Rethinking Common vs. Private Property (2): Market Responsibility vs. Corporate Irresponsibility

Excerpted from:

* Article: Rethinking Common vs. Private Property. By David Ellerman.

David Ellerman writes, on Wall Street capitalism as institutionalized irresponsibility

The market principle of responsibility

“In the 20th century capitalism-socialism debate, it was always emphasized that markets embody a certain feedback loop between beneficial actions and rewards as well as between damaging actions and paying the costs of those actions. In short, markets are supposed to institutionalize the connection between actions and bearing the responsibility for those actions. When the connection breaks down (“externalities” in the language of economics), then markets malfunction.

Yet over the last century, there have been innovations, particularly in the type of market economy loosely identified as Wall Street capitalism, that have systematically institutionalized a disconnect between actions and bearing the consequences of those actions. The irony is that these innovations are not seen as some non-market interventions corrupting the market principle of connecting actions and responsibility. They have been seen as the creation of new “markets” heralded as “improvements” and “advances” in market economies. In the eyes of American leaders and pundits, these institutional innovations are supposed to be the envy of the world.

Institutionalized irresponsibility in “advanced” financial markets

The continuing American-caused economic crisis of 2008 was due in large part to a new set of financial instruments (derivatives) and the markets in those instruments. Derivatives were widely touted as innovative financial instruments that “could” be used to hedge risk in new ways. Of course, by the same token, derivative markets can be used to greatly increase risks (and rewards). As it turned out, the explosive combination of secondary markets in junk mortgages and derivatives markets created trillions of dollars of losses spread over the whole population, a population that had no responsibility for these Wall Street “innovations.”

The root of the problem cannot be solved by tweaking regulations. The basic problem goes back to the violation of the most fundamental norm of a market economy, the connection between actions and bearing the responsibility for the actions.

The “Model” of the absentee-owned publicly-traded corporation

The recent financial crisis is only a surface tsunami in comparison with slower and longer term tectonic shifts in the form of the large corporation due to Wall Street. The mother of all disconnects in the American or Anglo-Saxon model of a market economy is the absentee-owned corporation created by the public trading of the equity shares, i.e., by the set of market institutions collectively called “Wall Street.” The creation of public markets in corporate ownership shares was also seen as a great innovation, improvement, and advance in a market economy in the late 19th and early 20th centuries. In the Anglo-Saxon model, “the Stock Exchange is not the appendix or gall bladder of the body economic, but its very heart.” [Dore 1987, p. 118]

Yet these “new markets” created the most fundamental violation of the market principle of linking actions and their consequences, the violation that Berle and Means [1932] famously characterized as the separation of ownership and control. On a grand scale, corporate executives could, on the sole basis of their organizational role (like the nomenklatura of communism), make decisions that directly affected the people working in the companies (and indirectly their communities) without any responsibility mechanism to hold the decision-makers accountable. At least in a political democracy, there is in theory the responsibility mechanism of the voters “throwing the bums out.” But an absentee-owned company is not even an economic or workplace democracy in theory.[2] The people working in the large corporations, who are the people actually governed by the managers and who primarily bear the brunt of the decisions, have no vote in the matter.

And the so-called “owners” (the far-flung shareholders) have been so atomized by the wide distribution of shares by Wall Street that the usual difficulty of organizing collective action across the widespread shareholders prevents any effective use their voting power. The aptly-termed “Wall Street Rule” prevails; if you are dissatisfied with the company, then exit by selling the shares. No one buys shares on Wall Street thinking they will have any real influence on management; the shareholders are in fact only passive investors like bondholders.

As was pointed out by John Maynard Keynes:

– The divorce between ownership and the real responsibility of management is serious within a country when, as a result of joint-stock enterprise, ownership is broken up between innumerable individuals who buy their interest today and sell it tomorrow and lack altogether both knowledge and responsibility towards what they momentarily own. [Keynes 1933, 235-6]

In fact the only people in sight who the capacity and the incentive to monitor corporate management are the people working in the corporation. “The only cohesive, workable, and effective constituency within view is the corporation’s work force.” [Flynn 1973, 106]

Not all market economies have rushed headlong to imitate that “envy of the world,” Wall Street capitalism. The Japanese idea of the company-as-community [Dore 1987] is the basis for a fully competitive “employee-favouring” (as opposed to “shareholder-favouring”) model [Dore 2000]. Germanyhas also developed more responsible and even “employee-favouring” forms of enterprise. The German institution of Mitbestimmung [Dore 2000] is inconceivable in the American-style corporation which treats the livelihood of the people in the firm as a cost category to be minimized in whatever way possible. This includes moving the jobs to low-cost labor elsewhere—which has the added effect of slowly deindustrializing the country, devastating the economic base of whole regions, and slowly demolishing the middle class—all the while creating unimagined wealth for the few in control.

But until there is a rethinking of “private property,” even the modest steps towards a more participative and democratic model (e.g., the Japanese “employee-favouring” firm or German Mitbestimmung) will always be seen as “violating” private property rights and as retrograde vestiges that only impede the latest “innovations” in Wall Street capitalism that “should” be the envy of the world.”

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