|Man Without Qualities|
Saturday, May 04, 2002
Who Are the Stakeholders? What is the Lesson?
Is the “market share” of companies in compared economic systems a good measure of comparative success? For example, Mr. Hutton compares Nokia with Motorola, suggesting that Nokia is the more successful company: “Nokia's success is legendary; it has 35% of the world market - twice that of Motorola.” But Motorola’s stock price is essentially where it was a year ago while in the same period Nokia’s stock price has lost about one-half of its value.
Sometimes it just doesn’t pay to be popular. Perhaps Nokia shareholders now regret not giving their company’s upper management more stock options. But the whole picture makes one wonder why Mr. Hutton chooses Nokia as a supposedly high-flying example of what Europe has to offer Uncle Sam.
Of course, Mr. Hutton disavows “shareholder capitalism” – so perhaps it is unfair to cite stock performance here. On the other hand, as noted in the prior post on this topic, Mr. Hutton does not make it easy for one to determine just WHOSE welfare should be examined to determine corporate “success.”
But it may be possible to tease out of Mr. Hutton’s obscurationist prose some understanding of what he is up to – at least implicitly. When Mr. Hutton writes that Europe can teach a lesson to “Uncle Sam” or “American conservatives,” he seems to refer to the kind of people who hang around places like the University of Chicago – especially in its economics department and law and business schools. Many of those people advocate policies that are intended to increase aggregate social welfare. And one of the big reasons many of them favor corporate policies that focus on maximizing shareholder returns (that is, “corporate earnings”) is that such returns measure whether a company is the best user of its own resources. Simply put: if earnings are low, the company should be sold to someone who can make those assets yield more. (This is the “market for corporate control” so despised by European intellectuals, among others.) If all companies are generating as much as their resource will allow, a society has gone a long way towards maximizing its overall wealth.
Of course, “Uncle Sam’s” system should not be confused with the actual American economic system. While the actual system has been seriously influenced by “American conservatives,” the capital of the United States lies far from Hyde Park, Chicago, Illinois! Mr. Hutton is rather relaxed with his conflations of actual American systems and those advocated by “American conservatives” – but there is certainly more overlap in this country than there is in Europe, so his informality is not all that confusing.
Continental European (German) law provides that the employees of large companies appoint one-half the members of the companies “supervisory board,” its ultimate policy making body, even when the employees are not shareholders. The board of supervisors appoints the company’s management board. In practice, employees and banks dominate the ultimate governance of large German companies at a policy level, where the banks act through equity stakes, through proxies given to them by small investors, and through bankers’ positions on the supervisory boards. But governance of British companies is more similar to that of American companies (shareholders alone elect the company directors) – so Mr. Hutton doesn’t seem just want to look to the welfare of employees, creditors and shareholders. British law historically also accommodated the activism and strength of British labor unions which restrict management’s discretion, an accommodation weakened under the Thatcher reforms. European labor laws make firing employees difficult and fix many aspects of the employment relationship that in America are dealt with by contract, such as minimum vacation periods. And, of course, widespread direct state ownership and continental tax laws have in the past impeded the “market for corporate control” advocated by “American conservatives,” a market intended to check management’s tendency to run the company for their own benefit. By concentrating board control in banks, the continental system attempts to substitute the countervailing power of institutionalized, professional ownership for a market for corporate control as the monitoring mechanism checking management.
There is a common thread in the above. Mr. Hutton and European law seem to deem a company “successful” if it advances the interests of existing influential institutionalized economic interests: unions, banks, institutional shareholders, existing political parties, established companies, government employees, governments, and whoever else managed to scrape together some presence on the economic scene in the past by whatever means. In particular, a development which would increase overall societal welfare but reduce the welfare of such established interests would be welcomed by “Uncle Sam” but not by the European way or Mr. Hutton. One can certainly see why a society based on “Uncle Sam’s” thinking is often going to be more dynamic and sometimes downright frightening than the comfy European model Mr. Hutton favors. One can also see why the comfy European model is also comfy for antisemites – since one historical, European view of Jews (a view much more prevalent outside of Britain) is as ‘cosmopolitans” who seek to benefit from whatever growth is possible, inside or outside established interests. Indeed, the novel from which this blog’s name is borrowed includes a marvelous mediation on this aspect of non-British European civilization through the medium of Bank Director Leo Fischel of the Vienna branch of Lloyd’s Bank.
What of the question of whether “American conservatives" (“Uncle Sam”) should heed Europe’s “lesson,” as Mr. Hutton advocates. Well, it seems unlikely that the European system, which specifically rejects developments which increase overall welfare unless those developments also enhance the welfare of established interests would provide many good examples for people who just care about increasing overall welfare. Of course, not every development that increases overall wealth will bring material harm to established interests – Nokia seems to be a fair example of that, although the European way eventually seems to have caught up with Nokia, too. Also, many people are focused on the distribution of wealth as well as the creation of wealth, but it sure makes things easier for those folks to have more wealth the spread around in the first place.
