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Saturday, October 29, 2011

Why capitalists destroy themselves

I just now wrote a comment on Riverdaughter's site that is rather juicier than anything I've written for my own in the past few days. So let's haul those words over here.

RD wrote a piece about Merck's recent massive round of new layoffs. Her post includes these words:
Well, if pharma is any indication of what is really going on, globalization is a fad. That’s what the business people do. They chase fads and trends. They rarely follow up on their initial enthusiasm to see if the fads actually add to their bottom lines. It’s the initial savings that they care about because that’s immediate, it’s quarterly and they think better in 3 month increments.
My words of response:

This is it. You have put your finger on the problem — on the reason why you are out of work.

Speaking as a lefty, I don’t hate corporations — I hate corporations that think like THIS.

It was only in the 1980s that the mania for maximizing shareholder value gripped American industry. This mania led to a lot of ruinous short-run thinking. Why? Because shareholders don’t care about the long run. They can buy and sell stock on a moment’s notice; they really don’t have much stake in a company’s long-term future. Yes, they can choose to stay with a single company for the long haul -- but they can also switch their affections at whim.

Jack Welch, the CEO of GE, was the one who ruthlessly pushed the idea of focusing only on shareholder value to the detriment of all other considerations. He started that crusade in 1981.

More recently, Welch said that his mania for shareholder value was “the dumbest idea in the world.”

Focusing only on the bottom line for a single quarter can lead a company to do a lot of things that will destroy its own long-term viability. Over time, that sort of there-is-no-future thinking can injure the viability of the nation itself — perhaps even of capitalism itself.

You might increase your short-term profits if you institute ruthless outsourcing or layoffs or plant closings or whatever. But for a company to grow, it needs to invest massively in things that the shareholders, who can’t see beyond the immediate horizon, may not like.

You want to grow a company, to create a new Toyota, a new Merck? You have to encourage long-term thinking. Alas, our present system does not do that.

This is why I think the left MUST differentiate between finance capital and industrial capital. They are two separate animals.

In other countries, companies depend on investment from banks owned by the state. (Often, the ownership is hidden behind a veil or two, but it is there.) That sort of funding can encourage a corporation to think beyond the quarter.

Do I favor socialism? Not for industrial capitalism. But for finance capitalism — yeah, we need much more government involvement. Industry pumps blood into the system; the financiers are vampires.
It just aint so simple. For example, what is GE? Is that an industrial company or a finance company? I can tell you that it is definitely a finance company, but some people might be fooled into thinking its an industrial.

And should the owners of industrials really not have control of them? The shareholders are meant to be the owners. If the companies are not run for the benefit of the owners what are they for?

I would argue that businesses which have the right to create new money enjoy a privilege which should necessarily involve heavy regulation. I would argue that businesses which take risks which involve significant externalities require heavy regulation. Banks fall into both categories. Investments banks into the latter category. But nuclear power companies also fall into the latter category and some would describe them as industrials.

Its not running companies in the interests of shareholders which has been the problem. Its running them in the interests of the managers which has been the problem. And this remains a problem - despite Sarbannes Oxley etc. Shareholders cannot effectively discipline management with the current organisation of managerial capitalism. I say throw the bums out before they loot everything out of the shop. Jack Welsh got himself he perpetual use of a corporate jet, an office, and a billion dollars. Do you really think this was the working of a free and competitive market?

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That capitalism has reached the point where its most parasitic part is in the driving seat, at the helm, calling the shots, and whatever other metaphors I can think of this late at night - suggests that no reform programme is going to help the exploited majority much without wrecking things in the world of big business, including industrial capital. Industrial capital has zero autonomy; it is dependent on finance - Keynesianism is over. But it's worthwhile calling for some reforms, which rather than being about 'managing the economy' (tff!), directly oppose needs to finance. Nationalise the banks, yes. The government should then exercise the mortgage rights which will then be in its possession, take ownership of the houses, CANCEL PERSONAL DEBT, and rent houses to the people who live in them at very low rents - even for free, and certainly subsidised for those who can't afford them.

Not revolutionary, but focuses on people's need for security, which is really the key issue.

Meanwhile, have you seen this excellent leaflet distributed to occupationist comrades in New York. It's excellent that people are talking about France May 1968. Is it possible, just fucking possible, that New York may wake up? (Or am I being too optimistic?)

I went into a post office today to post a letter. There were scores of people standing around; the waiting time to get served must have been 15-20 minutes. But there was a room there with a debt persuader in it, sitting by himself. So the position was that if you wanted to post a letter, you had to wait around for ages, but if you wanted to take out a loan, you'd get seen right away. This typifies Britain. Someone should make a film. Talk about 'late' capitalism!

