CEOs make less than doctors, you know

This is a rather amusing point being made by Mark Perry over the Pond. CEOs actually make, on average, rather less than doctors do. This is, as you will clearly note, not the usual story we get told about our times:

It should be noted that USAToday’s analysis includes the CEOs of only 200 of America’s largest multinational companies in the S&P500. According to the US Census, there are more than 27 million private firms in the US, so the 200 firms reported by USAToday represent only one of every 135,000 private firms in the US, or 0.00074% (less than 1/1000 of 1%). Note also that USAToday compares the annual wages of ALL full-time employees working at more than 27 million companies to the CEO pay of executives at only 200 companies.

We can get a more accurate and complete picture of CEO compensation by looking at wage data just released by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2013. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups,” including the category “chief executives.” In 2013, the BLS reports that the average pay for America’s 248,760 chief executives was only $178,400. The 200 S&P500 firms reported by USAToday represent only one out of every 1,243 firms in the country that have a CEO at the head, and that small sample of 200 would represent only 0.08% of American CEOs, or less than one-tenth of one percent of all CEOs. The larger sample of CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”

That some CEOs make those very large multiples of the average wage is entirely true. But in the US economy it's a vanishingly small percentage of those who do that job. And it is worth noting that that average CEO pay is, in hte US context, about that of a dentist and rather lower than the average doctor.

It wouldn't surprise me at all if this were true here in the UK as well. GPs are, as we know, on a pretty good deal these days. £110,000 a year is commonplace, earned without really breaking into a sweat in that job. And it wouldn't surprise me, as I say, if the average CEO (or perhaps Managing Director we might say here) pay in the UK was below that.

Which leads to an interesting question. Do we actually collect the statistics that would allow us to prove this?

Apparently Nigeria now has a larger economy than South Africa

The government of Nigeria has had a quick look down hte back of the couch and appears to have found and extra three quarters of the economy just lying there. Well over $200 billion's worth in fact:

Nigeria’s economy surpassed South Africa’s as the largest on the continent after the West African nation overhauled its gross domestic product data for the first time in two decades. On paper, the size of the economy expanded by more than three-quarters to an estimated 80 trillion naira ($488 billion) for 2013, Yemi Kale, head of the National Bureau of Statistics, said at a news conference yesterday to release the data in the capital, Abuja. That compares with the World Bank’s 2012 GDP figures of $262.6 billion for Nigeria and $384.3 billion for South Africa.

That's how shall we put this, a fair old difference, isn't it?

Much of the chuntering on about this is over how it makes the debt and taxation loads look much smaller, they being numbers that haven't changed. But the much more important one is to grasp the point this makes about economic planning.

We do actually know that this sort of mismeasurement is commonplace right across economies. It's not just the way that it's very difficult to measure the size of black (ie, innately illegal) economies, or grey (legal, but hiding from taxation), it's that we're only ever doing statistical sampling of an economy when we try to measure how large it is. And over time our statistical methods, if we don't change them, are going to get further and further out of whack as the structure of the economy changes. To take an absurd illustration, we we tried to measure transport in the UK using the methods of 1880 we'd note more rail and very fewer horse drawn journies but entirely miss the rise of the motor car.

So, given these problems a rebasing every now and again isn't that bad an idea. We in hte UK end up chaging some part of our statistical methods with just about every release of the statistic (hyperbole alert!) and other places devoting less attention to the problem might, as here, do it only once in decades. All of which is just fine but let us now add this to another current preoccupation.

We've managed to hunt down and shame into silence most of those who argue that planning an economy is either desirable or even possible when we're operating at the technological frontier. But there's plenty about who insist that poor countries must plan, must have the joys of the central plan as we did not so that they can become rich by the method that we did not. Even on the face of it that looks like a pretty silly argument they're using but add to it the news from today.

Nigeria's just found that extra $200 billion down hte back of the couch. How in heck can you plan and economy when your estimate of what's actually in that economy is out by 40% or so?

