The Market is Eating Capitalism
Photo by Gforsythe / CC0 via Wikimedia Commons
My grandfather has long been a believer in the markets.
He was in management, and by the time he retired he had a decent stake in his company, and others besides. He was living the American dream, propelled up by the rising tide of investments to a generous retirement.
Naturally, he was keen to get my sister and I started on investments early. So for Christmas one year, he bought us stock in GM. It was better than any toy, he promised. It would make us money while we grew up, and nothing would ever happen to it. It was GM! An American institution! What could go wrong?
Needless to say, I learned a valuable lesson – that the stock market is far from a guaranteed winner. In many respects, it’s more akin to government-encouraged gambling. This isn’t exactly news, of course. As we are regularly reminded, capitalism involves winners and losers, and sometimes a company will go bust, rendering its stock worthless. Unfortunate, but inevitable.
What gets discussed far less often is the negative incentives the stock market has on the economy. Specifically, the importance it has been given within the system itself, along with the increasingly short-term nature of investments, has resulted in an instability that defines the modern American economy.
The rise in influence itself traces back to the rise of “shareholder value” as a corporate mantra. While frequently cited as a legal obligation, in truth that appears to be something of a smokescreen, designed to deflect questions regarding executive behavior rather than addressing the issues at hand. Instead, its origins trace back to the late seventies and early eighties, where corporate competition and the rise of globalization led to shrinking profit margins that made investors disappointed with their returns. Unlike the end consumer or the employees, large shareholders have enough financial weight to throw around that they can force concessions on top of potentially forcing executives out of a job. This is no idle threat, either. The recent rise of the “activist investor” has demonstrated how willing major financial players can be to assert control when they feel they aren’t getting adequate returns.
Compounding the problem is the shortening duration of the average stock investment. The increasing prevalence of daytrading has no doubt contributed to this, thanks to predictive models and complex algorithms allowing for nigh-instantaneous purchases to scoop up tiny price fluctuations in bulk. That alone cannot account for the whole story, though. Even within the realm of longer-term purchases, that “longer-term” definition seems to be increasingly short.
According to a white paper produced by Massachusetts Financial Services last year, the average holding time for a stock has plummeted dramatically, falling from a several-year average to just a few months, the lowest it has been through the 90 years the study covered. On the one hand, this could be taken as a sign of a healthy economy, that the money is in circulation and not sitting in the same place for extended periods. Indeed, many people make precisely this argument regularly, citing healthy stock market growth as a sign that the economy is doing great.
But is it? According to statistics provided by the Brookings institute, unemployment and underemployment levels are only just returning to pre-Great Recession levels. The recession itself has been officially over for several years, but the recovery has continued to lag. Wall Street certainly doesn’t seem to think so, though. We’re frequently reminded how great the markets are doing, yet the gig economy continues to grow as people desperately attempt to supplement their incomes in increasingly unstable times.
These facts are not unrelated. It’s easy to connect the dots. If companies are driven exclusively to maximize the return on investment that shareholders get, and those same shareholders are no longer in it for the long haul, company priorities will inevitably shift. Five- or ten-year plans become a relic of a bygone era, relegated to the same idealized corporate nostalgia mine that brought us Mad Men. The fact that executive compensation is itself regularly stock options just makes these incentives worse.
Why pay for full-time employees when temporary contractors will get the job done and then be removed? Employees are expensive, and we can get those margins up for this quarter if we bring those costs down!
Why spend money on research and development? New products cost time and money that could be going to dividends! We can just switch over to a service-based model and charge ongoing fees for the same products.
And so on, and so forth.
Even for people with “safe” degrees like STEM, security is a thing of the past. I am an engineer myself and have personally worked at multiple companies that proudly announce their record profits at the same time they announce that raises are going to be smaller this year and they’re just going to have to let some people go. The company may have had a record year, but they just didn’t meet those shareholder targets.
This trend is far from over. It seems likely to continue to accelerate, if anything. The world as a whole continues to speed up. Companies devote more resources into automation, hunting for ways to do things faster and cheaper. Jobs will become even less secure over time as this automation gets better. When one person can do a job that once took ten, where will the other nine go? To Uber, for now. A far less reliable gig job with no benefits and increasingly poor pay as more and more people rely on it to paper over the cracks in their personal situation.
