Capitalism and markets are supposed to be about spreading prosperity and making America stronger, not weaker. Why allow finance-led arbitrage and corporate games to undermine the real economy?
You're 100% right about SWA. I used to fly them, and they were a fun airline. Now, even before the bag fees, they'd turned into one of the worst of the worst. Every flight is delayed.
However, you're 100% wrong about this:
"Everyone today takes for granted an idea that only emerged in the 1970s—the Cult of Shareholder Value."
It's not a "cult" and what you're exposing is the theory of history that says "nothing happened before I became an adult."
"Shareholder value" was not invented by Milton Friedman. He just recalled a fact that was always there but had fallen into disfavor. It's the entire basis of our corporate and financial systems.
As for "solving the problem" : you've identified the problem but whiffed on the solution. Private equity and short-term gains are inherent in our system because they solve some problems. A legal "reform" that doesn't create more problems than it solves -- now that would be worth hearing about.
1. I didn't make up the name of the cult! That's what it's usually called in the literature. To be fair, it's a bit of a pejorative. But since I think it's overplayed, I didn't mind that.
2. I didn't say Friedman invented it. I said he popularized it, which is absolutely correct.
3. Now as to the brass tacks of solving the problem. You need to balance the incentives so people who can claim the power of owners have all the risks and incentives of owners. I'm all for private equity as originally intended: investing in a poorly run company to turn it around and increasing its value. I'm not happy with buying companies secured by their own assets and then siphoning it into your pockets. If you buy a company and your decisions burden it with debt and cause it to fail, you ought to go bankrupt, not benefit.
I've got some ideas of the picky details of how to do this, but that would bore anyone in an article. What matters right now is the principle--reorient investment and power over the real economy with a responsibility to the real economy.
1. "what it's usually called in the literature": what "literature" is that?
I have some acquaintance with economics literature. Since academic economists are predominantly liberal, that doesn't cut much ice with me.
2. "I didn't say Friedman invented it. I said he popularized it, " I think that is splitting hairs. You said
"Everyone today takes for granted an idea that only emerged in the 1970s—the Cult of Shareholder Value. Economist Milton Friedman popularized the idea that the sole purpose of a public company was to increase the return to its owners by increasing the price of shares."
You said it "emerged in the 1970s" : I'm explicitly denying that. It was always there. Friedman just gained prominence by many of his ideas, rescuing that among them.
3. I'm totally with you on that, and being a disciple of Nassim Nicholas Taleb (whom I just posted about last week), I agree that "the Bob Rubin trade" as he would call it, where the profits are private and the risks are someone else's, needs to be outlawed.
However, "the picky details of how to do this .... would bore anyone" they wouldn't bore me. Anyone can call for action, but the hard part is defining it and not ruining America's attraction for entrepreneurs.
I don't want to get into a debate over minutiae in the comments, so I'd just say google the phrase "Cult of Shareholder Value" and see what comes up. It's an old and common term. It will come up a lot in mainstream sources.
As for "popularize," I used that word intentionally. You'll see it used a lot for just this purpose. A lot of ideas or concepts were around, but out of fashion or obscure or undefined, until someone pushed them, or wrote an important book about them, or expanded them, or otherwise made them famous. The idea is therefore now associated with them. They didn't technically invent it, but people associate the idea with them and the person deserve the credit for why the idea became a thing. The common way to express this everywhere is "popularized." Lazy writers, or ignorant ones, will just credit the person with the idea as this is the common perception. Most good writers who are careful about stating things correctly will always use popularize for exactly this situation.
As for the last point, I entirely agree. As I said, I'm the opposite of an anti-capitalist. That said, I think pro-capital folks have developed some blind spots in the twentieth century while fighting against centralizing ideas, knee-jerk thinking anything and everything that interferes with anything anyone wants to do in a market is always bad. But markets depend on stable, sensible, fair rules that allow everyone to play on a level field and that encourage socially useful building and innovation. Always have.
We need to do some work right now making sure those rules are sensible because I suspect a lot of what is causing social instability at the moment is the result of bad incentives and practices that benefit no one.
"It is true that only shareholders have the power to select a corporation’s directors. But it requires the peculiar imagination of a corporate lawyer to leap from that to a broad mandate that those directors have a duty to put the interests of shareholders above all others."
Excuse me, but if directors can only be elected or un-elected by a vote of the shareholders, and the directors select the company's management and sign off on all material decisions, then that pretty well seals it, doesn't it?
