NO FREE LUNCHES, THE STOCK MARKET
The 9 topics above:
1)
To attract people to their
cause, socialist, starting in the 19th century, would wave the flags of monopoly capitalism, surplus earnings squandered
by capitalists, and the stock market as siphon of earnings. Their primary slogan
was all wealth comes from the sweat (brow) of labor. Conditions of employment
were the strongest inducement for radical solutions. The second most important
cause was the disparity between the value of what was produced and the rewards for labor.
The various causes of this incensed laborer. Grand estates were found
in every urban center. Their wealth came from the disparity between cost of production
and the price of the goods sold. Low wages and high consumer prices radicalized
large percentages from all sectors of society. Surplus earnings were distributed
through dividends based upon stock ownership. The unions and socialist made the
obvious point that these surplus earnings could be distributed to workers and could be used to lower the price of goods.
Fitch, Gould,
Rockefeller, and hundreds of others pursued gains with an avarice that earned them the label robber barons, a phrase
that became part of the language. Their conduct was like that of the robber barons
(petty chiefs), which were the bane of travelers and merchants around the world. And
like the petty chiefs who had a defacto accord that had been worked out with the regional government, so too did the robber
barons have the support of the federal and state politicians. While politicians
courted the vote of the common people, they within prudent limits supported the capitalists.
Most workers only wanted to limit the rewards of the robber barons, to assure decent working conditions, and to increase
pay. The workers realized that capital needed to be organized so steel mills
and railroads could to be built. But the cost of this organization—as measured
by the wealth generated and the bankruptcies—was excessive. Moreover, the
competition between the robber barons resulted in cycles of speculation. There
were periods of boom followed by busts that resulted in a depression once every 20 years, the first one under the Presidency
of Andrew Jackson. The principle causes of these cycles were the major industrialists
and financiers. Industrialization increased productivity and profits, but there
weren’t an improvement in the workers’ lot. Centralization of wealth
with its competition for profits had terrible consequences.
The unions, socialists made sure that everyone knew of all the flaws in capitalism.
They had their newspapers and their well-attended town meetings. The workers
knew that wealth come from the backs of the working class. Because the ownership
through stocks gave the control of business to the robber barons, labor favored the elimination of the financial markets (bonds,
stocks, options, and futures, hereafter called markets).
2).
What is the effect of the markets upon the economy? Each structure has
a price. Government takes in through its many forms of taxes about 39% of the
worker’s income. Benefits flow back, but they are nowhere nearly worth
to the workers the 39%. Another river of funds flows into the markets. Some of these funds are consumed in commissions and in other expenses: brokerage houses maintain themselves. There are the trillions
of dollars tied up in the markets, which could have been spent on items that improve the quality of life. Funds consumed for commission, more held as mandated by the federal government in brokerage house accounts,
Except for the occasional sale of corporate held stock and bonds when issued, these funds do not go to the corporations, but
to brokerage accounts in the name of the investors, commissions to brokerage houses, and federal treasury accounts. These funds could be used for the purchase of a more commodious housing, for education, etc. But they are tied up in the giant stock-market bubble.
3).
It is argued that the stock market plays a vital role, like banking, in the production of goods and services by
raising funds for corporate expansion. Once a corporation reaches a certain size
they can apply to be traded on one of the major stock exchanges. They will be
granted permission by the SEC (Security and Exchange Commission of the federal government) to issue stock. The company then will arrange with a major brokerage house for their stocks to be offered on a certain
day to the public. Usually about half of the stocks are retained by the corporation
and its officers. Those stocks sold are income to the corporation, and those
retained are assets. It is like magic how the worth of a company, such as Yahoo
and Google suddenly shoots up upon the issuance of shares. But unlike banking
these companies do not have to pay back the funds received on the day the stocks were issued or when they later sell a block
of retained stock. The issuance of stocks is a way for a company to raise funds.
A number of companies
have grown without the issuance of public stock. Ford Motor waited until the
60s before going public. Moreover a company must have millions in assets before
they are permitted to be traded on a major exchange. Businesses can and do function
without the issuance of stock. In fact the main reason for the issuance of stock
is to make the founders of a company rich.
