On "Privatized Keynesianism"

I have been reading Colin Crouch's The Strange Non-Death of Neoliberalism¹. A major theme is that an ideological divide between more reliance on markets and on government misses issues raised by the existence of large - including multinational - corporations. The neoliberal assault on government has been increasing the strength of corporations, not competitive markets. Furthermore, corporations have been taking on the role of government. Crouch mentions, for example, the "seconding" of corporate executives to various ministries; the likelihood that internal policies of a Multi-National Corporation on, say, child labor may be more restrictive than laws in many third world countries; and the role of corporations in setting international standards, where organizations with nation-states may be weak.

But my point in this post is to note Crouch's introduction(?) of a new technical term, Privatized Keynesianism. A contrast between the post-World War II golden age and the later neoliberal era² is needed to make sense of this term. After the war, in the United States - and, I gather, in other advanced industrial capitalist economies - wages rose with average productivity. Furthermore, governments, under a somewhat Keynesian ideology, saw it as their responsibility to maintain aggregate demand. These conventions came undone in the 1970s. Productivity increased (at a slower pace), but wages failed to keep up, and governments came to emphasize fighting inflation, not unemployment.

Increased inequality, however, did not eliminate the need to manage aggregate demand. Neither consumer spending from wages nor an abdication from fiscal polity by government could fill this lacuna. This period saw the increased availability of debt, the creation of secondary markets for the trading of bets on bets on bundles of debts (derivatives), and the capture of credit rating agencies by sellers of debts. This institutional structure led to the collective, but private, macroeconomic regulation of aggregate demand³. This institutional structure is what Crouch calls privatized Keynesianism⁴. The irresponsibility of banks, in some sense, produced a (temporary, unsustainable) positive externality.

Footnotes

1. I might as well note two mistakes I found irritating. Somewhere in one of the early chapters, Crouch, who I gather is British, refers to Eugene McCarthy when he means Joe McCarthy. I also thought that Crouch's account of the role of Fanny Mae and Freddy Mac in subprime mortages reflected too much credence for right-wing liars.
2. I date the start of the neoliberal era with Nixon ending the fixed exchange rate between the United States dollar and gold, a major element of the Bretton Woods system.
3. Is this a non-microfounded, functionalist account?
4. From this perspective, the accumulation of private debt was a symptom, not the ultimate cause of the recent Global Financial Crisis, a cause that has yet to be addressed. These ideas seem to me to be close to Thomas Palley's Structural Keynesianism. Has anybody read James K. Galbraith's The End of Normal: The Great Crisis and the Future of Growth?

"Governance" As Used In Current Literature On Management

1.0 Introduction

One might study economics because one wants to explore the ruling ideas of the ruling class in our society. The literature directed to professional management provides another locus for exploring such ideas. I find it intriguing when such literature parallels selected ideas being developed by leftists.

One such idea is that corporations often make political decisions. The allocation of resources, particularly for investment, is a political decision. Some of these investment decisions in the United States are left to centers of private power, that is, businesses. Of course, some investment decisions, particularly in basic research, are made by government. And universities are important here.

I think the use of the "governance" in the literature on management fairly explicitly states a recognition of the political nature of management decisions in large corporations. Some work of the economist Michael Jensen can be seen as concerned with corporate governance. Some literature also discusses subsidiary governance in the corporation. I here provide some examples.

2.0 Governance of Information Technology (IT)

I start with IT governance:

"Effective governance addresses three questions:

1. What decisions must be made?
2. Who should make these decisions?
3. How will we make and monitor these decisions

...For our purposes here, governance is not about creating bureaucracy but determining what decisions must be made, by whom, and how they will be monitored. Providing clarity to the organization about the results of governance decisions and, more importantly, the process of decision making streamlines communications and removes ambiguity...

...It is reasonable to question why 'business needs' appear to be only a subset of the considerations for decisions when surely they should drive all IT decisions? ...Remember that this chapter is about how decisions on business needs will be made alongside other IT decisions. The assumption is that the real, major business decisions are being made in the context of a corporate governance model (which is at a hierarchically higher level in the organization than the IT governance model)." -- Harris et al. (2008): pp. 59-63.

Harris et al. go on to define a number of political structures for IT governance, including monarchies, feudalism, federalism, duopoly, and anarchy.

3.0 information Security Governance

I can cite a number of references (Allen 2005, Allen et al. 2008, Bowen et al. 2006, Westby and Allen 2007) addressing enterprise or information security. Perhaps information security governance should be as a subset of IT governance:

"Information security governance can be defined as the process of establishing and maintaining a framework and supporting management structure and processes to provide assurance that information security strategies are aligned with and support business objectives, are consistent with applicable laws and regulations through adherence to policies and internal controls, and provide assignment of responsibility, all in an effort to manage risk." -- Bowen et al. (2006): p. 2

4.0 Conclusions

Doubtless those concerned with other issues and technology areas of importance in corporate management can find definitions and literature on governance for their areas. Leftists and students of management agree: politics includes corporate decisions.

References

• Julia H. Allen. Governing for Enterprise Security, CMU/SEI-2005-TN-023, Software Engineering Institute, Carnegie Mellon University (June 2005).
• Julia H. Allen, Sean Barnum, Robert J. Ellison, Gary McGraw, and Nancy R. Mead (2008). Software Security Engineering: A Guide for Project Managers, Addison Wesley.
• Pauline Bowen, Joan Hash, and Mark Wilson. Information Security Handbook: A Guide for Managers, NIST Special Publication 800-100, Computer Security Division, Information Technology Laboratory, National Institute of Standards and Technology (October 2006).
• Michael D. S. Harris, David Herron, and Stasia Iwanicki (2008). The Business Value of IT: Managing Risks, Optimizing Performance, and Measuring Results, CRC Press.
• Jody R. Westby and Julia H. Allen. Governing for Enterprise Security (GES) Implementation Guide CMU/SEI-2007-TN-020, Software Engineering Institute, Carnegie Mellon University (August 2007).

