Sunday, 21 August 2016

As raposas, os guardas da capoeira e os ingénuos no caso da CGD

A recente saga em torno da nomeação do novo Conselho de Administração da CGD ilustra na perfeição o drama geral da sociedade Portuguesa, onde algumas raposas matreiras assaltam frequentemente a capoeira beneficiando da estupidez e conivência dos guardas da capoeira (leia-se dos governantes) perante a ingenuidade dos donos da capoeira (leia-se os contribuintes).

Comecemos pela ingenuidade de um povo que ainda acredita na necessidade de um banco público. No passado os bancos públicos tiveram uma boa razão de ser como instrumento para garantir as poupanças dos pequenos aforradores e facilitar o financiamento público. Mas esse passado foi nos finais do século XIX e princípios do século XX. No século XXI a regulação bancária e o seguro de depósitos obrigatório protegem os pequenos aforradores e os governos financiam-se sobretudo nos mercados.

Passemos ao papel dos guardas da capoeira (governos e reguladores) na gestão dos bancos públicos. Havendo bancos públicos é óbvio que os governos devem exercer o seu controlo. Porém, esse controlo só existirá se o Primeiro-ministro se envolver diretamente no seu acompanhamento. Nesta matéria, António Costa faria bem em aprender com Salazar. Quando em 1931 Salazar se deparou com a crise do BNU o que fez foi substituir João Ulrich (o indispensável da época, não o atual) por um banqueiro profissional e nomear um outro membro da comissão executiva para o manter informado sobre a evolução do banco. Porém, recusou-lhe a veleidade de ascender a presidente ou de se imiscuir nos negócios do banco. Salazar não precisava de 19 administradores para controlar um banco intervencionado pelo Estado.

António Costa não percebeu que a CGD não é a CML, onde pode nomear dezenas de assessores para fidelizar clientelas sem que isso fizesse perigar a solvabilidade da Câmara uma vez que esta teria sempre como salvador de última instância o Estado. A ideia, tão generalizada entre nós, de que se pode transformar os conselhos de administração dos bancos em sinecuras destinadas a apoiantes políticos é uma perversão da função das sinecuras e um perigo sério para as decisões de crédito dos bancos.

As decisões de crédito necessitam de grande independência e por isso não podem ser influenciadas pelos clientes ou seus representantes. A ideia de encher as administrações dos bancos com administradores não-executivos para facilitar as relações com os clientes e os políticos acaba sempre mal e é desastrosa, sobretudo em bancos mal capitalizados como são os nossos.

E, aqui chegamos ao problema das raposas. Porque é que a banca portuguesa está cronicamente descapitalizada, não atrai e afasta mesmo os bancos internacionais com reputação? Porque nasceu com pouco capital e uma estrutura acionista assente em clientes. A ideia peregrina de juntar dois ou três empresários para criar um banco e usar as poupanças dos restantes clientes e depositantes para financiar os negócios desses empresários só resulta enquanto estes correm bem. Porém, à primeira dificuldade, estes tratam de transferir os prejuízos para o banco. Este modelo bancário tem falhado em todo o mundo desde a Rússia até à América Latina e continuará a falhar com a sem ajuda estatal. Chega sempre uma altura em que já não há mais galinhas na capoeira para sustentar a voracidade das raposas.

Os bancos para serem eficazes têm de ser controlados por acionistas com um interesse meramente financeiro no banco, isto é, sobretudo investidores institucionais apenas interessados na rendibilidade e solvabilidade dos bancos. Mas aqui encontramos o velho problema da pescadinha de rabo na boca. Os investidores institucionais em Portugal (nomeadamente os fundos de pensões e as seguradoras) são quase todos controlados pelos próprios bancos ou pelo governo.

Como é que chegámos a esta situação? Porque ao longo dos anos os políticos tudo fizeram para manter o mercado de investimento no controlo dos bancos. Este conluio entre as raposas e os guardas da capoeira está finalmente a ser posto em causa graças aos efeitos da União Bancária a que Portugal aderiu por ser membro da zona Euro.

Quer isto dizer que com a nossa participação na União Bancária os problemas da CGD vão acabar? Claro que não! Um banco com atividade significativa no crédito às empresas nunca será imune a favores enquanto tiver como acionistas de controlo o estado ou os seus clientes.

Só há duas saídas limpas para a CGD, a sua venda a um banco internacional com reputação (como já aqui advogámos) ou o regresso às suas origens de banco de poupança.

Se por qualquer idiossincrasia dos Portugueses este continuarem a desejar um banco público, então a CGD deverá alienar o financiamento às empresas ficando apenas como banco de poupança e crédito imobiliário aos particulares.

De outro modo, os prejuízos continuarão a ser recorrentes e voltarão a ser suportados pelos contribuintes. Como dizia uma velha senhora, o socialismo só terminará no dia em que acabar o dinheiro dos outros! Infelizmente, como a experiência da Venezuela comprova isso pode demorar muitos anos e causar miséria inimaginável.

Sunday, 26 June 2016

A fine balance between the breakup of Britain or the EU

After the British vote to leave the EU, what should the EU offer the new UK (or England)?

The first thing that the EU must offer is time. Time to let the Brits reflect on what they wish to do about their new position in Europe and whether they wish to do it together in the UK or separately.

This should not stop the EU from setting the maximum it can offer. There is an obvious answer to this, which is the signing of a European Economic Area agreement. This is the obvious offer whether the new Britain decides to rejoin EFTA or not.

This would allow the English to participate in the EU internal market which is what they value most.

However, this creates a major problem because it forces the signatories to accept the EU rules on free movement of people, goods and services without much substantive discussion. Yet, not being ruled by Brussels was precisely the main motive for the leave vote.

Without signing an EEA agreement Britain may be in a position similar to Switzerland, which also did not sign with fear of labor mobility and loss of independence. However the Swiss Cantons are not as pro-European as Scotland and Northern Ireland are.

So, what are the options?

Basically, the EU can design a new type of EEA agreement to meet the Swiss and British fears and hope that it would be enough to prevent the choice of independence in Scotland and Northern Ireland.

Alternatively, it might advise the UK to rejoin EFTA with a promise to let Scotland and Ireland sign separate EEA agreements, by using a reverse of the formula found for the Norwegian Svalbard archipelago in the Arctic Ocean. I doubt that this would be enough to stop the breakup of Britain, but it is worth consideration.

What the EU should not do, is to give Britain better terms than the current EEA members have or encourage a breakup of Britain. The first would encourage more EU exits and the second would weaken NATO’s role and the prospect for lasting security and peace in Europe.

So, let us hope that the European Council meeting this Tuesday to discuss what to do about Brexit is a calm one, which decides to preserve the unity of Britain and of the remaining EU above all else.

Brexit and direct democracy: the double referendum option

Now that a petition to hold a new referendum has surpassed the 3 million signatures I need to discuss this option which I left out in my previous post.

I left it out because it does not solve the basic problem of direct democracy.

While a simple majority (even by one vote) is reasonable for easily reversible decisions, like the election of a parliament for a legislative period of four or five years, it should not be enough for decade lasting decisions. Typically, constitutions and major international treaties should last for several decades and not be subject to frequent changes because of the huge costs in terms of economic and political stability. Therefore, a repeat referendum is not a solution to heal a divided electorate. Only the requirement of a qualified majority solves the problem, because it guarantees a minimum of stability by avoiding the consequences of frequent reversals of opinion.

This said, I do not believe that such qualified majority needs to be extreme. Two thirds or three quarters majorities are clearly anti-democratic. However, majorities of 10 to 15% are a reasonable compromise between the rule by majority and the need to protect the minorities.

Obviously, these rules should be constitutional.

The case of the UK is peculiar in this regard because it does not have a written constitution. So, can a sitting parliament, the House of Lords or a high court cancel (or make non-mandatory) last week’s referendum? I do not know enough about the British rules, but, given the risk of UK disintegration, they should at least require a new election to decide on the future relationship with Europe; even if that means asking the former EU partners for more patience.

Friday, 24 June 2016

Brexit and the danger of direct democracy



The Brexit vote provides a clear example of why direct democracy is a poor form of democracy. The reasons against direct voting are well know.Irreversible and long lasting decisions are taken in the spur of the moment without due regard for its consequences, based on lateral issues.

For instance, the Brexit debate was decided mostly on issues related to emigration which are a minor issue compared with the consequences of Britain leaving the EU.

If the worst comes to the worst, the voters may find out that they voted to break up the United Kingdom, an issue that was never envisaged by most of them.

So, if referendum and other forms of direct democracy are acceptable to decide local or sectional issues they are not suitable to decide complex issues with many ramifications.

In particular, regime change decisions such as independence, constitutional changes or decisions on important international treaties should not be subject to popular vote based on a simple majority. Think for instance in voting for independence. If they are voted on a simple majority vote we would end up with a country deciding one day for independence a the following wishing to reverse its decision based on a change of mind by a few voters.

If such decisions require a popular consult then they should be based on a qualified majority that will not disappear easily overnight(e.g. a 2/3 or 10% majority).

So David Cameron’s assertion in his defeat speech that “There are times when it is right to ask the people themselves – and that is what we have done”, is not a convincing excuse for his fatal mistake of calling referendum on Scotland independence and European Union membership.

In conclusion, direct democracy has its place in a representative democracy but can endanger democracy itself if not limited in scope and quorum.

Thursday, 23 June 2016

Means and ends in the pursuit of happiness

A state of happiness or a happy life is subjective and difficult to define in a precise manner. Yet, most people will agree that a fundamental purpose of life is the pursuit of our and other people’s happiness. But, what is happiness?

