“I wish we would stop using the word Capitalism,” writes John Kay of Oxford University, in a recent post entitled Moving Beyond Capitalism.
Kay reminds us that, under 19th century British capitalism, large companies were in the hands of owners-entrepreneurs. In the 20th century, in England and the United States, the role of entrepreneurs was delegated to professional managers, already in family enterprises and especially on behalf of a multitude of shareholders. The role of shareholders was taken over mostly by pension funds, by insurance companies and mutual funds, whose investments are handled by professionals specialised in managing their portfolios.
After WWII, firms become international and multinational, managing many plants in different countries and operating in a global economy that frees them of many domestic constraints, giving them access to the mobility of capital and labour, of goods and services. The enterprise is ’empty’ (generating the ‘hollow company’), in that it has transformed itself into a network of relationships, with a fragmented division of labour worldwide and governed by intermediaries that are organised by markets, rather than by hierarchies as in the enterprise model developed by Ronald Coase in 1937. Coase asked why production was organised in firms instead of being conducted by self-employed individuals entering market relations, and why production was not organised in a single giant firm. He found the answer in the transaction costs of market relations versus those of centralised direction by an entrepreneur.
The capitalisation of a large company depends on the value of these relationships, which is particularly illiquid: the relationships as such, or the brand that represents them, cannot be transferred to others without losing much if not all of their value. For this reason the shares of such companies tend to end up in the hands of their managers, as well as their employees. These companies need a stock exchange listing initially to allow the founders to realise the value they added to their capital, and to reassure shareholders on the value and above all the liquidity of their shares, but otherwise are not financed by the capital market, rather by reinvesting their profits.
A certain fragility derives from this set up, but also a certain resilience, i.e. the ability to survive a bad management even if their own capital is used inefficiently. According to Kay, the enterprise of the 21st century – and therefore today’s new capitalism – would no longer involve a confrontational relationship between capital and labor, but rather a partnership, an inclusive relationship that merges the interests of managers and employees, of suppliers and customers, while the position of investors is secondary and precarious. A stakeholders’ paradise, we might call it.
Kay expects that such an inclusive character of enterprises should discourage selfish rent-seeking behaviour and maintain cohesion, without endangering a company’s external legitimacy through the misuse of the political process, reaffirming their character as social organisations embedded in communities.
The theory that shareholders are not the owners of their company is an old hobby horse of John Kay, oblivious to considerations that shareholders who disagree with managerial decisions can always vote for the liquidation of the company, sell the shares to anyone with an alternative vision of how make it more profitable, or simply sell the shares in the stock exchange depressing their price, thus making it easier for potential bidders to take over the company.
Robin Marris (1964) tried to build a theory of ‘Managerial’ Capitalism, in which professional managers sacrifice part of the shareholders’ value (the maximisation of profit and of capital valuation relatively to capital employed), in favour of higher growth of company turnover, capital and employment, which benefits managers directly and indirectly through their remuneration, social prestige and promotion opportunities. However this profitability reduction is constrained, according to Marris, by the danger that the failure to maximise the stock exchange valuation of the company might induce an investor or an alternative managerial team to attempt a takeover bid, which if successful would bring about the dismissal of managers and the rise of profitability also in the interest of all other shareholders. Paradoxically therefore Marris’ attempt to theorise the alleged specific difference of Managerial Capitalism led him to confirm its traditional textbook behaviour.
As for the model of the modern enterprise as a network of relationships mediated by markets instead of a centralised command hierarchy, it is easy to understand its greater fragility but not its alleged more inclusive and less confrontational character. On the contrary, the fragmentation of the productive process and the fierce competition among global workers can only intensify conflicts between capital and labour, as confirmed by the continuous decrease of the labour share in national income worldwide.
The capitalist evolution outlined by Kay does not alter at all the system’s tendencies towards labour unemployment and unused capacity, economic fluctuations and crises, rising inequality of income and wealth. “Moving Beyond Capitalism?” No, back to the future.
Coase, R. (1937). ‘The Nature of the Firm’. Economica, 4(16): 386-405.
Marris, R. (1964). The Economic Theory of ‘Managerial’ Capitalism, London, UK: Macmillan.
This article was previously published on Domenico Nuti’s Transition blog.