On this issue, the economist Andrew Smithers has been labouring in the vineyard for some time. It is high time that his analysis was taken seriously. He notes that whereas many substantial investment projects require a long time horizon and much patience, most senior executives have a short time horizon dictated by impending retirement. As the stock market typically responds to good news about earnings, while baying for blood if things go badly, senior executives have an incentive to scrutinise investments with a very beady eye.

As Smithers points out, the aggregate data from both the US and the UK tell a worrying tale. In both these countries, fixed investment as a share of GDP has fallen substantially. There are all sorts of possible explanations for this decline but surely a leading candidate is the prevailing structure of executive pay which incentivises business leaders to minimise investment.

Interestingly, this has major implications for the performance of earnings more generally. In America, surely much of the reason for the Trump phenomenon is the extremely disappointing performance of real earnings for the average American. This, too, has several roots. But one is surely US firms’ low investment.

This has constrained the amount of capital available to workers, and constrained the growth of their productivity. Without productivity growth, it is impossible for average real earnings to increase for a sustained period. 

The current Conservative government has taken an enormous gamble by interfering with market forces at the lower end of the labour market to raise minimum earnings. It remains to be seen what effect this will have, but the result could be a significant reduction in employment.

It should now direct its attention to pay at the top. The Government needs to act to ensure owners of businesses are empowered – and obliged – to restrain the excessive growth of executive pay and overturn the perverse incentives created by the concentration on short-term share performance.

Not only would this help to win widespread support for the capitalist system, but it would also help to improve overall economic performance.

David Fuller's view

I think many subscribers will agree with this, as I certainly do, so a hat tip to Roger Bootle and Andrew Smithers. 

Note the number of today’s successful companies which are still run by their founders.