Definitions have been attempted since ancient times by philosophers and more recently by psychologist and neuroscientists. For instance, Aristotle (384–322 BC) ethics defined happiness as made up of pleasure (hedonia) and a life well lived (eudaimonia), a definition close to that still used today by most psychologists – pleasure, meaningful and engaged. While neuroscience has focused on the neuroanatomy of pleasure (changes in brain activity associated with changes in reported happiness), it has also began researching the study of prospective consciousness a feature unique to human beings (the sole capable of anticipating the outcome of current choices).

Whatever definition one chooses, it is clear that we need to distinguish current states of mind (which can be manipulated with drugs or group activities) from feelings of long-term achievement, ranging in degree from content to intense, which are felt by individuals with different innate predispositions.

For instance, consider the state of mind of two elders in the presence of a beautiful young person. One elder may find it a source of happiness by remembering fondly his own youth while the other may feel miserable by thinking that, because of his age, he will never be able to date such a beauty again. Likewise, consider the fact that many people consider as their happiest days those lived under conditions of serious displeasure (e.g. war or disaster) simply because they remember more vividly the friendship lived during that ordeal.

So, a personal state of feeling happy depends on one’s personality and his happy memories in relation to specific circumstances, namely: health, friends, family, money, sex, love, freedom, safety, etc. Are these factors to be considered as means to happiness or as constituents of happiness itself? Possibly both!

When our brain produces a given state of happiness, it is being impacted by various factors that are conducive to happiness or unhappiness feelings. However, in the current state of knowledge it is not yet possible to understand why it reads and weights differently such signals. Likewise, we do not know how different individuals weight their own happiness in relation to that of others in their community. Nevertheless, we can influence his ideas and personality through education.

This led me to suggest that we distinguish the means or ends that can be confused with happiness itself from those primary means required to achieve the ends usually associated with happiness. For instance, in my blog on the six pillars of human happiness I selected capitalism as fundamental to create wealth and liberalism to achieve freedom. That is, I considered money and freedom as intermediary ends which are part of happiness.

This is important, if one is to design integrated policies aimed at improving human happiness. For instance, to achieve the material conditions needed for happiness, we selected a trinity made up of market capitalism, representative democracy and constitutional liberalism. While, for spiritual conditions, we selected a trinity of productive work, scientific methods and enlightened virtues. These are the ones necessary to produce the ingredients of happiness, be they education, health, freedom, peace, religion or love.

Sunday, 19 June 2016

Trump, Iglesias and Boris: The new faces of evil in western democracies

In contrast with the usual faces of evil from non-democratic countries (e.g. Putin, Maduro or Kim Jong-un), the new faces of evil all come from democratic countries. So, what is wrong with western democracy? Can we no longer rely on a free press and democracy to prevent the election of evil leaders?

Although extremists have a right to express peacefully and freely their views in a democratic society, it is expected that electors are sufficiently educated to not elect them. Yet, opinion polls on next week’s election in Spain and the UK referendum on EU membership suggest that such radical candidates are not far from winning. Likewise, in the US presidential election later in the year. So, is this because such candidates are wolves in sheep’s clothing misleading the electors?

Clearly not! They do not hide their hideous ideas, as I explained in previous posts. For instance, Donald Trump’s xenophobic ideas and hate for migrants are clearly dispelled in his so-called program to Make America Great Again. Likewise, the program of the Spanish party Podemos led by Pablo Iglésias, is a crude restatement of the Trotskyist version of communism coloured with populist claims of direct democracy, regional separatism and a phony rebellious youth. Finally, the proponents of Brexit, whether they are represented by Nigel Farage leader of UKIP or by Boris Johnson the former populist Mayor of London, play on the fear of immigration and loss of sovereignty, in a manner reminiscent of the infamous 1968 Enoch Powell’s speech on the Rivers of Blood. They downplay the costs of protectionism and economic disintegration, while bullying voters by claiming that they will be sissies if they do not vote out of the EU.

So, are these evil leaders gaining followers because the moderate media and politicians have given up on fighting their populist and nationalistic propaganda? Partly, this is true and it is often fostered by a media willing to resort to the dodgiest forms of reporting as long as it increases their audiences.

However, in my view, there are more important and genuine reasons for dissatisfaction with the current political systems. First, there is an inevitable peace lethargy among the young generations who do not remember the two world wars nor have they lived the age of utopias in the turn of the XIX century and the 1960s. Second, this is compounded by a generalized low regard for professional politicians who rotate in power and corruption fighting for special interest groups with an evident lack of public service spirit.

This real crisis of representative democracy and the new forms of media have been exploited expertly by the new evil leaders to disseminate their reactionary ideas. So, unless new leaders rise, as Churchill did in the 1930s against the appeasers and the nationalistic rhetoric of Hitler, and fight these new evil leaders, the Western World, as we know it, is in serious danger. This week’s electoral results in Spain and Britain will give us a first outlook of how real such danger is.


Wednesday, 25 May 2016

O dilema dos liberais perante a guerra de corporações

A guerra de interesses corporativos entre a FENPROF e as associações representativas dos colégios privados com contratos de associação teve um efeito colateral interessante. Os nossos liberais ficaram divididos entre os que cerraram fileiras no apoio aos colégios privados e os (muito poucos) que permaneceram neutros.

Será que essa divisão serve para identificar os verdadeiros liberais?

Em parte sim, mas não é suficiente pela seguinte razão. A escolha entre manter monopólios estatais ou privatizá-los é um dilema clássico para os liberais, que se vêm confrontados com dois problemas diferentes.

Por um lado, os liberais acabam identificados com os oportunistas que advogam a privatização apenas para se apropriarem das rendas monopolistas. E, uma vez instalados, conluiem com os políticos na prática de abusos muitas vezes superiores aos dos monopólios estatais.

Por outro lado, os liberais têm de reconhecer que é muito difícil avaliar a eficiência relativa de monopólios geridos por privados ou pelo estado.

Serão inultrapassáveis estes dilemas?

Não, se houver o bom senso de distinguir as diferentes situações.

Por exemplo, é essencial distinguir entre monopólios naturais e monopólios criados por regulamentação. Mesmo quando essa distinção é difícil, como acontece no caso da saúde e da educação. Como explicamos num post anterior apenas nas grandes cidades a educação não é um monopólio natural.

De igual modo, os liberais têm de reconhecer que as suas posições atraem inevitavelmente muitos “amigos de ocasião”. Por isso, têm de ter o cuidado de distinguir entre o que são apenas interesses ou afinidades ideológicas e o que são princípios fundamentais do liberalismo. Há mesmo uma necessidade de promover os princípios liberais junto dos diversos partidos políticos pelas razões que expliquei num post anterior.

Também não podem ignorar o sistema em que vivem. Por exemplo, em Portugal vivemos há mais de oitenta anos num sistema de capitalismo de estado. Esse sistema perpetuar-se-á por mais tempo se o eleitorado confundir a privatização de alguns monopólios com liberalização.

Em conclusão, o efeito colateral das guerras entre corporações de interesses instaladas no aparelho de estado pode ser benéfico para os liberais se estes souberem aproveitar para discutir os dilemas do liberalismo em vez de se dividirem em múltiplas fações de apoio ou oposição às corporações em confronto.

Tuesday, 24 May 2016

A burocracia e a perversão do espirito universitário

Como qualquer organização, as universidades precisam de uma administração burocrática. Porém, tal não deve ser motivo para destruir o espírito de governo tradicional das universidades, como tem estado a acontecer em Portugal.

O governo tradicional das universidades assentava num modelo de autogoverno, com prestação regular de contas às entidades financiadoras, abstendo-se estas de interferir na gestão das universidades.

Em termos simples o modelo de gestão das universidades era semelhante aos das restantes sociedades de profissionais (de auditoria, advocacia, medicina, etc.), modelo que na gíria anglo-saxónica se chama de partnership. Neste modelo os partners (sócios ou professores) contratam um corpo de funcionários administrativos e de profissionais auxiliares (assistentes e auxiliares), sendo os futuros partners selecionados entre estes últimos.

Num modelo de partnership, a burocracia é reduzida ao mínimo porque os sócios controlam de forma colegial a gestão e não precisam de um sistema de informação muito detalhado.

Em geral, um sócio assume rotativamente o controle da administração a tempo parcial. Esta é a diferença fundamental em relação a outros tipos de organizações onde os gestores respondem e são contratados pelos acionistas para dirigir a burocracia que administra os restantes colaboradores. Numa partnership o objetivo da gestão é maximizar o rendimento dos partners.

De forma equivalente, numa Universidade o corpo de professores contratava o pessoal administrativo e os assistentes necessários elegendo um dos professores para exercer as funções de reitor ou diretor a tempo parcial. Na universidade o objetivo era a maximização do prestígio da universidade conseguido através do prestígio dos seus professores.

O que levou as universidades (em especial as que não adotaram o estatuto de fundação) a abandonar progressivamente este modelo eficaz de gestão?

A principal razão invocada é que as universidades se transformaram em grandes organizações do tipo empresarial pelo que têm de adotar os modelos e técnicas de gestão empresarial.

Um outro argumento é que a prestação de contas das universidades tem de ir para além da responsabilidade orçamental, nomeadamente prestando contas sobre a sua política de recrutamento, escolha de cursos e seleção de alunos.

A primeira razão é claramente falsa, como é demonstrado pelos bancos de investimento que, tendo sido integrados em grandes bancos universais, continuaram a ser geridos num modelo de partnership.

