Kaletsky on Private Equity

These facts in Kaletsky's piece utterly undermine Hutton's, already weak, case against private equity:

"It is not good enough merely to quote statistics about the broadly positive effects of private equity deals on profits, productivity and even jobs — impressive though these are. The most extensive study of what happens when private equity companies take over businesses has been conducted by the Centre for Private Equity Research at Nottingham University. The research shows not only that investors in these deals over ten years on average made profits 22 per cent above the market index, even after paying the seemingly exorbitant fees of the merchant bankers and lawyers. More surprisingly it shows that employment, after dipping by an average of 5 per cent in the first year after a buyout, rose by 21 per cent after four years; also that productivity almost doubled in this period, that product innovation increased and that companies showed evidence of more entrepreneurship. Most surprisingly of all, the Nottingham study — financed in part by City institutions — “found higher levels of employment, employee empowerment, and wages” after these deals."

This article should also make Chris Dillow think again as it would appear that public limited companies are unfashionable thanks to regulation rather than any inherent inefficiency. My explanation, and one that is clearly credible to a certain extent, is that with the ability to privately pool large sums of capital, it is possible to avoid the free rider problem associated with public ownership. However, if Kaletsky's, also plausible, explanation holds then Dillow's case, based on identifying a possible inefficiency of the traditional capitalist ownership structure, is critically weakened:

"The answer is actually quite clear, but it has never been heard from either the detractors or defenders of the private equity business. The real origin of what trade unionists regard as this industry’s excess profits is not the lack of regulation of private equity. It is the overregulation of pension funds, public companies and other investment institutions.

Trade unionists and old Labour politicians will never make — nor even understand — this argument. For them, demanding extra regulation to control the likes of Damon Buffini, the head of Permira, is the automatic response."

The Carnival of Cinema

A new Carnival of Cinema is up with lots of great posts including one of mine.

Civilization and Game Theory

This article in the Weekly Standard (via the American Scene) makes the important point that generalising from Grand Theft Auto to ‘computer games are bad for the young’ does not allow room for Civilization, 'a video game version of a classical education'.

When I first studied game theory it struck me that Civilization is probably the most complex (in terms of number of potential strategies) artificial challenge mankind has ever set itself. The number of possible strategies in chess is truly staggering, more than all the molecules in the universe, but for Civilization, with so many choices as described in the article, the number has to be higher. I doubt there's a game with more going on and, in that regard, Civilization has to be considered something of a cultural high watermark. It would also be interesting to see how players respond to a game they are unable to truly think through due to its complexity (just as in chess where players and computers can only think so many moves ahead); how do people guess their way towards effective or ineffective strategies?

It might be particularly interesting because it seems far more plausible that the sentimentality which must infest real life decisions will be mirrored in the imitation of real political choices that is Civilization than in the abstract game that is chess. There's a PhD in that one I think...

Gordon Brown and the Military

It is sickeningly negligent and irresponsible to ask so much of the British military while funding it so poorly. This article for the New Republic (requires registration) details how bad things have gotten:

"Historians assessing the Blair years will wonder how the prime minister's remarkable appetite for sending British squaddies into action overseas could be matched by his ministry's striking disinclination to furnish them with the tools they need. A 1998 Strategic Defense Review concluded that Britain required the capability to conduct two medium-sized operations and a small peacekeeping operation simultaneously. Over the past decade, however, Blair has sent British forces into action in Bosnia, Kosovo, Sierra Leone, Afghanistan, and Iraq, while simultaneously reducing the army, navy and air force's manpower and operational capability. A 2004 "rebalancing" of defense priorities actually reduced the number of infantry battalions--the boots on the ground needed for peacekeeping or counterinsurgency operations--from 40 to 36. With the prospect that as many as 9,000 British troops may be deployed to Afghanistan this year, the 100,000 strong British army simply cannot indefinitely maintain a similarly sized force in Iraq on top of its other, albeit smaller, commitments around the globe.

Moreover, although overall defense spending has kept pace with inflation during the Blair years, the Treasury has insisted that the military do much more with, in real terms, much less. Since September 11 defense spending as a percentage of GDP has actually declined--from 2.5 percent to less than 2.4 percent. That's half as much as it was in 1984 and lower than at any point since the early 1930s. France and Germany, to name but two examples, spend a higher proportion of GDP on defense without the additional expense or strain of actually committing large numbers of troops to overseas adventures.

The effects on the military are clear and, to British eyes, shocking. Nearly one third of the Royal Navy is already confined to port to save money, and First Sea Lord Jonathan Band has warned recently that unless further proposed cuts to the surface and submarine fleets are averted, "We could turn into the Belgian navy." Although the government approved the construction of two urgently needed aircraft carriers as far back as 1998, no orders have yet been placed, fuelling suspicions that the Treasury is unprepared to pay for the new ships. As the Daily Telegraph noted, dryly "If you want to practise gunboat diplomacy, it helps to have some gunboats." As it is, the active duty navy is smaller than the French navy for the first time since Trafalgar.

For its part, the army is struggling to meet its targets for recruitment and, crucially, retainment, and many infantry battalions remain nearly 10 percent under-strength. Though public sector employees such as nurses, doctors, and teachers have received generous pay settlements during the Blair years, the armed forces have been granted no such bounty. According to the Ministry of Defense's own estimates, nearly 50 percent of the accommodation for single soldiers is deemed "unacceptable." It's little surprise fewer squaddies are prepared to re-enlist."

The man responsible is clearly Gordon Brown. His decisions at the Treasury have been the ones which have made this problem so acute. Failing to properly provide for a military being asked to do a huge amount for our foreign policy is an abject failure of judgement on Brown’s part. That, despite this, he is still the likely Labour choice for Prime Minister demonstrates how unserious that party’s approach to foreign policy is.

Kagan and a new conservatism

I’ve been thinking about the Kagan piece which I posted about last night and it might be helpful to put it into some context.

The closest one can really come to a definition of conservatism itself is the Burkean respect for inherited institutions and wisdom:

"We are afraid to put men to live and trade each on his own private stock of reason, because we suspect that this stock in each man is small, and that the individuals would do better to avail themselves of the general bank and capital of nations and ages."

