RE: Ownership and Growth

[Michael Harrington <mharrington@milken-inst.org>]

Alan has raised some tough questions and controversial issues here but I'll
take a stab at them (MY COMMENTS IN CAPS)...


-----Original Message-----
From: IPGmail@aol.com [mailto:IPGmail@aol.com]
Sent: Wednesday, November 03, 1999 11:40 PM
To: ownership@cog.kent.edu
Subject: Re: Ownership and Growth


It is this question of the effect of broader ownership on growth that is one

of the principal reasons I am engaging in this discussion.  I recognize that

in serious discussions of broadening ownership this question has to come up,

and I want to better understand the views of professional economists on it.
I WOULD SAY THAT ONE GOAL SHOULD BE HIGHER GROWTH BUT ALSO SMOOTHER, MORE
STABLE, SUSTAINABLE GROWTH AS WELL.
FOR EXAMPLE, DOES JAPAN'S RAPID GROWTH IN THE 1970S-80S LOOK SO GOOD IN VIEW
OF THE SUBSEQUENT COLLAPSE? I GUESS THAT DEPENDS ON WHETHER YOU CAN SHOW A
CAUSAL CONNECTION BETWEEN THE NATURE OF THE GROWTH AND THE NATURE OF THE
SUBSEQUENT COLLAPSE. THE FED SEEMS TO THINK THAT SLOW GROWTH IS MORE
SUSTAINABLE...  

But potentially higher growth is not my reason for supporting broadened 
ownership; I would support it even if there were to be a modestly negative 
effect on growth, at least in our industrial or post-industrial societies.  
In a much poorer nation where the bulk of the citizenry is starving or near 
starving, growth is a top priority.  But here, given our general affluence, 
other considerations seem more pressing to me: economic inequality, 
individuals' control over their lives, the corruption of democracy, etc., 
each of which I believe would be positively impacted by broadened ownership.

But if the effect on growth were to be negative, that would be a formidable 
political obstacle, so I want to understand the arguments that are likely to

be presented.

To the best of my knowledge, the arguments of economists would most likely 
fall into the two categories I mentioned earlier.

(1) No effect because it is allocation that is important.  The details of 
specific proposals make a difference, but in general I wouldn't think that 
investments would be allocated any differently if capital were more broadly 
owned.  If the effect is neutral, growth is not an issue and arguments for 
broader ownership can rest on my other concerns.
SPEAKING AS A HYBRID ECONOMIST/POLITICAL SCIENTIST, I WOULD SAY THAT WE
REALLY DON'T KNOW IF THE PATTERN OF OWNERSHIP MATTERS FOR AGGREGATE GROWTH,
WE ONLY HAVE CONFLICTING HYPOTHESES. HOWEVER, ECONOMIC EFFICIENCY AT THE
MICRO AND MACRO LEVEL CAN BE MEASURED BY FIRM VALUATIONS AND CRUDE
MACROSTATISTICS LIKE GDP AND IS ONE INDICATION OF AN IMPROVEMENT IN OVERALL
GROWTH POTENTIAL. BUT THIS CAN'T ANSWER THE QUESTIONS RAISED IN MY PREVIOUS
COMMENT ABOUT WHETHER IT WILL BE STABLE, SUSTAINABLE GROWTH.

ONE ARGUMENT ABOUT WHY BROADENING OWNERSHIP HAS A NEGATIVE EFFECT COMES FROM
CORPORATE FINANCE- FROM BERLE AND MEANS [1932]ALL THE WAY TO JENSEN AND
MECKLING [1976, 1989]. THE SEPARATION OF OWNERSHIP AND CONTROL ASSOCIATED
WITH DIFFUSE OWNERSHIP GIVES RISE TO AGENCY COSTS IN THE FIRM - MGMT IS
INEFFICIENT AND SHAREHOLDERS SELL UNTIL A CORP RAIDER STEPS IN AND
CONCENTRATES OWNERSHIP BY BUYING OUT SHAREHOLDERS, RESTRUCTURES THE BUSINESS
AND RAISES THE VALUATION. IN THE 1980S THIS WAS THE PATTERN THAT
RESTRUCTURED THE FAILED CONGLOMERATES OF THE 1970S.  

