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Wednesday, January 18, 2012

The Bishops of Wall Street and the dogma of capitalism

by John MacBeath Watkins

The Financial Times, and excellent publication with sometimes surprising views, has been running a series on capitalism, and John Kay has written something I find fascinating--that what we now call capitalism isn't what was once called capitalism, which means an entirely different set of incentives are at work.

You can sign up to look at FT articles for free (eight a month) so don't let the paywall stop you from reading the whole thing: 
We've been using the word capitalism since about 1850 to describe a form of economic organization where the owners of capital run large commercial enterprises, seeking to maximize profits and investing in their own interest.

This was the form of social organizational form Karl Marx critiqued. But since his death, the limited liability corporation has taken over most large enterprises. Sure, there are still a few true capitalists around, but most companies separate ownership and control into stockholders and management. As Kay notes:
"So the business leaders of today are not capitalists in the sense in which Arkwright and Rockefeller were capitalists. Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital. They have obtained these positions through their skills in organizational politics, in the traditional ways bishops and generals acquired positions in an ecclesiastical or military hierarchy."
This ties in with my post the other day about Thorstein Veblen and the 90% tax bracket the other day. As mentioned in that post, some people making public statements about how taxes will affect top earners -- even the top earners themselves -- have no idea what the top marginal rate actually is. What they object to, then, is not the rate but the notion that they deserve to have their taxes raised.

And what is it about this that they object to? Perhaps a societal norm that says they are being rewarded in excess of their value. After all, these are not capitalists, risking all and winning or losing all in the hard-knocks world of industry and finance. They are managers of other peoples' resources. When management decides that the company should lobby against a bill that says the company must disclose more about what its managers are paid, and how that compares to the average (or better, median) pay of workers at the company, are they acting in the interest of the shareholders, or in their own interest?

In economics, it's called the agency problem. You hire people to act in your interest, and not surprisingly, they are tempted to act in their own interests. In religion this means the Church spends its money on palatial workplaces and accommodation for the priesthood, in business, it means such excesses are reserved for the business equivalent to bishops, the CEOs. Who, in the pictures below, is the more potent potentate?
Apostolic palace, Vatican City
 
Transamerica pyramid
The CEO serves the company in much the same way the Vicar of Christ serves God. Because God does not have a corporeal being at the moment (as far as I know) we rely on those who represent Him to interpret His wishes and decide how the money and other resources given to Him should be spent.

And because the corporation has no corporeal being, the CEO must interpret It's will. Just as Popes have interpreted God's will as being very much in favor of making bishops comfortable and powerful, CEOs have interpreted the corporation's will as being to pay them well if they run a larger (therefore higher status)  company regardless of relative performance in comparison to smaller but better-run companies.

They may, as the executives of certain banks did, recklessly expand the company, thereby increasing their status and pay, even at the risk of collapsing the company.

The bishops of Wall Street even have their own dogma, and preach it to the converted, insisting that unbelievers are dangerous and evil. Faith-based economics dominates what should be technical discussions of the best policy for economic growth and responsible public finance. Spain and Italy are nailed to a cross of gold for the salvation of the Euro, and Saint Laffer's Curve is expected to produce a miracle any time...Now! Well, just wait a minute, all these tax cuts have got to produce results...Now!  Well, maybe tomorrow.

We know that markets are impossible without governments to guarantee property rights and enforce contracts, yet the dogma of capitalism claims all government is harmful to the functioning of markets. The question becomes, not how should markets be regulated so that they might function best, but whether they are to be regulated at all.

Taxes are cut with the claim that they will produce manna from Wall Street, but the history of the economy shows no link between the top marginal rate and the rate of economic growth.

And the Bishops, in their quiet rooms, contemplate the justice of it all.

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