However, this necessarily means that the detail of conservatism must be defined anew by each generation as there will be a different set of old truths under attack that the right will need to defend; some may also be abandoned as no longer worth of defence, ideally after a process of incremental change. Defending capitalism, and its productive potential, was a focus in the past century but certainly not for conservatives such as Disraeli in the nineteenth century who viewed it with a vague suspicion. Equally, few conservatives are now interested in supporting limited sufferage.

Islamism is a threat to the West but has limited appeal beyond its ‘heartland’ in the Muslim community. The ideological threat to the established order which is being identified as crucial in this century is transnational progressivism, which threatens liberal democracy. At the moment the intellectual right is therefore doing two things:

Firstly, it is trying to wake itself up to the threat. In this regard the various articles describing the Tranzi ideology and its likely progress serve as equivalents to Hayek’s The Road to Serfdom; they sound the alarm.

Kagan’s article is different in that it instead begins the conservative intellectual celebration of the institution under threat. Though using the example of the classical history of Athens the real subject is the modern world and the call for leadership is a call for conservatives to turn to the task of intellectually defending the liberal democratic nation state. Most of the rest of the article attends to this task: describing the more esoteric benefits of liberal democracy and why individual citizens should support it. Kagan’s piece is therefore the equivalent to W. W. Rostow’s Stages of Economic Growth; it even shares Rostow’s presentation as a guide for developing states.

Read O'Sullivan’s article (which I cited here) and you’ll get a good idea of how this new struggle could be just as important as the Cold War in determining the future path of the West. I think there is a good case that conservatives have been sleepwalking for some time basking in the glow of victory over Communism and fretting, in books like the End of History, that there just weren’t any decent challenges anymore. Now we're waking up.

Leaving the EU and the UKIP

Jackart, DK and the Nameless One are in a fight over the UKIP again. DK's response contains the same logical problem I've noted before. This sentence is a good example: "For fuck's sake, even the offer of an unloaded refendum would be good enough for me (and even for the majority of UKIP, I would imagine)." This assumes that the Conservative party's policy comes down from on high and that members should passively take or leave the opinions of the parliamentary party.

Parties are coalitions of people with broadly similar approaches to politics. The actual challenge for someone with a view outside the political mainstream (the position we share on climate change is another example) is, in the end, to find the party whose approach to politics is most compatible with their own and then try to convince them of the merits of their position. Once that party is convinced it can attempt to seek a parliamentary majority on that basis. If you do not like the leadership's position on the European Union then convince the membership and, at the next leadership election, you can get the kind of leaders you want.

As such, the only reason to leave the Conservative party is if you think its members aren't those who will be easiest to convince of your position (they're easily the most Eurosceptic portion of the population so that seems unlikely) or if you think your cause is hopeless but would rather be screaming at the wind than be dirtied by the compromise of contact with the Conservatives. If you can't convince the Conservative membership you're never going to be able to convince the public at large and the problem is in the case rather than the party.

Look at it this way: There are opportunity costs to the UKIP. Imagine if all the money, effort and people committed to the UKIP were, instead, within the Conservative party arguing and voting for change in its European policy. You wouldn't piss off loyal Tories by associating Euroscepticism with undermining right-wing electoral chances. What talent and funding UKIP possesses might be spent convincing people rather than on the paraphenalia of running a party. Eurosceptics wouldn't take the risk of strengthening the hand of the real europhiles in the Labour and Liberal Democrat parties.

Every time a Eurosceptic leaves the Tories and joins the UKIP they remove themselves from the debate within the Conservative party. They replace their voice and vote with a threat, to hurt Conservative election prospects, but there is no evidence that this is a threat which the party responds to in the way UKIP would like. Instead it creates a defensiveness that may be what came across to DK, in Oliver Letwin's speech, as arrogance. The best Conservative response electorally to the 'UKIP threat', so long as they are not convinced by its arguments, isn't to appease but to crush the smaller party. As such, the threat will continue to fail to have the effect you are looking for and the challenge remains to convince the Conservative party of the merits of leaving the EU.

I do not want to leave the EU but do have some positions on which the leadership does not represent my views; the proper response to climate change is one. On those issues I am doing all I can to change the minds of the public and fellow Conservatives. Setting up a new party would not be an effective means to that end.

Periclean Athens

Superb, high-minded, article by Kagan for the AEI arguing that the Athenian example provides crucial lessons in the qualities needed for the foundation of a successful democracy. The entire piece is so worth reading that I'm going to avoid citing any particular section. However, I would add that its lessons aren't just important to new democracies but essential to continuing the stability of the Western democratic states as well.

The section discussing the Greek understanding of mortality and the imperative that created for glory is very interesting. This sense of glory, enshrined in the story of Tellus, is, perhaps, what I was getting at but failing to define, as Gracchi was right to note in the comments, in my discussion of pre-birth insurance and why I find the Rawlsian position small minded.

Do take a read.

FreeBornJohn

This is a good blog and well worth keeping an eye on; he spots some interesting stories. Peter links, in my post below, to an article he has written highlighting just how insane the printing union was. Bill Bryson's description of his time there is equally amazing. These people were literally telling their employers how many they needed to employ and at what rates and huge numbers were just not doing any work at all.

He has another, brilliant post, here about the sheer weakness in the performance of green investments. When people tell you that it's worth Britain investing in green technologies as it will make a positive return show them that post. Maybe the market is wrong but historically it has been a far better predictor of the returns to investment than government.

Democratic Whores!

Apparently Hillary is going to spend a day as a nurse in order to attempt to secure the backing of the important Service Employees International Union. How... juvenile.

Our approach to union politics is so much more grown up. The unions don't need to be reassured by Hazel Blears dressing up as a nurse, civil servant or tube driver. Instead, they content themselves with complete financial domination of the Labour party.

