The Role the Stock Market Plays in Concentrating Wealth in the U.S.

The Role the Stock Market Plays in Concentrating Wealth in the U.S.

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The Role the Stock Market Plays in Concentrating Wealth in the U.S.

This article took some courage to publish, and some real work to write. It draws on freely available (if you know where and what to look for) data from the Federal Reserve to illustrate how much money is taken out of U.S. corporations from dividends, stock buybacks and mergers and acquisitions. Since 1952, U.S. corporations have distributed $14 trillion in inflation-adjusted dividends to shareholders, with 76% of that total, or $10.650 trillion, occurring in just the last thirty years.

My conclusions about the role of shareholders will rub some the wrong way. What I am trying to do here is paint a more objective picture about the real value that shareholders provide to the economy. They do play an important role, to be sure, but it is not what many of us assume it to be, and it comes at a relatively heavy price (more than 5% of our GDP, every year). 

As I say, questioning the value of shareholders here in the U.S. takes some courage. We’ve come to assume that the goal of “maximizing returns for shareholders” is inseparably tied to the pursuit of profit and even capitalism itself, but it is not, and I am not questioning those very important economic drivers here.

What I am trying to investigate here is the tenet of “shareholder primacy” and how it contributes to the growing problem that this country has with our concentration of wealth. I also attempt to foreshadow what could happen when more of our publicly traded corporations are increasingly automated with robotics and artificial intelligence. This is the “perfect, profit-making machine” and it could accelerate the process of wealth accumulation already underway. 

The way the timing of this piece worked out probably couldn’t be worse, given the emotional turmoil wrought by the stock market in recent days.Things usually happen for a reason though, so perhaps this recent roller coaster will help to unleash a different kind of conversation than we might normally have about this very difficult topic. 

#stockmarket   #wealth   #shareholders   #pikkety  

http://www.the-vital-edge.com/stock-market-concentration-of-wealth/

40 comments

  1. Can’t wait to read this!

  2. I hope you like it, Alexandra Riecke-Gonzales. 

  3. Gideon Rosenblatt Wow. I am adding a link to your article for my “Critical Thoughts” course at Antioch University (Yellow Springs, OH).

    Question: Teddy Roosevelt (I think) started Estate Taxation (my grandfather paid 85% of his millions in taxes when he died). I THINK W completely got rid of Estate Taxation (can’t check right now): but Teddy’s reasoning was that we couldn’t support a democratic republic if wealth were allowed to accumulate as it appears to be doing. (Not exactly on your wonderful insights, but a corollary.)

    Question #2: I have always understood economies thrive when money is “moving.” Wouldn’t a continuation of wealth extraction cause the rich to lose their wealth? I don’t know how long it would take…

    Question #3: With the super wealthy having such a disproportionate amount of money, what can they DO with it? If put in a bank, that would put money back in circulation (for mortgages, and ACTUAL capital investments). WTF are they doing with it?????

  4. Q3 Meg Tufano: some of the money is indeed back in circulation, via investments in bonds, shares, commodities… but here you then get in the question of paper money.

       Assume a company issues shares at $10. Assume that the company seems to thrive, so investors convince themselves that future returns are looking increasingly good (amount of dividends, but also how many dividends there might be in the future before some competition becomes able to seriously disrupt the company…): buyers are ready to pay more than $10 for the now-improved prospects of return, sellers are requesting more than $10 to let the share go, the share price moves up. Assume the price gets to $20. When the shares change hands, the company sees nothing  of the increase in share price! The company benefits from the fact that it’s now expensive so less likely to be bought, this provides it with some independence and less pressure from angry shareholders; some founders and managers might benefit from the prospect of “retention packages” if the company was bought anyway; but overall the company doesn’t benefit in terms of capital  from its improved ability to provide nice returns on capital.