O argumento de que a prestação de contas deve ir além das contas financeiras já pode ter duas leituras.

Se considerarmos as universidades apenas como instituições de formação, mais ou menos profissionalizante, então a sua lógica pode assentar não na maximização do seu prestígio mas na minimização dos custos de formação. Isto é, o financiador seleciona a gestão que por sua vez contrata os professores, assistentes e funcionários de forma a minimizar o custo de formação. A ideia de ter universidades estatais abertas a todos os alunos baseia-se nesta filosofia.

No entanto, se entendermos que a universidade deve estar ao serviço do saber e da ciência o alargamento da sua responsabilização só pode aceitar uma leitura. A avaliação tem de limitar-se ao seu contributo científico. Esse contributo pode ser a base do seu financiamento, mas não pode ir mais além, sob pena de comprometer a liberdade indispensável ao progresso científico e cultural.

Ora, em Portugal, confundem-se estas duas leituras ao impor às universidades numerus clausus, limites ao valor das propinas, democratização interna, escolhas curriculares e uma entidade avaliadora focada essencialmente na atividade letiva.

Em particular, a ideia de que a democratização universitária passava pela inclusão de assistentes, alunos e funcionários nos corpos de gestão (em oposição a uma desejável participação em órgãos consultivos) perverteu o objetivo de maximização do prestígio dos seus professores, substituindo-o pela maximização do emprego total e seu controle por grupos de interesses, geralmente com ligações partidárias. Os recursos passaram a ser distribuídos de acordo com a relação de forças políticas, frequentemente invertendo a hierarquia tradicional, e quase sempre com prejuízo da autonomia letiva e científica mesmo ao nível departamental.

Uma consequência visível desta evolução perversa foi que muitos dos professores mais qualificados passaram a ter de procurar prestígio em atividades não relacionadas com a universidade, deixando as suas decisões estratégicas, promoções, planos de estudos e distribuição do serviço aos assistentes e professores vocacionados para a burocracia.

Esta tendência agravou-se com a criação da Agência de Avaliação e Acreditação do Ensino Superior (A3ES) que, embora sendo uma fundação, é nomeada pelo governo e rege-se por princípios orientadores fixados legalmente pelo Estado.

Esta agência veio extravasar o que seria um trabalho desejável e útil de auditoria técnica da qualidade no ensino e investigação por iniciativa das próprias universidades, para se transformar numa entidade de acreditação dominada por uma perspetiva corporativa de formação profissional.

Assim, as universidades passaram a ser dominadas por uma burocracia que se autoalimenta e multiplica, interferindo cada vez mais na atividade dos professores sem que estes possam retirar qualquer benefício dessa avaliações. Isto é, os professores passaram a trabalhar para a A3ES em vez de ser a A3ES a trabalhar para os professores.

Em conclusão, este processo de “secundarização” das universidades resulta duma conceção errada do seu papel e da sua democratização e gestão, que diminui o contributo das universidades para a sociedade ao mesmo tempo que engana os alunos sobre a qualidade do serviço que a universidade lhes presta.

Wednesday, 18 May 2016

Trump: Caligula or Incitatus?

Legend has it that the Roman Emperor Caligula had his horse Incitatus elected senator. Caligula, an insane tyrant who ruled between37 and 41 AD, was famous for his cruelty, sadism, extravagance, and sexual perversity. He is said to have built for Incitatus a stable of marble, with an ivory manger, purple blankets, and a collar of precious stones. The horse would also "invite" dignitaries to dine with him in a house outfitted with servants. Some say that Caligula carried out such extravagances to ridicule and provoke the senate.

At the start, Donald Trump was also seen as an extravagant character, with a narcissistic authoritarian personality who named his buildings and casinos after himself and was a keen participant in reality shows. Yet, he is now the Republican candidate for President of the United States.

So, it is pertinent to ask if the Republican leadership (GOP) went crazy and found its own Incitatus in Trump, or if the reverse is true and Trump is a kind of Caligula who turned the GOP into his Incitatus. The answer might be the second, given that Trump was initially opposed by the GOP.

Were Trump to be elected, it would not be the first time that an electorate voted into office clowns or mavericks in a gesture of protest against the establishment. Electing a clown or an Ernest might even be a refreshing interval, if the country were not fundamental for world peace and democracy and the elected clown did not have firm crazy ideas.

Unfortunately, neither the US is a minor power, nor Trump is devoid of ingrained dangerous ideas.

To understand how dangerous are his ideas it is enough to translate them into plain English as follows:


This so-called program to Make America Great Again, will instead damage seriously the Dollar and the US economy, reduces America leadership and threatens world peace.

His nationalistic, xenophobic, homophobic and militaristic stance would alienate allies, divide Americans and create new enemies. The beacon for democracy, fairness and opportunity that America has been for more than a century would come to an end.

I do not believe that the American people will vote such candidate for President, but should it happen, Mr Trump could become simultaneously a modern-day version of Caligula and his horse.

Tuesday, 10 May 2016

Em que é que a Educação e a Saúde são assim tão diferentes?

Não são tão diferentes como se possa pensar. Ambos são serviços que na maioria das situações têm de ser prestados em condições de monopólio, o que justifica a sua regulação estatal.

Quanto à questão de saber se também deve ser o estado a providenciá-los diretamente é uma discussão semelhante à de todos os serviços públicos cujo consumo é divisível e individual. Quais são mais facilmente reguláveis: os monopólios públicos ou os privados? Trata-se de uma questão empírica, e temos certamente muitos bons e maus exemplos para ambos os lados.

No entanto, o bom senso recomenda que em ambos os casos se comece pelas situações mais próximas de um mercado competitivo, isto é, na educação devia começar-se pelo pré-escolar e primária e na saúde pelos cuidados primários (centros de saúde).

Ora, em Portugal, começamos precisamente pelo lado oposto - pelas universidades e pelos hospitais. Porque será?

Há razões que se prendem com o tradicional "chico espertismo” dos Portugueses, nomeadamente pelo facto de só os grandes negócios darem grandes comissões/rendas e pela tradicional acumulação de empregos e negócios entre o estado e o privado.

Mas há uma razão fundamental pelo facto do acesso às universidades e aos hospitais ser determinante na criação de igualdade de oportunidades e mobilidade social. São por isso o palco privilegiado para uma espécie de luta de classes surda nas sociedades modernas. No caso de Portugal essa luta é agravada por não termos no passado universidades de elite nem uma classe médica com um status tão superior ao dos restantes profissionais.

Curiosamente estes dois fenómenos estão interligados num circulo vicioso em que a garantia e preservação de um emprego bem remunerado na saúde levou á adoção de numerus clausus restritivos que por sua vez gerou uma procura absurda por notas altas em medicina e cursos afins e ao recurso exponencial ao sistema de explicações e respetivos centros e colégios privados.

Este fenómeno traduz-se num desperdício imenso de talento e recursos que pode ser facilmente resolvido através de legislação que fixe o acesso aos cursos de saúde com base numa nota ponderada entre a nota académica e a vocação profissional.

Em resumo, haja bom senso e não misturemos as questões da eficiência e regulação com as da igualdade de oportunidades de uma forma acrítica e generalizada.

Monday, 9 May 2016

Mitos urbanos sobre escolha e concorrência no ensino

O debate suscitado em torno do financiamento dos colégios privados contratados pelo estado trouxe novamente à baila uma controvérsia antiga sobre a liberdade de escolha dos pais e a maior ou menor eficiência do ensino público e privado.

A liberdade de escolha é importante numa sociedade, mas só pode ser exercida plenamente se houver condições materiais para a exercer. Antes do aparecimento do ensino obrigatório e da escola pública essa liberdade era plena, mas apenas para os nobres que podiam escolher os preceptores que quisessem para os seus filhos. Os restantes tinham que se sujeitar ao ensino religioso.

Como o conhecimento nessa época era limitado, um único preceptor podia ensinar todas as disciplinas em casa dos alunos. Com o avanço técnico e cientifico essa solução deixou de ser eficaz e os próprios nobres tiveram de substituir o ensino individual pelo ensino em grupo.

Ora o ensino em grupo tem requisitos mínimos em termos de dimensão, variáveis de acordo com o grau de ensino. Por exemplo, o ensino pré-primário pode ser economicamente prestado em pequenos grupos por um ou dois educadores já o secundário exige umas centenas de alunos e o universitário uns milhares.

Por isso em países pequenos ou pouco urbanizados o ensino tem de ser maioritariamente prestado em condições de monopólio local ou regional. E, esses monopólios, são incompatíveis com uma verdadeira liberdade de escolha. Nessa perspectiva o debate deve distinguir entre os níveis de ensino onde é possível encontrar ou desenvolver situações de emulação de concorrência daqueles onde isso não é possível.

Por exemplo, o ensino pré-primário pode e deve ser concorrencial nas pequenas e grandes cidades, mas não pode sê-lo nas aldeias e vilas mais pequenas. Já o ensino básico e secundário só pode ser concorrencial nas cidades médias e grandes como Coimbra e Porto. Quanto ao ensino universitário só pode ser concorrencial em Lisboa.

Deste modo a educação em Portugal é necessariamente monopolista e a questão a debater é se é mais eficaz regular monopólios privados ou estatais. Este debate é controverso não sói na educação, mas em todos sectores desde a saúde à energia com características de utility, mas não é uma questão de liberdade de escolha.

A ideia de que podemos ter uma saudável concorrência entre o ensino privado e público no secundário é fruto duma perversão do ensino em Portugal, traduzida naquilo que podemos chamar de “a praga das explicações”. Hoje em dia proliferam por todo o lado centros de explicações e colégios privados que prometem preparar melhor os alunos para os exames.

