This post first appeared on Harvard Business Review's blog, and is posted in conjunction with the publication of the October 2014 issue of the magazine's feature article, "The Rise (and Likely Fall) of the Talent Economy," which can be read in full here.
Peter Drucker was right, as he repeatedly was, when he foresaw in 1976 the emergence of pension funds as the most powerful wielder of capital in the modern economy. In his unique way he gave the story a neat twist by arguing that pension funds would save capitalism. Workers, he predicted, would own the means of production -- but not through the violent overthrow of capitalism in the way Marx had suggested. Rather they the ownership would come through the stocks held by their pension funds.
Drucker was right, especially if you lump traditional pension funds along with their sovereign wealth fund cousins. The top 350 pension and sovereign wealth funds control just under $20 trillion of assets. They are the largest holders of securities in for-profit organizations competing in democratic capitalist environments. Of course, the funds have holdings in securities in non-competitive vehicles too, such as government issued securities. But Drucker was principally concerned about their holdings of the means of capitalist production.
If one looks carefully at these holders of competitive, capitalist company securities, one thing jumps out distinctly: they are not themselves competitive, capitalist organizations. Virtually all of them share a single form: a monopoly enforced by government regulation. As a Canadian, I have no choice as to where the pension contributions that are legally deducted from my paycheck go. Whether I like it or not they are sent to the Canadian Pension Plan Investment Board. CPPIB is granted a monopoly right by the Government of Canada to serve me (except in Quebec, where the relevant and equivalent monopoly body is the Caisse de Dépôt et Placement du Québec).
The same rules hold in the home of the brave and the land of the free. California state employees, Texas teachers, and New York City workers have zero choice. They are served by government-regulated pension fund monopolies. In fact, 19 of the top 25 U.S. pension funds, with $2.1 trillion of assets under management, are government-regulated monopolies. The other six, with $500 billion of assets, are corporate-run monopolies in which employees have little or no ability to opt out.
Capitalism has broad support because of a general belief in the power of competition, free entry to industries, and customer choice to produce increasing productivity and high levels of innovation. However, the ownership of those actively competing companies is increasingly in the hands of organizations that face zero competition, no threat of entry, and have customers who are forced to use them.
Why is putting the economy in the hands of regulated monopolists a good idea? Obviously, many of those monopolists are doing a good job. I don't begrudge sending my pension deductions to CPPIB because it is well run and does a nice job for me with my pension savings, and I have to applaud California Public Employees' Pension Fund (America's second largest pension fund with about a quarter of a trillion dollars of assets under management) for making the bold and brilliant decision to eliminate hedge fund investments from its holdings.
But the broad history of regulated monopolies is not inspiring. Without the forcing mechanisms of competition, entry, and choice, monopolies slowly but surely gravitate to serving themselves, not their customers. That is why your cable TV provider probably won't tell you specifically when between 9 am and 1 pm the repairman will arrive to fix your defective cable connection. Although the company caused the problem, you are responsible for accommodating a schedule that is convenient to them not you, or they won't fix their error. Who is being served here?
If we really believe in competition and choice, then a big question we should all be asking ourselves today is what should be done about our monopolistic pension system?
To read "The Rise (and Likely Fall) of the Talent Economy," click here.