One lesson a European style emphasis on established economic interests brings home is the significance of subsidies. One might define the extent of the subsidy an interest receives in a particular economic system to be the difference between what wealth the interest actually receives over the wealth it would receive in a system that maximized overall societal welfare. Such a “subsidy” will be hard to calculate absolutely, but in particular cases it is fairly easy to see that a subsidy has increased or shrunk. For example, an industry that is protected by tight import quotas and tariffs is probably receiving a big subsidy. Until the year 2000, "Japanese automakers operating in Europe were constrained by import duties of 10 percent and voluntary export quotas that sharply limited their growth. In France, Japanese companies could claim no more than 3 percent of the market. In Spain, it was zero. In the United Kingdom, the cap was 11 percent, and in Germany the quota was 16 percent. Italy limited Japanese sales to 3,000 cars per year. Yet in Europe's smaller countries, too small to fundamentally influence the balance of power in the overall car market, there were no such quotas. Accordingly, Japanese automakers claimed as much as a third of the national markets in places such as Ireland, Denmark and Finland." Those quotas and “informal arrangements” have now supposedly been lifted, and Japanese car makers now claim about 7-1/2% of the European market – where they claim over 25% of the United States market (where the US auto industry is also subsidized by quotas on Japanese cars).
But it is highly unlikely that the Europe admired by Mr. Hutton could accept Japan’s frankly claiming, say, one-third of its auto sales, thereby seriously undermining many established interests even while increasing overall European wealth. Simply put: the known political realities in Europe (celebrated by Mr. Hutton, for example), forewarn the Japanese from making a full push into that market, and thereby continue to subsidize the European industry notwithstanding any putative termination of import quotas and “informal arrangements.” The subsidies continue precisely because of the European way admired by Mr. Hutton.
A big beneficiary of these past and present subsidies is Volkswagen – another of Mr. Hutton’s purported flagships of European success. Yet, despite such massive subsidies,
Volkswagen’s stock has performed only about as well as that of General Motors, which is the beneficiary of much weaker subsidies – and, in any event, has not been considered a flagship of American corporate success for decades. But even so, GM did generally better than Volkswagen during the long period before the European quotas were lifted.
Another consequence of the odd subsidies the European way creates is its artificial enhancement to European “worker productivity.” As a subsidy to unions and established employee interests, European law imposes very high costs (compared to United States law) on an employer’s decision to hire a worker – especially young, inexperienced workers. One consequence is that an employer will only hire and retain workers who are productive enough to justify such high costs – other workers will become unemployed. Since “productivity” figures generally reflect the output of those who are employed, the European subsidy system tends to artificially enhance putative “productivity.” Mr. Hutton seems to like that, but the failure of higher productivity to result in growth and employment concerns European social planners, some of whom noted, for example:
“Faster economic growth will be critical in creating jobs and assuring the success of EMU. Historically, Europe successfully created jobs when economies were strong. Fast growth between 1986 and 1990 (3.4% annually) added 8.1 million jobs in the EU. Unfortunately many of them disappeared in the slow growth of the 1990s, (1.5% annually). …[W]e believe that EU economies must grow more than 3 percent annually in the first 4 years of EMU: in order to handle growth in the labor force, to accommodate productivity improvements, and in order to reduce the unemployment rate. Anything less would mean a definite risk that the public would blame the EMU for failing to address unemployment.”
International comparisions of worker productivity are tricky. For example, "Gross Domestic Product Per Hour Worked" is a measure of productivity less subject to the artificial enhancement described above. Such figures exist. However, such reports with which I am familiar are considered to be "experimental," carry warnings that they are to be used for detection of trends and not reliable for cross border comparisions, and require acceptance of some rather difficult conclusions. For example, consistent with Mr. Hutton's arguments, the figures linked above rank the French economy as very slightly "more productive" (on a GDP/Hour basis) than that of the United States. But those figures also rank the Japanese economy as vastly less efficient than that of France or the United States. For example, the United Kingdom is defined on that productivity index to be 100, and for the year 2000 France and the US both show up at about 125 - while Japan appears at 90! Perhaps this is true. But one does not easily accept the suggestion that an hour worked by a French worker was almost 40 percent more productive than that of an hour worked by a Japanese worker in 2000. But then that study specifically warns that it is not to be used for cross-border comparisions.
But perhaps the biggest “subsidy” lesson Europe has to teach the United States lies in the field of national and international security. During the Cold War, Europe’s defense expenditures lagged far behind those of the United States while Europe’s social expenditures surged far ahead of those of the United States. Europeans argued that such social expenditures were equivalent to American defense expenditures because social expenditures bought security for the lower classes, and therefore security for Europe from the Soviet threat. This argument was always thin and was not advanced in the United States. Once the Soviet Union fell, European defense expenditures fell even further but social outlays did not. Europe presently and for the past fifty years was and is a subsidized free rider in the area of national and international security. The Europeans even managed to turn their subsidized status into an argument for their own subsidization of Airbus, another company admired by Mr. Hutton. The Europeans argued that Boeing’s having received the benefits of American defense industry research justified massive European government financial subsidies provided to Airbus.
But the force of the European Cold War position was that the Soviet Union was a very real threat to the United States. So when the Europeans refused to shoulder their portion of the defense burden, the United States was still better off defending itself. Europe has no such winning position now, and it is hard to see why the United States should continue to provide security assurances of any kind for Europe.
Simply put: It appears that the growing gulf between Europe and the United States as to matters of international and economic relations is probably explainable in terms of the United States coming to realize that Europe has been and is a free rider on America for a very long time – and there is no longer any justification for that subsidy. That seems to be a “lesson” Europe can teach Uncle Sam, although it is not a lesson Mr. Hutton suggests. As Catherine Aird noted: “If you can't be a good example, then you'll just have to be a horrible warning.”
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