Blindness about collective action

Vince Cable says:

The governance at the top of our leading banks has been lamentably weak...shareholders have to get a stronger grip on weak boards and out-of-control executives.

But there is a reason why shareholders do not have a powerful grip on companies, and will not even if legislation permits them greater control. It lies in the problem of collective action. For any individual shareholder, the costs of overseeing day-to-day corporate behaviour are considerable in terms of time and hassle, whilt the benefits of better governance are diffused across all shareholders, and indeed the general public.Each individual shareholder thus has an incentive to free-ride on others' efforts at oversight, with the result that shareholders collectively don't exercise effective control and company AGMs are disproportionately attended by the lunatic fringe.

This should, of course, be well known. So why doesn't Cable seem to know it?

His error is not an individual idiosyncrasy. As I've pointed out, a consistent theme of this government - from encouraging panic-buying to its attitude to welfare reform - is a failure to realize see that individually rational behaviour can be collectively self-defeating.

This is puzzling. Traditionally, it has been thought that one of the prime purposes of politics is to solve problems of collective action: to supply public goods that a free market would (might?) under-supply; to rectify market failure; to provide a legal framework which helps ensure that the pursuit of individual interest doesn't clash too horribly with the social interest.You'd expect, therefore, politicians to be especially alive to the problems of collective action - because it is such problems that (should) give them a reason for existing. And yet Cable's comment here suggests that he is as blind to this issue as the Tories.

Why? I can think of two possibilities.

First, the decision to enter politics is not taken as a result of an intellectual interest in social science, but rather as an emotional urge - something people feel they have to do, without really knowing why. Gordon Brown is a good example here. He became consumed by a desire to become PM, and yet when he achieve that office he hadn't a clue what to do with it.

Secondly, it could be that our politics has become dominated by a bastardized version of free market thinking which denies the possibility of a conflict between individual and collective interests - unless, of course, those individuals are workers or benefit claimants. This ideology is so ubiquitous that even intelligent men such as Cable are blinded by it.

* In fairness to Cable, his call for tighter regulation and alternative business models for banks suggests he is groping towards a recognition of this problem. But he doesn't seem to see the fundamental conflict between private ownership and the collective interest as clearly as he should.

Comments

[Shinsei1967]

"For any individual shareholder, the costs of overseeing day-to-day corporate behaviour are considerable in terms of time and hassle."

But large investment institutions do this as part of their regular job every day. Blackrock, Standard Life, Aviva, L&G etc will meet the senior bods at RBS or Vodafone twice a year for one-to-ones and 4 times a year for results meetings.

What is needed is for these institutions to pool their individual influence. Can't be that difficult and a perfect job for a few super-annuated fund managers that are too expensive to be made redundant.

[Anonymous]

Brilliant post! Spot on! What are governments for unless to address market failures? Cable is a waste of time, in my view. He would fail any performance appraisal of which I have been the subject.

Similar to the point made by Chris above is the observation that a victim of a crime or of a medical episode is less likely to receive help from a passer by in London (say) than in rural Sussex (say). This differential response rate arises because of the "buck passing" syndrome that arises in a crowded city where everyone hopes that someone else will intervene and expend the time and energy in providing assistance to the victim.

In contrast, in a small village, with few people around, there may be no one else to provide assistance so the responsibility to intervene falls on the co-incident passer-by.

So it is not because country people are "nicer". The differential responses are explained by Game Theory (or some variant of).

[Account Deleted]

Re "company AGMs are disproportionately attended by the lunatic fringe". A bit like the Liberal Party's annual conference then.

Cable is nothing if not a politician, hence he has dismissed Labour's call for a public inquiry into banks (which could possibly change the terms of debate) and insisted the solution is to proceed with ring-fencing, a watered-down implementation of Vickers very conservative reforms.

He knows that a demand for shareholder activism is just a gesture, as most voting shares are controlled either by institutions, whose interests are broadly aligned with those of company boards, or increasingly by sovereign wealth funds, such as the Qataris at Barclays. Bob Diamond may be sacrified, but there will be another cut from the same cloth along immediately after.

It's just sound and fury, signifying (so far) nothing. I particularly liked his claim in the Guardian piece that this was "a moral quagmire of almost biblical proportions". He sounds almost like Lloyd George.

[Account Deleted]

@Anonymous,

If you collapse on a busy street in London, you will be promptly attended to. Some will pass on by, but it only needs one or two Good Samaritans out of the scores in the vicinity to make a difference. I have witnessed this many times.

In contrast, if you collapse down a country lane in Sussex, you're probably a gonner. Even if there is someone near by, the odds of them being medically trained are slim. In London, there's a good chance you are within a matter of yards of one.

In the big city what you see is the sensible calculation by many that they'd just be getting in the way (that's why the first thing the police often have to do is move the crowd on). They're not cold and unfeeling, or passing the buck.

In contrast, country folk are inbred psychopaths who'll sacrifice you to their ancient gods quicker than you can say "a pint of bitter and a ploughman's lunch, please".

[Keith]

"He sounds almost like Lloyd George." Yes he does.

But, I am afraid it is all talk. Mr. David Lloyd George actually had radical policies that laid the foundations of a welfare state. He was the enemy of "The dukes" and proposed death duties on them and the Tory elite. Cable, Gideon etc have a tax cut programme for the wealthy and all the fake fuss bout tax avoidance of the same will lead to nothing. Actions not words should be the judge and jury of political actors. The Lib Dems have got away for decades with pretending they are nicer and more advanced than the Tories but the evidence contradicts the weasel words. All the same now in a Coalition of privilege.

[Luke]

A to E, you didn't manage to get in the phrase "You ain't from round here." Otherwise perfect.

[Anonymous]

@AtoE; @Luke

Ha! Ha! I shall keep clear of Wickermen next time I'm in the countryside!

[NomadUK]

Really, though, a ploughman's lunch, a pint of bitter, and Britt Ekland are pretty good compensations.

[theartteacher]

Congratulations on possibly the best summary of the major problem with modern politics I've ever seen -

"Secondly, it could be that our politics has become dominated by a bastardized version of free market thinking which denies the possibility of a conflict between individual and collective interests - unless, of course, those individuals are workers or benefit claimants. This ideology is so ubiquitous that even intelligent men such as Cable are blinded by it."