An important question: Can companies really gain investment capital via the stock market?
Elsewhere I have commented on how easily capitalist/entrepreneurial markets can and do get warped by cheating and parasitism. Some of it is inherent, as Adam Smith described way back in 1776. What could be more natural for human beings to do – for example – than insider trading? We set up rules, and then lay patches on cracks that inevitably open in the rules, then bandaids on the patches….
Across 6000 years, no civilization ever tried so hard to create fair and open arenas within which humans can engage in creatively cooperative and creatively competitive positive-sum games. Those who claim that markets are “natural” are romantics who know no human history and who have never even cracked open Smith’s classic, Wealth of Nations. Markets are far from natural! They are marvelous, wealth generating machines. Human inventions that need constant tuning, tweaking and re-adjusting. Especially since cheaters (in other words humans) are all over the place, looking for ways to exploit those cracks. If they must, they will use camouflage and call themselves socialists… or oligarchs… or champions of enterprise, — whatever garb will let them garb themselves in the sanctimony of their environs. But pay less attention to the polemics than to outcomes.
Witness how the emphasis in the U.S. economy has shifted, since the 1940s, away from goods and services to finance. Companies once founded by innovators start to fail when taken over by “business majors.” The clade of parasitical meddlers has an endless supply of rationalizations, such as those concocted by the HST or High Speed Trading industry, claiming that – by leaping to suck away the intermediate value between buyers and sellers – they are somehow doing both parties a service, by helping markets to settle on the “proper (intermediate) market price.” This catechism-incantation allows them to shrug aside the blatant fact that they benefit while producing nothing, and the buyers and sellers and produces of goods and services languish and fade.
(Aside: one reflex will be to to accuse me at this point of “socialism” – even though every word of mine so far has been in praise of honest trade and competitive market forces, in a capitalism free of what biologists and disease experts call “parasitic-burden.”)
== The “mutant” CEO ==
Elsewhere I have also discussed the flawed reasoning that defends today’s outrageous compensation packages for CEOs and other managers who create no product or service whatsoever. Think, market forces are supposed to correct imbalances! Hence, by the very logic of capitalism, high CEO salaries should attract new talent to the field of corporate management until the supply of brilliant corporate managers outstrips demand and the prices fall. That is capitalism!
It is the absolute core catechism of their faith… completely ignored when convenient. Members of the collusive CEO caste never ever, ever mention this — that the system they claim to admire should result in a smooth and natural limitation on these French Royalty level compensations. And the failure of a correction to appear is essential proof of a collusive market distortion.
The one excuse I’ve heard is that the very best managers are mutant-level good. They are like tall, fast NBA players, nonlinear and by far worth any price! But there’s a rub. NBA mutants can prove they are worth it by clear statistical performance measures and ticket sales! In contrast, there is famously almost no correlation between CEO compensation and company health. Rather, studies have shown a near-perfect correlation with how many members of a very small clade of 5,000 or so you play golf with.
== The myth that equity markets efficiently raise capital ==
But let’s go back to the stock markets. You can step back and question the fundamental rationale for equities trading, altogether! Oh, sure, people should be able to sell their shares to others who deem the company has better prospects. But for the most part it is a gambling den that is justified by the claim that companies use the NYSE and NASDAQ and other exchanges as “capital markets,” to fund their R&D and the building of productive plants and equipment. (Ironically, much of their catechism on this goes back to Karl Marx!)
The whole notion that a company benefits very much, when its stock price rises, is absurd. This only happens when the price rises AND the company’s board issues new shares to sell at that higher price. That will, indeed raise capital. Current stockholder value is diluted, but presumably it rises back up as a result of new activities and products that the fresh capital allows. To do this requires sober calculation and convincing existing stockholders that the dilution will prove beneficial. And it just doesn’t happen that much. Nowhere near enough to justify the 99% of trading that is pure speculation, gambling and manipulation.
(Note: current stock-owners should be able to trade, fine, but let’s stop pretending the companies benefit from any but the tiniest fraction of NYSE activity. To the contrary, managers are terrorized by stock value fluctuations into making rapid, short-term decisions that can prove short-sighted, even catastrophic. Secondary note: none of this applies to commodities markets, though those have their own problems.)
In any event, that cycle of ownership dilution and re-investment via new share issuance is the activity that should be tax favored, and NOT the passive clipping of gambling profits from the trading of old shares. Re-stating that again… the issuance of new shares – the proceeds of which go to new products, capital equipment and so on – should be tax-favored, and not (gambling) dividends and capital gains that benefit competitive capitalism not… one… iota.
1- The favored flows would go directly to the company-> investment -> productive capacity and competitive activities.
2- The result of new issuance would be a steady decline in the power of large bloc stockholders as dilution spreads ownership ever-wider. In order to hold onto control, large-bloc owners would have to keep plowing dividends back into buying new shares. So, either the ownership becomes more broadly spread (resembling democracy), or else the “kings” are forced to be hands-on, involved and committed to the firm. Either way, vigorously competitive investment in new goods and services would be the favored outcome.