The realities of the modern economy have been somewhat masked thanks to these new sectors, but they can never replace the old ones. The ability to opt-in to the ACA marketplace may help provide healthcare for people who no longer have full-time work, but that will never be a true replacement within our current employer-based model. More and more emphasis is being put on individual investment accounts to allow workers to retire as the pension becomes a relic of the past, and now even those become less helpful as company matching gets cut or dropped altogether. Working extra hours after work by driving for Postmates may help pay the bills but one person working three or four jobs to match what one used to provide does not a stable economy make. Imagine what will happen when the self-driving cars that so many companies are pursuing finally become a reality. Why pay a person to drive someone when the car can do it for free?
But at least the shareholders will be happy, and isn’t that all that matters?
The traditional conservative argument is that the markets will do better than a government program could, and the introduction of programs like single payer healthcare or universal basic income will cause more problems than they solve. Perhaps so, but that seems unlikely to dissuade people who no longer have reliable work or the ability to see a doctor. If the current trends continue, something will have to change to prevent widespread suffering in a country with more resources than any other. Changing the market’s existing incentive structure to return to a more long-term outlook may be the only way to prevent these more drastic changes conservatives seek to avoid.
But the shareholders probably won’t like that very much.
I’m trying to find a way to express this criticism constructively: This is too broad and not nearly deep enough. You cover a lot of ground, but you don’t go deep enough to demonstrate any real understanding of the underlying issues. The result is a piece that reads like you just opened a can of talking points and poured them out onto a page. If you just want to preach to the choir, it’s serviceable for that purpose, I guess, but it’s not going to convince anyone who isn’t already on your side that you have anything interesting to say.
I would recommend picking one or two key points and trying to develop an argument more fully. For example, you talk about short-termism. It would be interesting to explore the literature on short-termism, looking at rigorous definitions to determine whether it’s actually increasing, and what kinds of effects it has. Is there a strong consensus, or are these still open questions?
Note that because the value of a stock is the discounted net present value of expected future dividends, it’s not obvious a priori that short-term trading actually has much of an effect on management decisions. If management cannibalizes long-term value to deliver short-term value, then that’s not going to make the stock price go up unless they can fool the analysts into thinking that the long-term value has increased. Maybe they can fool the analysts, but why should I trust your assessment over that of professional stock analysts?
You say it’s easy to connect the dots, but it really isn’t. These are complicated issues that a lot of people have spent a lot of time studying very carefully; you can’t just intuit out the answers.
You talk about instability in employment, but layoffs and discharges are actually at the lowest level since the BLS started tracking them in December 2000.
We’re frequently reminded how great the markets are doing, yet the gig economy continues to grow as people desperately attempt to supplement their incomes in increasingly unstable times.
This would be another good candidate for a more thorough exploration. The “gig economy” may be growing because the term is used almost exclusively for task-oriented work obtained through cell phone apps, which is a new technology. But people have always done odd jobs and freelance work. Is the “gig economy” still growing if we take a more expansive, technology-agnostic view of what that actually means? Let’s see some receipts. As a quick sanity check, let’s take a look at full time employment as a percentage of the labor force. There’s some cyclical variation, but it looks like the long-term trend for the last 45 years is basically flat.
The mass media are…not doing a great job of keeping us informed. I routinely find major errors of fact and analysis, even in prestigious media outlets. You need to do your homework, not just take the narrative they feed you and repackage it.Report
“…[B]ecause the value of a stock is the discounted net present value of expected future dividends, it’s not obvious a priori that short-term trading actually has much of an effect on management decisions.” [Emphasis added]
The value of a stock is not the same as its price, correct? Isn’t the whole point to figure out when the value of a stock somehow varies from its price?Report
More or less, yeah. Although note that “expected future dividends” can vary widely from person to person. We can’t actually see into the future, so investors are just making educated (or not) guesses. If you’re an analyst and the price differs from the NPV of what you expect future dividends to be, the most obvious explanation is that other people have different expectations than you.
To be clear, I’m not saying it’s impossible for management to pump up the stock price short term by fooling analysts, just that I hear this story a lot, and it seems unlikely that every other rando on the Internet has it figured out while full-time professional analysts are totally clueless.Report
What’s the market cap for Uber? WeWork?
