I think Academia and the GOP have been pretty good at framing 'capatalism' as having pretty statc boundaries, even though its premised upon evolution and flexibility.

The thing that the GOP has done on top of the instance of 'capatalism' we practice has framed the you are pro-business OR progressive. In some ways I think the environment framed it, but other issues like workers rights, the feminism movement, and regulation of markets seems out and out "anti-business" but only because of the way we practice capatilism.

Primarily I see the problem as short-term and long-term. If costs of the long-term drove decision making, rather than short term share-holder/owner benefits were figured in, it would be easy to see the connection between progressivism and a thriving economy. For example, if the costs of medical care and absenteeism were figured into the costs of offering medical care, the short term costs always seem to say 'its expensive to be progressive' but over the long-term it would likely be a way more profitable venture. There are likely many ways to make those fundamental adjustments, but government regulation is one of the only effective ways it seems to influence change.

Personally, I think the line rather than labels should be. Do you believe the market will always protect the interests of the public, or do we need regulation to serve as the conscience of business and protectorate of the public. Historically speaking I think the answer is obvious....

by kelly (kelly@changemedia.com)

Nate,

I strongly agree with you in two areas. First of all, both parties miss the boat when it comes to their attitude towards business and competition. (Here come the gross generalizations.) The GOP�s hands-off attitude is much better for existing large businesses than it is for creating an environment where competition thrives (this is glaringly clear in the case of telecom regulation). On the other hand, the Democrats have a fear that businesses will make bad decisions, so they want to limit the amount of choice businesses have. Neither of these is particularly consistent with a thriving marketplace for new businesses and ideas; although the tension between them probably has a positive effect. The more I study markets and think about what it takes to make them function in a post-industrial economy, the more I believe that we need a strong government roll to make our markets function the way they should. And rather than having a public policy driven by pathological fear of government or industry, I would rather see one built around measured trust of both. But I�m not holding my breath.

I also believe that it is a travesty that we make such a point of teaching kids the ideas underlying our government, but make no effort to teach them about how our economy works. This contributes to bad policy because the population does not understand economic tradeoffs, and as you highlight it fails to prepare people to manage their own finances (which these days they cannot rely on anyone else to do). My high school was lucky to have an economics class, but it was taught by a lunatic who ranted constantly about the Japanese conquest of the world, so I am not sure it served any of these ends.

Kelly,

I have heard a number of similar arguments, asserting that companies are ultimately poor stewards of our economic welfare. In general I am both interested in such arguments and skeptical of them. Assuming you are right, that a set of decisions made by a corporate manager (such as the decision not to provide employees with preventative medical care) ultimately makes our economy poorer. I wonder what the source of that breakdown is.

You attribute it to short-term and shareholder-oriented thinking. But these are two different critiques, with very different implications. The underlying question is whether in the long-term the company is worse off as a result of its decision. (In our health-care example, we would ask whether enough costs from poor medical care imposed on the company down the line that it is better off offering treatment upfront.) If so, then we are facing a classic agency problem, in which managers are making decisions which are not in the best interest of the shareholders they are supposed to represent. This is believable, as managers often have incentives which unduly reward short-term performance (this is one of the many problems with heaping stock options on them). And in this case, the problem is not that managers are too driven by concerns over maximizing shareholder value, but quite the opposite. If managers were really concerned with shareholders, they would be offering more benefits. This is also a poor case for regulation, because this is a decision-making breakdown within companies, which companies are well-situated to fix themselves, but the government will have a difficult time influencing.

The second possibility is that managers make decisions which are genuinely in the interests of their shareholders, but not in the interest of society at large. (This is also believable in the health-care example, because the state takes on a significant amount of the burden of providing health care to the indigent.) This is a classic example of an externality, where one party has the power to make a decision which imposes a cost on someone else. Externalities are one of the best economic arguments for regulation (although much of the regulation aimed at them is counterproductive). But it is often hideously difficult to identify what counts as an externality, who it hurts and by how much. The classic examples of externalities include pollution of natural resources, and there seems to be a consensus that we should regulate those, but no one can agree on how. In these situations, it is easy to blame companies for being too focused on shareholders in a way that hurts everyone else. But one of the central tenants of our economy is that, when all costs are accounted for, having companies that are focused on the long-term needs of their shareholders is good for the economy as a whole. Managers are not equipped to balance shareholder�s interests against the nebulous interests of society at large. That is what policy makers are good at. And if policy makers adequately assigned costs to shareholders, then managers could remain focused on them and still make the decisions that are good for all of us.