Quite: exactly the places that leftoids tell us must be using planning are exactly the places where the Socialist Calculation problems hits hardest. No one's got a clue what is currently actually happening: so how in heck can anyone plan what should be done next?

The plan: it's working, it's working!

Madsen has long pointed out that we here at the ASI have a slightly strange job. We think up odd ideas which are regarded as those of idiots howling in the wilderness. Some years later they're mainstream and everyone is wondering why they weren't brought in earlier. What intrigues me is that one of those very strange ideas which I am (at least partially) responsible for is becoming mainstream, indeed is being enacted.

Back when the Living Wage was first proposed I did the calculations that showed that that Living Wage, post tax, was actually what the minimum wage would be if not tax were paid on the minimum wage. While the numbers have all moved around a little this is still true: a no income tax and no NI minimum wage would be higher than the post tax Living Wage.

I also said that this was mad and have been stamping around shouting that it's insane that people working part time on said minimum wage are part of the taxation of income system ever since. With repeats ever time the Living Wage or minimum wage calculations are done again.

That the idea of equating the tax allowance with the full year minimum wage got into the UKIP manifesto, given my background, is really not a surprise. But that it's now entirely mainstream is most pleasing:

The Treasury released research showing that Britain now outstrips Germany, which had the most generous personal allowance system in 2010, after a series of increases in the personal allowance which stood at £6,475 in 2010. It will increase to £10,000 from Sunday, the start of the new tax year, and will increase to £10,500 next year – a month before the general election. The higher allowance on Sunday will represent a tax cut of £700 a year for more than 26 million people and will mean that three million slip out of paying tax altogether. The Lib Dems, whose first pledge in their manifesto for the 2010 general election was to increase the tax free personal allowance to £10,000, have pledged to increase it to £12,500 in the next parliament if they return to government. This would raise the prospect of exempting workers on the minimum wage from paying income tax.

Calling it "generous" that the State does not reach so harshly into the pocketbopoks of the working poor revolts me. But the direction of travel is to be applauded. And it won't matter a damn that it will be some votestealer that gets the plaudits for such an obviously sensible move. The world will still be a better place for it.

Yes, of course we should abolish inheritance tax

This really isn't one of those difficult questions: yes, of course we shoud abolish inheritance tax. Or at the very least this is an easy one: we should abolish the inheritance tax that we actually have.

The Conservative party would be better off scrapping inheritance tax altogether rather than increasing the threshold to £1m, the Institute for Fiscal Studies has suggested.

Yes, quite. It's doesn't raise very much, it's wildly unpopular and distinctly distorting (as people pile into those assets that are not subject to it like farmland).

Let's think back to what the original point of this tax was (and this pops up in that new book of Piketty's as well). It was to prevent the great dynastic fortunes from being perpetuated on down through the centuries. There is, after all, something that might be considered not entirely fair if one person today is born with the whole silver cutlery cupboard in their mouths just because ggg to the nth power grandad was a murderous Norman bastard. Or perhaps we should revise that to a successfully murderous Norman etc.

But our current inheirtance tax doesn't actually do that: the great landholdings aren't actually subject to it and anyone with that sort of money can get around it entirely with trusts and so on. It doesn't actually do what it was set up to do.

What it does do is hit the bourgeois. Yes, I know, half a million, a million, that doesn't sound all that bourgeois but these days it is. 30 years of socking money away into ISAs will get you there (plus some compounding), not even including what has been happening to house prices. The tax hits those estates of those who have worked, saved and been successful, and doesn't hit the estates of those dynastically rich. It simply doesn't do what it says on the tin.

Now some might argue that we should be taxing those bourgeois pots: for there are those who don't have one for micturation let alone a pot to spend. But that's rather to miss what a nest egg does for people: it provides freedom in this life. Not total and absolute of course, not while we are still in this vale of tears that humanity is condemned to. But a bit of capital does indeed provide freedom. And the sort of amounts that those bourgeois inheritances provide seem to be just about the right amount too. Enough to aid, enough perhaps to be able to do anything, but not enough to do nothing with one's life.