Hazel Blears' article for the Guardian is utterly shameless. Unions are a group entirely dependent upon the exceptional privilege of legal protection from being fired or sued for breach of contract when they don't turn up for work, they have been the direct recipients of taxpayer's money under a Labour government, historically their excesses have done huge damage to the UK economy; they are the sort of interest group whose influence on our democracy we should be really careful of. Hazel Blears is actually boasting that they have a 'hotline' to the Labour government. Disgusting.

CF Diary Piece

I have a post up on CF Diary about the task of creating a Conservative Future that encourages thoughtful young Conservatives. Well worth a read, if I do say so myself.

This actually relates quite nicely to a recent post. Gracchi has graciously named me in his meme post as writing a blog that makes him think. I've been trying to work up a response to this for a few days and there are some candidates but I'm not sure I could make it to five from the British blogosphere, particularly without repeating from Gracchi's list. Look at the analysis links in my blogroll and you'll see a preponderance of Americans.

If British conservatives want to stick to what they do best now, quick rebuttals of idiotic lefties in the mainstream media, they will still fulfill a desperately useful function and I'm not going to tell people what to do with their own free time. However, I think that an analytical focus in the blogs will increase as the medium matures, as I set out in a post for the BUCF. There are quite a few Conservative blogs which are clearly capable of analytical thinking and it seems to me that, in the medium term, this will come to be how they distinguish themselves from each other as the fairly limited supply of blogging "scoops" is not enough to go around. Blogs which think a little deeper are, I believe, the future.

Reality and Cinema

I went to see my, rather overdue, first Iranian film today. It was Kimia at the Barbican as part of their War in Iranian Cinema series (on for a few more days). It set me thinking about films and how real I want them to be. If this analysis is not novel then I apologise, this is not my field of expertise and I can’t offer more than ardent, thinking amateurism but hopefully it might be of some value. Lee Siegel’s defence of Eyes Wide Shut (which I disliked when I first saw it and need to watch again) touches upon similar ideas.

Kimia is a good film with human characters and a compelling central dilemma. That dilemma is the heart of the film and the director does a good job of building the story of a man who has lost almost everything and yet, in order to do the right thing, has to give up all he has left.

Its treatment of the war itself portrays the Iraqis as something of an inhuman event rather than as people but that is probably their place in this kind of story. I’m not aware of a nuanced telling of the Iran-Iraq war and it is understandable that it is, perhaps, too soon to talk in an even handed manner about an event so destructive to both sides.

The acting is good although at times I felt a little left out and distracted by the clumsy translation job which left me having to work to ignore the dissonance between amusing translation error and screen heartache. It made me grateful for the superb job the people behind labels like Tartan, Hong Kong Legends and Premier Asia do in bringing East Asian cinema to our screens.

However, the biggest reason the film was one I liked rather than really loved was a more fundamental disagreement with the stylistic choice; one I understand has been made by Iranian cinema in general. The hyper-realistic, documentary-like style of film making is one that is loved by large parts of the critical community but seems dry and less emotionally powerful to me. This is also the reason why I found Force of Evil, which I watched recently on Gracchi’s recommendation, interesting but distant.

I quite like film making to be beyond reality. This doesn’t mean I need fantasy in the traditional sense but I do need a film to do something for me beyond presenting a well acted and written story. I watch films because they can bring me something which, through not being real, can highlight some emotion or moral that reality struggles to illustrate clearly.

This does not mean that I want my films to be simplifications of reality. Some of my very favourite films are those like Children of Men or Crash which depict nuanced human natures and problems which cannot be reduced to simple matters of right and wrong. However, they do so through an implausible change to physical reality or through a style which tells a story broader than any human could really perceive respectively. Their departures from realism allow truths to be shown in a new light and appear to us as something remarkable.

This does not mean that I want my films to be sugar coated. Korean cinema is, to my mind, the most exciting national cinema around but is frequently absolutely gruesome. However, the horror is not used just as a worthy reminder of horrible events or, at least in my mind, as a source of rough entertainment, but to give immediacy to the moral choices made by characters and to ensure that it is understood, clear as day, that when they take a hard path its rockiness is clear.

Finally, this does not mean that I do not like films to directly address contemporary political questions. Dr. Strangelove is, in my opinion, the best film ever (although Children of Men makes me rethink this every time I watch it) and was a nuclear holocaust comedy at the height of the Cold War. I love it despite being in favour of maintaining a nuclear deterrent and therefore, I suspect, disagreeing with the film’s makers; I think that the right conclusion to take is that MAD’s limitations needed to be kept in mind rather than the doctrine of deterrence be abandoned. However, all sides of the debate should appreciate that the fantastic plot of the film allows us to think about the problems of nuclear deterrence in a new way. Everyone can see political reality if they care to look but an inspired film’s artifice can allow us to see that reality with new eyes.

The best looking films are fantastic. The most beautiful film ever is Kubrick’s spectacular Barry Lyndon, an unfortunate omission from any list of the best costume films, which isn’t strictly speaking fantastic but becomes so through so thoroughly recreating a lost world of the aristocracy. That film makes it pretty clear that the movie Kubrick was planning about Napoleon was an unparalleled loss to cinema. Other candidates for most beautiful film ever, Zhang Yimou or Sam Mendes’ creations spring to mind, tend to be works of visual imagination.

There is a place for realistic cinema, some stories just need to be told plain and unvarnished, but I do not think it stands up as a doctrine for film making in general. Film is truly great and at its best as a medium when it is able to transcend the reality of our everyday senses and touch something deeper in our emotional or moral fabric.

Principle, Opportunism and the Italian Right

I've been thinking a lot over the last few days, as the crisis has been ongoing, about what our appraisal should be of the Italian right's behaviour in the dispute in Italy over Prodi's foreign policy. Prodi lost a vote on maintaining Italy's presence in Afghanistan as some of his own coalition abstained in the senate and the right voted against en masse. He was then forced to resign although it appears he will attempt to form a new majority.

