Dual Class shares and free markets

Andrew Gelman weighs in on dual class shares: 

Now I’m just confused here. Who’s supposed to be “concerned” here? As a New Yorker subscriber, am I supposed to be concerned that dual-class firms underperformed the market? I just don’t get it. Why should I care? If the shares underperform the market, people can buy a piece of Facebook for less. That’s fine too, no?

I think that Andrew would be completely correct in a perfect market (one in which all of Mark Thoma's issues are not present).  If some financial products give a piece of the return while others give ownership plus return then people could choose which ones to purchase. 

However, the modern American economy has fallen in love with the 401(k) as an investment vehicle.  This leads to two problems.  One, investors are generally not free to switch to a different fund because they dislike the investment decisions of the fund that they are in.  Since the individual investor bears all of the losses of bad decisions but the employer has control of the fund (and has an incentive to cut costs) you have a classic principal agent problem.

This problem is made worse by giving a limited group of people control over a group investment.  One can easily imagine the small group making decisions that benefit them at the expense of the majority of shareholders.  Again, not necessarily a problem in an open market.  But with the constraints that individual investors are under this could be problematic as they lack the freedom to enter or exit the market. 

This is why I wax poetic about Social Security (or the Canada Pension Plan): they shift the risk from small investors (who generally can't bear it) to large entities (that can).  I totally get that there are total social resources constraints, but I would rather that they be dealt with openly.  Instead I see the stock market becoming a worse and worse deal just as a large American cohort (the "Baby Boom") is about to retire. 

I am not sure that this is a good thing. 

See also Matt Ygelasis and Felix Salmon.

Some context on schools and the magic of the markets

One reason emotions run so hot in the current debate is that the always heated controversies of education have somehow become intertwined with sensitive points of economic philosophy. The discussion over child welfare and opportunity has been rewritten as an epic struggle between big government and unions on one hand and markets and entrepreneurs on the other. (insert Lord of the Rings reference here)

When Ben Wildavsky said "Perhaps most striking to me as I read Death and Life was Ravitch’s odd aversion to, even contempt for, market economics and business as they relate to education" he wasn't wasting his time on a minor aspect of the book; he was focusing on the fundamental principle of the debate.

The success or even the applicability of business metrics and mission statements in education is a topic for another post, but the subject does remind me of a presentation the head of the education department gave when I was getting my certification in the late Eighties. He showed us a video of Tom Peter's discussing In Search of Excellence then spent about an hour extolling Peters ideas.

(on a related note, I don't recall any of my education classes mentioning George Polya)

I can't say exactly when but by 1987 business-based approaches were the big thing in education and had been for quite a while, a movement that led to the introduction of charter schools at the end of the decade. And the movement has continued to this day.

In other words, American schools have been trying a free market/business school approach for between twenty-five and thirty years.

I'm not going to say anything here about the success or failure of those efforts, but it is worth putting in context.