       Back to how the wealthy invest. Few wealthies take big risks, they tend to invest in what is likely to provide stable returns with minimum risks: you don’t become rich(er) by gambling. Only gamblers believe so! It’s the maxim of Buffet that he invests only in businesses he understands well. So wealthiest invest in shares and bonds that have reasonable stable prospects of return, that is they invest in shares and bonds with inflated prices, prices which do not constitute capital  for the issuing companies!

       The same applies of course if the wealthies invest via banks, fund managers, family offices, etc: the money goes in the market but doesn’t constitute capital, it’s paper money. If you convert the paper money back into ‘cash’, and leave that at the bank uninvested  then the bank can indeed leverage this cash and allow for mortgages, etc., but no wealthy is rich by absentmindedly leaving money un-invested on a bank account! Your own banker would call you to make offers to invest your money for you, for a 0.5% service fee p.a. then invest cautiously (not to be sacked, and to keep earning 0.5% every year on a large notional) therefore invest in inflated share/bond prices of reasonably big companies. And if all that sounds implausible, just ask the Lehman shareholders (including most of its employees): the paper money simply vanished! Paper money is worthless: you need to get out of the market in time, by finding someone willing to pay you some cash for it, so it becomes ‘real’.

       The super wealthy sit on gigantic piles of paper money. Their ‘privilege’ is that so far they can convince others that it’s real money, so many people want a share of the pie and they want to buy some shares from the wealthy. It allows the wealthy to turn their paper wealth ‘real’ whenever they need some pocket money… and it maintains high valuations, e.g. via people getting their pension funds to buy… [Oh look what did China just do to support its markets? Allow pension funds to invest in shares!] As long as the population buys the ‘dream’ of “wealth=happiness” sold to them, they maintain the wealthy in their position of privilege. It’s purely conventional though, since it’s not real capital circulating! The money is stuck in the secondary markets, constantly changing hands but rarely (if at all) reaching the production capacities.

       The more you convince people (like in the US… but more and more worldwide) that success is primarily measured by wealth, and that investing in the secondary  markets (rather than during the primary issuance) is necessary to become rich / grow one’s savings / prepare for pension, the more you support the reign of the super wealthy.

       Of course, the idea of “improving prospects” as the key to profiting from shares is what drives the theory of “shareholder’s primacy”.

  5.    Additional thought:

       Economic theory would tell you to buy shares of which you think the prospects will improve, then to resell once the prospects did improve (an improvement which should make people willing to pay more than you had to).

       Game theory however suggests a different strategy is also possible:  buy shares of which you think a lot of people will think the prospects are improving.  It doesn’t matter if the prospects are improving for real,  you just need many people to believe so and they’ll be ready to pay more to appropriate your shares…

       Basically game theory says that if for whatever reason you think you can predict “market sentiment”, then you can ride a bubble (and get out before it bursts). The thing is: economically, to ride the bubble, you have to buy, so you yourself support the bubble! The bubble isn’t born out of the blue but out of the arrogance of investors. [It is notorious than many traders, fund managers and investment bankers fall for the “superiority complex” and more than half of them think of themselves as better at riding the market than the median professional investor… so they’ll stay in the market to ride the bubble even when they see one, and by doing so they’ll support the bubble… which for a while will seem to confirm that they’re good at riding it 😉 until Maddoff and Bear and Lehman burst, that is…]

       Interestingly, since professionals stay in the market when the market becomes exuberant, the fear of missing out (FOMO) then seizes other investors, normal people, etc., who put as much as they can in the market to increase their savings, pensions, etc. FOMO then supports the bubble too.

       Until someone big “cashes in”, or enough people get the feeling that something is horribly off, then everyone tries to get out at the same time and paper value vanishes.

       You might have noted how many newspaper and fund managers and bankers are all explaining at the moment that volatility is expected and that people should sit tight. Everyone hopes the bubble can be maintained by avoiding a massive sell off, which would expose the virtuality of it all!

       The key point (sorry this is a big long but there’s a point!) is that the secondary market is regularly out of balance, because a lot of flow is not even based on “improved prospects”!