Now, I find it highly unlikely that the Italian right actually wants to leave Afghanistan. Afghanistan is dissimilar to Iraq in some crucial ways and has broader, bi-partisan support across the Western alliance. Italian involvement there was begun by the Italian right under Berlusconi's leadership. While Italian foreign policy as a whole under Prodi might have flaws sticking with Afghanistan, particularly now, is an important enough issue to be treated independently. As such, this article by John Hooper is somewhat misleading as the majority of those who voted against the Afghan involvement are not motivated by a dislike of that involvement and other relations with the US; although that connection may be upsetting a portion of the population and certainly changed the votes of radical members of the left-wing coalition.

Was the right wing vote unprincipled?

In terms of the issue at hand it certainly looks that way. They are taking political advantage from voting against an initiative that they believe to be right. This is a very definite sacrifice of principle to narrow partisan advantage.

However, it is unlikely this will result in the troops actually being withdrawn. Were Prodi to actually fall the right could get itself elected and have both involvement in Afghanistan and an improvement across other policy which is a positive net result for principle. With Prodi surviving the likely outcome is a weakening of his position, and ability to do further harm, combined with a passing of the original measure to keep troops in Afghanistan.

Why is it that I'm still disconcerted? Why do I have a vague feeling that principle on each individual issue should be preferred to sacrifices for a general maximisation of principle across different issues?

Perhaps it is that the right is, to a certain extent, punishing Prodi for his willingness to take on the radical left in the name of sensible policy. Prodi is suffering for being taking the right-wing side of a debate and it seems immoral to me that the right should take advantage of that. Even if he is, in general, a Prime Minister few right-wingers would want much to do with his principled stand on this issue should be celebrated. After all, the right should have an interest in facing the best possible enemies. Blair's shifting the Labour party right may have hurt Conservative electoral prospects but undoubtedly shifted the political centre towards our beliefs by validating them. By punishing Prodi for being sensible on Afghanistan, the Italian right give prominence and credibility to the worst strains of the Left.

Hutton on Private Equity and Sinclair's Law of Bad Guardian Articles

For now he has given up on spouting ignorance about China and getting angry about private equity is, apparently, Hutton's 'thing'. This article is about as bad as the last one.

"It is time to come to the defence of the public limited company, one of the great Enlightenment gifts to western civilisation. Increasingly capital, in the quest for higher returns to make vast personal fortunes, is going private to escape the demands of public accountability on stock markets. If uninterrupted, the long-term adverse consequences of this privatisation of capital for our economy, society and democracy will be profound."

Again this bizarre idea that stock markets ensure public accountability. They hold firms accountable to the objective of making the fortunes of investors just as the shareholders of private equity firms do.

"Even six months ago, very few outside the City or the readers of business pages had come across the idea of private equity. Today, as Sainsbury's is stalked by a club of four private equity firms allegedly plotting a £10bn bid and the GMB has ignited a campaign against job losses incurred in private equity restructurings by comically embarrassing one its leading lights - Damon Buffini, the boss of Permira - private equity is news. It is even becoming an issue in the contest for the deputy leadership of the Labour party."

Job losses, while unpleasant for individuals, are a part of how the economy adjusts to changing technology and consumer tastes. If private equity firms can run a firm effectively with fewer employees that is a pure efficiency gain and those employees can be employed elsewhere where they are more useful. This transition can be particularly difficult for those with specialised skills, set in their ways or in a troubled labour market but the solution is to get better at moving those laid off into more productive employment rather than have them continue in jobs which are no longer required.

"The story, as recounted by consensus opinion from the shadow chancellor, George Osborne, to the CBI, and eagerly rehearsed by the private equity industry itself, is that the emergence of more than 700 private equity companies deploying saving and borrowing power of more than £1 trillion is crucial to wealth generation. By taking public companies out of the public arena of accountability, regular reporting and scrutiny, they can instead enjoy the benefits of engaged, committed ownership.

Too many companies, they allege, are just not trying hard enough to maximise their profits, indulged by disinterested pension fund and insurance company shareholders. They need the managerial alchemy of private equity investors who, aiming to make "life-transforming" money for themselves, will give them the necessary managerial and strategic shock treatment."

This is an utterly ignorant caricature of the role private equity firms play. It is the kind of logic that flies on the pages of the Guardian to a readership not versed in finance.

A recurring problem for stock markets is that ownership is so dispersed that each individual owner has such a small stake in each firm that the costs of actively monitoring its management, which can be significant, are not worth paying for marginal changes in results; it is preferable for each investor to free ride off the monitoring efforts of others who might be more conscientious. This leaves managers with a particularly strong hand in avoiding shareholder control of activity that might not be in shareholder interest, whether paying higher wages than are profitable or blowing piles of money on business jets. This problem is partly overcome by large groupings of investors such as the Association of British Insurers and by the threat of takeover. However, private equity avoids these problems entirely as ownership is concentrated and there is, therefore, active monitoring of management. Their improvements to firms financial performance are far from alchemical.

"One truth about private equity shines out: the extravagant management fees and annual "carry" (the share in profits) certainly means life-changing fortunes. Researchers at Manchester University's ESRC Centre for Socio-Cultural Change recently got hold of the internal management accounts of one fund with up to £8bn of funds under management. After five years 30 full partners expected to make between £25m and £50m each."

Can we call it Sinclair's Law that all bad Guardian articles will eventually make a shameless statement of envy?

"The rest of the industry's claims about creating jobs, investment and exports do not bear close scrutiny. Much of the alleged managerial alchemy is no more than old-fashioned financial engineering - that is, leveraging up returns by incurring lots of debt. One study by Citigroup showed that if pension funds and insurance firms had borrowed money themselves and invested in a basket of companies in which private equity groups invested, they would have made higher returns than even the best-performing private equity firms."

If your case is that these firms don't make sufficient returns to be a good investment then this isn't a political issue and we can leave a solution to the market which will stop investing in private equity funds if they don't get results.

"Mortgaging the future to capture gains for personal enrichment in the present is easy - as one chief executive of a well-known public company told me recently, the task of the good manager is to resist it. Managers have to balance the interests of today's shareholders with tomorrow's shareholders. Private equity drives a coach and horses through the proposition. And as Paul Myners, the former chairman of Marks & Spencer and chairman of Guardian Media Group, has remarked: "The one party that is not rewarded is the employees, who generally speaking suffer an erosion of job security and a loss of benefits.""

