The Hicks-Gillett saga shows that, despite the impression given by Jimmy Tarbuck and Stan Boardman, great comedy can come out of Merseyside. It also throws into question the standard view about the ownership of assets generally (I’d call it the neoliberal view if I were a pretentious git.)
This says that it is efficient for the ownership of an asset to go to the highest bidder. This is because the very act of bidding most for an asset suggests that a man knows best how to maximize its value. A free market in assets, then, ensures that assets go to those best able to manage them.
Hicks and Gillett’s mismanagement of Liverpool, however, shows that this story isn’t right all the time; highest bidders - as they were once - can make a horrible mess. Which raises the question: what is wrong with this standard story? Four things:
1. Over-confidence.  It’s well-known that bidders can overpay for assets - the winner‘s curse is a cliche. This is especially likely when those bidders are entrepreneurs who have been successful in other businesses. Such men are selected twice over for their overconfidence. Once, because the very act of becoming an entrepreneur in the first place betokens an overconfidence. And twice, because previous success further raises that confidence and breeds the belief that the ability to own baseball clubs or mobile phone shops gives one the ability to own a football club.
Ownership, then, doesn’t flow to the most competent potential owner, but to the most deluded.
2. Ownership does not confer genuine power. In the case of football clubs, real power - the ability to extract cash - lies with players, not owners; Alan Sugar called this the prune juice effect. Similarly, in banks shareholders lacked power to control excessive risk-taking.
3. The collective action problem. The people with the best knowledge or incentive to manage an asset might be a dispersed group; fans in the case of football clubs or employees in the case of other companies. Organizing such a group, however, can be prohibitively tricky.
4. Capital constraints. The standard view assumes that the people best able to maximize an asset’s value will be able to raise the cash to buy it. But this needn’t be true. Even the wealthy Red Knights were unable to put together a bid for their club, so it was always going to be impossible for Liverpool fans to do so, with one job between them. And of course, the point here extends way beyond football clubs.
These four difficulties undermine the standard argument for a free market in ownership - though how much so, and in which assets, is a matter for debate.
Herein, though, lies a curious thing. In a post-crisis economy, capital constraints are more salient than they have been for years, and there is more interest than before in cognitive biases such as overconfidence. You would imagine, therefore, that the question of how to determine efficient ownership would be more hotly debated than in the past. But this does not seem to be the case.
Which I guess only goes to show that arguments that call into question the legitimacy of capitalism don’t get the airing that they should. 

Comments

[Jimmy Hill]

"These four difficulties undermine the standard argument for a free market in ownership - though how much so, and in which assets, is a matter for debate."

Quite. Although, given that essentially we don't know who the best person (or group of people) to own an asset is, surely a rule of thumb that those willing to pay for them should own them is fine?

How do we know if an entrepreneur is over confident or not? Will fans really manage a football club well (and to what extent can thousands of individuals actually manage anything)? Can any system of ownership overcome the excessive power of people in certain positions e.g. bankers and footballers?

It might be true that the person that owns an assest might not be the best person to own it. But unless we can come up with a better mechanism for deciding ownership of assests in general it doesn't really matter that much.

[Luis Enrique]

2. mitigates the others.

I know it's worth pointing out problems with some aspects of the 'justification' for a free market in the ownership of firms, but if you think legitimacy, or lack thereof, lies in the efficiency of ownership, this is inherently a comparative question. The question is - as opposed to what? I'm sure you could come up with many drawbacks of alternative systems of ownership.

re: capital constraints - it's not as if the person best able to maximize the value of Vodafone is likely to be some chap currently watching day time telly in Oldham, and even with perfect capital markets, they are unlikely to be able to afford the price tag. Outside of footy, it's not about individuals raising cash to buy firms, it's usually about shareholder owned firms hiring individuals to maximize value, including organizing buy-outs of other firms. The individual needn't have access to capital

[Neil]

"A free market in assets, then, ensures that assets go to those best able to manage them."

Not keeping up your normal standards here, Chris. No economic theorist of *any* school, to my knowledge, has ever argued that a free market means assets always go to the most qualified. What they do argue is that assets go to the ones willing and able to pay the most for them, which is such an obvious observation as to be pointless.

What liberal theorists expect to happen - and indeed what *has* happened here - is that people with more money than sense make bad investments, lose all their money, and therefore do not have the capital to purchase other assets in the future.

So on aggregate, in the long run, the action of the market is to drive *CAPITAL* into the hands of those with the expertise to invest it wisely. Other factors - including inheritance and plain dumb luck - may act in the other direction, putting money into less qualified hands, but the fact that the unqualified are able to participate in the market is not a valid criticism of the market itself.