       A lot of flow is merely based on fashion and beliefs that for whatever magical  reason e.g. Apple will be the company everyone wants to buy in the future regardless of company policies that keep the cash abroad instead of paying dividends!  The amount of paper money associated to Apple shares is incredible: this doesn’t constitute working capital for Apple, and since dividends are not  distributed (profits are parked abroad by accounting tricks, to avoid paying taxes on profits… taxes which would partly redistribute wealth and reduce concentration!), no-dividend means no pocket money for the shareholders to spend and circulate in the economy! The secondary market for Apple shares is on the biggest accumulation spot of unproductive cash there can be!

       Sometimes it’s not dividends which are the problem, but also the lack of dividends.  And that’s where I might nuance the article of Gideon Rosenblatt: secondary market, no circulation, as the article explained… but… no dividend, no circulation either! At least the dividend might sometimes be spent, or invested!  So maybe the main problem is not the dividend: accounting tricks might be just as bad, and outrageously the very idea of not paying taxes, the very idea that concentrating wealth further is okay (let alone legal)!

       The problem ultimately is the belief that “wealth=happiness” which pushes everyone to invest in a few instruments; the problem is the caricature of capitalism that the world is falling for (and I say the caricature  of capitalism, for capitalism itself doesn’t have to be so obsessional and one-dimensional!).

       The key modern confusion is that capital is reduced to a number with a currency symbol in front of it. Modern errors from this caricature include e.g. 1. the environment is not capital to be protected, but simply a resource to be dilapidated and destroyed: just like the economy, there’s nothing wrong in circulating  resources, but then it has to be circular(!) so we need economies with a lot more recycling, better waste treatments, better pollution capture, etc.! 2. the social cohesion, and peace even, are not capital to be protected… Everyone knows the expression “the dividends of peace” but too few consider peace to be a capital to be protected, not squandered!

       Capitalism doesn’t reduce capital purely to cash, let alone to paper money. The caricature of capitalism may be a lot more problematic than the distributions of dividends. When shareholders are okay not to receive dividends because this would mean paying taxes that would redistribute wealth, that’s not capitalism, that’s some other unhelpful pro-concentration anti-redistribution dogma. Capitalism doesn’t have a problem with taxes: as long as cleverness and work are rewarded, as long as one is free to allocate resources in order to manifest said cleverness and work, the tax rate is irrelevant. And indeed historical tax rates in the US show that capitalism was doing perfectly fine with higher taxes (and less cash hoarding abroad to avoid tax).

  6. Meg Tufano, I don’t think I could have done a better job of answering your questions than Denis Wallez did. Thank you, Denis, for taking the time to outline all that. I think the main point is that people who have a lot of money in the market spend a bit of it on consumption (fancy houses, boats, cars, etc.), but most of it is simply re-invested in ways that balance the desire for high returns with the desire to diversify the risk. 

    On your first question, Meg, Thomas Piketty looked at the impact of inheritance on wealth concentration. He found that it used to be a huge factor, and then it largely disappeared, and now it looks to be making a comeback. 

    http://www.economist.com/blogs/buttonwood/2014/03/inequality

    And yes, I can’t say what role Teddy Roosevelt played exactly, but it was right around that time when inheritance started to lose it’s impact. The Right has invested a great deal in building the case against estate taxes. Opinion researcher, Frank Luntz figured out that one of the first steps was to change the name to “death tax” (why? because everyone dies, not just people with estates – and because we hate death and taxes). Bush pushed through a temporary estate tax holiday, and there is much interest by the Right (and more elements of the Left than one might expect) to make the exemption permanent. 

  7. Denis Wallez, just a few more thoughts on your thoughts: 

    First, on your meta point, which you are perfectly suited to make because of your history and your current focus: money doesn’t equal happiness. Yep, there is excellent research out there that shows that it does help to alleviate stress and unhappiness up to a certain amount of money, but beyond that, it doesn’t make us happier. 