If a firm is irrationally rewarding employees with job security and benefits that they don't earn in terms of production then that will be competed away, possibly from overseas, anyway. Private equity just speeds the process. If they do earn their benefits then it won't be in the financial interests of the firm to lose them.

"The catalogue of firms thus financially engineered is endless. A consortium bought the car rental company Hertz in 2005, packaged up the car fleet in blocks of tradeable assets that could be bought and sold by banks, and sold the weakened company back to the stock market. Others have bought media outfits such as PanamSat in the US or EirCom in Ireland - not to develop a free media that holds truth to power but, as Columbia University's Eli Noam argues, to weaken that capacity while remaining unaccountable owners themselves.

In Britain Debenhams was bought, its stores sold off to be leased back by the enfeebled company, which was then sold back to the stock market. And other public companies, including ICI, Amec and EMI, are being stalked, and adjusting their strategies accordingly. The shadow of private equity falls everywhere, making the gamut of British business hyper short-termist."

This misses the point that, while Hertz may make larger earnings through maintaining ownership of its cars, for that to be a good investment is has to make sufficiently larger earnings to offset the opportunity cost of capital that is inherent in maintaining ownership of large stocks of capital like cars. If private equity firms can earn more by selling those cars and then leasing them back (reductions in Hertz's earning capacity will be reflected in its share price which costs private equity firms). Unless Hutton can point to some kind of irrationality which would cause the market to not take account of the harm to Hertz's earnings power of no longer owning cars he has no case that it will be in the interests of private equity to do so unless owning cars is a less productive use of capital than some alternative. If there is a more productive alternate use of capital it is in all our interests that it capital is directed towards that alternative.

"This is not pro- but anti-wealth-creation. In this respect the attitude of private equity closely mimics that of the Chinese communist party. Both conceive of companies as networks of contracts between capital and labour that generate revenue streams to be manipulated by whoever has central control for personal or political advantage. Neither has any conception of companies as Enlightenment institutions that incorporate real-life human beings into a joint enterprise, in which being publicly scrutinised and held to account helps managers make better decisions. The foundation of a durable business, as James Collin and Jerry Porras argued in their famous book, Built to Last, requires vision, values, leadership and purpose around an organisation's "reason to be" - the antithesis of everything private equity stands for."

Private equity firms have a very precise vision: shareholder value. A very definite set of values: they value money. They pay closer attention than other firms to leadership thanks to not having the free riding shareholder problem. Finally, their purpose is clear: make money.

By putting capital to its most productive use they ensure that our economy adjusts more quickly to new priorities, new technologies and new challenges.

"So if we want such companies, shareholders have to give managers room for manoeuvre and back long-term business strategies. But British shareholders are not required by law to take their ownership responsibilities seriously (it would be a "burden on business"). Nor are British companies required to give them the range and quality of information that might help them. As a result, British shareholders are extraordinarily neglectful of their ownership responsibilities."

Require shareholders to take their responsibilities seriously by law? How exactly?

A legal responsibility for firm performance on the shoulders of shareholders would end the stock market's potential to raise funds from a wide range of sources as it would remove the legal separation between ownership and management which is the true purpose of that "Enlightenment institution". Not being legally responsible for its conduct allows shareholders to invest without monitoring the company's day to day operation. If they have to monitor a company day to day most investors won't be able to invest outside their own narrow sphere of expertise and geography. Modern capitalism and large scale enterprise would suffer massively as it would be impossible to raise capital on the necessary scale.

"Pension funds and insurance companies are myopic and short-term enough, but because takeover is so easy in Britain private equity has been able to carry short-termism to new extremes. This is said to raise productivity and performance. I would argue the opposite. The chief reason British business remains at the bottom of the international league tables for innovation, research and development, and productivity growth is because of too much takeover and too much private equity. Innovation lowers short-term profits."

Where is the evidence for this short-termism? There are plenty of other plausible explanations for Britain's problems with innovation (also, don't overestimate the degree of these problems); weak science education is a good place to start (has been a problem since well before the First World War). There may be a big focus on share prices but, unless Hutton is going to actually discuss why markets might be myopic, these should reflect expected future earnings as these affect future dividends and, hence, the earnings of any potential purchaser.

"The answer is obvious. Private equity cannot be outlawed; in any case it can do a good job. Rather, the perverse incentives in Britain that favour takeover need to be removed. We need to defend the public company and create conditions in which it can prosper. But who is going to do that? Not the Conservative party, in thrall to private equity, and not, judging by its legislative record, the government. Our politicians are confused. There is more to wealth creation than constructing a plutocracy of private equity partners."

Takeover is one of the most effective means by which managers are held to account for poor performance. Britain's low regulatory bar to takeover is the reason why much fewer of our firms than those in other countries are run as the personal fief of management. Managers can be prideful, selfish and flawed just like all other human beings and Hutton's call to inhibit an important source of market discipline upon them is one to ignore.

John Quiggin on Happiness Surveys

This is an absolutely brilliant post; via Marginal Revolution:

"Suppose you wanted to establish whether children’s height increased with age, but you couldn’t measure height directly.


One way to respond to this problem would be to interview groups of children in different classes at school, and asked them the question Don suggests “On a scale of 1 to 10, how tall are you?”. My guess is that the data would look pretty much like reported data on the relationship between happiness and income.

That is, within the groups, you’d find that kids who were old relative to their classmates tended to be report higher numbers than those who were young relative to their classmates (for the obvious reason that, on average, the older ones would in fact be taller than their classmates).

But, for all groups, I suspect you’d find that the median response was something like 7. Even though average age is higher for higher classes, average reported height would not change (or not change much).

So you’d reach the conclusion that height was a subjective construct depending on relative, rather than absolute, age. If you wanted, you could establish some sort of metaphorical link between being old relative to your classmates and being “looked up to”.

But in reality, height does increase with (absolute) age and the problem is with the scaling of the question. A question of this kind can only give relative answers."