Esses estabelecimentos prestam um serviço útil aos pais que não podem ou não querem acompanhar a educação dos seus filhos, providenciando um horário escolar compatível com horário de trabalho dos pais, algo que a escola pública se demitiu de fazer por pressões sindicais e falta de recursos. Basta lembrar que até há pouco em muitas escolas públicas os alunos só tinham aulas de manhã ou à tarde.

Porém, este recurso às escolas de explicações tem um custo elevadíssimo para o futuro dos alunos.

Para percebermos isso temos de lembrar como surgiram as escolas de explicações, chamadas de crammers em inglês. Essas escolas surgiram para preparar os filhos dos nobres ingleses que por burrice ou malandrice não eram capazes de passar nos exames de acesso a Cambridge ou Oxford. A estratégia pedagógica seguida consistia em obrigar esses alunos a decorar a matéria e exercícios de forma acrítica para despejar nos exames e esquecer imediatamente. Essas escolas privadas eram assim um misto de casa de correção e preceptor individual. Antes do 25 de Abril também existiam em Portugal alguns colégios com essas características, lembro-me por exemplo do de Abrantes.

Essas escolas funcionavam bem porque uma vez os alunos admitidos a Oxford ou Cambridge não precisavam de se preocupar mais com o estudo, mas sim com a confraternização com os bons alunos que mais tarde iriam encontrar ou contratar no governo ou nas empresas dos seus familiares onde em geral os filhos das elites exerciam funções não executivas. Este sistema permitia combinar a perpetuação das classes dirigentes com a eficácia administrativa.

Ora, pensar que este modelo pode ser generalizado à totalidade da população é um verdadeiro mito urbano. Um mito que custa muito caro ao país e, sobretudo, aos alunos que ficam para sempre iludidos a pensar que aprenderam alguma coisa, quando na verdade não aprenderam o essencial que é a capacidade de estudar por si próprios, inovar e resolver problemas.

Confundir esta tendência para a proliferação de escolas de explicações com a liberdade de escolha no ensino é um erro grave para aqueles que verdadeiramente acreditam no ensino como fonte de liberdade e de promoção da mobilidade social!

Thursday, 28 April 2016

The trigger for the next financial crisis

We know that financial crisis are recurring. The last one was in 2008, almost 8 years ago, so it is not difficult to forecast that a new one is in the making.

The trouble for investors is that it is almost impossible to forecast when a new crisis will arrive. It may be next month, next year or in five years. Who knows?

Another annoying feature of financial crisis is that it is equally difficult to foresee which drop will spill the glass, that is, what will be blamed as its trigger.

Paul Krugman just listed two possible candidates – China and oil – in his NYT op-ed “The 8 A. M. Call”.

So, let me add another candidate – IRRBB Interest rate risk in the banking book – caused by the excessive reliance of banks on the derivatives market.

This choice may sound odd, given that the Basle Committee has been working hard on new standards for this risk which will be implemented in 2018, aimed at preventing IRRBB to materialize when interest rates normalise from historically low levels. Indeed, the notional value OTC derivatives which at end-2014 was 6.5 times larger than all outstanding debt securities has been reduced by 70 trillion USD in the first half of 2015.

It really does not matter if the crisis is triggered in these markets, or any other place like the M&A or the currency markets. The “fire” can be started anywhere, as long as the “wood” is close enough to spread it by contagion.

What matters is to know whether the “firemen” are capable of containing it.

In this regard the perspectives are frightening, given the resistance to apply the so-called Volcker rule to ring-fence commercial banking from investment banking, the exhaustion of ammunition by central banks to deal with a liquidity trap and the balance of public finances in some major economies.

Thursday, 14 April 2016

Brexit: A brief history of economic disintegration

History is full of episodes of political and economic disintegration, which were often the natural culmination of experiences of forced integration. With a few exceptions, most empires ended through a process of violent and anarchic disintegration. Whether we think about the ancient empires of Alexander, Rome, the Qin Dynasty or Persia, or if we consider medieval empires like the Charlemagne Empire, the Islamic Caliphate or the Mongol Empire, or if we look at the modern empires of Britain, Ottoman, the German Reich and the Japanese Empire or the breakup of the Soviet Union and Yugoslavia, the lessons are the same. The separating regions often end up in civil war and always erect barriers to trade and investment through tariffs and instable currencies which bring economic decline.

The inevitable initial sacrifice in terms of economic and human misery is often followed by prolonged periods of underdevelopment (all too visible in Africa) in the separating regions, but there are some notable exceptions like the separation of the United States of America from Britain.

Do these lessons of history have any relevance in the case of an eventual separation of Britain from the European Union (the so-called Brexit)? If so, would the UK follow the general pattern of decadence and misery or could it replicate the US successful experience?

The first question is relevant because the European Union is a voluntary association of countries, not a forced empire. So, an eventual exit of a member state should be seen as the natural counterpart to a voluntary membership and should not be cause for war or vicious conflict. Nevertheless, we cannot ignore that Great Britain is itself an association of three nations – the English, the Welsh and the Scots – which may have quite distinct views in relation to the European Union, wish may lead some to question in which union they wish to participate - the European or the British.

Although military violence cannot be expected, social unrest may still arise in a strongly divided nation in relation to an eventual separation. Moreover, it will also depend on the attitude of the remaining member states in the European Union. Namely, whether they will be understanding and friendly or will be hostile and competitive, for example, by promoting an international financial centre to rival the City of London.

So, political attitudes in London, Brussels, Berlin and Paris would have an important bearing in the outcome of an eventual separation. Nevertheless, the answer to the question whether a separate Britain would be a failure or a success story requires an understanding of the economics of disintegration.

As a preamble to that understanding, let me just give the reader a chart depicting the experience of economic growth in Britain relative to that of France and the USA, before and after joining the European Union.
The chart is impressive. Before joining the European Union, the UK lagged France by over 30%. Since joining, it still lagged the USA by 20% until 1998, but managed to match the GDP growth in France. Since the creation of the Euro, Britain managed to overtake France by 10% and to match the growth in the US economy.

Given the success of Britain in the European Union, for outsiders it is hard to understand the decision to hold a referendum on its continuation in the Union. Is it simply local politics, or there are any fundamental reasons?

Sunday, 20 March 2016

Trump vs. Hitler: some dangerous similarities

“Entire libraries have been filled with books attempting to explain how a once-homeless failed artist could have launched a war machine that eventually resulted in 60 million dead, and a death machine that killed 6 million in the Holocaust's gas chambers. More are certainly to come. The rise of the Nazis defies any simple narrative, coming as it did out of a myriad of interlacing events, ideologies and historical accidents”. http://www.spiegel.de/ “

The quote above is true, not only in relation to the policies expounded by the two men, but, more dangerously, by the social and political conditions that permitted Hitler’s rise to power.

In other posts (see: here and here) I have already explained the similarity between the economic conditions in the 1930s and today. I will just add that today they are not as dire, but can turn so if the next financial crises exceeds that of 2008 and reaches the level of 1932.

Turning now to the political conditions, I recall that today’s dissatisfaction is two-fold – a generalized disillusion with the centrist political establishment in Western countries and a rise in nationalist illusions among former communist states who failed to thrive under capitalism. Unfortunately, both disillusions may converge into a dangerous spiral of nationalism in a 1930s fashion.

What worries me is the reaction of moderates in the left and the right who seem to start taking an appeasement approach to Trump, like the one that cleared the road to Hitler.

Its worrisome, to see how many moderate Republicans are trying to embellish the Trump discourse or to believe the wishful thinking that he will moderate his views when in power.

Moreover, the same stance is being taken by some radical classical liberals’ followers of Hayek, whose dislike of Hilary Clinton blinds them enough to endorse a candidate like Trump whose policies are extremely nationalistic and protectionist (see my exchange with Don Boudreaux here).

So, we live in dangerous times. And, whether we like it or not, we have to rely on the hope that Hilary Clinton is elected and brings some sense to the political arena. She is not the candidate of the Republicans, but, if they fail to stop Trump and do not support her, they may end up playing Hindenburg’s role 83 years ago.

Sunday, 28 February 2016

Demagogia sobre a ADSE

Está em marcha um processo de desinformação e disparates legislativos que põe em causa a sobrevivência do seguro de saúde dos funcionários públicos, designado por ADSE.

O processo começou com Sócrates que aboliu a obrigatoriedade de descontar para a ADSE, prosseguiu com Passos Coelho que aumentou desnecessariamente as contribuição para 3.5% de modo a fomentar a transferência dos quadros mais bem remunerados ou jovens para o setor privado e continua com Costa que se prepara para descapitalizar a ADSE alargando-a a todos os familiares dos funcionários públicos com menos de 30 anos.

O sistema da ADSE é muito invejado porque reembolsa a todos os seus participantes uma parte significativa das despesas de saúde e dá-lhes liberdade de escolha entre o Serviço Nacional de Saúde e o sector privado. Atualmente acaba por pagar mais de 20% da faturação dos hospitais privados.

Aparentemente, são razoáveis os clamores à esquerda e à direita para abrir a ADSE a todos e acabar com esta dita descriminação que favorece os funcionários públicos.

Porém, se pensarmos melhor verificamos que esta argumentação é idêntica à demagogia dos comunistas quando se propõem acabar com os ricos para ficarmos todos pobres.