  8. On the question of investment flows, Denis Wallez, I think there’s a lot to unpack there, and some of this is beyond my area of expertise, to be honest. I think it’s true that dividends and capital gains do provide the opportunity for the money to be “consumed” by shareholders in the form of fancy estates, lawn mowing, pool cleaning, Teslas, and the like. My guess though is that for most of the people in the 1% (and possibly the 10%), they are simply unable to consume that much, even with the stupidest behaviors one might imagine. And so, it is plowed back into the market in the search for that magic balance of return and risk mitigation. 

    One thing that I’d like to know more about is how the cash that Apple and others have is actually held. It’s easy enough to answer, but I just haven’t taken the time to look. In theory though, even if it’s held in cash equivalents, it could still be being invested in ways that are productive. Don’t you think? 

  9. Well written analysis +Gideon Rosenblatt

  10. Thank you, Ted Holmes. 

  11.    Good question Gideon Rosenblatt.

       No, the cash hoarded by Apple (and other multinationals, if it was just Apple it wouldn’t be a noticeable problem) is not  invested in production, it’s usually liquid (it could be paid out quickly) so it’s probably invested in bonds. But then just like with shares, it’s not invested by buying newly issued from risky companies badly needing credit. It’s invested in ‘safe’ bonds, i.e. ‘over-priced’ bonds (low risk, low return but easy to resell). It might be for example invested in government bonds… which are not new issuances by states in order to fund new infrastructures, etc., but merely bonds issued to repay older (maturing) bonds: it’s a roll of the debt, not investment!  Depressing, isn’t it?

       One aspect of the redistribution by dividends is the spending, but as you say the spending might only be a fraction of the dividend. The other aspect —I hoped this would be clear, not sure, sorry!— is via taxes: even if the dividend ‘net’ is not spent at all  by the recipient, the company will have paid taxes on profits prior to distributing the dividend. Dividends are shares of profits, a company cannot pay dividend without recognising the profits as such. The tax rate of course depends on jurisdictions, etc., but it easily amounts to 15% or more, which might prove substantially more ‘redistributive’ than the spending by the recipient!  But this requires recognising profits instead of shelving the cash abroad.

       I have obviously nothing against ‘investing’ abroad. No one would have a problem with multinationals expanding their activities by investing in various locations… But that’s not what’s happening!

  12. Denis Wallez thank you for this…

    “The problem ultimately is the belief that “wealth=happiness” which pushes everyone to invest in a few instruments; the problem is the caricature of capitalism.”

    I completely agree. I have spent some time recently looking in to the Blockchain and decentralized ways of attributing/earning value. I think that Synereo (where Gideon Rosenblatt is an adviser)  is building a very interesting use case for value attribution and discovery. Happiness is love not money. So how can we rigorously value and realize love?

  13. Denis Wallez I am out of my depth here even though I have taught Economics 101 and understand how wealth is created originally (Gideon Rosenblatt ‘s point about IPO’s); and I usually use an example for students about borrowing money from the bank to start a business, making a profit, paying back the bank with interest, then one has actually created wealth that did not exist before. It is the IDEA in the person that creates the wealth, not the money. (I tell them to think of Apple: before the idea, there was no wealth.) 

    Ironically, I bought the first iPhones by buying some Apple stock (in anticipation of the iPhone coming out) and selling it in order to pay for the phones. 

    But I understand Apple. And, like Buffet, I only invest in what I understand. I have been in cash for the past year because I cannot get a grip on what is happening and I need to be able to sleep at night (if I’m dead, the “profit” becomes moot ;’)).

  14. Denis Wallez Your second posting Denis:  I have always believed (it is Economics 101) that human capital is the most valued capital. Again, I am in theoretical territory having never actually worked in stocks, etc. except at the margins with money I can afford to lose. (My “motivator” is not so much to gain more as not to lose what I have, apparently not a normal motivation.)

