Sunday, July 13, 2014

Some thoughts while reading Higgins and Dow

Politics Against Pessimism: Social Democratic Possibilities Since Ernst Wigforss by Winton Higgins and Geoff Dow is a magnificent book.  Here are the thoughts that started coming to me as I was reading the book last night:  

Okay wait: If I have a set of unique talents (developed through a solid upbringing, a wealth of education, and dedicated practice) I can get hired by a firm to use my talents. And for my labor I receive a wage. But any bloke with access to eTrade, can buy a "share" of the profits created by my talents (if I'm at a publicly traded firm), in perpetuity for about $20. So I have to stay healthy and focused and keep delivering results, and the bloke with eTrade can just sit and watch movies and still get paid? How does that make sense? 
"Beginning in the 1970s, John Kenneth Galbraith [UC Berkeley alum] argued that shareholders served no useful function in corporate capitalism and that corporations ought to be governed by boards of community-elected monitors (to oversee compliance with taxation, environmental, labour and consumer law), with shareholders converted into debt-holders without direct influence over institutions that would become more like social foundations than private firms." (Winton Higgins and Geoff Dow, "Politics Against Pessimism: Social Democratic Possibilities since Ernst Wiforss" p. 373). 
I can see why investors would want to hold a share of a firm as collateral for big investments (in new or fast growing firms there may be nothing else with which to collateralize the loan). But once that initial investment has been repaid with interest, THE SHARE SHOULD EXPIRE BECAUSE THE LOAN HAS BEEN REPAID. 

The moment my labor stops, my wage stops. But the "wage" (return) never stops for the investor. It's this time difference -- between my labor which expires every day and the rights of the shareholder which never expire and are immortal -- that is how the game is rigged (or at least one of the ways).


By analogy, if I build a house, I own the thing that I created. If a guy loaned me money to buy the bricks, I pay him back for the cost of the bricks plus 5% to 8% to say thanks. It would be extremely odd if they guy who loaned me the money to buy the bricks, claimed ownership of the bricks and a share of everything produced in the house FOREVER. And yet that's what happens with share ownership of firms. 


I'll go one step further (with my out loud brainstorming here): the odd thing about the house is the land. If I buy the land, I own it forever (passing it on to heirs). Under Rawls' Veil of Ignorance, it would seem that property ownership would be prohibited -- because property ownership so completely changes outcomes for the next generation -- there is no way to have equality of opportunity or equality of outcomes if some people are born into property and others are not. 


I can see why the owners of start ups would want to go public. By getting access to a larger pool of investors they are inflating the value of the thing they created. By going public, the founders are getting out -- getting value out of the firm and into their pocket (they may still hold onto shares, even the majority of shares, but going forward the wealth they are creating is generated by their shares, not their wage). But at the same time that owners are getting out, employees are getting in to a system where the profits that they generate are owned by someone else in perpetuity. So my question is, how much of the value that owners are getting out, is based on the value of the employees they are locking in (to a system in which the profits of one's labor is distributed to someone else)? It's not quite 100% because the initial idea had some value. But in many ways, a firm is just an intellectual construction, a vehicle for guiding the actions of lots of people and selling off the value of the thing they create -- without them realizing it.

My marxian comrades are thinking to themselves, "duh!" But (unlike my comrades) I still see a role for money, I still see a role for capital and firms (at least for now). It's just that share ownership is such a bizarre concept when you really think about it. 

By the way we have the (theocratic feudalistic) KRATS block and Hobby Lobby to thank for this whole line of thinking. If firms are people, then people owning firms is slavery, so then all stockholding should be abolished (as a violation of the 13th Amendment). But then once you see that, you realize that even though firms are not people, it is extremely odd to be allowed to sell off the fruits of someone else's labor, in perpetuity, to someone else. 


Corporations then are this magical cardboard box. The owners of the corporation tell investors: 1.) that investors will be entitled to all of the profits produced by people who are lured into this magical box; and 2.) that the owners have figured out a way to lure people into this box (without them knowing the function of the box). What gives the cardboard box power is: 1.) the initial idea (which may very well be compelling); and 2.) corporations law which simultaneously helps to legitimize the rules of the box while obscuring its true function. 


Why didn't the owners of Facebook, just issue debt, instead of stock? Mark Zuckerberg knew that the game was fixed for insider investors -- that's why he "screwed" them on the IPO by pricing it at market value rather than the discounted rate that Goldman Sachs and others traditionally offer to insider clients (hence no immediate bounce after the IPO -- and an additional $10 billion or so to FB's initial owners). The market even has a term for a fair IPO -- they call it a "busted IPO" because the insiders didn't get their cut. But everyone knew that FB was solid gold -- and was about to take over the world. If that's the case -- that Zuckberg knew the market was rigged and knew that FB was a solid investment -- why not just issue bonds at a 5% rate of return and retain 100% ownership? If the purpose of the stock sale is to raise money for needed investment (servers, programmers, etc.) why not just make that needed investment with loans, rather than stock? 


The answer has to be that the value of an IPO is higher (by a lot) than the value of a firm that just issues debt because in an IPO one is selling someone's labor (and the value of patents I guess) in perpetuity. 


Also it must be that those who have $16 billion to lend, will not do so unless they get stock in return. But the public would have gone for it. If members of the public were offered bonds issued by Facebook guaranteed to return 5%, FB could have easily raised $16 billion directly.


Okay last beat in this conversation:

Growing up I used to play Monopoly with my two older brothers and I always lost (I invested heavily in low rent properties Baltic Avenue and Mediterranean Avenue while giving up on the rest of the board). It used to make me so mad -- I just could not figure out why I could not win.  

Whenever I got my sick, my mom would ask me what I wanted to do (to feel better) and I always wanted to play Monopoly.  And when I played with my mom, I cheated like crazy -- if I needed a seven but rolled an eight I would tap once on the property, once on the line between properties, and then once on the next space to get to the property I wanted.  But the worst part, and the part I still feel most guilty about today, is that when my mom went into debt, I started making all of these crazy unilateral demands. I would demand vast swaths of her property in return for paying off even minor debts.  She would protest mildly and I would assert that 'those were the rules.'  I always won when playing my mom and she would go away feeling lousy.  So I felt lousy when playing Monopoly with my brothers and then I made my mom feel lousy when I played with her. 

But that's really the system we have under modern capitalism.  Capital demands vast swaths of ownership in return for modest outlays of cash.  Owners give in to those demands and sell out their workers because the deal makes them rich.  But the value of the share price is based not on the present worth of the firm, but on selling off the future good faith profits produced by workers, who are often oblivious to the deal owners made with capital.  

[Note to parents: don't let your kids cheat, it turns them into monsters. It would have been so much better in that situation for my mom to have explained to me that zero sum competition, capitalism, and monopoly capitalism in particular make people miserable and that we would all be better off under systems of mutual cooperation -- and then to have gone off and baked bread together. It's on me that I cheated, but there were some teaching moments in there too that were missed (but who knows, I may not have listened, and eventually I got the message anyway).]  

No comments: