A crisis of managerialism or neoliberalism?

Paul asks lefties a question: is the crisis one of managerialism or neoliberalism? I’d answer: both.

The proximate cause of our current troubles is the failure of managerialism. The banking crisis shows not so much that financial markets fail but that organizations do so. There are three (non-exclusive) ways of reading the banking crisis, all of which represent a failure of management in some sense:

- Banks did not understand the risks they were taking in mortgage derivatives, relying upon wholesale finance or taking over ABN Amro.

- There was a principal-agent failure. Either regulation failed, or shareholders failed to rein in CEOs, or CEOs didn’t appreciate the dangers their trading risks were taking. 

- Banks’ business models failed to adapt to the new conditions of the 00s, in which saving was concentrated among Asians rather than westerners and in which there was a demand for safe securities.

However, you read it, the crisis shows that managerialism - the idea that some people have the capacity to control large organizations for the better - is wrong. Managerialism is an ideology justifying big pay for bosses, not an empirical truth.

However, in two other senses, the highlights a failure of neoliberalism.

First, the deep cause of the banking crisis was a  dearth of capital investment. In a parallel universe, the high Asian savings rate would have had a happy ending. In driving down bond yields, it would have encouraged western firms to invest in new plant and technology thus making us all richer. But it didn’t. Because of the lack of investment opportunities, the savings glut was invested in the housing bubble, which burst.

I say this represents a failure of neoliberalism because neoliberalism told us that if only labour and product markets could be deregulated, (some) taxes cut and profits increased, that investment would follow. From the 80s onwards, the UK and US governments followed this advice to some degree - but investment did not follow. Neoliberals had too much faith in entrepreneurial spirits.

Secondly, the banking crisis - and the euro zone debt crises - are crises of risk-bearing. The neoliberal case for financial deregulation was that it allowed risk to be parcelled up and so be bought by those best able to bear the risks. But this was wrong. Risk ended up being concentrated in the hands of a few banks, with the result that quite small losses had terrible macroeconomic effects.

Now, you might think that one implication of what I’m saying is that the left needs alternatives to both managerialism and neoliberalism. It does. The problem is that the left’s alternative to neoliberalism (insofar as it has one) often seems to lie in a call for just a different type of managerialism - top down control by a group of people whose confidence exceeds their ability.

Comments

[Luke]

You have raised the dearth of investment opportunity here and before. Could it be that companies/managers are looking for unrealistic rates of return? So yes, they can't make much, but they could make something worthwhile. And the shareholders to whom they distribute cash look for too high a return....until eventually someone spends the money on property/commodities or whatever, but not investment in the sense of new plant/technology.

(I suspect you might have doubts about managers looking for too high a return, as they might just assume through overconfidence that they can achieve those rates - I have been paying some attention.)

[Luis Enrique]

I know you don't like "top down managerialism" but does that really mean that calls to regulate the financial sector are misplaced? I don't think so - especially if they favour simple hard to game rules, as opposed to trying to finesse things like risk weighting etc. And something in the same simple rules based spirit to address imbalances within the Eurozone.

[guthrie]

Wait, I thought the point about the rules in the financial system was that they kept getting more convoluted and complex because people kept getting round them in some lawerly fashion.

Luke has a point about unrealistic rates of return. The deeper problem is surely a debt based system with entrenched borrowing which requires higher rates of return than can usually be achieved by simple normal economic activity.

The point in the OP regarding managerialism has been the bane of the labour party for 60 or 70 years and more. The takeover by neoliberal centrists didn't change that, just added more iedological baggage against workers democracy or any sort of non-hierarchical approach, presumably because such an approach would render management by the appropriately qualified and right thinking person unnecessary.

[Zorblog]

Excellent observation, and that's the whole point, about the crisis, about the lack of alternatives of the left, and about the people whose confidence exceeds their ability.

[chris]

@Luke - yes, companies probably do demand too high returns, and under-invest because of this. But this has been the case for as long as I remember - ie into the 80s. I'm not sure therefore if it on its own explains the recent investment dearth - though it does exacerbate the problem.

[Account Deleted]

If the crisis is one of managerialism (and I agree that it is), then it is also a crisis of democracy. The almost complete absence of democracy from the central activity of most people's lives is the elephant in the room.

What's is worrying is: a) the lack of a popular movement for democratisation of work; b) the increasing assaults on democracry by managerialism (technocrat governments etc); and c) the ideological denigration of grassroots democracy in favour of populism (elected mayors and police commissioners).

The 'Big Society' is cover for a patchwork of oligarchies and cliques. It is profoundly anti-democratic. The news that Tory outriders now want votes for businesses, similar to The City, should come as no surprise. Expect to see lobbying for a property qualification shortly.

http://www.telegraph.co.uk/finance/comment/damianreece/9095992/Letting-businesses-vote-could-boost-local-economies-and-increase-jobs.html

[BenP]

"Expect to see lobbying for a property qualification shortly."