  15. Steve Wright To answer your question to Denis Wallez . We increase love by loving!

  16. Meg Tufano and think that is true and… What I am struck by is the rigor and intention we are will apply to financial shenanigans while we relegate love and community to sloganism and Hallmark-ing. I want a rigorous hippies! I want transactional love (no, not that kind.) I want real, measureable and even fungible value to be assigned to those who contribute to the vibrancy of their communities.Doing this would require us taking love at least as seriously as we take money. Not patchouli, drum-circle love but a rigorous explication of the activities that generate vibrancy as a proxy for love. We would do that if love was real. We would stop war if peace was real. etc…

  17. Steve Wright in my experience, the word for that would be marriage (35 year anniversary next month).

  18. The fact that you are “neither an economist nor an expert in financial matters” is what adds credibility to your argument for me. You are able to explore this issue without the presuppositions that economists and “experts” typically bring with them. Sometimes it takes an outsider to expose the cancer that lies beneath the surface. You have expressed very succinctly something that has recently become apparent to me and it is encouraging to know that someone who is further down the road exploring this issue has come to the same conclusions.

  19. Thanks for the kind words, Loren Sickles​. Much appreciated.

  20. Gideon Rosenblatt I agree with Loren Sickles ,

  21. « The fact that you are “neither an economist nor an expert in financial matters” is what adds credibility to your argument for me. You are able to explore this issue without the presuppositions that economists and “experts” typically bring with them. »

       Meg Tufano, is this what you agree with, from Loren Sickles? This has to be wrong: it’s quite explicitly an apology of ignorance!

       Equivalents would be e.g. “a non-scientist is more credible about science than scientists”, “somebody who never researched ethics is more credible on e.g. abortion than philosophers”, etc. That’s seriously off! It’s a common logical fallacy which shouldn’t be encouraged. It’s dangerous, e.g. when repeatedly used by climate-change deniers: instead of reviewing the results themselves, they just attack the credibility of scientists (“ad hominem” fallacy) e.g. by projecting some ‘self-interest’ (without evidence other than fallacious calls to “it’s obvious”, another logical fallacy).

       The “presuppositions” are mostly “knowledge”!

       Sure, sometimes they’re “biases” as well, for indeed knowledge tends to come from a limited number of angles and can always benefit from being expanded (hence the value of trans-disciplinary discussions). But a lack of knowledge cannot logically give credibility: neither a complete lack of knowledge, nor even a partial lack of knowledge. The knowledge is what gives credibility. One needs to know something well to find the actual  faults of it! Denouncing faults prior to knowing well  is actually showing “prejudices” (and it’s classically used against anything disruptive / new: at the moment, you’d find a lot of this in anti-vacination movement, but also e.g. against artificial intelligence —by people knowing way too little about AI to have an informed opinion). “Fresh eyes” are to be complementary to knowledge, not a replacement.

       And for the avoidance of doubt, no, I’m not criticising Gideon Rosenblatt here. If anything, he’s precisely showing a willingness to learn more (rather than assuming that lack of economic knowledge is enough to have a ‘credible’ opinion)! I’m pretty sure both Loren and Meg are also learning, being interested, reading, thinking… So I’m not criticising them either, I’m only challenging a specific formulation that supports ignorance (and notably much of the ignorant sides of the political discourse) and that I think we should abstain from using.

  22. It’s a fair point, Denis Wallez. I assume the point Loren Sickles and Meg Tufano are making here is more about being able to see beyond the current assumptions. I had a well-respected economist who does very cutting edge work tell me once that he finds that many of his colleagues are stuck in old paradigms in ways that really limit their ability to see beyond them. 

    That said, we need to be careful not to slip into the Ted Cruz world of climate expertise. I took finance and economics in business school and they were good courses, but it’s just not my expertise. As a result, I had to do way more work than someone with more background here – just to ensure I wasn’t saying something completely idiotic  — and some would argue I haven’t made that hurdle!  😉  

    My attitude going into these kinds of topics (same with artificial intelligence, where I’m starting to put more of my emphasis) is one of shared exploration.  