This massively undermines the, already weak, happiness based case for high marginal rates of tax made by Layard and the like.

Zoe Williams on the Congestion Charge extension

Parts of this article beggar belief:

"One of the protest placards said: "Will your congestion charge pay for Livingstone's next trip to Cuba?" This is probably the most stupid of the arguments against the charge extension, unsupported as it is by any evidence, plucked from the irrational fumes of an angry motoring mind, but really, all the arguments against it are senseless. Yes, it costs money. The counter- argument is, of course, that it will pay for itself, based on the fact that the main zone made £122m profit last year, which was mainly ploughed back into buses."

This is truly idiotic. It doesn't "pay for itself"; motorists, Londoners pay for it.

"Now I can't stand the bendy buses, but they are still better for the air quality and the wider environment and sense of social cohesion than any car is. I cannot stand Transport for London (TfL), with its patronising leaflets for the lady traveller and the overall arrogance of its literature - you could spend a year wandering the corridors of its leaflets and website and all you will be told is how to pay, how important it is that you pay and what will happen to you if you don't. It's old-school leftie authority, basically. I am probably as anti-TfL as any Chelsea-dwelling 4x4 owner, but that shouldn't blind any of us to the fact that, not only is it doing the right thing, it's pursuing the only course of action that makes any sense."

The argument that this is good for social cohesion is the funny one in this paragraph. I sit on the bus most days and am a reasonably friendly fellow passenger but the idea that this gives me a common feeling with my fellow citizens, even though no one is even talking, is a little implausible.

"Naturally, the anti-extension lobby makes that noise the self-seeking always make when they're trying to invest their cause with more nobility and long-termism than it actually has. "This is bad for business" is of course true, as businessmen will have to pay the charge, and customers might end up buying heavy things off the internet. Possibly a purveyor of Venetian glass on a Kensington mews might go bust, but he or she will be replaced, I have no doubt, by someone selling lighter items, like sandwiches. Who cares anyway? If five shops close and are perpetually empty, and 500 cars are left at home instead of driven, we still all win."

Those shops are run by people with families and viewing their impoverishment with such equanimity is pretty inhuman. I guess leftie fellow feeling doesn't extend to 'capitalists'. By comparision, the congestion and pollution effects of 500 cars are pretty marginal.

"Conservative spokeswoman Angie Bray remarked: "I think [Ken Livingstone] has put his own political wishes before the interests of London." An otiose remark. If anything at all were to jeopardise Livingstone's plans it would be this extension and west Londoners' voting against him as a consequence of it. Regardless of that, as he says, there are 70,000 fewer vehicles in the original zone, so the interests of London have already been served 70,000 times!"

Livingstone has noticed that West London doesn't vote for him much anyway. That's why it looks pretty self-serving for him to impose an extra tax, which looks decidedly arbirtrary because it is supposed to combat congestion which isn't really that bad in most of West London (there are problems with speeding unlike in Central), on that particular community.

"Besides which, the system couldn't have stayed as it was, since it was totally unfair. The south-east of London is much poorer than the south-west. Drivers going east as far as Tower Bridge and south to the sparkling streets of Rotherhithe were being hit by a charge that exempted drivers in Holland Park. It was unjust and couldn't have continued."

Fairness makes sense when taxes are a cost to those taxed but Williams has spent the rest of the article arguing that this one isn't as it improves congestion and the environment in the areas concerned. Given that this tax is supposed to reduce congestion, rather than raising revenue which it is a highly inefficient mechanism for, surely the correct criteria isn't some prehistoric socialist sense that the rich should pay but an analysis of where congestion is at its worst?

If the programme has been extended too far South then it should ended in those areas but that has nothing to do with the case in the West; the only relevant question for each area is how bad congestion is.

"More important, for this current batch of protesters there is no ballast to this argument. The truth is that car use has to be reduced. Whether this is done to the advantage of the rich or the poor, or done at random, or done in the spirit of a practical joke, with TfL elves putting sugar in every fifth petrol tank, the result will still be better than having done nothing. So vote against Livingstone if your own interests are really so much more important than those of the community, but do so quietly, as pinch-lipped self-servers have always voted."

Given that there is no analysis in this article on how much congestion there is in West London, or any argument as to why a London only scheme makes a remotely significant difference to global warming or some other problem, Williams has done nothing to establish how important it is to reduce car use. She has assumed in this entire article that it is an absolute priority, that we have to reduce car use. Why?

Even if the externalities from cars in West London are significant this only means that it would be good to reduce car use. That should still be balanced against other priorities such as the fortunes of West London businesses and the money wasted in the collection of a costly tax to administer.

Oh, this entire post is written by someone who takes the bus, tube or walks; there goes the 'it's only the self-serving' argument.

The Great Global Warming Omni-Justification

Mark Steyn often frustrates me. His imaginary revenge over the immoral atheists of Europe through rather ambitious predictions of their dying out is distinctly unimpressive. Despite this when he gets a real left-wing absurdity in his sights his assault on it is always great fun and that more than makes up for the weaknesses in his 'magnum opus'. This article on global warming science is a classic example:

"Alas, the science isn't so solid. In the '70s, it was predicting a new ice age. Then it switched to global warming. Now it prefers "climate change." If it's hot, that's a sign of "climate change." If it's cold, that's a sign of "climate change." If it's 53 with sunny periods and light showers, you need to grab an overnight bag and get outta there right now because "climate change" is accelerating out of control.

The silliest argument is the anecdotal one: "You only have to look outside your window to see that climate change is happening." Outside my window in northern New England last week, it was minus 20 Fahrenheit. Very cold. Must be the old climate change kicking in, right? After all, December was very mild. Which was itself a sign of climate change. A few years ago, the little old lady who served as my town's historian for many decades combed over the farmers' diaries from two centuries ago that various neighbors had donated to her: From the daily records of 15 Januarys, she concluded that three were what we'd now regard as classic New Hampshire winters, ideal for lumbering or winter sports; eight had January thaws, and four had no snow at all. This was in the pre-industrial 18th century.