Nearly all the other Google hits are left wing sources, e.g. NYT and Reddit. One, "Conscious Capitalism" (how's that for a neutral name?) quotes John Mackay, Marc Benioff, and others. Benioff says:
"this still-pervasive business theory is “wrong. The business of business isn’t just about creating profits for shareholders — it’s also about improving the state of the world and driving stakeholder value.”
"Stakeholders" are usually defined as anyone who raises their hand at a meeting. Green activists, anticapitalists, neighbors, as well as temp employees, casual customers, etc. etc. "Stakeholder capitalism" is already dead as an influence:
Klaus Schwab -- now there's a name to build a dream on.
Anyhow, I'm also a disciple of Luigi Zingales, who distinguishes between being pro-business and pro-market. "Pro-business" groups usually favor large players at the expense of everyone else including the small players. I'm not pro-business.
My point is it's a well-known term that has existed for a long time that I didn't invent. I think your point is that a lot of people who have been reported using the term on the first page of google are people you believe have bad ideas that you don't like. Fair point. But it exists because there isn't a better name for the concept (shareholder value primacy? I made that up), which is a real concept that exists.
We might just have a different view. I don't think artificial financial engineering and short term efforts to juke an abstraction like a stock price is good when it means degrading the real economy. The point of financial markets and investment is to support the real economy--making real things, providing real services, and making people's lives better and more prosperous. When it's not doing that, you need to change the incentives so the best way to make money is to build real things, and not break them. I'll stick by that.
OK. I think we can both agree that the financial sector is WAY too big for a healthy economy. Private equity isn't especially a good thing, either. Public companies with a tradition and a history of making actual products are much preferable to short-term pools of money, which you've amply decried.
I'm interested in methods for addressing that, but I think a concept of "stakeholder capitalism" is not a promising one.
I love this article, but how do we make this kind of negative-value financial engineering illegal in a practical way that doesn’t simultaneously prevent useful functions? Shareholders should have the ability to force course corrections when a board is genuine not performing well.
I've got some thoughts about that, but they are too detailed to go into the article.
Essentially you need to align shareholder power with the risks of ownership. You can't allow folks to pump money in to be an "owner" for five minutes, screw things up, and then leave. You can't allow folks to buy a company with its own assets, screw things up, and walk away. You need to get back to the original idea of shareholder democracy: shareholders make decisions because they bear the long term risk of failure.
Some ideas to look at might be long ownership holding periods before and after taking board seats--like 5 or more years. Outright prohibiting the private equity shell game where you buy a company with a shell that borrows the money would be smart--make the shareholders actually borrow the money themselves and take on the risk. In essence, you need to eliminate any corporate structure that allows people to take on decision making power without long term risk if their decisions fail. (There are related problems to look at with corporate management in the same situation--CEOs that grant themselves ownership stakes, make decisions, and then get to walk away).
Teddy Roosevelt was able to bust up the trusts and monopolies so we should be to do this. I guess it boils down to those we elect to run our government.
exactly - it's easy to say "why not just prohibit financial games that destroy real things?" but very hard to define 'financial games' especially considering that any definition you come up with will just encourage financial wizards to think of a workaround.
I think once upon a time there would have been basic norms that discouraged this sort of predatory behavior, but those are long gone now. I think Founders that actually care about their companies are mad to take them public because Wall Street tends to force you into short term profit maximization at all costs, even at the cost of long term sustainability. Unfortunately that’s how your early investors usually get paid. But the problem of short-termism on Wall Street is a serious one. It’s no way to operate an economy for long term prosperity, but it’s a great way to end up deindustrialized and with crappy, overly expensive goods and services.
I think you are correct about the "once upon a time". Predatory behavior was not an attribute that was morally accepted here in the US because most people were "satisfied" and willing to abide by rules in order to live a "comfortable" life. The "greed is good" gang came along and look what we now have. We've gone from Bedford Falls to Pottersville and it Ain't a Wonderful Life anymore!
My favorite movie of all time! It's not really "about" Christmas at all even though that is what it's become. It makes me sad that my children were born into and grew up in this "artificial" (and dystopian) world. As much as I tried to keep our own life like Bedford Falls, they had to live within and learn how to survive in Pottersville.
There's a difference between Capitalism (for the people) and Crony Capitalism (for the shareholder). I was born under Capitalism and have lived my entire life through the morphing of the system into Crony Capitalism. It is shocking to see how far we have fallen from common good/decency.
You're 100% right about SWA. I used to fly them, and they were a fun airline. Now, even before the bag fees, they'd turned into one of the worst of the worst. Every flight is delayed.