  23. To be clear Mr. Rosenblatt and I have never met. My only exposure to his thinking is through reading what he makes available through this medium. That being said it is readily apparent to me that when Mr. Rosenblatt makes the effort to put his thoughts in writing it is neither cursory nor reactionary. This is evidenced by his effort to pass his thoughts by someone from within the discipline. I have been watching his progress as he has been pursuing this area of interest and to a lesser degree I have been following the same path. 

    While Mr. Rosenblatt and I are not economists, his MBA and expertise in business and my MA in communication theory and rhetoric provides us both with tools to evaluate and critic the messaging coming from the economics community. One thing that has become abundantly clear is that, despite the messaging of some within the discipline, economics is not based on natural law and therefore is open to critique from any studied source. I for one, having watched how the last 40 years of economic policy have affected the American and global economies, cannot shake the sense that I smell a rat. The fact that someone such as Mr. Rosenblatt is expressing a similar sentiment encourages me to continue in my pursuit of understanding the systems and structures we have supported that shape the conditions as they exist now.

    As the little boy who had the courage, or was it naivety, to publicly declare the “emperor has no clothes” Mr. Rosenblatt, and others like him, may be what is needed to prompt a broader dialogue on the legitimate role of the economy as a vehicle for common good.

  24. Denis Wallez Gideon Rosenblatt As a rather odd sort myself (I am a scientist, a philosophy professor, and a novelist), I appreciate good thinking when I see it. It is those who take the time to explore areas that are at the edge of their normal vision who hint at possibilities that those who just stare ahead are unable to do. So, thanks again Gideon.

    Gideon, I had a rather long conversation with an investment expert last Sunday about your article. He is in the venture capital business and is making a fortune in what I guess I would now call a genuinely “capitalist” way.

    However, at the end of our conversation, he said his IPO was coming out and he could cash out. 

    I didn’t say it, but I thought, does capitalism HAVE to end up this way? With the wealth being removed from the original source? IDK.

    Also, and I think Denis would also be interested in this, he told me the story of GM’s bailout and WHY people are not investing their money back into companies in the U.S.

    It was a long story, but to cut to the chase, the bankruptcy laws were not followed and the bond holders (who would normally be paid earlier in line) were pushed back.

    And that has made people with money feel very “iffy” about putting money into businesses. A “chilling effect” he said.

    I don’t honestly know what a bond is exactly (sounds like a bank loan or IOU to me), but do you think the GM bailout had as negative an effect on the wealthy putting their money back in our system as he thought it did?

  25.    Yes, Meg Tufano, a bond is like a loan, the money you get when issuing it is capital (you’re free to use it the way you want) but you have an obligation to repay it at a fixed date (plus interest payments in between at fixed dates too, unless it’s a “zero-coupon”, in which case the interest rate is used to ‘discount’ the final payment to compute what you actually receive at issue, so you might end up receiving 80 but having to repay 100, the 80 being the ‘discounted’ 100 at the appropriate duration and interest rate).

       The differences with shares are many: most notably, the initial capital is never refunded in shares (unless they’re special types of shares being ‘bought back’ later… but let’s stick to ordinary shares for now). That’s ‘forever’ capital. Shares can be resold in secondary market, but that’s only if you find a buyer, it’s not directly the problem of the company if you don’t… But what you get with shares is a share of profits… If the company gets really profitable with your capital, you benefit from this. With ordinary bonds, you wouldn’t (interests are pre-determined). Because you’re taking more risks with shares (“no profit => no dividend”, and “no exit, only secondary markets, you have to find a buyer” — vs. “no profit or even losses => interests on bonds still are to be paid or it triggers ‘default’ / ‘bankruptcy’ “), you benefit a lot more if things go well… which somehow makes sense otherwise nobody would ever invest ‘permanent’ capital (or ‘seed’ capital) in companies.