Na verdade, o sistema da ADSE é generoso para os funcionários públicos mal remunerados porque são subsidiados pelos restantes que pagam uma contribuição excessiva. No entanto, essa contribuição é subsidiada pelos colegas e não pelos restantes contribuintes. Existem outros sistemas e subsistemas bem mais generosos (nos sectores da banca, defesa, energia e telecomunicações), alguns com contribuições adicionais das entidades patronais.

Contudo, o sistema da ADSE só é possível porque a percentagem de profissionais e quadros no sector público é mais elevada (cerca de 60%) do que no privado (cerca de 30%). Basta um pequeno exemplo numérico para avaliar o impacto desta estrutura profissional.

Por exemplo, se quer no privado quer no público o salário médio mensal dos trabalhadores qualificados fosse de 2500 Euros e o dos não qualificados de mil Euros, com uma contribuição de 3.5% seria possível comprar €67 de cuidados de saúde por mês para cada funcionário público e apenas €51 para os trabalhadores do privado.

Tal seria possível porque cada quadro no sector público subsidiava com €32 os não qualificados enquanto os do setor privado apenas financiariam os não qualificados em €16.

Qual seria o resultado de juntarmos toda a gente num único sistema.

Tal sistema só podia gastar €54 por beneficiário. Isto é, em média os trabalhadores do privado teriam mais €3 e os do público menos €13.

Será que vale a pena em termos do bem-estar geral? Não, porque a generalização do acesso ao setor privado faria imediatamente subir os preços e baixar a qualidade dos seus serviços de tal modo que os €54 passariam a comprar menos serviços de saúde do que os €51 iniciais.

Tal como acabar com os ricos não beneficia os pobres, também acabar com o privilégio dos funcionários públicos mais pobres não irá acabar com os pobres do privado. Em suma a inveja e a ignorância não são bons conselheiros.

Tuesday, 22 December 2015

Robotics and the value of labour

For a long time, economists have used production functions to study the impact of changes in the elasticity of substitution between capital and labor in factor income distribution. When the elasticity of substitution is one the relative shares remain constant, when it is greater than one the share of capital increases and when it is less than one the share of labor rises.

Most economists believe that the remarkable stability of the relative share of capital and labor in total income experienced in capitalist countries is due to the fact that technical progress is either neutral (and the elasticity of substitution is one) or is mildly labor-saving but the relative earnings of labor in relation to capital will decline due to a relative labor abundance, thus moving the elasticity close to one. But, what will happen to capitalism if technical progress turns extremely labor-saving and labor income becomes negligible or negative?

For instance, imagine a futuristic scenario where each one of us owns personal robots better than us in all domestic and professional tasks, not just the simply tasks of cleaning and similar. Science fiction typically depicts such scenario in terms of who will be the master, us or the robot, but I will assume that humans will be the masters.

Following the law of comparative advantage we would leave to the robots the tasks where they had a comparative advantage, for both pleasant and unpleasant jobs. However, by increasing the number of robots relative to that of humans, humans would be able to skip entirely all the unpleasant tasks. Therefore, the few pleasant jobs left to humans would be mostly the design and supervision of robots and to decide on collective investments. Because these function will not occupy many people jobs for humans will be so scarce that workers might be willing to pay for the privilege to work rather than be paid.

So, in such a world, how would capital accumulation and economic exchange work? Could the six principles of capitalism survive in such world? Can we imagine exchanges to continue as usual but now with trading between robots at a speed not accessible to humans?

In such a world the accumulation of human capital (skills and education) will be driven by non-economic factors and everyone’s income is essentially determined by capital returns. Thus everyone would need to own traditional assets and robots either directly or indirectly through collective investment vehicles (e.g. pension funds) or the government.

That is, the markets for goods and services could work as they do now but the labor market would be substantially different, since humans would no longer be sellers but buyers in such market. Likewise, preferences for consumption and accumulation will be altered since in such society the leisure class will be a majority while the working class is a small minority.

There would be then three types of assets, the traditional forms of property, the human replicas (slave robots) and the embodied skills and human capital necessary to qualify to buy the right to work. The first two types of capital can be merged in two categories - traditional assets and slave robots. Therefore, one could still use the conventional two-factor model so that in a product function we were left with two single inputs, traditional capital and slave robot labor, and again define an elasticity of substitution between them in the usual way.

The only requirement is that slave robots be separable from their owners so that they may be traded like any other type of capital. In this futuristic world, private property would still be needed to drive consumption and capital accumulation, but human labor supply would no longer constrain the rate of capital accumulation and could be considered as perfectly elastic. Therefore, the personal fortune of each individual robot-owner will depend entirely on its initial endowment, investment skills and luck on selecting their portfolio of capital and robots.

The jobs for humans would be a status symbol to be achieved through other means rather than competitive markets, namely through hereditary rules, lottery or voting. All job positions could be theoretically auctioned, like old master paintings, but it would be inefficient. Such a society would resemble Ancient Rome but with robots instead of human slaves.

Nevertheless, it is unlikely that self-reproducing slave-robots could be left entirely in the hands of private individuals. Even assuming a good regulatory environment, most people might prefer state ownership fearing that robots might turn against humans.

If that happens one could no longer rely on comparative advantage, even in the context of a single factor (slave-robots) model, because that factor would be jointly owned (state owned). Moreover, slave-robots would be more homogeneous than humans which would make them less differentiated in terms of comparative advantage. So, new solutions will have to be found.

In conclusion, the ways humans chose to regulate the production of humanoid slave-robots will determine how a new economic system may differ from capitalism.

Monday, 21 December 2015

Capitalism and consumerism

Capitalism is the world’s greatest production machine. However, eventually, production needs to be consumed. Thus, capitalism can only go on growing if consumers are willing to consume. So, it is consumerism indispensable to the survival of capitalism?

Of course, we are still very far from a society of plenty, but should capitalism go on for several centuries producing wealth at the rate it has produced in the past, we may expect to reach such a status.

Alternatively, we may consider that consumer demand is infinitely elastic since humans can always either design new items of consumption (e.g. inter-galactic travel) or, because when their appetite subsides, it may be encouraged through advertising. For instance, most people would live quite well with just a pair of shoes per year. However, the fashion industry persuades us to have dozens or hundreds of them and we become trapped into an unreasonable pursuit of consumption that contributes little or nothing to human happiness.

Moreover, consumerism creates many side effects that generate also production opportunities for capitalists. For instance, to use the words of Harari (2015), “Obesity is a double victory for consumerism. Instead of eating little, which will lead to economic contraction, people eat too much and then buy diet products – contributing to economic growth twice over.… The new ethic promises paradise on condition that the rich remain greedy and spend their time making more money, and the masses give free rein to their cravings and passions – and buy more and more.”

Nevertheless, the reliance of capitalism on consumerism creates two distinct overcast clouds on its future. First, it increases human alienation which may degenerate into revolt against capitalism. Second, and most importantly, it sets a boundary on how much such an economic system can rely on consumer sovereignty and consumption-led growth.

In relation to the first it is opportune to remark that this argument is already used as the basis for the anti-capitalism of some religious leaders and communists. It is hypocritical that, having failed to solve poverty through charity or having created misery with their social experiments, they now want to accuse capitalism for having provided the opportunity to consume to the masses.

The reliance of capitalism on consumer-led growth is necessarily finite, unless humans transform themselves into consumption machines. The point of consumer saturation is certainly centuries away but it will happen. So, when that day comes who will substitute the individuals' demand for goods and services? Whether it is the government or a new type of institution it will have to be driven by a new form of rationalization different from consumer welfare. That is the valuation of leisure, consumption and work will change and may not be decided on competitive markets.

Overall, consumerism and waste is not fundamentally caused by capitalism but it sets a limit on the duration of capitalism. The other constraint is set by the relative contribution of machines and labor to the production process.

Sunday, 20 December 2015

Capitalism and globalization

Will capitalism conquer the world? May be yes, but, per se, this is not a desirable outcome, because some diversity in economic systems is always beneficial for humankind.

What is more relevant is to assess whether the globalization of capitalism will be a positive or negative force in the current world. In this regard the balance between positive and negative impacts is clearly positive. I shall explain why below, but first let me explain why anti-capitalism movements are often also anti-globalization.

The detractors of globalization have three main lines of attack, namely that: globalization kills local and national cultures, that multinationals exploit non-unionized labor and lax regulations in poor countries and destroys national sovereignty and decision centers. Anti-capitalist advocates attribute to capitalism whatever they think is wrong in society. For instance, feminists blame capitalism for the unfair treatment of women, animal rights groups blame it for animal maltreatment, environmentalists say it is responsible for the destruction of nature and “climate change”, civil rights groups charge capitalism with promoting racism, peace activists attribute war and conflict to capitalist greed, moralists claim that commercialization and consumerism are responsible the loss of religious and social values, consumer-advocacy groups accuse capitalism of putting profits before people.

As explained in previous chapters none of these charges withstands the most simple scrutiny, let alone the counter-evidence provided recently by the turn to capitalism of former socialist and communists systems in China and other less developed countries.

First, and foremost, the globalization of capitalism accelerates the eradication of extreme poverty on a global scale, with the consequent positive effects on health, education and consumption. But, as is normal, accelerating economic growth also has its side effects, namely in terms of environment and demography. Likewise, it will accelerate the rise in the capital/labor ratio and the consequent impact on their relative share of income, which needs to be tackled through an increased capital ownership by workers either directly or through pension funds.

