Pluralistic: 17 Mar 2022

Today's links

An animation based on the 1911 cartoon 'Pyramid of Capitalist System,' depicting 'the wealthy few on the top, and the impoverished masses at the bottom.' The image has been animated with a rolling 'broken TV' effect as well as a lateral 'wobble' effect.

Late stage capitalism is weird capitalism (permalink)

We are living in an era of extremely weird capitalism. American capitalism is usually described as a system in which top managers are rewarded with stock options, which incentivizes them to maximize returns to shareholders, who are so dispersed that they struggle to control companies by voting their stock.

A chart entitled 'Hallmarks of historical corporate governance regimes' from 'Asset Manager Capitalism as a Corporate Governance Regime' by Benjamin Braun.

The potted history of this system goes like this: Gilded Age robber barons were horizontal tyrants, monopolizing single industries. Trustbusters broke this up, wealth was more dispersed, and households took the fore. These atomized, individual shareholders didn't exercise much control, because voting their small holdings made little difference to companies.

This was the age of "managerialism" – where technocratic, "scientific" managers worked with strong unions and regulators to create "Fordism," where experts from capital, labor and government structured the productive economy.

From there, we transitioned to the age of the pension fund, where pension managers began to diversify their portfolios and threaten companies with ruinous sell-offs if they failed to put their short-term profits first. This was the age of "shareholder primacy," when executive compensation started to include large stock-grants to "align incentives."

That's the picture we tend to carry around in our heads today. But as the Max Planck Institute's Benjamin Braun argues in a paper called "Asset Manager Capitalism as a Corporate Governance Regime," we have moved past that stage, to a new, weirder capitalism: "Asset Manager Capitalism."

What's Asset Manager Capitalism? It's a market dominated by the asset managers from three giant index funds: Blackrock, Vanguard and State Street, along with a few other giant funds that roll up pension funds and other funds (vast family fortunes, managed funds).

These funds are giant. Between them, they own an average of 22% of every S&P 500 company. They don't just own a big stake in a whole sector – like Warren Buffet buying a big chunk of all four airlines. They own significant stakes in every industry – not just airlines, but hotels, resorts, rental car agencies, etc.

But even though they have a lot of power – for many companies, an index manager is their largest shareholder – they are weak in one critical respect. An index fund can't walk away from their investment. If you're tracking the S&P500, you've got to own the a piece of nearly every S&P500 company.

This is super, extra weird. These giant companies have the structures bequeathed by stakeholderism – especially a C-suite whose compensation is almost entirely determined by movements in the share price. The biggest determiner of that share-price is a fund that owns a big chunk of their all their competitors and all the businesses downstream and upstream of their industry. But even though those index managers control the rewards accruing to corporate execs, the managers can't liquidate their investments in the companies, unless they perform so badly that they slip out of the S&P500.

But wait, it gets weirder! The whole point of index funds is that they have very low fees. That's why the standard advice is to invest your pension in an index – it will track the market and you won't lose your shirt to high-paid investment managers.

But the corollary of that is that index managers get paid the same no matter what: if they intervene in a company to make it more profitable, they get the same compensation as if they make it less profitable.

Which creates a paradox. The traditional wisdom is that retail investors don't vote their shares due to "rational apathy": what's the point of researching shareholder questions and casting a vote when you own such a small piece of the company that your vote won't make a difference?

By contrast, the shareholderism era was dominated by too much voting: pension fund managers and other "activist" investors demanded that companies produce short term gains on threat of mass investor exits, which would tank the share price and beggar the company executives.

On the face of it, Asset Manager Capitalism could give us the best of both worlds. Asset managers are the very definition of long term, "patient capital" because they can't sell their shares. And since they've got these incredible economies of scale, it's worth their while to pay experts to track and intervene in corporate governance.

But they don't. For one thing, the big companies whose shares asset managers manage are also asset managers' clients, having entrusted these funds with their pensions. The Big Three index funds control 14-20% of all 401(k)s. No surprise that asset managers "overwhelmingly vote with management, especially on controversial issues."

In fact, Big Three managers are the King Logs of corporate governance. Between 2008-17, 4,000 shareholder proposals were tracked by the Russell 3000 index. None of them came from a Big Three asset manager.

Regulators have grown increasingly alarmed at this state of affairs. In response, the Big Three had adopted "Stewardship Codes" and increased their rhetoric about Environmental, Social and Governance (ESG) principles, promising to steer their portfolio companies for the social good.

This hasn't amounted to much, though. For all that Blackrock's Larry Fink talks a big game about environmental sustainability, Blackrock is more likely to vote against ESG resolutions than other shareholders:

Meanwhile, regulators are comforted by the idea that the USA remains a world leader in "dispersed ownership," with most of us having an ownership stake in the large businesses that have come to dominate our economy. But that's a misleading impression. In reality, the US has undergone "The Great Re-Concentration," with consolidation in asset management concentrating ownership stakes in every large business in the hands of just a few fund managers. And those funds don't represent all of us.

In the US, the 1% owns 35% of the total wealth, but they own 50% of the shares in companies and funds. The top 10% owns 86% of the shares in companies and funds. Only half the country owns any shares.

