Heinz Geyer

Consumers, Employees and Investors alike are not properly protected in the UK. The Takeover Panel is in effect run by Investment Bankers and its absurd rules even require companies that are the target of takeover bids to hire (expensive) advisers. So a company like Cadburys only has the option to try to find a higher bidder rather than simply say no. There should be a better regulation of takeover bids that requires the bidder to pay a fuller price and also properly disclose beforehand the cost of redundancies and the likely impact on prices consumers are charged. In the case of the planned combination of the UK business of T-Mobile and Orange the deal should be rejected out of hand. Rather than engage in protracted (and costly) legal wrangling any merger that leads to a market share greater than 25% should automatically be ruled out.

Robert Searle

In an ideal world financial resources should be shared more fairly. One attempt at this is Binary Economics originated by Louis Kelso. It ofcourse believes in "capital ownership" using profits from shares, or equities from productive companies. The initial money for the "capitaless" is bought on their behalf as a loan (ideally interest free!), and pays for itself overtime.

However, I think we need to not only have a rethink about capital ownership but but also about the nature, and purpose of capital itself but in a way which favours both the rich as well as the poor. See my project in progress.

http://www.p2pfoundation.netTransfinancial_Economics

Will Davies

Robert - thanks for this, although that link does not appear to work.

I reference Kelso in the report, and hopefully address the very questions you raise.

Will

Edmund O'Sullivan

Thank you Mr Davies for the report.
The essential justification for a corporation with capital-raising capacity (whether this is a sole private partnership at one extreme or a joint stock company at the other) is the need to mobilise the financial resources required for investment in the capacity to manufacture tangibles.
The justification for large corporations is, following the Coase argument, the need to discover, and process, the market prices of the goods that corporation produces and to deal with the risks associated with uncertain future trends in those prices.
The dominance of services (intangibles) in advanced economies fundamentally undermines both justifications:
1 Service producers (like most teachers and doctors) don't need capital other than what they require for training. They don't need to invest in machines or equipment. All tangibles involved in intangible production can be rented or leased and the costs incurred passed on to purchasers (private or public) in current transactions.
2 In services, the idea of the market-price breaks down: there can be no coherent utility curve/preference trade-off for things that can't be seen or touched, which is what intangibles are by definition. Consequently, there can be no aggregate demand and supply curves. Each service transaction is unique to those that participate in it. In services, the market doesn't only not work. It doesn't exist. The price discovery/risk-management function served by corporations addressing tangible markets is redundant in services.
I congratulate you on identifying the fact that the net asset value of service firms (almost exclusively) mainly takes the form of intellectual property rights (IPR) and other types of intangible asset. But you have failed to follow through the logic of this point to examine whether it is objectively possible, or even right, for an intangible asset (including IPR) actually to exist (this is an issue which the accounting profession, has consistently failed to address). A new and, inevitably, doomed attempt is now being made to devise a "scientific" definition of an intangible asset (other than an IPR, which is a state-imposed restriction on the market; all hail McCurry!!). In most modern service firms, it comprises two types of balance sheet entry: goodwill (the difference between the tangible value of a service firm and the amount paid by an acquiring firm for that firm) and brand. Goodwill is a subjective concept derived from a projection of the future surplus net cash flow that firm might generate. But -- since all the cash generated by a service firm must come from the efforts of the people working for that firm and those people are free to leave to work for themselves-- a service firm seeking to harvest the projected surplus cash flow will be obliged to increase wages to the point at which the surplus itself will be eliminated. This is why the surpluses of service firms will tend to decline to zero, a characteristic that is already being displayed by advanced service firms. The fact that it is objectively impossible to quantify the net present value of the discounted cash flow of a service firm explains the failure of practically all service firm mergers/acquisitions, including the RBS takeover of ABN.
It is also impossible to argue that brand has a value independent from the talents of the people working for the firm that owns it. It would be like saying that Manchester United would have a market value even if it had no players or Goldman Sachs would be worth anything if it didn't employee bankers. Service firm brand assets are an accounting fiction that should not be allowed.
A pure service firm with external financial liabilities, whether it is in the form of debt or equity or both, will have higher average costs than an identical firm with no external financial liabilities (like an employee partnership). This result is that a service firm that has financial liabilities must strip resources from the value-creating areas of its business and, consequently, suffer a fatal competitive disadvantage compared with service firms that don't.
The conclusion is this: pure service firms will experience declining surpluses/falling relative wages unless it is freed from owners driven solely by the profit motive: ie conventional shareholders or banks. Once that is accepted, the form of alternative ownership structures is a matter of indifference, though it will have to take into account the long-term interests of the services the firm produces (eg patients, students, restaurant users etc).
In the light of this analysis, the sole economic justification for large corporations with capital-raising capacities is when they are involved in the production of tangibles (cars, food etc). But that justification will depend upon their capacity to reduce consistently the average cost of what they produce. The institutional arrangements governing markets in tangibles should be fashioned solely to deliver that outcome. If a tangible good producer delivers the lowest long-term average costs and prices, then the fact that it pays dividends or services debt would be a matter of indifference.
Infrastructure supports value-creating human interaction. The less it costs, the better. Corporations producing infrastructure (roads, rail) should only be motivated, therefore, by cost reduction: payments in excess of essential factor payments should be disallowed. Because there are enormous economies of scale in most infrastructure activities, logic suggests that there should be only a single provider of roads, railways, power generation etc. Whether that can be reconciled with private ownership is something that even neo-classical economists have consistently failed to prove.
Money/finance serves two main functions (means of payment and store of wealth). The banking industry, therefore, addressess infrastructure as well as service needs. The logic of the above argument is that the processs element (the digital capacities required to capture information about the flow of payments in an economy) should be treated like infrastructure. Huge economies of scale in digitalisation suggests that there should be only one electronic payment corporation. This will either have to be owned by the state or regulated to an extent that would make it unattractive to conventional investors.
Pure financial service activities, which involve advising individuals and corporations about how to preserve and increase their wealth, should be separated from the process element. They should be entirely privately owned and lightly regulated, but subject to the condition that financial service providers are only paid once the fruits of their value-creating advice is actually crystallised by their customers: no more up-front fees. This will probably require a simple but strict piece of legislation. With these two steps taken, the Bank of England and the FSA could be abolished.
Individuals and corporations should be encouraged to abandon fiat money in favour of digitalised payment methods. The digitalised national payments system (NPS) would be programmed and managed to reduce transaction costs to as close to zero as is possible. This alone would add about 5 per cent to GDP by eliminating the need for replicant and largely redundant bank networks.
The fact that banks control the banking process as well as the banking relationship is the principal reason why the credit crunch happened. In pursuit of the profits they could make from their financial relationships with their customers, banks understandably manipulated the payments system. Allowing banks to control the payments system as well as all banking relationships is like making Alex Ferguson the referee of matches involving Manchester United. It is not that banks or Alex Ferguson are bad. It is because such arrangements constitute an egregious conflict of interest.
Unless the finance industry's control over the payments sytem is ended, no form of regulation will prevent a recurrence of what happened in 2007-08.
A full exposition of this and other relevant points can be obtained by contacting edmund.osullivan@meed-dubai.com.