And the concept that we should tax away such freedom just seems most terribly odd. We should rather be hoping that all can gain such freedom from the immediate trials of having no assets.

Personally I'm not actually worried about inequalities of wealth. But I can see that some might worry about the position of the Duke of Westminster while there are those without a £10 note to their name at the age of 21. But the current system takes from those bourgeois, leaving the Duke alone, and still does nothing for those without the tenner.

The inheritance tax system as it is just doesn't do anything of any value for us as a society. We should therefore abolish it. You know, like Sweden has just in case Polly wants to scream at us about the Nordics.

The latest bright idea about the housing shortage

The latest bright idea from those who would solve the housing crisis seems very much less than bright to me. Here's Polly detailing it:

But land prices are the key. Oxford economist and housing expert Professor John Muellbauer calls for a national land bank, the state acquiring land for garden cities or any building at current land use value and, once given planning permission, selling on to builders, keeping the windfall added value.

Err, yes. The current high price of housing is a result of not much housing being built. OK, so we're OK with that analysis. Polly then tells us that simply building more won't help: in direct violation of this supply and demand thing that we know abouit economics. And then the solution is that the State should be the person buying the land for development. But our problem is that it is already the State that decides what can be built and where.

For that is indeed our problem. The majority of the price of a house, anywhere anyone actually wants to live that is, is in the value of the chitty that allows you to build a house on that particular plot. These chitties are, we might note, State issued. So our problem is simply that said State won't issue enough chitties so as to bring the scarcity value of the chitties down. And our solution to this is to allow the State to collect the value of said chitties?


The solution is, of course, as we here have been saying for some years now, simply to keep issuing those chitties until the scarcity value is exhausted.  It's absolutely true that certain locations will still have scaricity value but housing as a whole won't. Or, if you prefer, the solution is not that the State should be more deeply involved in the planning of housing but that it should laregly withdraw from such planning of housing.

Should libertarians care about Brendan Eich's resignation?


Mozilla CEO Brendan Eich has resigned his job after just 10 days in the role. This came after it was rediscovered that he gave $1,000 to Proposition 8, a direct democratic move to ban gay marriage in California, that narrowly passed. Upon discovering this, twitter and other areas of the internet mobilised, with 72,000 supporting a petition to the board to sack him. One libertarian perspective might be that, since no negative rights were infringed, this was an entirely defensible use of social pressure to enforce social norms—Eich contributed to a proposal that many libertarians believe would restrict the rights of gays. For this perspective, the Eich situation is proof that state intervention is not needed to achieve socio-political equality for groups considered oppressed. It's very very interesting that many progressives are actually using the rhetoric of thin libertarianism, which they would usually abhor, to defend their position on the issue.

Contrariwise, an alternative "thick" libertarian perspective might hold that people have the right not to be hounded out of their job for opinions they hold and do not enforce on others—by all accounts Mozilla is a highly equal-opportunities place for LGBT people. For this perspective, Eich's resignation is a worrying indication that First Amendment—freedom of expression—rights are disappearing. But confusingly, some would call the hounding position the true "thick" libertarian view, since it says that legal rights alone do not guarantee gays' freedom.

A third perspective might say that although this resignation, considered alone, might not be regrettable, because it advances gays' freedoms, as a rule people should not lose their job for holding certain political perspectives and even actively supporting them. This would hold especially strongly if we agreed that the small donations Eich made were unlikely to actually change anything.

I think all of these perspectives have merit as libertarian responses to what's happened. But whatever the normative issues here, I think the whole situation is much more interesting as an illustration of a positive (i.e. descriptive, not morally loaded) historical trend and tendency that is becoming, in my opinion, more and more obvious. Gay marriage was on almost no one's radar in 1990. In 2000 it was still only an utterly minority idea even among gays.

