At various points in this blog I’ve challenged the power of the market to make good investment decisions, and my conclusion last week is that we need to start learning about the role of government in this aspect of the economy.
But we need to do this without slipping into simplistic dichotomies of “public ownership” vs “private enterprise”. So this week I’m going to to explore the concept of “public ownership” and show you it is not just what you think.
The term probably makes you think of a nationalised industry. And in some cases this would probably be a good option.
The privatisation of probation services has been such a dramatic failure that the Government has had to cancel and renegotiate all the contracts. Contracting out the security for the London Olympics (to G4S) was such a failure that the Government had to step in, calling on the army to help. We have the ironic situation that often the companies that offer the best tenders to run our railways are the nationalised European operators. And since the privatisation of water utilities, we have seen a chronic underinvestment in the water system, and a deteriorating, leaky system in the South East in particular. Practical experience is slowly teaching us that some services are best provided purely through the public sector.
However, there is another version of public ownership – the public limited company, or plc (the clue is in the name).
Plc is the UK term for a company that is listed on a stock exchange. Anyone can buy shares in these companies. Now you might not think that you’re a shareholder, but if you are in a pension scheme or have life insurance then your funds may well be invested in stocks. Insurance companies and pension funds (ICPFs) are significant owners of shares.
Shareholders are the ultimate owners of a company – while leadership and management is left to the Board of Directors, shareholders do have the power to play a more active role, particularly in the selection of Directors and setting their pay. But the behavioural norm is to leave everything to the Board, taking away an essential element of accountability in corporate governance. And ICPFs are particularly famous for playing no role in the governance of companies.
Your pension could be invested in companies selling arms to repressive regimes; in the worst polluters that are destroying the planet; in companies that donate to political causes that you find abhorrent. And you have no idea what is being done with your money.
Markets are meant to reflect the preferences of all parties in the market. But financial investment decisions in no way reflect the preferences of the people whose money is being invested. And the participants in financial markets are not looking at all at real investment – decisions on investment in real productivity – and the implications of these decisions for the nature of our future society.
How do we reform this? I could go into lots of detail about different possibilities of how this could work, drawing on organisational theory as well as economics. But what is the point sitting here dreaming about some theoretical future that, at present, we have no power to bring about. The first step is to identify the nature of the problem (unregulated financial markets not channelling savings and wealth to productive investment), and the principles that guide the first steps in putting it right. Until these principles are accepted, no coherent action can follow.
The radical, revolutionary changes that are needed in the financial market could proceed simply by acting on principles that are already accepted, that go back to Adam Smith – that the owners of companies are the ultimate decision-makers. To translate this into reality would require a transformation in corporate governance, and it would take many years to learn how to do this, but the principle on which we should proceed is not controversial, and just needs to be acted upon.
These aren’t my own whacky ideas. Many credible economists and institutions are writing about the need for greater oversight in the operation of financial markets. The United Nations Conference on Trade And Development (UNCTAD) published a report in 2015, “Making the international financial architecture work for development”, which discusses such issues in some detail. Their conclusions are summarised by Mehrling:
“What the authors would most like to see is a complete restructuring of the international financial architecture: a very substantial expansion and “democratization” of official multilateral credit institutions, and a replacement of dollar reserve currency hegemony with a true global currency (the SDR) and a true global central bank. In this ideal, private financial markets with their inevitable focus on short-term private gain would be replaced by public financial intermediaries with their ability to focus instead on long-term economic development.”
Admittedly they are not writing about it the most accessible language (hence this blog)! But note the term “public financial intermediaries” – this could include, for example, public bodies that manage or even just regulate the investment of our money on our behalf (ICPFs) in productive investment.
Last week I cited Mehrling’s summary of Minsky’s conclusions, “that capitalism could be stable if, first, large-scale capital investment were owned and financed publicly rather than privately”. What I’m now pointing out is that much large scale finance is already publicly owned, and what is required is greater, democratic oversight of the use of this capital.
Of course, a major finding of Pozsar’s research, cited extensively in this section of the blog, is that ICPFs are no longer the major source of capital funding – the market has turned on its head such that today the major source is the institutional cash pools of large corporations. But these corporations are themselves publicly owned (in the sense of being publicly listed on a stock exchange). The need for democratic oversight remains.
Next week we will look further at this role of public oversight in investment decision, drawing on the recent empirical work of Mariana Mazzucato on the role that government has always played and needs to play in funding research and in shaping and creating markets.