RE: Re sorting the issues

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

Responding to the discussion over the weekend, it seems we have a couple of
stumbling points but also perhaps some possible avenues of progress:

>From Alan and Keith:
>1. Is broader capital ownership good, bad or neutral from a
macro-economic standpoint? 
THIS IS NOT QUITE THE ISSUE.  ECONOMISTS LOOK FOR AN IMPROVEMENT IN THE
GENERAL WELFARE.  IT IS NOT EASY TO JUDGE WHEN THIS HAS BEEN ACHIEVED.  AT
A MINIMUM, WE WOULD EXPECT AN IMPROVEMENT IN SOME MACROECONOMIC INDICATORS,
BUT SUCH GROWTH ALONE IS NOT SUFFICIENT TO DEMONSTRATE INCREASED GENERAL
WELFARE. 

So we don't have a very good way to measure General Welfare - this is
probably at the root of many of the disagreements between economists,
political scientists, sociologists, lawyers and ideologues. Is it possible
to develop agreed-upon measures amongst ourselves?

>From Shann:
"Now let make the economists metamorphical assumption, mentioned by David
Ellerman, that "we have a can opener" in the form of a ruling from the tax
authorities that they will provide investors with an offer they cannot
refuse.  The offer is that the government will change the basis for paying
tax from the current accural system to a cashflow system on condition that
the investor give up all ownership rights to their investment and transfers
it to the stakeholders after five years.  It is a free choice for the
investors to select."
IF THIS IS POSSIBLE, IS THERE A MEANINGFUL POINT OF CONTENTION BETWEEN SHANN
AND KELSO'S VISIONS? IF INVESTORS HAVE THE CHOICE AND ARE NOT COERCED THEN
IT MUST BE A FAIR MARKET EXCHANGE? THEN IT IS JUST A MATTER OF POLICY AND
POLITICAL UNDERWRITING....

The question then segues into the issue of whether braodening capital
ownership makes sense from a general welfare maximizing point of view (which
of course depends on how we measure general welfare) and ultimately from a
political/social policy POV.  
Alan and Keith have pointed the argument towards these issues and I would
concur:

>From Alan:
2. This hasn't been as explicit, but: is broadened capital ownership good 
from a political-ethical standpoint?  (E.g., Keith sees it as an issue of 
providing income security in an age of transitory employment, a position I 
very much agree with; David E., if I remember right, argued that it is not 
ownership but rights of democratic control over the workplace that are 
important.)

>From Keith:
Arguments for privatization in recent years have extended to social security
programs. Proponents complain that social security premiums (taxes) are
invested ineffectively (wastefully) by governments, and that if peoples'
savings were entrusted to the financial investments industry there would be
greater economic growth of a better kind, and the average worker would get a
better return on his/her savings. What are the implications for the capital
ownership campaign?

This fits in with the argument I have tried to make elsewhere - that if we
want to judge policy (or general welfare) by what we have created with
democratic governments in the 20th century then income security should be a
large measure of it. (I've attached a short essay addressing this
perspective.) Basically, if we look at US Federal budget expenditures by
function we see that for 2002, net of interest on the debt, almost 75% of
spending is on social insurance and income security programs. The remaining
25% is devoted to national military security.
This suggests that modern democratic govts can be better characterized as
national social insurance pools - something I call the Insurance State. 

Now, is economic security better provided for by national redistributive
pools or micro-based asset ownership and diversification? Probably a mix of
both, as they are complements. This perspective ties the micro-based
ownership issue to the macro-policy agenda.
If we're going to spend all our public monies on income security, why not do
it most effectively?
Social insurance proponents claim that it is social solidarity that is the
benefit of universal social insurance but I would argue that, though part of
it, these claims are overstated.
Also, the concern that Keith expressed that one problem could be that
capital ownership would promote a large group of coupon-clipping drones
ignores the fact that it is relative wealth that matters and that most
people would need and want the dual incomes from productive capital and
labor to maintain their relative economic status. They are now just more
secure...

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

P.S. Keith, you mentioned that this subject of social/political rationales
might be appropriate for other groups so please forward as you see fit...