Nevertheless, the major impact of globalization will be through changes in political systems and regulations. Globalization unleashes forces that simultaneously strengthen and weaken the case for regulation. For example, greater freedom of movement for goods, labor and capital weakens the role of national governments. But the fear of sudden mass movements with disruptive consequences on infrastructure and employment calls for global regulation. Thus, using a parallel with monetary theory, the question whether the world is an optimal jurisdictional area for all the fundamental principles of capitalism is critical.

Without detailing all the issues let me just illustrate with a few. For instance, can we conceive of a global corporation reporting and paying taxes to single world entity? Or, can we anticipate an international court to judge violations of the rule of law? Would it rule under a system of common or civil law? Most of these question remit to the fundamental problem of how to structure different levels of government from a local to a global level and the respective enforcement apparatus, within a democratic system.

Although a body of generally-accepted international law is being developing slowly, it will probably take some centuries before a comprehensive system makes its mark. In the end, the fastest route may still be a progressive economic and political integration at the regional level like in the European Union.

In conclusion, although capitalism and globalization are both desirable and reinforce each other, any non-synchronized acceleration in one of them may backfire into a joint relapse.

Friday, 18 December 2015

Capitalism and the economics of happiness

It is difficult for humans to be happy on an empty stomach or without shelter. Yet, in most surveys about the sources of happiness, people usually rate higher other determinants of happiness such as family and health. So, it is wealth-creation (the main objective of capitalism) the only road to happiness? The answer is obviously no!

Different people pursue happiness in different ways, namely through meditation, friendship and many other ways that do not depend on the availability of the material comforts of life (see Layard, 2005). Yet, it is also unquestionable that the abundance of material comforts may facilitate or prevent the attainment of happiness.

One important factor to notice is that the pursuance of material wealth is often detrimental to the other factors contributing to human happiness, namely family life, community and friends. However, most people will pursue wealth regardless of the economic system.

Therefore, as it is often the case, the drive for wealth should not be confused with the results of an economic system (capitalist or other). For instance, imagine that humans were divided in two groups – satisfiers and maximizers. It will take a lot of reward to convince the first to emigrate and leave behind family and friends. So, in capitalism only its higher rewards can be blamed for enticing the urge to move on those individuals.

Nevertheless, the opposite is equally true. One should not ignore the key role played by wealth in family life. In particular the Portuguese adage that “in a hungry family all fight and none is right”.

Indeed, the impact on family life and health through industrialization and urbanization was initially very disrupting and resented in the early days of capitalism, which led many social-minded philosophers to blame capitalism for that.

Likewise, long working hours, women employment and job insecurity often contribute to some of the greatest causes of unhappiness, namely separation/divorce and unemployment. Yet, this cannot be fairly attributed to capitalism, especially when we compare its working conditions with those under slavery, serfdom or communism. Moreover, it gave women a degree of freedom never enjoyed in the past both in terms of self-supporting income and domestic help.

Of course, greater freedom inevitably comes with a greater sense of insecurity. In particular, the freedom of contracting could not provide a job-for-life and the sense of security enjoyed by the serfs tied to the land. But, to some extent the state ended up replacing the landlords in providing unemployment insurance and other welfare programs. Moreover, it freed men from compulsory labor and military service which were a major cause of death.

Finally, at the cultural and moral levels, capitalism is often criticized as responsible for the loss of a sense of belonging and for growing resentment and envy, all factors that diminish happiness. Again, the greater freedom, wealth and opportunities created by capitalism in turn favored individualism, consumerism and egalitarianism, which have happiness-reducing consequences. However, they also had significant happiness-increasing consequences in terms of liberty, abundance and social mobility, which, on balance are more important.

In conclusion, like all new economic systems, capitalism brought its own share of disruption to traditional values and certainties which wears down some sources of happiness. Although its facilitation of many other sources of happiness largely outweighs such erosion, there are some utopias that it cannot and should not promote, such as wealth equality. While equality of opportunity is indispensable for economic efficiency, trying to impose an equality of results would require eliminating individual risk and rewards and entrepreneurship which are fundamental for capitalism.

Wednesday, 16 December 2015

The control of rent-seeking behaviour

Initially business regulation focused on anti-trust policies and barriers to entry. However, rent-seeking behaviour is not exclusive of natural or government sponsored monopolies and oligopolies. Rent-seeking is generally defined as the pursuit of payments beyond those necessary to have the service or factor supplied. Although most of these situations involve licensing, e.g. as in the case of doctors, taxis, drugs etc., or natural monopolies (as in the case of land), there are situations where market dominance may create the same type of rent-seeking behaviour.

I shall illustrate this with two examples related to new technologies and distribution, that is, – rent seekers vs. innovators and distributors vs producers.

With free entry, innovators will enjoy only a temporary monopoly until new imitators come in and drive profits to zero, thus eliminating any rents. However, in sectors subject to winner-takes-all economics that is no longer the case, because innovators can only compete until one of them dominates the market. That is, inventors become like lottery players, playing in the hope of winning a jackpot. Those who get it either retire or become a kind of private equity fund (doing little or no new research) but buying up any new innovators that threaten their dominance.

This eat-or-be-eaten is not always negative. Indeed, many so-called serial entrepreneurs thrive on finding new business opportunities and not on running them for long periods and therefore welcome the possibility of cashing-in and having a higher turnover in their investments. The problems exist when the acquirers use bundling and financial power to stop prematurely the natural selection of the winners.

Consider for example the social network Facebook’s acquisitions of Instagram and WhatsApp, for 20 billion USD, in order to secure dominance in global photo-sharing and mobile messaging. Can we be sure that those services had already achieved their position of winner-takes-all through competition or did they reach it prematurely by being acquired by a dominant player in the same space?

It is important to note that most of those payments were in Facebook shares, which may be seen as counterfeit currency if they are excessively overvalued because of the expected longevity of its oligopolistic position. So who is rent-seeking, the innovators or their acquirers? Probably both, because the innovators capitalize on the anticipation of a wider monopoly position while the acquirer achieves a higher valuation on the assumption that it will be able to maintain its dominant position and capture the rents achievable through such position longer than normal.

However, it is not uncommon that the acquirer ends up writing-off many of such acquisitions and ends up being the “sucker” while the tech entrepreneurs cashes in hefty gains. So, as long as this processes increases rather than limits entrepreneurship, the potential for market perfecting policies on the part of regulators is very limited.

This is possible because inventors also hold a monopolist position. This is quite different from the position of distributors and suppliers. To the extent that retailers manage to concentrate their retail outlets in a few locations their stores achieve a local oligopolistic situation which allows them to pursue rent-seeking. These oligopolies are often reinforced by local planning and licensing regulations.

For instance, during sudden recessions consumer demand contracts and retailers try to stop falling sales through discounts and lower prices. However, these reductions are transferred to their suppliers so that they manage to protect their profit margins throughout the recession. They are able to do so because suppliers no longer have direct access to end-user clients . Therefore, most of the adjustment takes place at the producers level. However, in contrast to the tech sector, here a write-off in the producers’ investment generates a reduction in entrepreneurship but the distributors will not incur write-off losses.

A similar process occurs in sectors (e.g. petrol stations) where the producers are in an oligopolistic position while the retail distributors are many and receive a fixed payment. Obviously, in this case, the producers are the only able to pursue rent-seeking.

That is, there are cases where producers impose a fixed price to retailers e.g. soft drinks, ice cream, petrol and domestic gaz. And the opposite, cases where distributors impose a price to producers, e.g. research, supermarkets, etc. Such practices are certainly anti-competition and may justify some form of regulation. However, in those sectors where both producers and distributors have oligopolistic power (e.g. IT and healthcare) it is not clear whether regulation can add much value.

In conclusion, striking the right balance between market perfecting regulation and intrusive messing up it is not always easy. For instance, in the financial sector excessive regulation often results in the protection of the incumbents which have the resources needed to cope with heavy regulation. Nevertheless, in most domains, whenever the right level of regulation cannot be ascertained, one should err on the low side.

Tuesday, 15 December 2015

Pro-business or pro-market?

When evaluating public policies there is a widespread confusion in the identification of pro-business with pro-market policies. This is a dangerous confusion, because not all business interests are pro-market. In this regard the phenomenon observed long ago by Adam Smith about businessmen reunions where (“the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”) is as alive today as it has always been.

Therefore, it is crucial to assess if any policies classified as pro-business are not really for specific-interest groups and anti-competitive practices. In general, it is important to realize that both insufficient and excessive regulation work for the benefit of incumbents with market power. This said, it is equally true that there is no way of fixing theoretically the right balance for regulation.

So, in the end, the judgement on pro-market policies must be based on economic theory and on how such policies eradicate well known distortionary practices. Sometimes, this requires playing on the opposite interests of specific-interest groups.

For instance, in the energy industry regulators often play some players against the others, either industry segments or corporations. This is so because the players are often sophisticated and ruthless.

For example, oil companies like BP or Repsol are not choir boys and yet they were recently taken for a ride by local companies and their political allies in Russia and Argentina. It is often said that under crony capitalism one needs a crony to deal with another. This may be so, but taking sides on the infighting between oligarchs does not guarantee that one is not replacing a special interest by another one. Thus fighting for competitive markets should not be confused with business infighting.

Business ethics is another field where pro-business should not be confused with pro-market. There are often two opposing camps on this debate, some wanting to transform businesses into social or philanthropic institutions while others think that the end (profit maximization) justifies the use of any means, including testing the limits of the law. Both are wrong, because capitalism cannot flourish without simultaneously upholding the profit motive and the rule of law.

Another concern regards the tolerance or even support for distortionary price policies through price controls or subsidies. Although such policies are usually promoted by claiming that they are temporary special measures, they invariably end up creating special interest groups which are difficult to dislodge.