Today, faced with eight thaws and four entirely snowless Januarys, we'd all be running around shrieking that the great Gaia is displeased. Wake up and smell the CO2, people! We need to toss another virgin into the volcano. A virgin SUV, that is. Brand-new model, straight off the assembly line, cupholders never been used. And as the upholstery howls in agony, we natives will stand around chanting along with High Priestess Natalie Cole's classic recording: ''Unsustainable, that's what you are.'

[...]

The question is whether what's happening now is just the natural give and take of the planet, as Erik the Red and my town's early settlers understood it. Or whether it's something so unprecedented that we need to divert vast resources to a transnational elite bureaucracy so that they can do their best to cripple the global economy and deny much of the developing world access to the healthier and longer lives that capitalism brings. To the eco-chondriacs that's a no-brainer. As Mark Fenn of the Worldwide Fund for Nature says in the new documentary ''Mine Your Own Business'':

''In Madagascar, the indicators of quality of life are not housing. They're not nutrition, specifically. They're not health in a lot of cases. It's not education. A lot of children in Fort Dauphin do not go to school because the parents don't consider that to be important. . . . People have no jobs, but if I could put you with a family and you could count how many times in a day that that family smiles. Then I put you with a family well off, in New York or London, and you count how many times people smile. . . . You tell me who is rich and who is poor."

Well, if smiles are the measure of quality of life, I'm Bill Gates; I'm laughing my head off. Male life expectancy in Madagascar is 52.5 years. But Mark Fenn is right: Those l'il malnourished villagers sure look awful cute dancing up and down when the big environmentalist activist flies in to shoot the fund-raising video."

Brilliant.

What I'm beginning to notice is that global warming, and the "but we have to do something" attitude which comes with it, is used as an argument for just about every shoddy, down on its luck, political idea going.

It's used as an argument for agricultural subsidies which take the form of ethanol subsidy (an absurd response to climate change) in the United States and an, albeit modified, continuation of the CAP subsidies in Europe.

It's used as an argument for vegetarianism. We already knew that vegetarianism usually means consuming less agricultural production but so does eating or otherwise consuming less in a range of ways; the efficiency challenge of global warming should surely be to maintain the highest level of consumption for a given level of warming? Eating less probably has more fringe benefits given obesity levels but no one proposes that as a solution to global warming, do they?

It is used as an argument for global governance instead of democratically accountable nations; the transnational elites that Steyn refers to.

It is used as an argument for 'soak the rich' socialism; most notably through the "contraction and convergence" doctrine.

It's used as an argument for greater taxation. While everyone argues the hypothetical of a neutral switch for non-green taxation it never quite seems to work out that way.

It's used as an argument against an expansion of airports and foreign travel for those on medium-low incomes; turning our back on one of the great achievements of the twentieth century in deference to narrow 'not in my backyard' opposition.

All of these, otherwise weak, positions are justified by climate change implications because, with the present state of the climate change debate, they know that normal standards of evidence and logic will go out of the window and any opposition will be compared to David Irving or, in a new twist, 9/11 conspiracy theorists by Monbiot and the rest of the global warming clergy. It is a potent excuse for discredited ideologies and narrow interests.

Power and the Market

The argument on Chris Dillow’s blog that the Bowles & Gintes study he has recently cited identifies genuine power within labour market transactions appears to me to be deeply flawed. I’m going to first deal with a separate argument in Chris’s piece before moving on to discuss Bowles & Gintes.

Chris makes a classic, and at times credible, left-wing argument for power within the labour market; that some employers have power over employees because there are imperfections in labour markets. His example of City law firms with particularly prestigious and demanded jobs exists, I would guess, thanks to barriers to entry in the form of a need for an established reputation. A more conventional example would be that of a town with only one major employer. His other argument, that employees have less wealth so lose more if they are fired than employers lose if they resign, is dependent upon this as in an efficient labour market they would find another employer. I would argue that these labour market inefficiencies go both ways as superstar employees are just as rare and coveted as jobs at superstar firms. The best solution would seem to be to widen the range of plausible employers/employees. Freedom of movement within Europe probably contributes to this along with an increase in cultural willingness to move between regions and a decline in other institutional barriers to movement (the Poor Laws are a famous, if rather old, example of legislation which inhibited movement of labour). I’ll make a controversial but credible claim at this point: the railways, through their impact on the perception of distance and the cost of travel, did more to lessen inequities in labour market power than the unions.

Now, onto Bowles and Gintes’ argument which is summarised by Dillow here (I’ve corrected average wage to market-clearing as I think that’s what he means… sorry if I’m mistaken):

“But, say Bowles and Gintis, bosses' power is more widespread than this. It exists in any job where efficiency wages are paid - that is, where the firm pays [above market-clearing] wages in exchange for above-average effort. In such firms, bosses have power over workers because the threat of the sack is credible and worrying, as the worker could not get such a well-paid job elsewhere. However, workers don't have symmetric power over bosses, as the threat to leave is not credible.”

This is then supposed to feed into allowing bosses to sanction employees without suffering in return. However, employees would not be paying efficient wages if they were not getting something in return. The Wikipedia article summarises some proposed benefits to a firm of paying an efficiency wage:

• “Avoiding Shirking: If it is difficult to measure the quantity or quality of a worker's effort -- and systems of piece rates or commissions are impossible -- there may be an incentive for him or her to "shirk" (do less work than agreed). The manager thus may pay an efficiency wage in order to create or increase the cost of job loss, which gives a sting to the threat of firing. This threat can be used to prevent shirking (or "moral hazard").
• Minimizing Turnover: By paying efficiency wages, the employees' incentive to quit and seek jobs elsewhere is minimized. This strategy makes sense because it is often expensive to train replacement workers.
• Adverse Selection: If job performance depends on workers' ability and workers differ from each other in those terms, firms with higher wages will attract more able job-seekers. An efficiency wage means that the employer can pick and choose among applicants to get the best possible.
• Sociological Theories: efficiency wages may result from traditions. Akerlof's theory (in very simple terms) involves higher wages encouraging high morale, which raises productivity.
• Nutritional Theories: In developing countries, efficiency wages may allow workers to eat well enough to avoid illness and to be able to work harder and more productively.”

