Ownership and Control


Don’t get me wrong; I love Adam Smith.  In particular I love and support his description of the “negligence and profusion resulting from the separation of ownership and control in a business enterprise".

However it pains me no end to see this concept brought up to support a prior argument (policy-based evidence rather than evidence-based policy, as some wag put it recently) – especially when there is a far more likely explanation to hand.

Chris Dillow, an experienced writer on economics at the Investors Chronicle wrote this in an article in The Times on 18th September:

"There’s a pattern here. The biggest shocks to the financial system have all come from stockmarket companies. By contrast, hedge funds, which many expected to cause trouble, have been innocent bystanders. These are, generally, owned as private partnerships.  So one form of ownership has caused a crisis, and another hasn’t".

Come on, Chris.  You’re not a politician – a species which uses statistics like a drunken man clinging to a lamppost – for support rather than illumination.

Surely the explanation that sticks out a mile is that hedge funds are fund managers and not banks.  The shocks to the financial system have come from banks – who are heavily controlled by the Bank of England and the government in one of the clearest examples of corporatism you are ever likely to see.  In contrast, hedge funds (whose activities are extremely diverse and include funds offering deliberate reduction of risk as well as the opposite) are plain vanilla fund managers.  It is true that many other plain vanilla fund managers are also privately owned and are surviving but the point is they are not banks.

The credit crunch is now spreading outside the financial sector and it will be interesting to see further analysis by Mr Dillow.  In the meantime his perfectly valid concern about the “cost of separating ownership from control" should be applied to voters and government – now there’s a real gulf to consider.  It’s funny, and it may be a coincidence, but I don’t recall Chris Dillow praising the virtues of small government.