Corporate Governance

Most arguments about the state versus the market seem fundamentally misguided to me, begging, as they do, false premises. Many have noted that the state underlies the ability to trade goods on the market. What attributes of a bundle of property rights are alienable, what contracts can be enforced, default conditions, etc. are all defined by laws enforced by the state.

But I want to consider a reverse interaction between state and market, so to speak. I focus here on how many private actions are not only of public concern, but even are made as part of a political process. Market actors often take actions that in other systems would be delegated to the state. Consider proposals for voting on at the annual meeting of a corporation, which can be of two types:

• Company-sponsored resolutions,
• Shareholder resolutions brought forth under the Securities and Exchange Commission (SEC) Rule 14a-8.

Many resolutions are about pay, or the process for setting pay, appointing independent directors to the committees that set executive compensation, etc. Both Lenin and Hayek consider the question of "who-whom?" as political, even if we leave much of the answer to the result of the interactions of private actors. But many laws you might see debated in Washington, I think, resemble certain shareholder resolutions. My impression is that such resolutions might treat working conditions in China that must be satisfied for parts built into products distributed in the United States, environmentally responsible methods of production, etc. Many of these political resolutions for controlling corporate behavior may have low likelihood of enactment. They are, I think, more about raising consciousness.

I think it would be interesting to find a database of proxy resolutions. One could then confirm my claim above about many being political. Could one classify proxies, especially shareholder-sponsored ones, into various categories? Could the number in such categories be used in some sort of Instrumental Variable (IV) analysis or correlated over time with anything of interest? Broadbridge Financial Solutions provides support to many companies in electronic voting of shareholder proxies at corporate annual meetings. As far as I could see, they only provide access to the statement of proxy resolutions to shareholders of the company to which the resolution applies. Other possible sources of proxy resolutions are the SEC and organizations that track socially responsible investing.

Performing Corporate Finance

1.0 Introduction

Economics can change the world, and not necessarily for the better. Mainstream economists often do not describe actual capitalist economies, but theorize an imaginary, supposedly ideal world in which everybody pursues their own self-interest, narrowly defined. Participants in this world are then sometimes encouraged by the theory to change institutions and their behavior to come closer to that imaginary world.

This post describes theories that encouraged corporations to become more vulnerable, by taking on large amounts of debt, and to become more short-run oriented, by focusing more on immediate stock market prices. I know about these two contributions to economics more from Bernstein and Cassidy's popularizations than the primary literature. I am deliberately treating some elements that I think have not much appeared in popular discussion since the advent of the global financial crisis.

2.0 Modigliani and Miller (M&M) and Capital Structure

The Modigliani and Miller theorem states that whether a corporation obtains financing with stocks or with bonds has no impact on its stock price. I gather that this follows from an arbitrage argument under admittedly unrealistic assumptions. An individual can buy stock with borrowed money. By buying stock on the margin, individuals can raise the leverage ratio from whatever corporations have decided on to whatever they like.

The M&M theorem serves as a baseline in corporate finance. One considers the implications of existing deviations from the theorem assumptions. Apparently the treatment for corporate taxes in the United States of dividends and interest is one such deviation. Interest on bonds can be deducted as expenses on corporate taxes; stock dividends cannot. Therefore financing by issuing bonds is to be preferred.

"This [proposition] carried not very flattering implications for the top managements of companies with low levels of debt. It suggested that the high bond ratings of such companies in which the management took so much pride, may actually have been a sign of their incompetence; that the managers were leaving too much of their stockholders' money on the table in the form of unnecessary corporate income tax payments [of] many millions of dollars." -- Merton Miller (1988), quoted in Bernstein (2005)

The implication is that corporations should increase their leverage.

3.0 Michael Jensen and Executive Compensation

Most owners (that is, holders of stock) of modern corporations are absentee owners. They would like corporate executives to act in a non self-dealing manner, against their own interests. This is a principal agent problem. The stock holder is the principal, the Chief Executive Officer (CEO), for instance, is an agent. In theory, the problem is how to structure executive pay and corporate incentives such that in value of stock is maximized. (I gather that in this theory, social norms about how stockholders, traders, and executives should behave doesn't come into it.) A supposed answer to the principal agent problem is to pay executives partly with stock options. They will then be encouraged to do their utmost to ensure the market price of the stock exceeds the price specified in their options.

References

• Peter L. Bernstein (2005) Capital Ideas: The Improbable Origins of Modern Wall Street, John Wiley & Sons.
• John Cassidy (2002) "The Greed Cycle: How the Financial System Encouraged Corporations to go Crazy", The New Yorker (Sept. 23): pp. 64-
• Michael C. Jensen and William H. Meckling (1976) "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", Journal of Financial Economics, V. 3, N. 4
• Meron H. Miller (1988) "The Modigliani-Miller Propositions After Thirty Years", Journal of Economic Perspectives, V. 2, N. 4 (Fall): pp. 99-120.
• Franco Modigliani and Merton H. Miller (1958) "The Cost of Capital, Corporation Finance, and the Theory of Investment", American Economic Review, V. 48, N. 3 (June): pp. 655-669