-----Original Message-----
From: Keith Wilde [mailto:kwilde@magi.com]
Sent: Monday, November 01, 1999 12:23 PM
To: ownership@cog.kent.edu
Subject: Re sorting the issues


Thanks to Alan Zundel for reviewing the discussion to date and providing us
with a summary of the issues.  I take it as an opportunity to express some
of my biases about the appropriate role of economics and economists in
addressing the questions that surround the democratizing of access to
capital.  Please excuse me for having having abbreviated Alan's text and
inserting my own comments in caps.  I should have done it the other way
round. 

On  10 /31/99 Alan Zundel wrote: ....an outline of the issues as they look
to me, then a couple of  comments. 

 >1. Is broader capital ownership good, bad or neutral from a
macro-economic standpoint? 
THIS IS NOT QUITE THE ISSUE.  ECONOMISTS LOOK FOR AN IMPROVEMENT IN THE
GENERAL WELFARE.  IT IS NOT EASY TO JUDGE WHEN THIS HAS BEEN ACHIEVED.  AT
A MINIMUM, WE WOULD EXPECT AN IMPROVEMENT IN SOME MACROECONOMIC INDICATORS,
BUT SUCH GROWTH ALONE IS NOT SUFFICIENT TO DEMONSTRATE INCREASED GENERAL
WELFARE. 

 >1a. Conventional economic theory sees it as bad or neutral... .Are there 
 >flaws in the reasoning? (Everyone here thinks or hopes there are?) 
I WOULD DISAGREE WITH THIS INTERPRETATION.  IT IS QUITE CONCEIVABLE TO
ARGUE FROM CONVENTIONAL THEORY THAT BROADER CAPITAL OWNERSHIP COULD BE GOOD
FROM THE PERSPECTIVE OF CONVENTIONAL MACROECONOMIC INDICATORS.  BUT WHETHER
OR NOT A CHANGE IN GDP, EMPLOYMENT OR INTEREST RATES CONSTITUTES AN
IMPROVEMENT TO THE GENERAL WELFARE IS ARGUABLE-EVEN IF THE CHANGE COULD BE
IDENTIFIED CLEARLY AS A CONSEQUENCE OF THE OWNERSHIP-BROADENING POLICY
INITIATIVE. 

 >1b. Is Kelso's theory...which sees it as good, sound?  
I BELIEVE IT FOLLOWS FROM MY RESPONSES ABOVE THAT ECONOMICS IS SILENT ON
THIS--OR MORE ACCURATELY, IT IS "TWO-HANDED".  IT COULD GO EITHER WAY.
ECONOMISTS MIGHT AGREE ON CRITERIA FOR A DECISION, BUT IT IS DEVILISHLY
DIFFICULT TO TAKE THE REQUIRED MEASUREMENTS.   

>1c. Does a revised version of Kelso's ideas (e.g. Shann's) do a better job
of it?
IN MY OPINION, SHANN MAKES A MORE PLAUSIBLE EXPLANATION OF WHY POLICY
INSTRUMENTS OF THE KIND DEVISED BY KELSO AND HIMSELF COULD IMPROVE THE
WELFARE OF SOME PEOPLE WITH MINIMUM DAMAGE TO THE INTEREST OF OTHERS.  HE
SEEMS TO AGREE WITH ELLERMAN, NEVERTHELESS, THAT THESE POLICY INSTRUMENTS
CAN HARDLY BE IMPLEMENTED WITHOUT AT LEAST A LITTLE BIT OF REDISTRIBUTIVE
IMPACT.  THAT IS WHAT TRIPS THE WARNING BELL FOR ECONOMISTS AND MAKES US
UNCERTAIN OF THE OUTCOME.  I BELIEVE, HOWEVER, THAT SHANN ALSO ARGUES THAT
HIS OWN TECHNIQUES ARE MORE LIKELY TO INCREASE GENERAL GROWTH. 