In 2008 (the same year as Prop 8, and the end of the google ngrams data range in the previous link), US President Barack Obama was elected and specifically opposed gay marriage. Between 2008 and 2014 gay marriage has gone from something a liberal Democrat felt he could not guarantee election without opposing, to something that a chief executive (admittedly a Silicon Valley chief executive, of a particularly "socially aware" firm) has to favour, or at least not outwardly oppose, to keep their job. This is astonishingly rapid.

And various issues suggest that maybe this ousting had little to do with a cost-benefit analysis. Let's assume the best argument in favour of ousting him is that (a) he tipped the balance in favour of anti-gay marriage in the past, and this delayed gay people gaining their deserved marriage rights, and (b) his position at the top of Mozilla will stop it being truly equal to gay employees and consumers. That is, let's assume that the left-leaning people who got Eich overthrown do in fact wish Eich to have meaningful freedom of conscience and speech, but they also think it's fair to censor him if he acts based on those in ways which increase oppression or reduce social welfare.

(This isn't entirely accurate: some do think that people genuinely shouldn't be able to be both employed and hold personal anti-gay marriage perspectives. But I see personal opinions (many of which are genetically heritable) as a much weaker justification for the hounding and the principle of charity dictates I tackle the strongest possible opposing argument here.)

The fact that showing neither (a) nor (b) has even been attempted in any of the myriad of news and commentary I've seen on the issue is telling (I'm open to being refuted here). Indeed, none of the commentary I've seen has even mentioned these issues. And what's more I bet Eich-resignation-advocates wouldn't change their minds if we discovered that Mozilla's currently pro-LGBT policies were impervious to CEO influence, and that his $1,000 did pitifully little to change the outcome of Prop 8, never mind the overall progress of gays' marriage rights.

This suggests to me that this is about policing heresies. This is a doctrinal dispute. I wonder if Eich would still be in his job had he publicly stated regret at his old anti-gay marriage perspective and repudiated it forcefully. I bet he would. And this brings me to the final point: libertarians should care, but not because the instance itself is necessarily a bad thing—an ugly, base, low, cowardly, mean thing certainly, but it might pass a cost-benefit analysis if we really did one—but because of this trend. Progress appears to be an unstoppable juggernaught, and it might be speeding up.

No wonder activists hate the Koch brothers so much

his ia a rather alarming thing for any activist to read in the daily newspaper. From Charles Koch in the WSJ:

Far from trying to rig the system, I have spent decades opposing cronyism and all political favors, including mandates, subsidies and protective tariffs—even when we benefit from them. I believe that cronyism is nothing more than welfare for the rich and powerful, and should be abolished. Koch Industries was the only major producer in the ethanol industry to argue for the demise of the ethanol tax credit in 2011. That government handout (which cost taxpayers billions) needlessly drove up food and fuel prices as well as other costs for consumers—many of whom were poor or otherwise disadvantaged. Now the mandate needs to go, so that consumers and the marketplace are the ones who decide the future of ethanol.

But, but, if a rich guy is fighting for there not to be privileges granted by govenment then what are we allgonna do? Hundreds of thousands of jobs as well paid activists, demonstrators, organisers of petitions, demanders of special privileges, all will disappear! For the entire foundation of all of this social justice stuff is that the rich are using government to screw the working stiff. If anyone actually catches on to the idea that  it's people buying privilege from said government that is the problem then where go our careers in campaigning for privilege for our guys from government?

No wonder the activists actually hate the Koch brothers. They're not playing that part assigned to them in the great political kabuki play and by refusing to do so they're putting those lovely careers "influencing " DC at risk.

Should the government play the markets?

