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Stock markets and capitalism in general is simply too short term to be investing in the long-term future that we all require. Our own tech industry is full to the gunwales with unicorns, capital-swallowing and loss-making companies each worth more than $1bn.
Those two statements are inconsistent with each other. One is a statement of a certain conventional wisdom, the other an observation of the world outside the window. In such cases, it’s reality that wins – wins logically at least, even if politics doesn’t quite work that way.
That capitalism is short-termist is something we’re repeatedly told. It could be US senator Elizabeth Warren, or it could be Jeremy Corbyn or John McDonnell over here.
Companies are paying out too much of their profit to shareholders and not investing enough in their ongoing businesses. This is a mere symptom of how those markets – whether we consider them free or rigged – do not look to the long term enough, and thus government should be darn well telling everyone what to do.
Spend or invest
We’ve seen this critique many a time, the latest part being a report from the Institute for Public Policy Research on economic justice.
The argument fails even in theory because money doesn’t just disappear. Sure, a company might pay out dividends or buy back stock, rather than invest in its ongoing business efforts. Unfortunately the analysis usually stops right there – the company’s not investing the money, therefore it’s being wasted on shareholders.
But the recipients of the money must then do something with it and there are only two things you can do with money – spend it or invest it.
Even if it’s just invested in extant shares of some other company, that only moves the decision one recursion back. Any money in anyone’s hands will end up being spent or invested. Thus paying out to shareholders isn’t quite a disaster.
There is the conventional economic point that if investments are making lovely returns of cash, this then makes investing more attractive and more people will do more of it. Humans generally being greedy types, we will do that. Offer us more for something and we’ll do more of it.
However, the best argument against this idea is the one offered by US economist Larry Summers. Part of what he says is about public stock markets, but we can extend the point to CEO pay.
It’s a subset of the original argument that public markets encourage this short-termism, what with things like quarterly reporting and so on, taking management’s eye off those five- and 10-year goals. If only we stopped forcing that periodic accounting, then longer-term views could prevail.
But we have an entire economic sector, private equity, which doesn’t have to make those public quarterly reports. That sector instead demands monthly reports even though all generally agree that the sector does have those desired long-time horizons.
The CEO pay thought is that public companies only cough up so much because management bamboozles the myriad shareholders, each of which have too little power to intervene. Private equity normally has one dominant, even majority, shareholder so that can’t be true there – but they pay even more.
But as Summers points out, it’s the tech industry which is really the disproof of the contention. For we can look around our industry and see that it cannot possibly be true that investors are only after those short term, possibly just quarterly, returns; that they’ll not invest for the long term, that they demand dividends and cash right now.
If all of that is true then how did Amazon get funded? Why is it worth a trillion dollars? It’s made losses for most of its life and even now trades on some ungodly multiple of hundreds of times its earnings, the supposition being that it’s going to conquer the retail world. That may or may not be a good thing, to have some near-monopolist retailer, but it’s most certainly looking to the long term, isn’t it?
And how have Slack and the like gained their unicorn status? How did the loss-making Uber raise capital at a $60bn valuation?
The contention that modern capitalism is just too short term for its own good ends up hitting the brick wall of the technology industry where capital is raised on mere hopes of one day making a profit. And it’s very difficult to explain bitcoin without thinking that people are willing to spend on some possible long-term outcome.
Test every viewpoint
This is not, by the way, just some shouting about a particular political viewpoint. Rather, it’s to point out that we’ve all got to test any and every such view against that universe we can observe.
There are “right wing” ideas which fail that same test too – banking will be just fine, prices react near immediately so we don’t have to do anything about recessions for they’ll clear themselves up, tax cuts pay for themselves with extra growth.
All of those are observably incorrect insistences in and of themselves, even if some tax cuts might pay for themselves, as what we do about recessions is important.
The point of going into the detail on the one idea was to show that we can disprove such contentions by looking around us. And so we should – we should look to our own expertise in our own industry to test those grander political ideas against.
We’re in an industry full of companies worth billions even as they have large losses, often nearly no revenues and existing on the fumes of future hopes. We’re simply not the people who can believe that the system is too short-termist, are we? Sure, we might still think it’s not that good an idea, but that the system fails to take a punt on the future is obviously wrong.
Economist Friedrich Hayek said all knowledge is local, and we should indeed be using our own local knowledge to measure those grander claims about how things are and should be.
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