Invisible band vs. Invisible hand

Jonathan Haidt’ column from 2015 on the organisational structure in Sears is useful. But, it is not clear if the blame on the bankruptcy of Sears can be laid solely on that. At some level, there is some merit in having a clean organisational structure with each business in Sears operating as an independent company.  But, he points out that this ruled out cooperation between businesses and that Sears businesses even privileged Samsung brand rather than Sears’ own brand of consumer durables in shelf spaces. Perhaps, the KRAs of the CEOs of each of the businesses could have also included a component for cooperation and synergies between the businesses. An interesting case-study for students of organisational structure and behaviour, etc.

It cannot be said that much of this wisdom is hindsight, because Sears is in trouble now. The article was written three years ago. It can be even called prescient, actually.

He concludes that invisible bands matter as much as inevitable hands. Nice. Read the post here.

Validating Jonathan Haidt is Nick Hanauer whose speech delivered on September 30th at MIT, where Nick Hanauer won the 2018 Harvard and MIT Humanist of the Year award calls for killing ‘Homo Economicus’ to bring about the destruction of ‘neo-liberalism’ that celebrates selfishness or self-centredness.

His profile says that he is a Seattle-based serial entrepreneur, venture capitalist, author, and activist with a knack for identifying and building transformative business models.

These are powerful sentences:

The neoliberal claim that the sole purpose of the corporation is to enrich shareholders is the most egregious grift in contemporary life. Corporations are granted limited liability in exchange for improving the common good. Thus, the true purpose of the corporation is to build great products for customers, provide good jobs for employees, provide a fair return to shareholders and to make their communities stronger—in coequal measure. [Link]

I am all for the pendulum swinging in the direction of greater consideration to other stakeholders, esp. in the developed societies. But, I am far more ambivalent on their benefits for developing societies where these might be interpreted (or, misinterpreted) deliberately as calling for greater government intervention, regulation and the return of State-directed socialism. Let us see.

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by promarket.org, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

The hilarious paragraph of the year

Earlier this year, HMRC was embarrassed when it emerged that it had refused to assist a French investigation into suspected money-laundering and tax fraud by the UK telecoms giant Lycamobile, citing the fact that the company was the “biggest corporate donor to the Conservative Party”.

HMRC initially denied the Lycamobile story, saying: “This is the United Kingdom for God’s sake, not some Third World banana republic where the organs of state are in hock to some sort of kleptocracy.” It later conceded that the story was accurate. [Link]

The moral requirements of Nirmal Mulye

This story boggles the mind. The Chief Executive Officer is either Indian or of Indian origin. His comments are politically incorrect, at the minimum and wrong, at worst.

“The point here is the only other choice is the brand at the higher price. It is still a saving regardless of whether it is a big one or not,” said Mr Mulye.

Mr Mulye compared his decision to increase the price to an art dealer that sells “a painting for half a million dollars” and said he was in “this business to make money”.

He also defended the actions of Martin Shkreli, who became infamous in 2015 for his decision to raise the price of an Aids and cancer drug from $13.50 to $750 per tablet. Shkreli was jailed earlier this year on unrelated fraud charges.

“I agree with Martin Shkreli that when he raised the price of his drug he was within his rights because he had to reward his shareholders,” said Mr Mulye.

Mr Mulye pointed out that Shkreli was able to increase the price of Daraprim so dramatically because his company was the only one making it.

“If he’s the only one selling it then he can make as much money as he can,” said Mr Mulye. “This is a capitalist economy and if you can’t make money you can’t stay in business.”

He added: “We have to make money when we can. The price of iPhones goes up, the  price of cars goes up, hotel rooms are very expensive.” [Link]

I do not know whether he has learnt that the goal of capitalism was not rewarding shareholders at all times; that it is a construct of the 1980s, etc. Further, I wonder if he also knows that capitalist enterprises could survive only if they are also seen by the market as being fair players and not amoral players. Then, there is Karma, of course.

I wonder what Adam Smith would have made of him, had he been around.