(2) Negative effect because capital income will be consumed rather than 
reinvested.  Kelso (and Shann) argue that credit rather than savings could
be 
used for investment, and I am interested in the professional economists' 
assessment of this claim.  Elsewhere I have heard worries that there are 
definite limits to this strategy, which if exceeded would cause inflation.  
Unfortunately, I'm not sure I can reconstruct this argument accurately.  
Another argument against the "negative effect" judgment would be that since 
most people in our societies have their basic needs met, their choice of 
consumption over investment would not be a necessary response to higher 
income, but would depend on the marginal utility of more consumption vs. 
investment at particular rates of return.  In other words, businesses might 
have to pay a higher rate for capital to get citizens to forego further 
consumption, but free markets would work it all out.  That seems plausible
to 
me and I'd be interested in reactions from others.
GENERALLY, WHETHER CAPITAL INCOME WILL BE CONSUMED OR REINVESTED DEPENDS.
ALL INCOME IS EVENTUALLY CONSUMED, WHETHER NOW OR IN THE FUTURE - THE
ALLOCATION OF CONSUMPTION IS A TEMPORAL DECISION BASED ON MANY FACTORS, SUCH
AS INTEREST RATES, UNCERTAINTY, LIFE CYCLE PATTERNS, TECHNOLOGICAL
INNOVATIONS, ETC... 
PRICES ARE SIGNALS THAT AFFECT THESE DECISIONS SO THAT THE TEMPORAL
ALLOCATIONS BETWEEN CONSUMPTION, SAVING AND INVESTMENT ARE SUPPOSEDLY
OPTIMIZED ACCORDING TO REAL FACTOR CHANGES OVER TIME. 
THE INTUITIVE ARGUMENT FOR BROADENING OWNERSHIP IS THAT CONCENTRATED WEALTH
OVERINVESTS AND UNDERCONSUMES. CAPITAL FORMATION DERIVES FROM CONSUMPTION
DEMAND - IF PEOPLE AREN'T BUYING GOODS, THERE'S NO POINT IN INVESTING IN NEW
PRODUCTION. 
BETTER TO BID UP ASSETS PRICES, WHICH IS WHY ASSET BUBBLES PRECEDE
COLLAPSES. UNFORTUNATELY, FOR ECONOMISTS THIS INTUITIVE ARGUMENT VIOLATES
EQUILIBRIUM ASSUMPTIONS.


Okay, but could the argument be made that broader ownership would have a 
*positive* effect on growth?  Here we want to compare giving higher incomes 
to citizens via them becoming capital owners vs. giving higher incomes via 
redistributive policies, to see if there is an effect other than a Keynesian

boosting of aggregate demand.  From a conventional economic perspective, as 
far as I can make out, the only possible ways there would be a positive 
effect of broader ownership on growth would be (a) if the costs of carrying 
out the gov't policies were less than the alternative, or (b) or if 
worker-owners work more efficiently.  I wouldn't expect such effects to be 
significant.

This leaves Kelso's theory of binary growth.  (Unless there are other 
arguments I didn't catch or am not aware of.)  Frankly, I do not understand 
this argument at all.  Nowhere does Kelso lay the argument out, altho there 
are hints of his expectation of higher growth here and there.  Robert
Ashford 
is the only one, to my knowledge, that has attempted to make the argument 
explicit.  (He worked with Kelso and I believe he is a very faithful 
transmitter of Kelso's ideas.)  But I have read and re-read Ashford's 
writings, including his recent co-authored book, and the argument for binary

growth is simply opaque to me.  This may be due to my inadequacies in 
following the argument, but I don't think so.  I really don't think it is 
spelled out clearly enough to follow.

I am sure this assessment will be a disappointment to Keith!  My quarrel
with 
binary economics is not about the issue of growth specifically, but the 
assumption that in a free market income shares will reflect relative 
"productiveness."  Many of Kelso's claims rest on this assumption: that if
we 
got rid of redistributive policies income shares would be more like 10%
labor 
and 90% capital (this claim has been a lightening rod for criticisms of 
binary economics), that citizens are morally entitled to become capital 
owners because they could not possibly support themselves on labor income 
alone absent redistribution, and so forth.  But I can see no reason why 
income shares would reflect productiveness.  (As I said earlier, 
productiveness is not productivity, but something like the physical work 
contributed to production.)  The productiveness of capital would affect 
demand for capital, but lots of other factors could also affect the supply 
and demand for capital or labor.  As I mentioned earlier, if I am right
about 
this, a lot of Kelso's claims (but not all of them) fall apart.  Insofar as 
the claim that a binary economy would have greater growth is based on this 
assumption, it too would fall apart.  But it is hard for me to tell what 
exactly the claim of binary growth is based on, so someone else will have to

explain this if they can.
IF I AM NOT MISTAKEN, BINARY ECONOMICS IS BASICALLY REAFFIRMING THE EFFICACY
OF SAY'S LAW - THAT SUPPLY CREATES ITS OWN DEMAND (OR VICE-VERSA AS THE
SUPPLY-SIDERS CLAIMED). THE CONCEPT OF PRODUCTIVENESS MAKES THIS PLAUSIBLE.
TAKE THE CASE OF HENRY FORD'S FACTORIES. WAGES WERE $1 PER DAY FOR
AUTOWORKERS AND AT THE PRICE FORD WAS CHARGING FOR CARS THERE WERE FEW
BUYERS - BASICALLY ONLY THE RICH. WHEN HENRY RAISED THE WAGE TO $5 PER DAY,
HIS WORKERS STARTED TO BUY HIS CARS LEADING TO MORE ECONOMIES OF SCALE AND
LOWER CAR PRICES AND A VIRTUOUS GROWTH CYCLE. HOW WAS THIS POSSIBLE? WHY
DIDN'T THE HIGHER WAGE COST JUST MAKE THE CARS EVEN MORE EXPENSIVE? WHAT
KIND OF GROWTH SYNERGIES WERE CAPTURED HERE? THE PROBLEM FOR BINARY
ECONOMICS AS I SEE IT IS HOW DO YOU DEMONSTRATE THIS FEEDBACK EFFECT BETWEEN
CONSUMPTION AND PRODUCTION OVER TIME?


Michael Harrington
The Milken Institute
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mharrington@milken-inst.org
TEL: (310) 998-2699
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