Finally, the generalized idea that firms need to grow to be able to compete is equally misleading. When pursued to the limit winners would inevitably transform into oligopolies and turn to the pursuit of rent-seeking opportunities. However, fixing firm size limits or forcing company breakups it is neither easy nor a guarantee of success as more than 100-years of enforcing antitrust legislation suggests (see Bork, 1993 ).

To conclude, since business people are neither more evil or saintly than the rest of the humans, regulatory measures too much focused on preventing their potential evil or trying to transform them into saints will be inefficient and messy. Regulation should focus more on the playing than on the players and should only be pro-business whenever this does not collide with being pro-market.

Monday, 14 December 2015

Wacky WACC and the cost of capital

WAAC is an acronym widely used in corporate finance which stands for Weighted Average Cost of Capital. It is often identified (confused) as the marginal cost of capital or the rate of return required by a firm. In discounted cash flow models, WACC is used as a discount rate to evaluate investment projects or to value companies.

There are several controversies regarding the way it should be computed (e.g. see Fernandez, 2011) but I do not address them here. I shall focus on its abusive identification with a true definition of the cost of capital. Indeed, the WACC is neither a cost nor a required return, but an weighted average of both.

Initially, finance theory discussed the concept of the cost of capital in the context of how to fix the rates of public utilities, in order to recover the costs of investment, their replacement costs, their financing costs and any other costs. In corporate finance, it originates from the valuation of investments, and can be regarded either as a discount rate or a multiple used to obtain the present value of expected future net cash flows.

So, what is the appropriate discount rate? Since different investors may use different valuations for different objectives, there is no single rate derived independently of specific markets and circumstances (e.g. Somers, 1971, even argues that “appropriate discount rates are not only project-specific, they are project-unique”).

Nevertheless, modern corporate finance, has been dominated by a specific choice that is consistent with the model of the irrelevance of capital structure and dividend policy. At the theoretical level, the modern school of finance (Modigliani and Miller 1958) postulated that the cost of capital, measured as the market rate of return, is a perfectly definite quantity not subject to manipulation through capitalization or dividend policies.

On the contrary the old school of finance (Durand 1952 and 1966), regards the cost of capital as too nebulous and elusive to play a key role in financial policy. I shall argue that the “old school” argument is more reasonable and does not introduce an unnecessary bias in favor of managerial capitalism.

From an empirical point of view the approach followed by the modern theory of finance may be dismissed on the grounds that a valuation based merely on a small share of total financing – traded debt and common stock – is necessarily unreliable. In fact, that was the argument for its dismissal by its first proponent (William, 1938).

Nonetheless, from a theoretical point of view, it could still be useful. However, it happens that its theoretical value is also limited, even at the mathematical level, despite its straightforward mathematical definition.

Weighted averages must be meaningful. For instance, one may calculate the weighted average cost of a piece of fruit in two baskets by summing the average price of each basket multiplied by the percentage of fruits it contains, regardless of whether both baskets contain apples or one has apples and the other has pears.

However, for most purposes one is only interested in averaging close substitutes, e. g. apples with apples or apples with pears, not baskets with a mix of completely different fruits. Likewise, with various sources of funding one must ascertain if they are really close substitutes beyond a narrow range within the capital structure.

So, for a start, one may consider weird a metric like WACC that averages two distinct terms - the cost of debt, which is indeed clearly perceived as a cost and easily measureable, and the required return on equity, which is not unquestionably defined or easily perceived as a cost in an accounting sense but as a potential gain that needs to be estimated. This mix up is reasonable if presented as an expedient or academic exercise but not as a scientific foundation for investment decisions made by different agents.

It is true that seen from an investor perspective exchange-traded debt and equity issued by a firm look like two substitute financing instruments suitable for arbitrage. However, debt and equity financing are not identical or sufficiently similar instruments to be considered perfect substitutes for controlling shareholders or for pure arbitrage. They may be sufficiently correlated for statistical arbitrage but that is not enough to combine them in the same basket. Let me show why by explaining first why the return on equity cannot be considered truly a cost like debt.

Imagine a business run by Mr. Management and funded by Mr. Supplier, Mr. Creditor and Mr. Stockholder. From time to time Mr. Management organizes a tender to finance the firm´s funding needs and asks suppliers, debt providers and stockholders to bid. Mr. Supplier would have to compete with other suppliers to offer better payment terms for the amounts procured. Similarly, Mr. Creditor needs to outbid other debt providers and Mr. Stockholder would need to beat other equity investors.

It is obvious that the tender would have to offer investors different terms for different types of funding. For suppliers, other than business preference, the firm may not offer any explicit consideration for deferred payment. To creditors it offers to pay interest in cash or kind. To stockholders it offers a payment in kind by giving them part ownership in the company.

Suppliers, creditors and shareholders bid for the three types of funding would depend on the respective consideration and the seniority of their claims on the firm’s assets. Stockholders are the last in terms of seniority and the cost of funding (the return demanded) declines as the seniority of the claims increases.

Now, imagine that Mr. Management has a fiduciary duty to minimize net working capital, the cash conversion cycle and funding costs. So, he must bargain hard payment terms and fund as much as possible from the cheapest source of funding. The first two suppliers of finance are easy to bargain independently, but not so with stockholders.

Stockholders pose a special challenge since they should be able to bid for how much they wish to plowback into the business and the possibility of providing additional financing. Indeed, Mr. Management would need to make sure that the value of the stock owned by their existing shareholders would not be reduced by the ownership dilution of their holdings. That is the new capital would need to earn enough to meet the current owners required rate of return plus any dilution costs.

When Mr. Management is also the majority owner of the company this paradox is easily solved by treating the other shareholders as junior partners. However, this is not the case for firms operating under managerial capitalism. In such firms, the directors’ ownership is small or inexistent making them simply agents of other stockholders. These, in general, have only small stakes. Indeed, their capital dispersion may be so high that managers are able to select shareholders rather the other way around, creating serious agency problems when choosing different sources of funding and defining objectives.

So, the key issue is whether firms should leave the amount of equity (including retained earnings) as a residual source of financing after exhausting all other funding sources or instead should the shareholders decide how much they wish to fund the business and let the others with the residual to be funded through other sources?

Traditionally, textbooks avoid this question by assuming that shareholders can attain their objectives in terms of capital structure through homemade leverage, leaving the firm to invest up to the point where its marginal return equals the marginal cost of capital.

But then, the capital structure and the marginal cost of capital cannot be determined separately when both depend on the same determinants (lenders mark-ups and risk aversion) and leverage has simultaneously contractionary and expansionary effects on investment (Marques-Mendes and Mheica, 2006).

For a simple illustration of the kind of confusions caused by the cost of capital theory consider the valuation of two unlevered companies with the same cash flow. Imagine that they are quoted in the same market and one of them is seen as outperforming and the other as lagging the market, so that the first appreciates more than the market while it rises and falls less when it declines and the opposite happens with the second company. For instance, assuming that when the market declines at a rate of 2% the first company declines at 1% and the second at 3%, and the opposite happens during rising markets, the average betas would be 1.09 and 0.93, respectively. Assuming further that the risk free rate and equity risk premium are 4 and 6%, respectively, the second company would be worth more 10% than the first company. So, using the popular CAPM model to estimate the required rate of return, the first company would have a higher beta and therefore a higher rate of return. However, assuming that it is the true cost of capital, this would mean that investors would value more the second company which is the opposite of what they are doing.

The reasons why such an obscuring theory achieved such popularity among academics and professionals were already given in another post. So, I will conclude by recalling how a reasonable minor departure from profiting maximization was seized by special interest groups on the basis of a somewhat wacky theory.

Saturday, 12 December 2015

Maximizing profits or stakeholder value

The role of firms has been in a slippery slope ever since finance theory began replacing the pursuit of profit maximization by maximization of shareholder or firm value.

Before outlining this evolution let me recall first why for-profit organizations choose to incorporate and its consequences in terms of finance.

Following Veblen (1923), one may say that a “corporation arises out of a collective credit transaction whereby funds supplied … are entrusted to the corporation as a going concern … therefore, an impersonal incorporation of liabilities to the stockholders, and by employing these liabilities as collateral (formally or informally) it will then procure further capital by an issue of securities (debentures, typically bonds) bearing a stated rate of income and constituting a lien on the assets of the corporation.” For him, the two main consequential facts were: a) an inflation of credit (increased leverage), and b) a capitalization of funds, essentially liabilities, with fixed charges. This way the value of a firm could be gauged by the value of its securities traded in exchange markets.

So, in the 1930s, people began questioning whether the profit or return maximization rule used in economic theory to optimize the allocation of resources through market exchanges. In particular, if it was appropriate to ignore the non-pecuniary motives that so often drive business or if a focus on current income would be myopic, ignoring uncertainty and long term considerations.

The non-pecuniary motives were rule out, on the usual grounds that on average they would have a small impact, but different schedules of future income could not be compared unless using an appropriate index of time preference to convert future income into its present value.

Hence the suggestion that investors replace profit maximization by maximization of investment value, defined as the discounted value of an expected income stream.

However, this shift was not a simple question of semantic. While under profit maximization the optimal business expansion proceeds until the marginal return on capital equals the rate of interest, for the maximization of investment value stockholders must consider if their shares will be worth more or less following the expansion.

That is, the rate of earnings on the new investment must exceed not only the interest cost of borrowed money but also the rate of earnings required by stockholders to maintain the value of their shares. This rate is the opportunity cost for stockholders and, although it is not an out-of-pocket cost, it can be interpreted as a cost for the corporation.