Writing about this for NY Magazine, Eric Levitz cites Matt Bruenig, who calls it "market socialism." Asset Manager Capitalism has delivered low prices while "rationally planning" not just a single industry, but all the industries.

It's true: notwithstanding the latest round of price gouging under cover of inflation scare-talk, the long-run trend of market concentration has been a general decline in prices. As the Big Three's influence has expanded, prices have gone down.

Why would this be? Levitz says it's only rational. While common ownership of all the airlines might result in collusion to drive up airfares, common ownership of all airlines and hotels would see that as a net negative, since fewer fliers will depress hotel occupancy.

This is the central planned economy that capitalists say could never work. But while we may have sleepwalked into Socialism With American Characteristics, those characteristics are very…American.

When three index managers plan the economy on behalf of the 50% who own any shares (or, more realistically, on the 10% who own 86% of the shares), they leave the rest of us in the cold. Braun suggests that the Big Three "should be expected to push the economy towards the lowest sustainable labor share." And yeah, the rise of wage stagnation tracks the growth of index funds.

For Levitz, this market socialism explains some of the paradoxes of economic policy. For example, the Fed's recent love-affair with low interest rates, which orthodox economics blames for higher wages. This is a debatable proposition, but it's certainly a bedrock of the business lobby's belief-system.

What political force would drive the Fed to embrace policies that are said to drive up wages, especially at a moment of historically low union membership and organized labor influence? As Levitz explains, high interest rates are good for lenders, but they're bad news for asset managers. When interest rates are low, savers are stampeded into the market, and wealthy people borrow to speculate on assets.

But, Levitz reminds us, the alliance between Blackrock and low-waged workers is fragile and limited. Asset inflation exacerbates intergenerational wealth inequality – everyone who bought a house before real estate inflation took off is sitting pretty, and everyone who came after is stuck paying >50% of their income in rent.

And again, per Braun, the asset-owning class prefers lower wages, even when they reduce aggregate demand and slow growth: "a negative externality for the poor can be a positive externality for the rich."

So what do we do? Levitz says "Understanding contemporary capitalism requires paying as much attention to its novel oddities as to its myriad continuities."

The phenomenon of market socialism is especially interesting in light of Leigh Phillips and Michal Rozworski's brilliant 2019 book, "The People's Republic of Walmart," which argues that today's mega-firms are successful planned economies on the scale of nation-states.

The argument goes that if we can have this market socialism that only benefits the 50% or the 10% or the 1% in the shareholder class, why can't we just change the management and make it benefit all of us?

Certainly, doing so would resolve some important contradictions, like the phenomenon of pensioners being forced out of their homes because of rent-hikes driven by the real-estate investment trusts (REITs) that their own pensions are funding:

But if the economy now consists of monopolies that answer to three index managers who can't sell their interest and whose interventions in corporate governance primarily consist of putting pressure on central bankers, not CEOs, that is significant in and of itself.

For example, Elizabeth Warren has has introduced legislation to curb future mergers, and has proposed blocking future large mergers and possible breakups of many major mergers of the past 20 or so years.

I love both of these ideas, but I can see a logistical challenge here. Blocking future mergers is much easier than unwinding old ones, but if all the FTC does is prevent new monopolies from forming, the standalone companies that this creates will struggle to survive as monopolies deprive them of market oxygen.

Unwinding all those old gigamergers is a tall order. It took 68 years to break up AT&T, from the first antitrust action until the actual breakup in 1982. IBM spent 12 years in antitrust hell and emerged intact, thanks to its ability to outspend the entire DoJ on antitrust lawyers for every one of those years.

But what if we could convince the monopolies to break themselves up? After all, the "activist investors" already prefer breakups, because the in the short run, these big, concentrated companies are worth more when sold off in pieces than they are intact. It's the institutional investors – the biggest funds – that keep them intact. When The Gap broke itself up, its stock went up – investors prefer broken up companies.

Could we somehow turn those big institutional investors into breakup militants? Like, what if we created a preferred tax position for capital gains from vertical breakups – would the asset managers transform from King Log to King Stork and order executives to self-splinter?

This idea has some obvious deficits, beyond the fact that it further enriches the crooks who benefited from monopolization. It's akin to paying hydrocarbon barons to surrender the oil reserves in the ground, bribing the monsters who've put us in mortal peril for their own gain to change their ways.

But also, abuse-proof tax shelters are really hard to create! And then the funds would have to find somewhere else to put their money, which could lead to new bubbles that were even more dangerous.

Still, I'm intrigued by the idea, and reading about Asset Manager Capitalism has me thinking hard about how we might capitalize on the bizarre place that our economy has arrived at to transform it into something better.

Hey look at this (permalink)

This day in history (permalink)

#20yrsago Me reading from Down and Out in the Magic Kingdom

#15yrsago RIAA explains why they’re suing your children

#15yrsago David Byrne: Who needs music labels?

#5yrsago The Minnesotan left-wing economic miracle continues, while neighboring Republican states slowly collapse

#1yrago How unions de-risk work

Colophon (permalink)

Today's top sources: Naked Capitalism (

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