A recent report from the National Audit Office found that the government could have made £750m more from the sale of Royal Mail if it had sold at the highest price the shares reached on its first day. This has led many to blame the government for selling off the family silver at the bottom of the market. Others have pointed outthat the reason for privatising Royal Mail was to subject it to the disciplines of the market, not to raise money. And that no one knows in advance what a share will be worth. Grey markets undervalued the share as well—and of course some advisers said it would rise higher, just as others said it wouldn't. Perhaps government politicking prior to the sale caused some of the problems. In any case, the value has not disappeared, it has just been distributed differently. There may be weak reasons to question the profile of the distribution (e.g. will it be spent more progressively or efficiently by government?) but realistically we're talking a small amount of the budget and bear in mind that investors who ordered more than £10,000 of shares were shut out completely. But one interesting angle is whether this is like Gordon Brown's gold "sell-off" of 1999-2002. As everyone remembers, Brown, as chancellor of the exchequer, sold off the government's gold at what turned out to be the bottom of the market, losing out on potential gains easily ten times more than available with Royal Mail. He is widely criticised for this, but I can't quite see why. I can't think of any good reason why the government should hold any assets whatsoever. On top of this, there are at least four reasons why the state should not hold any specific assets:

1. The government is not well placed to play asset markets. So there's an interesting question as to whether the government should hold net wealth. Maybe there are shocks where easy sources of income will evaporate and the government will need to instantly liquidate some assets in order to pay its normal bills, defend the country against external aggressors, enforce the law etc. This might suggest the government needs to hold net wealth. But we know that even very smart and knowledgeable fund managers with all the right incentives only consistently outperform the market due to luck. So what would make us think, outside of one issue I'll deal with later, that the government's agents, so universally derided for competence in most contexts, could succeed in this either impossible or just really really really hard task? The UK government's Royal Mail and gold holdings were vastly out of proportion to those assets' size in relation to all wealth. If the government wants to hold wealth we know that it should hold a low cost exchange-tracker, as broad-based as possible. Otherwise it will effectively be handing over taxpayer wealth to traders in the markets.

2. Playing asset markets may directly distort those markets. If governments hold given assets (e.g. Royal Mail shares or gold) then it might be because there are social welfare reasons for doing so. It's at least possible that people have the specific desire for the equity of companies to not be held privately or to be held by the state and this something worth at least factoring in. When it comes to gold then individuals might be glad the government has it as a backstop. And of course the state could just be holding these assets on behalf of its citizens, perhaps because there are economies of scale in so doing. Even if there aren't benefits to the state holding assets on behalf of citizens, individuals may take these holdings into account as if they were their own, thus causing only small inefficiencies. But I take most of these considerations to be of minuscule empirical importance. Mainly the government's holdings of assets cannot be justified by these reasons. But since the market will be influenced by their holdings, they will reduce the supply of certain sorts of assets for the market to hold, leading to price shifts and portfolio rebalancing. Since this will be away from the ideal portfolio firms would have held (I can imagine exceptions but none of them are relevant here) this reduces social welfare.

3. Government holding assets means they're unlikely to be used with allocative efficiency. This depends on some of the considerations in 2, but again they're very very unlikely to have empirically large impacts. By contrast, there are probably some very empirically large impacts from the fact that few of the government's assets—totting up to about £600bn, according to a recent ASI report—are ever marketed. As we know from Friedrich A. Hayek's most important work, market pricing is how we rationally allocate resources in society. This was why Hayek and Ludwig von Mises won the socialist calculation debate as even noted Marxist G.A. Cohen agreed. What this means for assets is that we don't know whether they are properly used unless we trade for them. An illustration: if the government sold off all its army barracks the army might then rent the selfsame barracks from their private owners. But it's possible that they would rent somewhere else, and someone might set up a factory or a farm or a theme park on the original site. Without the market competition process we have no idea what would happen and we have no idea what the best use of the land and buildings would be. This applies to big nebulous assets like Royal Mail just as it applies to land and as it applies to gold.