React viscerally. Call this “socialism.” In fact, there is not one molecule of socialism in this proposal. Just anti-parasitism, plus a will and eagerness to see so-called “capital markets” actually function as advertised, for a healthy version of capitalism.
Let me swivel now and point my finger in the opposite direction: left-wingers who blame “capitalism” for our recent messes should replace the word with “cheaters.” I consider healthy “Smithian” capitalism to be one of the top five victims of the malignantly incompetent rule of the recent U.S. GOP. There are no outcome metrics of national health under which the Republican Party’s tenure in command did not wreak harm upon the people of the United States, on human civilization, and upon healthy capitalism… and upon the spinning ghosts of Barry Goldwater and William F. Buckley.
Okay. It’s been said.
More… anon… Meanwhile… and just to clear the decks… here are some political miscellany.
== Who won the Iraq War? ==
“We lost out,” said Michael Makovsky, a former Defense Department official in the Bush administration who worked on Iraq oil policy. “The Chinese had nothing to do with the war, but from an economic standpoint they are benefiting from it, and our Fifth Fleet and air forces are helping to assure their supply.”
Not to mention that Iraq is now largely a satrapy of Iran. What a great idea that pair of trillion dollars was. And you would even consider trusting those goofballs with a burnt match, let alone any role in political life?
== Political-News ==
An infographic rates countries based on the state of freedom of the press. Many criteria are used, including violence against journalists to legislative measures to curb press freedoms.
An interesting look at how unusual it is to see the Republican Party without a clear next front-runner. “For decades, the party has drawn from a small pool. There was a Bush or a Dole on every national ticket from 1976 through 2004. For 20 years before that, Richard Nixon was on the ballot in every election but one.”
Tracking progress toward US energy independence: a handy chart, from Popular Science.
A provocative essay, Radical Centrism and the Return of Ricardo, reminds us that Adam Smith was not the only founder of enlightenment economics. Ricardo also played a major role. I cite both of them in that they knew what most “free market” economists have forgotten, that economic distortions will always be generated by toxically massive accumulations of wealth. A healthy market system – like an ecosystem – needs recycling, not just for “liberal” reasons of justice and equity and outcomes, but for the very health of the system itself, so that competition remains a real, vibrantly creative force, with a maximum number of empowered participants on a relatively flat playing field. This proposal for a radically altered tax and property system has no chance of ever being implemented outside of a sci fi novel. And I only agree with half of the aspects. Still it shows real thought.
See statistical proof that obstruction of appointments has skyrocketed under the Tea Party House of Representatives.
How 1% of 1% dominate U.S. elections. Yes it is Mother Jones and I don’t always agree with their polemics. But unlike Fox, they use actual facts. And they show where all of this will head, so long as the agenda of The Insatiables is the re-establishment of feudalism.
It would be one thing if — as I portray in Existence — the re-emerging oligarchy took seriously their need to be intelligent rulers. It is another thing to blithely assume they are smart while undermining every institution and enlightenment system that brought them all they own. Do they actually plan to ignore where history says that this will lead?
4 responses to “The Contradiction of Capital Markets…and more”
I agree with the essence of your explanation; there is one thing I disaggree with: it is the qualification of “capitalism” for any way to socialize the economy and fight against what is (at the basis) capitalism: cornering of wealth by the oligarchy. In Adam Smith’s sense, the Market is a socialist, anti-capitalistic, tool. The fact that, by a very heavy mistake and because of the power of capitalist’s lies, the socialists now reject the free market, which is at the bottom what they should fight for, and give it to its worse ennemies, the monopoles, doesn’t change what I consider as truth: a really free market is the real aim of real socialism. All those who deny it are, in fact, Capitalists.
You linked to the Amazon version of The Wealth of Nations, but of course there are free versions available, since it’s out of copyright.
Here’s the one at Project Gutenberg:
Just to add to your comments on Iraq, it now looks like Afghanistan will soon be handed back to Taliban.
A top British officer, General Nick Carter, says we should have tried talking to the Taliban a decade ago. We would have been in a better position to negotiate. So much for 10 years of fighting, 3,300 coalition casualties, and who knows how much money spent.
Afghanistan has seen off numerous invaders from Alexander the Great onwards, and the Americans will soon be added to the list.
At the (metaphorical) heart of the American dilemma is our perverse reliance on faith-based moralizing to counteract our systems’ built-in incentives to misbehave, instead of designing incentives for socially constructive behavior.
We make it profitable for CEOs to serve themselves at the expense of others, to seek short-term profit at the expense of long-term sustainability, and to benefit the few at the expense of the many – and then, we are dismayed and astonished when they behave precisely as the systems reward then for behaving.
We do the same thing in our political systems – elected and appointed representatives gain power and longevity in our system by doing exactly the things we expect them to resist.
Design embeds and propagates values, whether by intention or by accident. When we finally outgrow our irrational puritanism and start deliberately designing systems that reward desired behavior, rather than just hoping for the best, we will have a healthier capitalist society.
People will behave in constructive ways if given half a chance.