[Tristan]

There are however serious questions as to whether accumulation of this much capital would be possible in a free market - which also mitigates these problems.

These are definitely problems in today's unfree (neo-liberal) market, but that does not make it an automatic case against actually free markets.

[chris]

@ Neil - is there any empirical evidence here? If you're right, we'd expect to see the rate of profit rise over time, as more expert owners emerge. Is this really the case?
I fear this "long term" of the free marketeers might be a utopian fiction.

[charlieman]

I think that the football analogy has been stretched too far. The clubs that are in the premiership have been around, on the most part, for 100 years. This makes them utterly unlike most other businesses.

Football clubs occasionally collapse; Leicester City is a business that trades under a traditional brand but which is distantly related to the club that sold shares to fans in the 1990s. Collapse and complete disappearance is more common in the lower leagues, but when it occurs it is remarkable.

Compare that to another high profile industry such as IT. Open one of the trade magazines from 1980 and count the number of then successful companies that exist today in roughly the same form. You should quickly spot Microsoft, IBM, HP and Apple. But you can scan the pages for hours before you spot another name that rings a contemporary bell.

If IT is unfamiliar territory, look at high street shops. C & A and Woolworths dominated them for years but disappeared in the UK.

Football club ownership is a special industry. It can only be compared with others where there is an emotional attachment with the product (vintage/classic cars, antiques, model railways). I'd say that football clubs are part of the heritage industry.

[john b]

I think Charlie's right here. The reason anyone cares about the Liverpool saga (beyond being amused by the farce and by the fact that Hicks and Gillett are going to lose all their money) is that fans are emotionally attached to clubs in precisely the way they aren't emotionally attached to supermarkets or TV manufacturers. Which supports the Spanish model for football club ownership, but doesn't have any wider implications for ownership of normal assets...

[James]

It's not "great comedy" Chris, it's unspeakably tedious..

[chris]

@Charlieman - your point that many firms don't live long is very true and very important in many contexts. But does it really invalidate my point that the market in ownership often fails?
I'd have thought the death of so many investment banks, and the failure of so many mergers, was further evidence of my point.
Yes, football clubs are different - but all industries have their idiosyncrasies.

[WhiskeyJim]

On what planet are sports teams representative of a 'free market?'

Who says another coalition will do better without 20/20 hindsight?

No free marketer would argue the straw man you just attempted to denigrate. Markets make mistakes all the time. It is called creative destruction.

If we do not use price to determine who should control an asset, what would you suggest we use? Shall we make you king? Or perhaps bureaucratic committees? God save us.

Pricing gives people a chance to extract value. It does not guarantee it, and no mechanism can or should be put in place to mitigate that risk. If we do, we have destroyed creativity and evolution, which are dependent on failure to succeed.

[Luis Enrique]

"the market in ownership often fails"

where do you get "often" from? Sometimes, OK. But for all we know, "rarely" might be a better description than "often", and this is quite important when it comes to deciding whether you think free markets in ownership is a good idea.

I think the criteria "has the owner best able to maximize the value of the asset gained ownership?" is too demanding. Let's say an entrepreneur founds a company, and at some point in time there exists an alternative owner who could do better with that company. Do we indict the free market if this alternative owner doesn't gain ownership? No. No system is always going to instantaneously and perfectly match the the optimal owner with assets.

You haven't established anything about the frequency with which, or the degree to which, the free market in ownership "fails", let alone established whether this frequency and degree is not that of the best available system of ownership.

[Neil]

Chris - The empirical evidence is right in front of you! Hicks and Gillett stand to lose something like £144 million from their dalliance with Liverpool. That is £144 million that will now not be available to them to invest in their next project.

As for expecting to see the rate of profit rise over time, what on Earth makes you think that? Where else in the whole field of economics do we see long-term rises in profit margins? Are Tesco's profit margins any wider than a good 19th-century grocer?

Competition in the marketplace squeezes profits. That's it's essential function. If there's a greater concentration of expertise in the capital markets, we'd expect to an increasing gap in the price between good investments and bad (which, sadly, is pretty hard to prove). We'd *certainly* not expect higher profits for investors, though.

Is the "long run" a utopian fiction? Depends. But if you can believe that differential survival rates as a result of minute genetic variations can over time result in the emergence of new species, you can certainly believe that differential rates of investment success can result in the emergence of greater allocative efficiency in capital markets.