       It is accurate that bankruptcies law have not been particularly respected in the recent, long financial crisis and this should  (and probably will) have consequences.

       The way the law has not been respected is because sometimes interest payments have been missed, but instead of classifying it as ‘default’ / ‘bankruptcy’ as it should, authorities have regularly classified such non-payments as mere ‘delays’ (this has happened both with government bonds, notably Greek, and with corporate bonds when governments tried to save a big corporate player). Without the official ‘default’ stamp, the bond holder cannot insist on the remaining debt being repaid now (before the loss-making company wastes even more of the remaining capital…), an early repayment that they’re entitled to by law and a basis for discerning ‘debt’ from other fundings. As a result, share holders have been protected while bond holders have had to manage ‘delays’ they shouldn’t have had to, and to not receive capital back when they should, etc. At the same time, some companies did default, even governments (like Iceland), and so bond holders did lose some money but didn’t always benefit from early capital return, therefore putting them in difficult spots (bad news came early, good news were postponed)!

       In theory, if a company default, assets are disposed of, and bond holders  are repaid first, any remaining capital after repaying debt then being distributed among share holders. In general, there’s next to no capital left for shareholders (partly because disposing of all assets from a big  company, reasonably fast, requires to sell the assets at a discount…). I.e. bonds are senior over shares (“senior bonds” might be senior to “junior bonds”, too… many subtleties 😉 as ‘seniority’ is a legal status, not age…).

       The theory is that bonds are less risky (for less return) than shares. Bailouts that tweak market rules change this. If credit becomes more expensive for companies (i.e. they need to pay more interests on bond in order to find buyers/lenders), because it’s now just more risky than before (due to rules being tweaked), then it doesn’t help companies so much… It is well-known that legal stability, allowing to anticipate consequences and therefore assess risks, etc., is key to a functioning market economy. Legal unreliability (common in ‘corrupt’ countries) makes people invest elsewhere. The idea behind any investment is linked to the expected return on investment (ROI). If there’s no reliable expectation, severe discounting or even withdrawal from participants is to be expected.

       As I was mentioned earlier, rich people don’t take wild risks, they invest in big companies (even if it means paying a premium, and lowering returns). And they regularly are invested in bonds too (bonds too have a ‘premium’ if they’re from bigger, ‘safer’ companies than from start-ups…). Increasing the risk for them as bond holders, pushes them toward secondary market in shares where they can at least hope for better returns (which as discussed earlier doesn’t provide the cash to the company itself, but merely locks it as paper money into the secondary market).

    ———

    « does capitalism HAVE to end up this way? With the wealth being removed from the original source? »

       Yes and no. It doesn’t “have to”, but it makes sense.

       “Capital risk”, as the name suggests, comes with huge risks. Most new companies fail. A few modestly succeed. Very few are grand successes. The grand successes have to be “cashed in”, to fund the losses incurred by the failures.

       Moreover, investors that might be heavily involved in helping initially, because they are good ‘networkers’, are not necessarily so needed once the business stabilises and grows: the new company now has the network it needs and no longer needs the networker so much. It makes sense for the networkers to get out of this one and get in other new ventures, to maximise what it brings to the market as a whole. Conversely, new investors, less hands-on, happier to let the company run its course as long as it provides a reasonable return, are now appropriate for the company as it goes through its transition from small to medium (a difficult phase, when ‘departments’ often appear, and when HR needs to become a department (not everyone  is interviewed by the CEO anymore), etc.). Later, even more ‘remote’ investors might become needed, and they’ll be bond-holders (not even having a say in how the company is run, but being ‘protected’ in return, by being senior to shares should the company default).

  26. Well Gideon Rosenblatt , if Denis Wallez is correct here (second half of his very complete (thank you Denis!) answer), then your analysis, though accurate, also seems sort of a description of what is wrong with capitalism itself (NOT where I thought you were going, and not what I got out of it while reading it).  