However, you're 100% wrong about this:
"Everyone today takes for granted an idea that only emerged in the 1970s—the Cult of Shareholder Value."
It's not a "cult" and what you're exposing is the theory of history that says "nothing happened before I became an adult."
"Shareholder value" was not invented by Milton Friedman. He just recalled a fact that was always there but had fallen into disfavor. It's the entire basis of our corporate and financial systems.
As for "solving the problem" : you've identified the problem but whiffed on the solution. Private equity and short-term gains are inherent in our system because they solve some problems. A legal "reform" that doesn't create more problems than it solves -- now that would be worth hearing about.
A few notes:
1. I didn't make up the name of the cult! That's what it's usually called in the literature. To be fair, it's a bit of a pejorative. But since I think it's overplayed, I didn't mind that.
2. I didn't say Friedman invented it. I said he popularized it, which is absolutely correct.
3. Now as to the brass tacks of solving the problem. You need to balance the incentives so people who can claim the power of owners have all the risks and incentives of owners. I'm all for private equity as originally intended: investing in a poorly run company to turn it around and increasing its value. I'm not happy with buying companies secured by their own assets and then siphoning it into your pockets. If you buy a company and your decisions burden it with debt and cause it to fail, you ought to go bankrupt, not benefit.
I've got some ideas of the picky details of how to do this, but that would bore anyone in an article. What matters right now is the principle--reorient investment and power over the real economy with a responsibility to the real economy.
OK, in order:
1. "what it's usually called in the literature": what "literature" is that?
I have some acquaintance with economics literature. Since academic economists are predominantly liberal, that doesn't cut much ice with me.
2. "I didn't say Friedman invented it. I said he popularized it, " I think that is splitting hairs. You said
"Everyone today takes for granted an idea that only emerged in the 1970s—the Cult of Shareholder Value. Economist Milton Friedman popularized the idea that the sole purpose of a public company was to increase the return to its owners by increasing the price of shares."
You said it "emerged in the 1970s" : I'm explicitly denying that. It was always there. Friedman just gained prominence by many of his ideas, rescuing that among them.
3. I'm totally with you on that, and being a disciple of Nassim Nicholas Taleb (whom I just posted about last week), I agree that "the Bob Rubin trade" as he would call it, where the profits are private and the risks are someone else's, needs to be outlawed.
However, "the picky details of how to do this .... would bore anyone" they wouldn't bore me. Anyone can call for action, but the hard part is defining it and not ruining America's attraction for entrepreneurs.
I don't want to get into a debate over minutiae in the comments, so I'd just say google the phrase "Cult of Shareholder Value" and see what comes up. It's an old and common term. It will come up a lot in mainstream sources.
As for "popularize," I used that word intentionally. You'll see it used a lot for just this purpose. A lot of ideas or concepts were around, but out of fashion or obscure or undefined, until someone pushed them, or wrote an important book about them, or expanded them, or otherwise made them famous. The idea is therefore now associated with them. They didn't technically invent it, but people associate the idea with them and the person deserve the credit for why the idea became a thing. The common way to express this everywhere is "popularized." Lazy writers, or ignorant ones, will just credit the person with the idea as this is the common perception. Most good writers who are careful about stating things correctly will always use popularize for exactly this situation.
As for the last point, I entirely agree. As I said, I'm the opposite of an anti-capitalist. That said, I think pro-capital folks have developed some blind spots in the twentieth century while fighting against centralizing ideas, knee-jerk thinking anything and everything that interferes with anything anyone wants to do in a market is always bad. But markets depend on stable, sensible, fair rules that allow everyone to play on a level field and that encourage socially useful building and innovation. Always have.
We need to do some work right now making sure those rules are sensible because I suspect a lot of what is causing social instability at the moment is the result of bad incentives and practices that benefit no one.
I took your suggestion and googled it. I got, e.g. this WaPo article:
https://archive.ph/r7bOj
which is rife with nonsense like:
"It is true that only shareholders have the power to select a corporation’s directors. But it requires the peculiar imagination of a corporate lawyer to leap from that to a broad mandate that those directors have a duty to put the interests of shareholders above all others."
Excuse me, but if directors can only be elected or un-elected by a vote of the shareholders, and the directors select the company's management and sign off on all material decisions, then that pretty well seals it, doesn't it?
Nearly all the other Google hits are left wing sources, e.g. NYT and Reddit. One, "Conscious Capitalism" (how's that for a neutral name?) quotes John Mackay, Marc Benioff, and others. Benioff says:
"this still-pervasive business theory is “wrong. The business of business isn’t just about creating profits for shareholders — it’s also about improving the state of the world and driving stakeholder value.”