Students of economics can debate the following questions:

  • Is market economy compassionate?
  • Or, is there no place for compassion in a market economy? Why not? Shouldn’t it be there?
  • Without compassion, can there be a society? Without society, can there be an economy? – market economy or non-market economy?
  • Further, is he right to come across as so callous and insensitive? He may score marks for honesty but is the CEO being  insensitive?
  • There is another angle: Intellectual Property Rights/Patents of Pharma companies. Should there be IP protection at all, in the first place? If so, for how long?

These are all the questions one can explore.

Das Activist Manifesto

I cannot fathom why I did not blog on Frank Partnoy (with Rupert Younger)’s article on ‘The Activist Manifesto’ (‘What would Karl Marx write today’ was the title of their article in FT in March 2018). By chance, I stumbled upon it again, today.

I was writing to my friend Gulzar about some of the books written by Wall Street insiders. ‘F.I.A.S.C.O’ came to mind. Frank Partnoy was the author. He wrote it after he worked for Morgan Stanley. I had read the book long ago. I liked it. He practised law after that and joined University of San Diego in 1997. I understand that he is now shifting to University of Berkeley as tenured law professor. I had used his article in ‘The Atlantic’ on Wells Fargo (‘What’s inside American banks?’) in the courses that I teach.

I decided to check and see if he had a Twitter handle. Thankfully, he had one and even more thankfully, he was not an inveterate Tweeter! In the process, I chanced upon the FT article again on the rewriting of ‘Das Manifesto’. They had a website for the manifesto.

I spent time reading Professor Alan Morrison’s great introduction to the manifesto of Partnoy and Younger. Worth reading. I am yet to download their new manifesto and the original. Intend to do so.

In the process, from Partnoy’s Twitter handle, I read the wonderful review of Adam Winkler’s book, ‘We, the Corporations’ by Zephyr Teachout. Sample this comment:

Beginning in the 1970s, a group of activist lawyers associated with the University of Chicago persuaded courts to gut well-established principles designed to protect open markets and decentralized power, and to replace them with an ideology of efficiency that has contributed to our current crisis of monopoly capitalism and inequality. Winkler mentions the Chicago school in passing, but he doesn’t address the post-1980 antitrust cases, a striking oversight because they fit neatly into his theory: Corporate monopolies gained rights by asserting that they benefited the rights of others (in this case, consumers). [Link]

Teachout says that Winkler missed out on this but writes a nice tribute to his work.

Also, read the review of ‘The Chain of Title’ by David Dayen, reviewed by Frank Partnoy himself. It is the kind of stuff that one sees in developing economies. Nobody knew who had the titles to the properties that were foreclosed. Yet, they foreclosed! This happened in America. Heart-rending, actually:

Lisa Epstein, a nurse, learns that the bank foreclosing on her, the one at the end of
the securitization daisy chain, could not prove that it had legally obtained her loan. When she challenges the bank in court, its lawyers present a document dated three months after she was served with foreclosure papers — a “poorly drafted cover-up,” Dayen writes. She meets Michael Redman, a car salesman who had a similar experience, and persuades him to publish an online guide to uncovering mortgage fraud. The two of them connect with Lynn Szymoniak, a lawyer, who investigates the signatures in her own foreclosure action and finds one with a date when the signer was actually in state prison.

Exposing those lies becomes a moral crusade. The homeowners’ stories are emotional roller coasters, which Dayen meticulously reports. He and his characters find the banks’ behavior not just indefensible but criminal. Prepare to be surprised, and angry.

Partnoy also reviewed Anita Raghavan’s Billionaire’s Apprentice.

So, an evening in ‘partnership’ with Partnoy!

 

How to revise GDP and other links

(1) American economy is now USD20.0 trillion and change. The personal savings rate is 6.8%. It was 3.2% before revision. Just like that. Investments in Cloud technology were allegedly under-reported. India was one of the few countries or is it the only country that revised its GDP calculations and the base year from 2004-05 to 2011-12 and reported a lower number.