Just as an employer might pay an employee more if they can offer better skills or longer hours they might pay them to be more loyal or offer the other benefits of an efficiency wage paid worker. If they are to sanction employees, to use the power they supposedly possess, then that must necessarily reduce the loyalty of their employees (or the other benefits of an efficiency wage). Every use of the power granted by efficiency wages also carries a cost with its use in the opportunity cost of other uses of the funds required to pay efficiency wages whose influence has now been spent. If they misuse this power they have to be less efficient than other employers and competition will see to them. This would not appear to be a Pareto inefficient result because employers pay very directly for any exercise of influence over their workers and there is no reason to think either side is acting irrationally.

These limitations and costs to market power illustrate that it is profoundly different to political power. If power is something which is bought and only maintained so long as it is in the interests of the person you have power over to remain within your control is it really power at all?

Efficient wages buy a service just like regular wages and one of those services is reliability; this is very similar to the standard influences of money and very little like power.

More on Pre-Birth Insurance

I’m glad Chris Dillow has clarified his position away from the Rawlsian theory of justice. I think that now his view, as I understand it, has become considerably more sensible. However, I would caution that it may have lost a lot of its intellectual implications. Before discussing this I must respond to a specific question.

"Being born disadvantaged would be a sacrifice I hope I would be happy to risk so that humanity might, on occasion, do something glorious that might ennoble us all.

This is an empirical claim. How disadvantaged are you prepared to be? Born in Burnley maybe. But what about being born in Darfur? And what are the chances that such disadvantage is actually a necessary condition of humanity doing something noble?"

I’m not saying that the two necessarily are in conflict. Just as most Rawlsians usually do not believe that a society of Communist perfect equality would be conducive to the best interests of the poorest, I certainly do not believe that a society conducive to brilliance is also one that allows its citizens to starve. Both sides have plenty of room to moderate but that does not imply that the debate over whether a society’s goal should be, to grossly simplify, comfort or glory is not important.

The main clarification in Chris’s new post is that he does not believe in moral luck and is therefore willing to allow that people have, to some extent, earned their income. This means that, instead of arguing that our money is properly society's as we have not earned it, Chris is instead making a plea that our society should be a sympathetic one. He is forming a secular version of “There, but for the grace of God, go I”. This is entirely legitimate and morally worthy but doesn’t really offer a response to the libertarian doctrine that we have no right to take what others have earned, they would argue that true sympathy and caring for the disadvantaged is only possible when chosen freely, or even the the objectivist arguments against altruism which start from radically different notions of right and wrong. Without moral luck the original position is a far more moderate and sensible notion but it is hardly a radical departure from a moral code most are already working to and cannot refute libertarianism.

Chris Dillow on Pre-Birth Insurance

A couple of Chris Dillow's posts have particularly troubled me lately. I'll deal with his arguments on power in the market tomorrow. First, this article which he wrote last September, I'm afraid I missed it at the time but he is linking to it a lot. It leaves out some of the most potent critiques of Rawlsian theories of justice. There are others but I'll discuss three which I find important here:

1. It requires complete moral luck: The interesting result here isn't really created by the new logic of the original position but by the assumption that no one can earn anything and success is entirely a gamble. This is enough to cut Nozick and Locke to pieces but most other moral theory as well. The only basis that can really be established for this is scientific determinism which is more of an assumption than an established fact. While, as the Economist noted in its Christmas issue, the sphere of free will which has not been questioned by science is shrinking any role for it at all would cascade and cause enormous trouble for the logic of the original position.

One other thing to note is that moral luck completely undermines the position Chris takes on the inheritance tax which is about taxing unearned wealth more than that which is earned. Why do you earn what you make with the talents and character luck gave you any more than you earn what luck gave you through inheritance? City bankers were lucky to be born able to earn their bonuses so why do they deserve that wealth more than inheriting children?

If that doesn't trouble Chris and undermine his position on the inheritance tax then he doesn't really buy the concept of moral luck at all and should give up on Rawls.

2. We don't really know how we would behave in the original position: Would people be risk averse before they knew what they had to lose? The risk averse tendency may well be contingent upon a hand in life which you have been dealt and become attached to. This kind of question is clearly unanswerable and hints to the weakness of the original position as an abstraction.

3. While the Rawlsian position can tolerate such things as art, which has little value to the common man, in the name of a free society or incentives which might benefit the poorest, it assigns no independent value to them. After all, to be an artist is to sit in a room painting pictures most likely only the middle class will value while others starve; art is cruelty. Alykhan Velshi responded to my post on this subject and the Mirabella V with a quote from Harold Bloom:

"The pleasures of reading are indeed selfish rather than social. You cannot directly improve anyone's life by reading better or more deeply. I remain skeptical of the traditional social hope that care for others may be stimulated by the growth of individual imagination, and I am wary of any arguments whatsoever that connect the pleasures of solitary reading to the public good."

Tolerating this is not enough. Any theory of justice which fails to appreciate the higher instincts of mankind is a manifesto for venal banality, for the last man. While Chris might see it as ignoble to want to take the results of a gamble you would not have chosen it would seem, to me, to be mean spirited and low to value some having the comfort to read, paint and own big boats lower than avoiding the risk of being born in Burnley.

I hope that, were I to find myself in an original position, I would choose that some be comfortable enough to read, paint or own stunning yachts (I am still in close to an original position with regards owning a luxury yacht) even if that came at the expense of me risking being worse off. Being born disadvantaged would be a sacrifice I hope I would be happy to risk so that humanity might, on occasion, do something glorious that might ennoble us all.

Ricardo López Murphy

When I saw this advert on Iain Dale's Diary I was a little worried it might be for a socialist. It's a truly brilliant advert and part of that brilliance is that it avoids sounding partisan but instead sounds a note of hope. That hope could have been the false promises of a socialist candidate. However, instead it turns out he's an economist with a Master's from Chicago and head of the centre-right party; one of us. Yay.