How about a tax based qualification?

http://blogs.telegraph.co.uk/finance/ianmcowie/100010127/a-tax-based-alternative-to-the-alternative-vote/

Andrew Kliman's latest would tend to back up your view; that neo-liberalism failed to mitigate a dearth of investment opportunities caused by the tendency of the rate of profit to fall.

http://www.amazon.co.uk/Failure-Capitalist-Production-Underlying-Recession/dp/0745332390

[Sean]

I dont think the neo-liberals designed the US housing market post 1995, In fact if they had I doubt things would have been as bad as they were. As I understand it the politicians designed that one, see "Reckless Endangerment" by Gretchen Morgenson and Joshua Rosner

Any engineer will tell you the problem is one of load bearing. We used to have a ship circa 1997 that could take 3000 tonnes after the Asian contagion that same ship was loaded up with 5000 tonnes and every one now seems to think the design of the ship was at fault when it sunk. when it was the idiots who loaded up the ship with the extra cargo and the folks that authorized it.

Maybe one day the "science of economics" will come up with its own form of engineering safety philosophy

[Keith]

Sean and Luke are partly right. The financial crisis is the result of expanding practices which seemed sustainable on a small scale but which did not stack up when greatly expanded. There is no way the total return to capital can exceed the long run productivity growth and the growth rate of productivity was not increased by all the "innovation" in finance. The collapse of the system is just like the railway boom for example. You can also think of the high savings rate by "Asians" as you put it as being rally a low consumption rate in china in a system that does not allow people to enjoy the fruits of productivity growth. If all of them had just been able to buy stuff rather than be forced to lend to the USA or Europe they would be better off by far. More useful goods rather than worthless paper assets. Another negative effect of an undemocratic managerial system i.e. the Chinese communist party.

[Keith]

On the other hand the response to the crisis has been lamentable. The need to boost demand by monetary and fiscal means has been almost entirely disregarded. With nominal GDP growth falling way behind trend all the consequences of the crisis are exerbated and in fact have been constantly intensified. The Hover inspired ECB are liquidating Labour and capital and whole countries on the Gold standard without the gold EURO deflation express.

[BT]

Nice post. But please don't use the words 'capital' or 'savings'. These words have do not mean the same thing to everyone.

For example: "First, the deep cause of the banking crisis was a dearth of capital investment. In a parallel universe, the high Asian savings rate would have had a happy ending."

Should read: "First, the deep cause of the banking crisis was new credit flowing into asset price speculation, rather than real investment that creates jobs and incomes. In a parallel universe, the high Asian trade surpluses that were recycled into US T-bonds would have kept interest rates low and had a happy ending."

Evidence that credit went into asset markets, rather than incomes can be seen in the rise in household debt:income ratio (or just private sector debt:GDP) since 1950. This may have resulted from the 2% inflation target restraining incomes for the majority but not asset prices. Interestingly, the rise in this ratio matches the rise in the Gini index for the US.

[Paolo Siciliani]

Luke's point is spot on. Firms in aggregate are net savers right now, and with negative real interest rates on so-called "safe assets" the lobbyists are even calling for further tax cuts to stimulate investments. This is not entreprenourial spirit but self defeating managerialism - in a sense, there is a dearth of "animal spirits" not investment opportunities. To pretend that in a period of financial repression capital budgeting rules should stick to, say, 10% IRR over the life cycle of an investment is delusional.

[Primary Teaching Resources]

The ideal primary teaching resource should contain a variety of useful features. High quality teaching resources can be the difference between a constructive, attentive and content classroom and an unproductive and idle one.

[alastair harris]

"The banking crisis shows not so much that financial markets fail but that organizations do so". WRONG. The financial markets did not fail. In fact they worked very well. Or at least well enought that it was obvious which organisations had failed. Government decision to "save" said organisations does not demonstrate market failure. Canute understood that the tides cannot be stopped. Unfortunately Brown did not understand that the economic tides cannot be stopped.

[Paul0Evans1]

Thanks for the link Chris.

I think this comment - above - is another way of putting what I was trying to say there:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/02/a-crisis-of-managerialism-or-neoliberalism.html?cid=6a00d83451cbef69e2016302383cef970d#comment-6a00d83451cbef69e2016302383cef970d

Also, you do have to wonder what planet some people are on when they say "Government decision to "save" said organisations does not demonstrate market failure." I suppose it's an accurate thing to say, but it's a bit like saying that - just because the wheels on a car aren't going around any more, it doesn't prove that there's been an engine failure....

Anyhoo,