See for yourself:

India GDP

(2) I liked this article that appeared in Wall Street Journal – by one Donald Luskin. He now writes as to why China will lose the trade war. That is a far cry from what many thought when the trade war began. It is not over yet. But, clearly, people are revising their odds.

(3) China is issuing dollar denominated bonds in record amounts. Nine years ago, they called for the end of US dollar hegemony. [Link]

(4) Mark Mobius says that the bottom is not in for China stocks. I leave it to you to decide on how to play it. [Link]

(5) China’s old economy is back [Link]

(6) Which means leveraging is back too [Link]

(7) FT Editors think China will listen to their advice on how to conduct Belt and Road initiatives. I am just wondering how will they have written the Edit had Trump launched OBOR and it is courting the controversies that China is courting now. [Link]

(7) Covenant-lite Leveraged loans (double whammy) are now 78% of all leveraged loans. They were 29% in 2007. [Link]

(8) Support for Merkel’s German Conservative coalition has dwindled to a 12-year low. Wait and wathc happens by the time she leaves office. [Link]

(9) That is a nice headline that explains everything that is happening in the world:

Australia executive pay hits record as workers’ wages stagnate [Link]

(10) This is what will happen in that case:

Royal Mail faces shareholders’ pay revolt [Link] AND

Nex shareholders’ punchy payday protest [Link]

(11) This may be three weeks old but Malaysia is abandoning white elephant infrastructure projects. I must confess to being pleasantly surprised so far with Malaysia’s new government [Link]

(12) This article offers a good assessment of Pakistan even as it wonders if OBOR projects have pushed the country into a debt trap.

(13) Good to know that Australian Parliament has passed two sweeping foreign interference and anti-spying  Bills [Link]

 

Who is a Liberal?

TIME magazine has the following cover in its July 2nd Edition.

TIME Cover_02072018

Sanctimonious hypocrisy.

The purpose of the cover is not better public policy. The purpose of the cover is not even to regain power in elections. That can happen only when one wins converts to one’s cause. This won’t or cannot win converts.

These are not liberals. They are D.A.D.D.I: Dangerous, Arrogant, Deluded, Double-standard Idiots.

Who is a liberal? See here. That is a covery story I wrote for the Dec. 2015 issue of ‘Swarajya’.

Also, it is a good time to recall John Gray’s article in July 2016 (a classic) in the aftermath of the Brexit vote. If you thought that the Brexit was narrow and lacked legitimacy, pl. check your facts again here. Take out Northern Ireland, Scotland and the Greater London Area. It was as clear as it could get.

As Tim Price reminds us in his latest note,

In recent debates, Quisling MPs and unelected peers have resorted to the purest sophistry, citing sources such as Edmund Burke’s speech to the electors of Bristol in their appeals to override the legitimate plebiscite held in the UK on 23 June 2016, in which 17.4 million people voted to leave the EU – more voters than have ever voted for anything, ever, in our country’s history. [Link]

By the way, Tim Price’ ‘Darkest hour’ is a very good read.

Back to John Gray:

As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer. …

… The contradictions of the world-view shared by progressive thinkers and established elites are becoming acutely evident. There is constant talk about being in a time of unprecedented change. Globalisation is connecting the world as never before; our lives are being continuously transformed by disruptive technologies; old ways of life and hierarchies in society are fast dissolving . . . these are the ruling clichés of the age. What is striking is that they are deployed to prop up a failing ancien régime. …

… There is much that is ugly and threatening about Donald Trump – not least his divisive attacks on Muslims. But it is the parties that have been in power for the past thirty years that have created Trump’s main constituency. His appeal is to casualties of the American economy that mainstream politicians have chosen to ignore…

If Brexit has come as a great blow to many who think of themselves as progressive, it is because politics is undergoing a regime shift – several of them, in fact, at the same time – that they have not perceived….

…Like the financial elites shown to be so pitifully short-sighted in the early hours of Friday morning, politicians and pundits who bang on about adapting to change have been confounded by changes that they believed could not happen. [Link]