4. If the government holds assets it may have incentives that distort its policy-making decisions. Why does the UK have such an appallingly tight planning regime even though basically all economists think it's extremely inefficient and damaging? It's probably because lots of people own houses and these groups tend to be disproportionately likely to vote and are otherwise politically well-connected. If these groups rented their house and owned the same amount of wealth spread across a wide range of assets it's very unlikely we'd see such economically unjustifiable policies. The same goes, potentially, for government-held assets. After all, the government will be blamed not to mention having less ability to achieve its policy goals if assets it holds lose value. It's not so much that they're likely to directly pursue policies designed to boost the value of state assets. But acts of commission are treated differently to those of omission. It seems highly likely that the government will treat policy changes that affect these particular assets' value differently, just like housing.

So maybe the government should hold some wealth, I can see the arguments for and I can imagine some arguments against. But if it holds wealth it ought hold assets as broadly as possible: because it's not placed to take gambles on particular assets; because doing so may distort markets directly; because holding assets takes them off the market and reduces allocative efficiency; and because holding particular assets may distort the incentives facing policymakers. Thus we should praise Gordon Brown for selling off gold just as we should praise Vince Cable and George Osborne for selling off the Royal Mail.

What on earth is Germany doing here?

This looks to me like an extraordinarily silly decision over there in Germany:

BERLIN—Germany's cabinet Wednesday adopted a bill to introduce a statutory pay floor of €8.50 ($11.72) an hour, a change in policy after Europe's largest economy for decades let business groups and trade unions set pay and working times in collective agreements. The measure, which targets the five million German workers who currently earn less than €8.50 an hour, will be introduced in 2015 with a two-year transition period given to existing regional and sector-wide wage deals.

Where do we expect to see the unemployment effects of a minimum wage? Quite, in the unemployment rate of the young, untrained and unskilled. So, what can we note about the youth unemployment rate in Germany, given that up until now it hasn't had a minimum wage that bites? Yes, quite, we can see that it's very low compared to that of other European countries.

What do we expect to happen with the introduction of a minimum wage, especially one this high? That the youth unemployment rate will start to look more like that of other European countries of course.

Oh, and Germany also has another problem:

Government officials have said that former East Germany with its lower wage and higher unemployment levels will likely be hit hardest by the new minimum wage.

Yup. Just doesn't look like a sensible decision to me.

Capitalism under siege

Mikko Arevuo, a senior lecturer in strategic management and Adam Smith Institute fellow, explains the moral foundations of capitalism and what is causing the current crisis of confidence in it.

Adam Smith taught us that self-interest leads an individual to seek the most “advantageous employment for whatever capital he can command.  It is his own advantage, indeed, and not that of the society, which he has in view.”  Adam Smith’s magnum opus, The Wealth of Nations (1776), or even more importantly his earlier work, The Theory of Moral Sentiments (1759), are no longer required reading in most management schools.  We have forgotten that Adam Smith was first and foremost a moral philosopher.

By omitting the moral foundations of Smith’s work, we have come to equate his concept of self-interest with a greedy disregard for others.  Nothing could be further from the truth as Smith’s self-interest is directly linked with the common good. Smith quickly clarifies the link between the pursuit of individual advantage and the societal benefit by adding:

It is his own advantage, indeed, and not only that of the society, which he has in view.  But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.

History has vindicated Smith’s fundamental insight. Capitalism has made the world richer and healthier than previous generations could have imagined.  An average person today lives in infinite luxury compared to the lives of our forebears, which Thomas Hobbes characterised in Leviathan (1651) as “poor, nasty, brutish, and short.”  According to the World Bank, in 1981 1.93 billion people lived on less than $1.25/day, an indicator for extreme poverty.  By 2008, the number of people in abject poverty had decreased by a third to 1.28 billion.

Why, despite the benefits of the capitalist economic system, is it under existential siege?  The explanation for the widespread anger is not difficult to find.  Over the last 30 years there have been serious dislocations which have been exacerbated by the recent economic crisis.  Millions of manufacturing jobs have been moved  from developed market economies to countries where labour costs are lower, and youth unemployment is alarmingly high, particularly in some of the European economies.  Income inequality has radically widened in the US and the UK, and market pressures and management compensation structures have led managers to focus on short-term profits rather than on long-term wealth creation.

