The just-finished Conservative Party conference was a victory parade for “The Good Right”, as Tim Montgomerie calls it. In an article on this site, he celebrated the contribution of the Minster of Justice, Michael Gove, who drew a distinction between the deserving rich and the undeserving rich.
On Mr Montgomerie’s paraphrasing, the deserving rich “work hard, are creative and … add value to society”. The underserving rich “play the markets, rig rules and sit on each other’s remuneration committees”. The undeserving rich have been warned: the Conservatives are comin’ to getcha!
And they need to be got because, according to those on the Good Right, there is a lot of undesert around. For example, even when big wigs fail, they still get rewarded. Or, as Mr Montgomerie despairingly put it, “why do so many CEO’s receive golden parachutes as well as golden hellos?”
Which shows the risk of asking rhetorical questions about matters you don’t understand. They may have perfectly sensible answers. The question may be not so much rhetorical as embarrassing.
Here is why CEOs receive large payments when they lose their jobs, even when they have produced poor financial results.
Imagine two companies, shares in which have the same price volatility: that is, the prices of these shares are equally variable. Suppose you own shares in both companies. The volatility of the pair will be less than the volatility of each individually. When the price of one moves up or down, this will sometimes be offset by the price of the other moving in the opposite direction.
This is why it is sensible to invest not in a single company but in a portfolio of them. The average return on each share is unaffected but the volatility of your earnings is reduced. It also means that, if you seek investments with volatility V, the average volatility of the individual stocks in your portfolio needs to be greater than V. Or, to put it another way, if you own a share as part of a portfolio, you will want it to be riskier than if it is the only share you own.
This means that the owners of a company want it to take more risk than its CEO does. The risks of a CEO are concentrated in the firm he works for. If it fails, he loses his entire income. A company’s CEO is therefore more risk-averse than its owners, who usually own shares in the firm as part of a broad portfolio of shares.
This explains the big bonuses for short-term performance, golden parachutes and other elements of “fat cat” compensation that outrage the like of Mr Gove and Mr Montgomerie. They are designed to relieve corporate executives of their natural caution and bring their appetites for risk up to the level of the owners’.
Mr Gove and Mr Montgomerie cannot be expected to understand this. Neither has an academic background in corporate finance or executive incentive schemes, nor any work experience in the fields.
Which brings us to the big problem with the Good Right’s market interventionist agenda. When government ministers do not understand what is happening in the economy, how can they judge whether its outcomes are deserved, fair or otherwise good?
The problem is bigger than the economic ignorance of government ministers. Even someone with an excellent understanding of how markets work could not comprehend the goings on of a particular market economy comprising millions of buyers and sellers of millions of goods and services, with their ever changing preferences and resources. Even Milton Friedman couldn’t do the job that Mr Gove proposes for himself.
The opacity of an economy to any one individual or committee explains more than the folly of the Good Right’s moral agenda. It explains why planned economies fail. This insight – commonly associated with Friedrich Hayek – was briefly embraced by the Conservative Party.
Now they have joined the Labour Party in rejecting it. Indeed, Mr Gove’s distinction between the deserving and undeserving rich is a mere verbal variant of Ed Miliband’s 2011 distinction between productive and predatory firms. Mr Miliband claimed that these two kinds of firm “have been taxed the same. Regulated the same. Treated the same. Celebrated the same. They won’t be by me.”
Mr Miliband could not define a predatory firm. But he reckoned he could tell one when he saw it: pre-crisis RBS under Fred Goodwin, for example. In the absence of a general definition, Mr Miliband would have needed to proceed on a case-by-case basis, relying on his ineffable moral sensibilities. Every company in the U.K. would have been arbitrarily deemed naughty or nice, and the appropriate tax rate applied.
Mr Gove will need to do the same. He will not be able to define undeserved wealth. So he or his agents will need to make arbitrary decisions and then fine or imprison those deemed undeserving.
The Good Right has thus set itself against the rule of law. We will instead live under the rule of men – men who believe their arbitrary interventions into our affairs will ensure that we all get what we deserve. Men who believe themselves extraordinary, not only in their superhuman understanding of the affairs of remote strangers but in their moral judgments.
In his 2011 speech Mr Miliband advertised the superiority required for his desired role by engaging in outrageous moral boasting. “So I’m going to tell it straight”, he declared. “That’s the lesson I have learnt about this job and myself over the last 12 months. To be true to myself. My instincts. My values. To take risks in the pursuit of that. And to stand up for what is right.”
Tories are more self-assured. No such boasting from Mr Gove and Mr Montgomerie. They are quite simply the Good Right. Nasty little money-grubbers be told: your betters have returned.