Don�t get me wrong, I think that businesses can and should do more to make the world a better place. But there are some decisions they make exceptionally well (at least in comparison to government), and weighing costs and benefits are among them. Which is why I often find the explanations that we need to make businesses do X because they are too dumb to realize that they should have done it in the first place a little too convenient.


by Aaron

Aaron, well said. Excellent breakdown of what I said. And maybe I am stuck in the contemporary world, but in our first example, where manager incentives are shorter term than the interests of shareholders, in my mind are very similar. In that, while shareholders claim to be interested in long-term value, but the reality is the market is always rewarding short term gain. This seems mostly true of even large 401K buyers. Its easy to think that corporations (absent lopsided management incentives) will make the better long-term decisions. But, it seems in reality, that long-term value is built by a whole bunch of very small short term decisions. Very few company managers, even when thinking about share-holder value are able to weight one decision versus the other. I believe that most of the time that any middle manager will always make the short-term benefit decision, in almost every case. For example the HR manager in the healthcare example might choose a less expensive medical benefits plan, that excludes treatment options for repetitive stress disorders, a common yet destructive ailment. Maybe I'm just overly cycnical of coprorations, in this particular economic climate, but it seems true today. A better example, although lacking external costs, but seems to prove true, is corporate profits are increasing and things are getting healthier, but few new employees are being added, even if those hires over the long term could drive increased market share, prodcutivity, etc. Because the short-term costs would penalize them in the marketplace.

On the second end. The externalities argument was actually what I was getting at. And your right there are problems with assessing the appropriate costs. The environment, for me, is a poignant example. Its to bad good ideas (like tradeable permits) get used in the wrong instances (regulation of mercury). But there are emerging mechanisms to allow for those costs. But, I wonder if actual 'cost' assignment to those externalities really is the best way to handle it. You argue that CBA is best handled by commercial entities, but I wonder if straight up laws prohibiting or diminishing those external costs aren't, in many cases, the better or more efficient way to handle them. For example, the CAFE standards used to regulate vehicle emmissions for manufacturers, doesn't say this is how much one cubit foot of CO2 will cost each manufacturer, and yet manufacturers given the freedom to hit those efficiency standards have developed some very interesting technologies in the publics best interest. Perhaps a fungible assignment of cost, would allow the market to be even more efficient, but as you say assignment of what gets regulated and at what cost, may be more difficult than jsut setting the cieling and allowing the market to figure it out.

Any chance this Aaron is Aaron Pesky?

by Kelly (kelly@changemedia.com)

Kelly,

Good thoughts. As far as the short-term vs. long-term discussion is concerned, you make the assertion that capital markets �reward� short-term gains. This is worth exploring in a little more depth. It is clearly the case that given the choice between making equal sums of money at different times, investors prefer to receive their money earlier. This is both demonstrated empirically and common sense. It is also the case that companies who are significantly profitable right now tend to be more highly valued by financial markets than other firms. This is because empirically, there is a correlation between recent profits and future profits, so these companies are more likely to make a lot of money in the immediate future. However, it is not clear that either of these indicate that markets reward companies for skimping on long-term investments. Ultimately, the only way companies become more valuable is if through making significant investments in technology, facilities and people. If you look at our most well-respected companies, the Microsofts, GEs, P&Gs of the world, you see that they pump a lot of money into long-term initiatives like R&D and building new plants. Their management has earned the trust of investors, and the companies are not penalized for thinking long-term. The managers who do complain about being punished for long-term investing tend to be those who have done little to inspire confidence in their long-term plans. It is true that many individual investors may be looking for short-term gains from their stock, but they can still accomplish that through investing in companies with long-term plans.

I will take issue with your assertion that most managers are unable to weight the short-term and long-term implications of their decisions. Much of modern financial theory is dedicated to the question of how one makes those kinds of judgments, and most large companies employ fleets of financial analysts to help with exactly those kinds of decisions. While this may not guide every decision by every manager, companies do live and die by their ability to do exactly this sort of weighing (and I think we have seen a number die through an inability to do so). It is true that companies are much less likely to invest in new projects today than they were four years ago, but given the uncertainty in the U.S. and world economies and the lack of abundant cheap capital, this seems to be both rational and in the shareholders� best interests. Perhaps the lack of investment today is a reflection of short-term thinking, but it also seems to be normal behavior when we are coming out of a recession, and firms have not clearly identified the right areas to invest in to take advantage of the next wave of growth.

I do see many of the same problems as you, but I would describe them differently. In my mind, the problem is not short-term vs. long-term, the problem is weighting benefits you can�t see against costs in cash. Managers and financial analysis are right to be skeptical of claims that giving more money to an insurer or employee will create nebulous benefits through heightened morale or productivity. But after being oversold on any number of initiatives in the past decade, I think that managers have gotten to a point where they are unwilling to invest in any project where they don�t know exactly how it will create cash for them in the future. And that does lead to underinvestments which hurt both employees and shareholders.

I admit that I am prone to want to address all externalities with direct fees or subsidies set by the corresponding cost or value, even though this can be difficult to implement. And although I am no expert in the issue of fuel standards, it does seem that it would be much more efficient to have a uniform tax on emissions, rather than giving producers no reason to do better (on average) than the standard, and giving consumers no reason to upgrade. In that case, I actually think that politics has more to do with the problems in our current solution than the costs of enforcement. But your underlying point seems correct, which is that in adjusting for externalities the specifics of the mechanism are not the most important thing. What is important is that the regulation appropriately addresses the externality, and that it is outcome-based so companies can meet it in innovative ways. This brings us back to the political discussion now, where the problem is that we have too many policy-makers who prefer either a na�ve absence of regulation, or regulation that directly specifies behavior (like Gore�s call to phase out the internal-combustion engine).


by Aaron

i-d39ce695c6ce3f15abeb671b95bdf371-i Very good work, nice webpage.

by Samuel Harper (graham676@bellnet.ca)