"Stakeholders" are usually defined as anyone who raises their hand at a meeting. Green activists, anticapitalists, neighbors, as well as temp employees, casual customers, etc. etc. "Stakeholder capitalism" is already dead as an influence:
https://archive.ph/iYwWb
Klaus Schwab -- now there's a name to build a dream on.
Anyhow, I'm also a disciple of Luigi Zingales, who distinguishes between being pro-business and pro-market. "Pro-business" groups usually favor large players at the expense of everyone else including the small players. I'm not pro-business.
My point is it's a well-known term that has existed for a long time that I didn't invent. I think your point is that a lot of people who have been reported using the term on the first page of google are people you believe have bad ideas that you don't like. Fair point. But it exists because there isn't a better name for the concept (shareholder value primacy? I made that up), which is a real concept that exists.
We might just have a different view. I don't think artificial financial engineering and short term efforts to juke an abstraction like a stock price is good when it means degrading the real economy. The point of financial markets and investment is to support the real economy--making real things, providing real services, and making people's lives better and more prosperous. When it's not doing that, you need to change the incentives so the best way to make money is to build real things, and not break them. I'll stick by that.
OK. I think we can both agree that the financial sector is WAY too big for a healthy economy. Private equity isn't especially a good thing, either. Public companies with a tradition and a history of making actual products are much preferable to short-term pools of money, which you've amply decried.
I'm interested in methods for addressing that, but I think a concept of "stakeholder capitalism" is not a promising one.
I love this article, but how do we make this kind of negative-value financial engineering illegal in a practical way that doesn’t simultaneously prevent useful functions? Shareholders should have the ability to force course corrections when a board is genuine not performing well.
I've got some thoughts about that, but they are too detailed to go into the article.
Essentially you need to align shareholder power with the risks of ownership. You can't allow folks to pump money in to be an "owner" for five minutes, screw things up, and then leave. You can't allow folks to buy a company with its own assets, screw things up, and walk away. You need to get back to the original idea of shareholder democracy: shareholders make decisions because they bear the long term risk of failure.
Some ideas to look at might be long ownership holding periods before and after taking board seats--like 5 or more years. Outright prohibiting the private equity shell game where you buy a company with a shell that borrows the money would be smart--make the shareholders actually borrow the money themselves and take on the risk. In essence, you need to eliminate any corporate structure that allows people to take on decision making power without long term risk if their decisions fail. (There are related problems to look at with corporate management in the same situation--CEOs that grant themselves ownership stakes, make decisions, and then get to walk away).
Teddy Roosevelt was able to bust up the trusts and monopolies so we should be to do this. I guess it boils down to those we elect to run our government.
exactly - it's easy to say "why not just prohibit financial games that destroy real things?" but very hard to define 'financial games' especially considering that any definition you come up with will just encourage financial wizards to think of a workaround.
I think once upon a time there would have been basic norms that discouraged this sort of predatory behavior, but those are long gone now. I think Founders that actually care about their companies are mad to take them public because Wall Street tends to force you into short term profit maximization at all costs, even at the cost of long term sustainability. Unfortunately that’s how your early investors usually get paid. But the problem of short-termism on Wall Street is a serious one. It’s no way to operate an economy for long term prosperity, but it’s a great way to end up deindustrialized and with crappy, overly expensive goods and services.
I think you are correct about the "once upon a time". Predatory behavior was not an attribute that was morally accepted here in the US because most people were "satisfied" and willing to abide by rules in order to live a "comfortable" life. The "greed is good" gang came along and look what we now have. We've gone from Bedford Falls to Pottersville and it Ain't a Wonderful Life anymore!
I like the Bedford Falls an Pottersville analogy. I might adopt that one!
My favorite movie of all time! It's not really "about" Christmas at all even though that is what it's become. It makes me sad that my children were born into and grew up in this "artificial" (and dystopian) world. As much as I tried to keep our own life like Bedford Falls, they had to live within and learn how to survive in Pottersville.
I honestly think it would be a powerful slogan to bring back Bedford Falls.
Great article here.
So you're implying there needs to be state controls on capitalism. This is not going to fly with fans of capitalism.
There's a difference between Capitalism (for the people) and Crony Capitalism (for the shareholder). I was born under Capitalism and have lived my entire life through the morphing of the system into Crony Capitalism. It is shocking to see how far we have fallen from common good/decency.