 >2. This hasn't been as explicit, but: is broadened capital ownership good
from a political-  >ethical standpoint? (E.g., Keith sees it as an issue of
providing income security in an age   >of transitory employment, a position
I very much agree with; David E., if I remember right, >argued that it is
not ownership but rights of democratic control over the workplace that are
>important.)
THIS IS NOT A QUESTION THAT ECONOMISTS ALONE CAN ANSWER, QUA ECONOMISTS.
HENCE, I AM OFFICIALLY SILENT.  AS AN INITIATOR OR COORDINATOR OF
DISCUSSION, HOWEVER, I LOOKED FOR A GERMANE POLITICAL ISSUE WHICH MIGHT
GRAB THE ATTENTION OF ECONOMISTS--TO INDUCE A FEW OF THEM TO APPLY THEIR
RATIONALE, DECISION CRITERIA, EMPIRICAL KNOWLEDGE AND MEASUREMENT SKILLS TO
SEEKING ANSWERS FOR THE GENERAL WELFARE QUESTION.

 >3. If broadening ownership is a good thing, what's the best way to get
there? 
FROM THE ECONOMISTS' PERSPECTIVE, ONE THAT IS EFFECTIVE WITH THE LEAST
REDISTRIBUTIVE IMPACT.

 >3a. Would/do Kelso-type financing devices work as claimed? (Much
discussion has revolved >around ESOPs, to the neglect of non-employment
based models, except for Shann's ideas about >getting stocks into the hands
of "stakeholders".) 
THIS IS THE CRITICAL QUESTION, OF COURSE. AND SEAT-OF-THE-PANTS ARGUMENTS
ALONE ARE NOT GOING TO RESOLVE IT.

>3b. Are policies that, in effect, redistribute ownership justified?  
SPEAKING FROM THE ECONOMICS PERSPECTIVE, ONLY IF THEY CAN BE SHOWN TO
IMPROVE THE GENERAL WELFARE.  NOT EASY TO DO.

>(Orthodox Kelsonians--and Shann if I read him correctly--would say no, we
don't need to >redistribute but to change the distributive mechanisms for
ownership of newly created >capital; David E. has, I think, been charging
that ESOPs are redistributive and so I surmise >he is against
redistribution.) 
AS AN ECONOMIST, ELLERMAN CANNOT ENDORSE REDISTRIBUTION, FOR REASONS
SUGGESTED ABOVE.  KELSONIANS AND SHANN ARGUE THAT THEIR METHODS INVOLVE A
MINIMUM OF REDISTRIBUTION.  AS AN ECONOMIST, I AM INTERESTED IN WHICH OF
THESE CLAIMS IS THE MOST PLAUSIBLE.  

>I think there is a major problem at the heart of the orthodox version.
There seems to be  >some confusion here over what Kelso said about capital
productivity. Kelso rejected the >concept of productivity for his own idea
of "productiveness."  Productiveness means >something like the amount of
physical work contributed to producting something, and the >claim is that
capital productiveness far outstrips labor productiveness in the modern
>economy. I guess that is sensible enough, but Kelso went on to claim that
in a truly free >market economy (not one distorted by political
interventions, like our present economy, with >its 25% capital 75% labor
income shares) income shares would be based on productiveness. 
THANKS.  YOUR WAY OF PUTTING IT ADDED TO MY UNDERSTANDING OF THE CONCEPT.
IT ALSO RAISES A WARNING FLAG.  THE "TRULY FREE MARKET ECONOMY" IS AN ITEM
OF RHETORICAL BULLSHIT DRAGGED IN BY THE "PURE IN HEART" ON THE SIDE OF ANY
DEBATE INVOLVING POLITICAL ECONOMY--AND IT DOESN'T EXIST.  MARKETS ARE A
MANIFESTATION OF HUMAN INITIATIVE COMBINED WITH FACILITATING INSTRUMENTS
AND RULES OF BEHAVIOR, HAVING VARYING DEGREES OF FORMALITY, ENFORCEMENT AND
ADJUDICATION.  THE APPEAL TO "FREE MARKET" MUST ALWAYS BE INTERPRETED AS
"MY IDEA OF BETTER RULES TO GOVERN HUMAN BEHAVIOR IN EXCHANGE
RELATIONSHIPS".   THUS IT IS A POLITICAL ISSUE,  NOT AN ECONOMIC ONE, AND
THE OUTCOME DEPENDS ON WHOEVER CAN GET THE MOST INFLUENCE OVER LEGISLATORS,
REGULATORS AND JUDGES.  