    It’s not what Marx thought was wrong with capitalism exactly (the means of production being outside the control of the workers), but a new ‘wrong:’ namely, that one cannot have the KIND of growth that I like to think capitalism would lead to (more money for better quality products, better wages, better life, more thriving all around). That won’t happen because at the end the investor HAS to take his money out…

    …I know Denis is right about markets needing strong laws (and good will (with some transparency) to make businesses grow, but has your research hit upon the “cancer,” if you will of capitalism? 

    That the problem is that, eventually, it just cannot keep growing???

    I know that there are elements to capitalism that even the strictest conservative capitalist agrees must be “socialized” (national defense, for example), and actually health and the care of the very young and very old is strict conservative thinking (but in the U.S., most do not understand that), but is there a point in capitalism where those known areas where markets can’t help ( no “invisible hand” positives for health market because you make more profit by making people sick ), where we have to bring even more social elements in to keep things from getting bifurcated as is happening now?

    I feel you’ve hit on something important to understand in the big picture, but I cannot think of any good analogy for it yet.

    Too new! 

  27. « That the problem is that, eventually, it just cannot keep growing??? »

       It (obviously) cannot keep growing materially  speaking (although even this is debatable if recycling is improved), but there’s less limitations in terms of services, creative endeavours, lessons/teaching… Right now, I’m convinced a lot more people could learn more (anything: from art to sport to cooking to science to ethics to how to organise a society and politics…) 😉

       There’s two ways to ‘grow’ economics: more stuff, or same stuff circulating faster. We’ve been focusing mostly on “more stuff”, but we could switch to faster circulation. Non-physical goods like knowledge can circulate really fast so there’s growth potential, and while a lot of information is already available the availability of free courses on anything doesn’t magically make people ‘know’ the content. In many cases some practice is necessary and feedback from others is useful, feedback, not just a big dump of information. So exchange still has a potential for growth: less material exchange but faster exchanges of fixed goods.

       May I add that this is no utopia at all, because research repeatedly proves that buying experiences is more conductive to happiness than buying stuff… Unfortunately, many rich people did not really get this yet, not fully. It’s one of the most striking experiences I got from working in investment banking: the number of colleagues and clients actually happy was infinitesimal! People (worth $millions) worried too much about hoarding, clinging, avoiding taxes, getting more… The worry ate their happiness in plain sight, only they could never accept this observation, spiralling down in stress and misery! If capitalists who cashed out then spent their wealth on experiences (and I don’t mean just on lap dancers, cocaine and alcohol), then there’d be a lot of room for further growth.

  28. Denis Wallez So there is such a thing as human nature (what we are discussing in my classes).

  29. BTW, Denis Wallez, I had to smile when you spoke of learning as happening without serious effort from teachers. I have been a teacher for more years than I care to reveal and the EFFORT it takes to get even a curious student to start the climb? Wow. It takes everything you’ve got. And as hard as you might imagine it would be? Triple, quadruple, multiply by more than I ever thought possible. …and the gift is unrecognizable to “outsiders,” …might even be simply that the student asked a question. Worth more than rubies, as the stories say.

  30. RobotEnomics, this is the data I was referring to in my comment on your post. It suggests one of the answers to what’s happening with the productivity increases you saw in your research. 

  31. Oh wow Gideon Rosenblatt​…indeed a gr8 collection theme

    ..I just found this collection while searching for collections on business

  32. We gotta make money My Brother goodmorning

  33. Business as a force for good in the world may be in two forms , one is a large business. Which can impack the community or cross country .But this kind business it need a high investment. It takes a lot of complexity resources to set up, and the people who runs the business will be only a of capitalists . The second form of business as a force for good in the worl may be in the feature of a small business,scattering in specific area ,low complication. small group of people can manage it or even do it http://individualy.It can expand, People feel happy running their business.

  34. The people them self still has gaps ,they are different by age, knowledge, physical condition, aptitude Business that can widely accommodate the difference is a interesting business and worthy for applying.

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