What’s the present value of an unending series of losses?Report
Anyone else see a comment box at the top of the page? I’m only seeing it on this post.Report
I am seeing also.Report
I saw it, too, but it seems to be gone now.Report
People generally like stability in their lives. They want to wake up and have Tuesday be more or less the same day as Monday assuming Monday wasn’t a bad day. The problem with the more doctrinaire laissez-faire advocates is that an entirely free market at least feels incredibly unstable to most people regardless of whether it is stable or not. Laissez-faire was described as creative destruction by one its’ advocates for a reason. The destruction part isn’t so nice if you are on the receiving end of it though.
So even if laissez-faire is theoretically the best form of economy possible, the number.of humans that have the personality to handle it is rather on the low side. That some, not all but some, laissez-faire advocates take a sort of social darwinistic delight in seeing people who fail under laissez-faire doesn’t help there case. In a Facebook conservation regarding tenure, one of the commentators remarked that tenure was bad because it makes professors lazy. People should always be online so they remain rough, active, and competitive. I think that for many people extreme laissez-faire has that sort of attraction. They believe themselves to be tough enough to handle it and don’t want a system that they see beneficial to the weak. It’s sink or swim to them.Report
As we’ve discussed here before, “laissez-faire” has a fuzzy indistinct meaning.
Picking up on my comment to Marchmaine on the other thread, in a laissez-faire market, would Paul McCartney still own the rights to his songs?
In other words, how does the marketplace assign property rights? It doesn’t, of course.
Property rights, and markets themselves are a constructed device erected by the collective body. How to dispose of the property of people when they die is another construction defined by the collective body.
“Laissez-Faire” usually is just the term people use for “The status quo, but with a few modifications that I prefer.”Report
I go back to the old saying that markets are a wonderful servant but a terrible master.Report
McCartney and Lennon didn’t own the rights to the songs, they were held in partnership with others in a publishing venture. And as time slipped away some of the partners sold their stakes to those songs to a higher bidder (ATV music).
In the end, the estate of Michal Jackson sold them to Sony music, which last I heard, McCartney was trying to steal them from. He thought that he could sell stuff for money needed at the time, but be given it back because “reasons” and “feels”.
Laissez-faire capitalism works perfectly, but some people feel that they need “a few modifications that I prefer.”Report
John Fogerty didn’t own the rights to his songs, because as a young guy he signed a crappy deal with Saul Zaentz to get a record contract. Years later, when Fogerty owned the right to songs he’d just written, he still sounded like himself, so Zaentz sued him for plagiarizing the songs Zaentz owned.Report
I think Chip’s point was that, whoever owns the rights to Paul McCartney’s songs, no one owns the rights to Paul McCartney’s songs until some government says someone does and sets up a system by which others can be forcibly prevented from using them without paying for them. (There wasn’t always such a system; Shakespeare had no recourse if someone else wanted to publish or perform his plays.) Whatever lousy deals the original holder of this governmentally-approved monopoly makes afterward may be his own look-out, but there isn’t anything to make good or bad deals about until the government steps in and imposes some sort of order.Report
Given enough money and political connections, I could have the government grant me the right to the entire catalog of Shakespeare’s plays. I could have it grant me the right to the house in which you live, the car you drive, the clothes you are wearing right now.
Jurists, theologians and political scientists have tried to formulate principles by which we can resolve how property rights arise.
Most of them turn on some sort of moral intuition whereby people have a natural ownership claim over the fruit of their labor.
But ironically the marketplace itself causes that to become diffuse and weak.
The clear moral intuition that causes everyone to accept that Paul McCartney owns a song he writes, is hard to discern after the rights are sold and resold, then as time passes those rights are passed down from generation to generation like an antique clock or something.
Its a bit like if someone in Eastern Europe were to discover some ancient scroll that gave deed to a piece of land, and it turned out Chip Daniels was the sole surviving heir.
Legally it might be clear, but its hard to mount some clear moral argument that I am entitled to the land, as opposed to the people who have lived and worked it for centuries.
Phrased like this, it’s an amusing thought experiment. But things like this are playing out all over the world, in places like Jerusalem and Kashmir and Crimea.
Who owns it? Why should we recognize their claim?
Free market economics has no role to play here; It isn’t capable of resolving the fundamental question of how humans should divide up the natural wealth of the world.
These are political and moral questions and they can’t be resolved by anything but the collective body agreeing on something.Report
And why did we, as a political body, move to create that? I know what Chip is trying to say, but there is a reason we developed the idea of intellectual property. It both protects the interests of the creator, and at the same time gives them control over what financially happens with it. Indeed, it helps the creator become an even greater part of the economy. And to inject some stability into the world. That if I create something, the next large ape with a big rock cannot come an simply take it.