@anonymous - no, the owners should have their stuff taken off them, and their 'right' to control it made meaningless and totally forgotten about. A company is like a god, a totally fictitious entity, attributed the characteristics of people. Bye-bye to this vile category forever, is what I want!
What must be done is what FDR did during the Great Depression, that is the only things that will save us as a nation. Raise the tax rate for millionaires to at least 80%, 90% would be even better, then even with their loopholes they'll still be paying some taxes. Regulate Banks and take no nonsense from them, no mercy for them, they've been merciless on the American people, time for some instant karma. Give the anti- monopoly laws back their teeth, millions of government jobs through all kinds of jobs programs, not just "shovel ready" but arts, research work of all kinds-

I'm a public librarian with a very shaky job situation- a not uncommon situation all over the US as local governments go into debt libraries are closed- at just the time they are most needed- our libraries are packed with patrons using our computers to apply for jobs, get free help learning computer skills and writing resumes, etc... public libraries have had enormous cuts in workers the last 10 years (the system I work for has had our workforce cut by 75% in the last 10 years, with more of us likely to be cut out soon...) If public libraries across the US were backed by a federal grant just for employing or rehiring all those lost positions it would drop the unemployment rate and allow for public libraries to help out even more people while also helping support literacy, the arts, and researchers of all sorts.

Labor Unions must also be strengthened. Strong labor unions means more jobs for all, and jobs that pay better wages, safer work conditions, health insurance and pensions provided to more workers. This will also bring back prosperity for a far larger percentage of people- when our labor unions were at their most powerful exactly coincided with the time our country was at it's most economically (and politically too) powerful and that's no accident.
No, Joe. Capitalism, in any form, is the worst way to do anything.

This is easy to understand. Other things being equal, the competitor who makes his product a little worse--a little smaller, a little less safe, a little more chemicalized--will beat the guy who doesn't. If one capitalist doesn't do it, the next one will. So they always end up doing it.

Capitalism also inevitably screws up the government, because of the same built-in flaw: other things being equal, the guy who suborns the government will beat the guy who doesn't. So someone eventually does it. Where there is capitalism, the government will always be corrupted. It is a fatally flawed system.
So many points, we do in fact, need a book not a post.

1) Part of my point was that any company can make itself a bit more finance, or a bit less. Finance is at its heart lending money. So when a company makes something and then accepts late payment it has financed the item. In fact if you look at Dysan, you can see a curious type of industrial company. One which does not manufacture, but it designs. So it collects economic rents on its excellent and innovative designs, but it doest actually make anything.

2) I think b made a fine point again. I suspect he is right. Best solution is what Marriner Eccles suggested. Take some of the wealth(debt) off the rich to save them from themselves. The problem reasonable Americans have is that they believe that disliking capitalism itself is problematic so they need to find schemes or approaches which make it ok to reform one part of capitalism but not others. But dont worry. Almost nothing that happens in American business today is capitalist. Its all either crony, or monopolist, or market failure by reason of externalities - pollution or socialising of finance risks.

3) I think the issue that you are looking at is part of the design failures of Victorian capitalism as it has evolved. We have needed new institutions for some time.

A Victorian capitalist would have had pretty much the same legal structure in his joint stock company as we have today. It might even have been a public company. But the number of shareholders would have been limited to a few, and as a result the underlying owner would feel a real sense of ownership. He would carefully watch the managers and act in a hands on fashion. He would be a hands on owner.

The creation of substantial pools of pension capital has meant that very few of the owners of companies now have any real power over the managers. The managers have taken over the companies, and now run them for their own benefit - not for the benefit of the shareholders and certainly not for the workers or customers. It is not in the interest of shareholders for the managers of the company to take 10 or 20% of the return on capital of the company. And its not in the interest of bank shareholders to pay huge bonuses on short term profits while being exposed to all the risk of loss.

Same issue. Classic principal agent problem. Except very few people have diagnosed it and government has no incentive to do anything about it. But in both cases, what is going on is looting. Both industrial managers (Dennis Kozlowski) and finance capital (Lloyd "God's usurer" Blankfein") are both stealing. But they are both stealing in a legally sanctioned way. The system allows for it as the system currently stands. F*cking ridiculous. Its just a product of ignorance.

There's a similar idea reflected in the dominance of the FIRE economy (finance/insurance/real estate) over the real economy. You get a misallocation of capital away from productive enterprises. See here.
Are you saying that if we don't completely agree with your view on politics we shouldn't visit your blogsite?
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