Ownership and productivity

In last night’s leaders’ debate, the audience laughed when Jeremy Corbyn said that productivity gains could pay for a four-day week. This is an example of what I said recently – that we cannot have nice things because voters have resigned themselves to the inadequacy of British capitalism.

And inadequate it is. The ONS estimates that UK productivity is one-fifth lower than that of the US, Germany or France and one-tenth lower than Italy’s. Closing some of this gap would allow for a cut in the working week with no loss of pay.

In this context, Labour’s plans (pdf) to reform corporate governance, including putting workers on boards, are crucial. John McDonnell is bang right to say that giving workers a stake in companies raises productivity: there is a ton (pdf) of evidence for this. (Which of course is wholly consistent with the likelihood that there are many other possible ways in which a government might increase productivity.)

But how can this be? One answer lies in a classic article written 30 years ago by Michael Jensen. Stock market-listed firms, he said, contain “widespread waste and inefficiency” because an of “absence of effective monitoring” of bosses by shareholders. Giving workers greater say can reduce this agency failure. This is partly because workers know the ground truth of how the company is performing better than do external shareholders. But it’s also because many workers have more skin in the game than do fund managers; whereas workers lose their jobs if the firm does badly, fund managers face less severe penalties.

At this stage, righties like to claim that the market can solve this problem.

There’s a grain of truth in this: since Jensen’s classic article, the number of stock market-quoted firms has fallen and private ownership has risen. The market cannot, however, so easily transfer companies into worker ownership in part because workers are credit-constrained.

What's more, we know for sure that product market competition does not eliminate the inefficiencies caused by agency failures. Nick Bloom and John Van Reenen show (pdf) that there is “a long tail of extremely badly managed firms.” And Andy Haldane has said (pdf) that “there is a striking and widening divergence” between the most productive firms and the rest. This would not be the case if market forces quickly drove inefficient firms out of the market.

As for what explains such differences, Haldane echoes Jensen:

(A lack of) management quality is a plausible candidate explanation for the UK’s long tail of companies…It is possible that current UK corporate governance practices may act as a brake on innovative companies.

Fans of David Graeber’s book Bullshit Jobs (of whom I am one) know one way in which bad management manifests itself. “Managerial feudalism” means that intermediate bosses prefer to create hierarchies of flunkeys rather than maximize profits. And inadequate oversight and imperfect competition allow them to get away with this. Graeber's is a colourful way of expressing what economists and equity investors have known for a long time – that companies often grow at the expense of profits.

Now, in saying all this I’m not entirely endorsing Labour’s position. My point is that companies have not been effectively pursuing shareholder value, perhaps because, as John Kay has said, such value can only be achieved obliquely. (I’m also unsure whether short-termism is a problem.)

What I am saying, though, is that the notion that changing ownership might increase productivity is far from risible. There’s tons of evidence that it can do so, and mainstream economists agree that there are failures of management and ownership: Jensen, Haldane and Bloom are not Marxists.

The fact that an audience can laugh at Corbyn’s claim to raise productivity, therefore, tells us nothing about Labour policy. But it speaks volumes – and damning volumes at that – about a political discourse that has become so debased as to put discussions about productivity outside of mainstream politics.

Comments

[pablopatito]

In general, would you expect nationalisation to increase or decrease productivity, based on the issues you've outlined with listed companies?

[Ben]

One of the main problems is the idea that managers do not need to have any knowledge of the business they are managing. This has spread to government where expert knowledge is despised and data is manipulated to suit cutting costs.

[Kevin Carson]

The productivity gains from the shorter week itself would probably pay for it, never mind any other changes in ownership or incentives.

[georgesdelatour]

1. “Stock market-listed firms, he said, contain “widespread waste and inefficiency” because an of “absence of effective monitoring” of bosses by shareholders.” - Maybe this is principally a size-related effect. I’d expect corrective feedback mechanisms to operate better in smaller firms than larger ones.

2. “Workers know the ground truth of how the company is performing better than do external shareholders.” - I doubt this is true at all for very large companies with huge global supply chains. The person washing the M&S salad in Africa, or the Foxconn employee in Taiwan, will have a very incomplete understanding of how well M&S or Apple are actually doing.

3. “Many workers have more skin in the game than do fund managers; whereas workers lose their jobs if the firm does badly, fund managers face less severe penalties.” - I understand that argument. But things may not play out that way in practice. In particular I’d expect worker-run companies to be relatively risk-averse. There may be occasions where the only way to save the company is by rapidly transforming the entire product line. This is what Nokia needed to do (and failed to do) after the introduction of the iPhone. Would workers in the Nokia factory have understood this better than, say, outside analysts?

[George Carty]

Georgedelatour, certainly Nokia's _factory_ workers wouldn't have understood their firm's predicament, but perhaps their _marketing_ staff would have when they saw their own product sales cratering as customers embraced smartphones?

[MJW]

I'm willing to believe some level of worker ownership will raise productivity, but what happens when more efficient practices mean greater productivity but less need for certain workers? We have this on the railways now, where guards don't want to give up responsibility for closing doors because it weakens job security.

Besides, the key message from Labour is not that it is aiming to be more efficient or more productive, but that it's going to chuck loads more resources at certain things, and it's going to control the situation to make it redistributive even if that means inefficiency. For example the great broadband giveaway offers zero evidence for how civil servants will deliver the challenges more efficiently, or given the leaps forward since deregulation, why things will be better this time round!

[LJC]

I recommend the book "Tragedy & Challenge" by Tom Brown as a clear explanation why UK productivity is so poor.

https://www.amazon.co.uk/Tragedy-Challenge-Engineerings-Decline-Economy/dp/1788035313

In Germany, the supervisory board contains the worker representatives.

https://www.handelsblatt.com/today/companies/handelsblatt-explains-why-german-corporate-governance-is-so-different/23581290.html

[cjcjc]

Germany's strength lies in the unquoted sector but still worth observing that German market cap in total is less than the sum of Apple and Microsoft...

[Paine]

Firm level worker perspectives
On labor saving innovations
are
Greatly constrained
by macro contrived
Job scarcity

End job scarcity

Invert
the Beveridge ratio

By macro demand management

make job selection
a matter of wage earner choice
not corporate hiring screens

[georgesdelatour]

"make job selection
a matter of wage earner choice
not corporate hiring screens"

Especially jobs like heart surgeon, airline pilot, air traffic controller, structural engineer, fugu chef.

[georgesdelatour]

@George Carty

I appreciate that the marketing workers might spot the lack of consumer enthusiasm for Nokia products before the manufacturing workers do. But think about the company whose products were destroying Nokia’s market share - the second Steve Jobs era Apple.

Starting with the Bondi Blue iMac G3, Jobs and his team kept coming up with innovative, attractive-looking products which sold well and transformed the business. They were mostly well-marketed. But the marketing department was never allowed to actually drive product design. That was always down to a very small team, including Jonathan Ive, but most of all Jobs himself.

I don’t think those innovations would have happened if every Apple employee had a vote on each new product, because most people are 1) quite conservative and 2) quite risk averse. With the iPhone, most employees would have said 1) we’re not a phone manufacturer, and 2) people like pressing buttons…

[KG]

Maybe the audience were laughing because Labour has spent most of the last decade saying that real wage income is not high enough, and seems now to be proposing that we take days off in lieu...