Yes, it is some sort of collective illusion, but so is money, which it is part of, in very specific way. It, the songs and other art, are no different than a building plan. Or a automobile blueprint, a piece of gold. They are created wealth.
Indeed, this is why we have created gov’t. We have moved past the simple act of whose strongest to a deliberative body in order to protect what we feel is ours. That it is our money, our husbands, our place to sleep. And as we grow bigger, these things grow bigger, thus creating an economy.
Chip is an architect. That the world needs and or wants people who can do this and have the ability to pay for it is a direct feature of that fact. As opposed to sleeping around a small fire, spears pointing out.Report
And why did we, as a political body, move to create that?
Because it seemed to us, collectively, to be a good idea at the time. And if we eventually come to believe that other expedients are good, we will enact them, and no theory can tell us, on the basis of some general principle, that we are wrong.
To be sure, there are often good reasons for what we adopt, but that gets us into the weeds, where generalities don’t help us much. As the philosopher John Mackie once said: there is no natural law of property, but it is natural that there be some law of property. The details are negotiable.Report
I really enjoyed this!!! Thanks so much for writing it, and welcome aboard!Report
There was a story I saw this week inn Vox I think about how Wal-Mart needed to pay 13 billion dollars in dividends in its most recent fiscal year and Amazon paid zero in dividends. Jeff Bezos was somehow able to convince investors that it is good to take profits and reinvest them in the company and new ventures.
The “shareholder value” theory is enshrined in Delaware law where many corporations are incorporated but I think the big issue with the short-term strategy is that it seems enshrined in the outsized way finance pays in economic life.Report
Bezos has been right so far. There are sound theoretical grounds for reinvested dividend being a solid investment for a growing company, but like most of that stuff, it’s true until it isn’t and no one can predict when that will come.Report
Jeff Bezos was somehow able to convince investors that it is good to take profits and reinvest them in the company and new ventures.
I’m not sure where this idea that investors are hostile to reinvesting profits comes from. Reinvestment of profits is strongly favored by the tax code in two ways. First, profits are taxed but expenses and depreciation are not. If a company reinvests its profits, that saves money on corporate income taxes. Hence Amazon’s low tax bill. Note that when Bernie Sanders rails at Amazon for their low federal income tax bill, that’s because they reinvest their profits, something which tax law is explicitly designed to encourage.
On top of that, investors get taxed for dividends, and they don’t get taxed for holding a stock appreciating in value until they sell it. If you’re holding Amazon stock and want cash, you can always sell some shares, which is just as good as a dividend. But if you’re not selling shares every year, you save on taxes compared to a dividend.
I’m not sure why Walmart investors are pushing for dividends. Maybe it’s because they don’t believe in the management’s plan. Competing against Amazon is pretty risky, even for Walmart. Reinvesting your profits is great if the investments pay off, but it’s money down the drain if they don’t. Eventually a company has to start paying out dividends; you can’t grow forever.
But also I suspect that they attract a different, older, more financially conservative type of investor. If you have a long history of paying dividends regularly, you attract investors who want regular dividends. Amazon has a long history of not paying dividends (or even making profits!), so they attract investors who are looking for growth.Report
There is something to be said regarding the messaging corporate executives put out and how conflicted it can be.
For instance, at the start of the year, my employer put out a big internal email talking about how great the company is doing, how much we are growing, etc. Just all light and rainbows.
Then they told every department and business unit to cut expenses by 10%.
I can see corporate looking at individual units and saying, “Hey, your costs have gone up X%, but your value has not increased accordingly, you need to justify this, or start trimming the fat!”.
But company wide messaging of growth and profits that precede company wide directives to cut costs can erode employee loyalty and faith.
Likewise, cost cutting that impacts the rank and file, but that results in generous executive bonuses.
But those are issues related to corporate culture, not short term stock ownership.Report
I just wanted to say that this was a really good essay.
One of the things that got me to turn around on the Market Capitalism Uber Alles attitude was the Amazon case where they kept workers after their shift was over to wand them and search their backbacks for stolen goods… without paying them.
This is the richest company in the world, right? And they won’t pay for the half hour it takes to search worker’s bags for stolen goods. And that’s on top of the “peeing in gatorade bottles” stories.
Which is messed up.Report