Despite the apparent growth in corporate and public governance over the past 20 years, agents are acting ever less in the interests of their principals than in the past. In the corporate sector, the extent of rent seeking and corporate welfare grows ever larger, particularly in the financial sector. Whereas once capital market discipline and competition would provide some semblance of control over wayward managers, now they rely on the government to buttress their positions at the expense of their shareholders (and of course taxpayers). But at least shareholders have the option to dispose of their shares. But this rent seeking and corporate welfare helps keep relatively inefficient companies in play and prevent potentially more efficient companies from rising.
In the public sector, and this includes the numerous NGOs that rely almost entirely on the taxpayer, the situation is perhaps worse than at any point in modern industrial history. The public sector now acts in its own interests, expanding its remit with ever more intervention and control over the citizen. Vast international bureaucracies have been expanded, to offer more opportunities to extract rent from the unwilling taxpayer. And as we know, taxpayers have less opportunity to exit than shareholders, (although examples such as Gerard Depardieu moving to a small town (Nechin) in Belgium 1 km from the French border and about 260 km from Paris to escape a punitive new Hollande tax shows, at least in Europe, there are some opportunities in that direction).
Take the international financial crisis – despite the IMF, OECD, World Bank, BIS, etc, being absolutely wrong pre and post crisis, they continue to maintain their powers and privileges. If they operated in an efficient private sector, they would have been displaced long ago. I find it highly objectionable that these organisations which contributed to the crisis and did nothing to warn or mitigate the crisis have been able to use the crisis to expand their activities.
Then our freedoms are eroded, all under the pretense of encouraging diversity (which means anything but diversity of opinion), allowing this racket to expand and making it ever more difficult to criticise the racket.
The same applies in universities, with many faculties being shelter workshops for those who hold a common viewpoint – don’t expect much in the way of an intellectual debate in today’s universities. By expanding the number of students entering university, we have dumbed them down, particularly in the liberal arts which is now just a series of comparative literature exercises which are essentially meaningless. But which still consume resources.
I’m not sure how principals can reassert control over their agents – it is difficult to sack them.
I’m afraid that we are returning to a feudal society – one where a group of Lords (who have been selected for their lack of intellectual diversity) rule over the rest of us serfs. This mean that ever greater proportions of GDP will be extracted from the productive class to line the pockets of the Lords. But that in turn means that productivity will decline, GDP will reach a peak and then start to fall. The Lords will be extracting an ever larger proportion of a shrinking pie. The principals – the productive class – will be the future serfs.
Take HSBC as an example of the principal-agent problem. This article outlines the extraordinary money laundering operations the bank was pursuing, but instead of throwing a number of the managers into jail, the US Department of Justice merely levies a large fine on the bank. So the perpetrators of the crime – some managers – get away without any punishment, while the principals (the shareholders) have to pay the fine.