[quote=harvey]Economists have answered the question long ago: The market determines value.
Although there is good reason for regulation that helps markets work better (e.g. by improving transparency and eliminating textbook market failures), there is never a good reason to believe that government should be the sole judge of economic value.[/quote]
I’m a big fan of markets – I used to be a small-l libertarian and I still have a great fondness for markets. But they don’t work ALL the time and it goes beyond just the textbook cases of market failure (e.g., pollution).
One big market failure is executive compensation at public companies. Public companies are fantastic vehicles for looting. Ownership tends to be fragmented and most large institutional shareholders place greater value on the information that management provides them than they do on proper governance. And the trading is such that there are very few “owners” and lots of “renters,” which is perfect for management. Consequently, it’s very unusual – although not unheard of – for investors to stage a coup (there almost has to be gross negligence involved). The boards are typically hand-picked by management and championed to the nominating committee. And of course the board fees are so lucrative relative to the time commitment that most decisions, including compensation, are rubber stamped. It’s really a complete joke. Once in a blue moon someone like Icahn will come along and shake things up but that’s the dramatic exception to the rule. So, I’d say executive compensation within public companies is a pretty big market failure as a result of internal control fraud. The shepherds (mutual funds, hedge funds, etc.) render the ultimate owners (the investors in those funds) impotent… and management runs roughshod over the lot of them. Which is why, in my view, public companies are to be generally avoided if at all possible.
So while I certainly prefer situations in which a pure market determines value… there are a lot of situations in which folks manage to do their damndest to make certain that doesn’t happen. Executive compensation is a good example, which fits in with the theme of this thread.