As shown in Durand (1952), the required return is higher than the interest rate and therefore the optimal level of expansion as determined by the schedule of investment value is smaller than the level determined by the schedule of total return. Most importantly, the required schedule of the rate of return depends on the method used to capitalize earnings. For instance, with capitalization based on operating profit the interest rate and the required rate of return coincide up to the point of zero borrowing, while if capitalization is based on net profit the required rate schedule will be always above the interest rate curve.

Under the net profit approach the required return curve defined as a function of financial leverage has a maximum which implies the existence of an optimal capital structure. This is at the core of the heated debates on the cost of capital and the neutrality of capital structures mentioned previously (see Modigliani and Miller (1959) and Durand (1959)). For reasons given above the subsequent academic literature choose to ignore the theoretical implications of the choice of capitalization method and proceeded with a theory of corporate financing based on the concept of neutrality of capital structure.

From the 1960s onwards, this otherwise reasonable substitution of profits by investment value was used to justify the linking of management compensation to the stock market which led to the uncontrolled rise of their compensation relative to shareholders and employees. Whether the cost of this side-effect of shifting from profit-based compensation to stock market-based compensation exceeds the benefits of a better selection of investments through investment value is an unsettled empirical matter.

What a cursory look at the history of this process shows is that the pursuit of stockholder value maximization, which was initially welcomed, come to be also increasingly criticized for generating “short-termism”.

A living symbol of the shareholder value theory was Jack Welch during his tenure as CEO of General Electric from 1981 to 2001. But, according to Steve Denning (Forbes, June 26, 2013) he became one of the strongest critics of shareholder value. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

It is interesting to notice that, instead of narrowing the constituency that management has to serve, he not only enlarged it substantially but also demoted investors to a secondary role. Under managerial capitalism, this is consistent with a rising perception of management (and not the owners) as the real rulers of corporations.

In summary, history has shown that moving from corporate profits to stakeholders value made the metrics to assess performance more vague and accountability more diffused, while leaving unsolved the supposed short-termism of corporations and compromising their future by transforming them into major self-serving bureaucracies.

Given that this process generated many market and fiscal distortions one has to consider whether regulators and tax authorities opposed them or were accomplices on this evolution. The role of regulation is difficult to ascertain because of the successive cycles of excessive/deficient deregulation-regulation-deregulation. So, there is little empirical evidence on which one can rely.

However, there is a common sense perception that excessive regulation damages small investors by treating them as children while protecting the big players which have the scale and resources needed to cope with the cost of regulation. Likewise, the recurring shifts in the taxation of dividends and capital gains distorts most serious attempts to estimate long-term investment returns. There is nevertheless a large field of taxation – subsidization - where it is easier to assess if regulation (or lack thereof) contributes to an unfair leveled playing field. I will illustrate that below through various examples.

Thursday, 10 December 2015

An overview of finance theory under capitalism

The remarkable rise of financial markets in the first quarter of the XX century was followed by an increased interest in finance. Initially the emphasis was in security analysis, but since the 1950s its focus shifted towards portfolio theory, markets and new financial instruments such as derivatives.

Before the XX century, finance theory was mostly a branch of mathematics (actuarial calculus) dealing with the pricing of risk in fixed income securities (debt) based on the probabilities given by mortality and bankruptcy tables. Given the stable nature of such tables finance was not seen as ideological or having anything to do with the fundamental principles of capitalism.

However, following the rising issue of variable income securities (equity) by joint stock companies, finance theory become progressively the realm of accountants and lawyers dealing with the valuation of stocks on the basis of the calculation of future profits and the rights of each class of shares issued. These concerns were already at the core of the principles of capitalism (property rights and free markets), but remained largely non-ideological because of the nature of such valuations based on common sense forecasting of business profits and the growing prohibition of share manipulation. Such valuations were generally accepted as relevant to value firms.

Yet, this benign acceptance of security valuations came to an end following the 1929 stock market bubble and crash. During that period valuations were so much at odds with the corporate fundamentals that financial analysts had to look elsewhere for explanations.

The first attempt appeared in 1934 with the publication by Graham and Dodd of Security Analysis, a book that has gone through two major revisions but it is still seen today as the bible of financial analysis. The book covered many of the pitfalls of traditional financial analysis but did not cut with the tradition.

However, security analysts were not the only trying to find explanations for extreme volatility in market prices. Accountants responded by increasingly recording non-cash transactions in an attempt to find explanations and macro economists began explaining why arbitrage was not reducing such large departures from price equilibrium.

For this, both professions had to come up with new theories (not new facts) to explain past and current valuations. These theories had to draw on assumptions (subject to ideological bias) and could not be tested in a laboratorial sense.

These rival theories searched for supporters while special interest groups searched for theories that served their interest. Consequently, finance theory ceased to be a reasonably neutral instrumental tool to become a battle field of ideologies with an impact on the interpretation of the principles of capitalism, especially on the role of private property and the profit motive.

This process was fostered in the 1950s by the sudden interest in finance by macroeconomists with a tradition of competing schools of thought and doctrines.

Curiously, accordingly to Miller (1988), the Modigliani-Miller interest on the cost of capital had been awakened by listening to a paper presented by Durand (1952), the last preeminent scholar in the old finance tradition. Modigliani and Miller (1958) developed a general equilibrium model for a closed economy aimed at explaining the “determinants of aggregate economic investment”. By consolidating the accounts of the business and household services into a single balance sheet debt and securities no longer appear, thus proving the proof of their first proposition about the irrelevance of the capital structure.

This proposition had already been proved in finance theory by Durand (1952) for security valuations based on operating income rather than net income, which he did not consider a best approach to capitalization. He suggested that the businessmen’s interests were better served by the maximization of the present value of their investments rather than their profits, because the first took into account their time preference. Moreover, the cost of issuing debt or equity would have to consider the effects of increased leverage or equity dilution on investment value to assess the rate of return required on the investment to preserve shareholder’s value. That way, this required rate of return could be interpreted as an opportunity cost of capital.

Durand’s conclusion was that: “Given a method of security appraisal, the costs of raising capital can be both defined and measured. At the same time I have tried to show that there is at present no generally accepted system of appraisal; hence there can be no generally accepted system of measuring costs”.

In particular, Durand claimed that none of the two methods widely used in analyst’s valuations – capitalized net income or capitalized net operating income – was adequate or correct, when strictly interpreted. Not surprisingly, he was the first (Durand, 1958) to refute the Modigliani-Miller proposition on the grounds that it may apply to certain partnerships but not to corporations, since it neglected a fundamental principle of capitalism – limited liability. Later, Durand (1989) extended his critic to the static nature of a theory based on constant growth rates, by showing that “growth, when resulting from a premium rate of return in an imperfect market, will manifest itself in a premium stock price”.

Nevertheless, Miller and Modigliani (1961) extended their approach to the case of dividends to prove their second proposition about the irrelevance of dividends for firm valuation. Both propositions relied on pure capital markets and the possibility of creating so-called homemade leverage and dividends to create conditions for arbitrage between debt and equity that made structure irrelevant for valuation. These papers were necessarily controversial and triggered an unprecedented interest of macroeconomists in finance which extended also to econometricians and finance professionals.

This would create an new age in finance theory in academia. Given the rather complex and theoretical nature of the Modigliani-Miller approaches, it is still unclear why this happened so suddenly. Especially, since the greatest innovation with a practical use – Harry Markowitz (1952) paper on portfolio optimization - had remained forgotten for almost a decade.

It is nevertheless plausible to assume that the interest of company managers in encouraging a theory that would free them to use whatever capital structure they liked and to decide on how and when to return funds to the shareholders did not remain unnoticed. Likewise the replacement of profit by firm value maximization fade away the monitoring of their performance while justifying their growing compensation in terms of stock options .

In this new era of so-called modern finance, or new finance if we add behavioral finance, theory and practice became increasingly divorced. Contrary to tradition, practitioners began using complex academic theories to impress their marketing targets the same way salesman use super models to sell cars.

Thus modern finance theory became the realm of economists and econometricians, hiding their primeval ideological bias under a heavy use of complex modelling and econometrics.

Curiously, modern finance theory had begun in the right foot with Durand’s (1952) paper on the “Costs of Debt and Equity Funds for Business”, which questioned a proclaimed shortage of equity capital as the reason for the increased retention of earnings and borrowing.

Unfortunately, Modigliani and Miller (1958) reversed Durand’s conclusion and used the cost of capital concept to develop their model on the irrelevance of the capital structure on a firm’s value and the neutrality of dividend policy, by recurring to devices such as shareholder’s leverage and homemade dividends.

Despite the protests of Durand (1959), the Modigliani-Miller theory became fashionable among academics and was seized by managers to reclaim their long held desire to treat indifferently debt holders and stockholders. This fostered the idea (and reality) that managers select shareholders not the other way around, in order to maximize the owners value but that of an enlarged constituency ranging from employees to suppliers.

Combined with accommodating fiscal policies this “new ideology” justified an enormous rise in institutional investment and consequent facilitation of the rise of managerial capitalism. This fueled a number of potentially nefarious policies and political collusions. I address below some of these ranging from the abuse of the weighted average cost of capital to the attempts for (re-)privatization of money.

In conclusion, finance theory may not have had an impact as large as that of technology, but it was still significant. Its role has been mainly accommodating in explaining the trend for financialization and managerial capitalism. On the contrary, it has been lacking on exposing the excesses of financial deepening in finance-led capitalism. Since this is not always benign, one would expect more from financial theorists.