Finally, capitalism is suffering from an ethical crisis.  According to the think-tank The Henry Jackson Initiative for Inclusive Capitalism, a broad-based acceptance of basic ethical norms is necessary if capitalism is to regain acceptance.  Otherwise, the system itself will become discredited and ultimately destroyed, whether by internal failures or external pressures.  To rebuild confidence in capitalism, there are two critical areas that need to be addressed: short-termism and business ethics.

Shareholder value maximisation became the norm in the 1980’s. There is nothing wrong with maximising returns for risk-takers as long as it is based on the sound strategic principles of long-term value creation.  However, over the last 30 years investment markets have undergone a structural change that has caused capital and equity markets to become focused on short-term returns.  In the 1960’s the average stock holding period in the UK and the US was approximately eight years.  Today, it’s about four months.  It is difficult to call today’s equity holders risk investors in the traditional sense of the word that they have an interest in the firm’s long-term survival.  In fact, modern investors are more akin to speculators seeking quick returns.

This structural change in investor behaviour has pressured management to create value on a short-term, and even quarterly basis.  Companies become fearful that investors will divest at the slightest wobble in the share price or if the firm misses its quarterly performance expectations.  Under these conditions short-term fixes tend to win over the long term goals. The situation becomes even more exacerbated if management compensation is linked to short-term corporate performance.

Data is beginning to support the negative economic impact of short-termism.  There is increasing evidence linking short-termism with a long-term decline in corporate investment as a percentage of GDP.  Moreover, corporate investment activity tends to favour efficiency innovation that releases capital by reducing employment and cutting production costs.  What is particularly worrying is that the released capital is not invested in R&D which could increase the rate of product innovation and thus have a positive impact on employment and economic growth.  Instead, as the emerging evidence points out, capital is used for share buy-back schemes that artificially increase share prices. The end result is increased volatility, inflated asset prices, and stagnating long-term growth and employment.

Economic policy initiatives such as investment tax credits can be designed to counteract management short-termism. However, these measures alone will not be sufficient to change the prevailing market behaviour.  A more effective means to encourage long-term investing is  for businesses to stop providing quarterly earnings guidance for equity investors.  Unilever, Merck, and GE have already shifted their investor guidance away from quarterly reporting to long-term performance indicators.  Other firms have started programmes that reward equity investors who hold their shares for a longer period of time.  There is also evidence that institutional investors such as pension and sovereign wealth funds, who collectively hold roughly 35 percent of the world’s financial assets, are beginning to redesign the performance and reward systems of their asset managers to reward long-term performance.

Combating short-termism is a start but it will not solve the crisis of confidence in capitalism overnight.  Although we know that people tend to behave better when they are evaluated over the long-term, they will not behave ethically unless they work in an environment that fosters ethical behaviour.  We should remember that the behaviours that led to the near collapse of the global financial system in 2008 were not the result of illegal behaviour.  The financial crisis was largely precipitated by questionable moral and ethical behaviour.  The reaction to economic crisis has been to increase the level of regulation.  However, the danger of regulation is that rather than asking the question “Should I do this?,”  the question becomes “Can I do this?”

Regulation creates rules-based behaviour that essentially removes an individual’s moral responsibility.  If capitalism is going to survive in the future, we need to bring ethics back to the centre of commercial activity.  Adam Smith would surely agree that commerce can not be separated from morality.  As we seek solutions to the the 21st century problems of capitalism I will leave the last word to Adam Smith:

"When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self-love might suggest to us, prefer the interests of one to that of many.  The man within immediately calls to us, that we value ourselves too much and other people too little, and that by doing so, we render ourselves the proper object of the contempt and indignation of our brethren.”