>A lot of Kelso's theory is built on that foundation, but I have yet to get
an answer as to >*why* income shares in a free market would reflect
productiveness.
LOOKS LIKE A VERY IMPORTANT QUESTION.  DOES THE ANSWER HAVE SOMETHING TO DO
WITH HISTORICAL CONTEXT?  THAT IS, WITH THE POWER ENJOYED BY LABOR UNIONS
IN THE DECADE FOLLOWING WW II--WHICH TO ECONOMISTS REFLECTS THE RELATIVE
PRODUCTIVITY OF LABOR, IN SPITE OF THE PHYSICAL QUANTITY OF WORK THAT WAS
BEING PERFORMED BY STEEL AND CONCRETE FACTORIES ENERGIZED BY THE
COMBUSTION OF FOSSIL FUELS?

>It seems to me that supply and demand set the price of labor and
capital... . 

>... the orthodox Kelsonians' attachment to the concept of productiveness
hinders other >people from looking [at the]...good in Kelso's complex web
of ideas. 

>Second, to reemphasize a point made above: the discussions of ESOPs are
interesting, but >even Kelso saw them as second-best to his other policy
ideas. Some of the flaws of ESOPs as >devices for using credit to help the
capital poor become owners come from the fact that they are
employment-based devices, which is not a necessary feature. 
BUT DO THE OTHER DEVICES RAISE EVEN MORE CONCERN ABOUT REDISTRIBUTION IN
CONTRAST TO "EARNED" OR "MERITED"  INCOME?

 >And last, if such capital-credit devices are really redistributive, as I
take David E. to >be arguing, is that a bad thing? I know the claim is that
they are not, and it is an >interesting issue, but if the principle of
income redistribution (at least to some degree) >is morally and politically
acceptable (I think this is quite tenable), wouldn't wealth >redistribution
also be? I am inclined at this point to see this as somewhat of a side
>issue, so I am wondering why it seems so important to others?
I HOPE THAT MY INSERTED COMMENTS HAVE HELPED ON THIS LAST QUESTION.  TO WIN
THE UNEQUIVOCAL ENDORSEMENT OF ECONOMISTS, THE CAPITAL CREDIT DEVICES WOULD
HAVE TO BE FREE OF REDISTRIBUTIVE TAINT.  AND THAT SEEMS TO BE WHAT THE
KELSONIANS HAVE TRIED TO CLAIM FOR THEM, THEREBY DEMONSTRATING AN
UNDERSTANDING OF THE ECONOMISTS' POSITION.  REDISTRIBUTION IS INDEED A
MORAL AND POLITICAL ISSUE, AND IF IT IS RESOLVED IN LEGISLATURES ECONOMISTS
WILL SIMPLY ACCEPT IT AS PART OF THE FRAMEWORK IN WHICH MARKETING BEHAVIOR
MANIFESTS ITSELF, AND WILL THENCEFORWARD ACCOUNT FOR IT IN CONDUCTING THEIR
WORK MORE OR LESS AS USUAL.  IT IS WHEN WE ARE ASKED TO PARTICIPATE IN THE
MORAL AND POLITICAL ARGUMENT THAT ECONOMISTS GET EDGY ABOUT WHAT WE MAY
RESPONSIBLY SAY AS MEMBERS OF A DISCIPLINARY GROUP WHICH HAS AGONIZED AT
LENGTH OVER THIS KIND OF QUESTION.  AS INDIVIDUALS, OF COURSE, WE HAVE OUR
MORAL AND POLITICAL PREFERENCES LIKE ANYONE ELSE.  THOSE OF US
PARTICIPATING IN THIS DISCUSSION EXPOSE OUR PERSONAL BIAS BY THE VERY ACT. 

Keith Wilde
Canada Pension Plan
Ottawa
kwilde@magi.com
613 990-8125 (office)
613 747-6847 (res)