A further proof is the
corporations in socialist countries. These countries didn’t fail for want
of a stock market, but rather because politicians ran the economy. Imagine our
Congress running our economy. Performance is a question of incentives and
structure. A few state run industries do exceptional well. The Pennsylvania State Liquor Store system is an example of efficiency, organization, and use of size to
maximize return. The vital role of raising capital has been taken over by state
banks. A similar function is played by banks under capitalism, only to a lesser
extent.
4).
The stock market provides a new source of financing often utilized
by small corporations for the purpose of rapid growth, development of new products, enter into new markets, purchase competitor,
etc. Stocks are the cheapest way to raise funds; there is no payback or interest.
There are three down sides, both to the company,
to the purchaser of stocks, and to society. First by bypassing the standard method
of raising funds, banks, a company with a poorly conceived and doomed idea will, as with so many e-commerce companies of late,
is able to expand. Failures would occur far less if they were forced to prove
the viability of their plans to a bank’s loan department. Similarly, a
start-up company overburdened with debt can, through creative writing of a prospective, seem to the common purchaser of stock
as a company going places. The high failure rate of newly incorporated business
with stock offerings is proof of the waste generated by this form of financing. Corporate
failures underline the imperfections of this from of raising venture capital through the markets. The morass created counts heavily against this form of financing.
5). The effects of rising earnings (the principle factor affecting a stock’s
price) upon corporate performance. The CEO and board will provide deceptive earnings
reports to make the company seem better than it is. They will do a number of
things that are not in the public interest. Drug companies will fail to make
public serious side effects. They will tout their medication as better than their
competitors, even when it isn’t. Automobiles are made with parts that will
fail prematurely. The list of ways to improve the bottom line is long. Before going public the increasing the worth of the corporation was the way in which the owners
increased the worth of their holdings. Now with the stock being publicly traded,
the CEO & directors focus upon the price per share, for they have voted themselves millions of dollars worth of stock
options. They thus focus upon those policies which will affect the stock’s
price. Serving the public wheal does not enter into their calculations.
6).
Earnings as a measure of performance measures only the ability of a corporation to create a gap between costs and selling
price, other things valued by society such as working conditions, salary, employment of Americans, and environmental responsibility
stand in opposition to maximization of earnings. Moreover the gap between cost
and selling price comes out of the consumer’s pocket. The incentive
of rising stock prices drives the CEO to cut costs, and among those costs are ones that improve working condition, wages,
and protect the environment. Moreover, when a saving can be obtained by outsourcing,
it is used, and often the entire operation is moved off shore. Under the
for-profit system, our nation and our economy suffer. There is the stagnation in income for workers over the last 35 years, even though the production per worker has increased
over 30%. And in this millennium the work force has dramatically shrunken as
production and service have been in mass moved overseas, and this loss of jobs is occurring as our population grows.
The
motivation of government to intercede on behalf of the masses has been greatly diminished by the fact that elections are fund
almost entirely by business, and the relationship they have worked out has resulted in a removal of those restrictions that
have increased costs. Social programs such as education, welfare, and medical,
environmental protection, and the very infrastructure have all suffered cutbacks over the last 25. Those who pay the piper determine the tune. The system of
maximization of profits has undesirable social, environmental, employment, and political consequences.
7). Band-Aids
of course could be applied to deal with the glaring undesirable consequence. Raising
funds through the issuance of stocks could be ended. Banking and venture
capital would fill the gap. There could be a tightening of SEC regulations of
accounting. The pay of CEO & board members could be limited and stock options
ended. The performance of directors & CEO could be reviewed by an independent
external group of auditors. And of course there is the need to separate business
from government by prohibiting election donations and perks given by lobbyists.
Because the spirit of the robber barons persists, the intent of regulations will be circumvented.
Thus it would seem that greater regulation could bring the
level of failures and abuse to an acceptable level. There is a limit to improvement: first because there are limits to regulation and the costs of administration, and
secondly because politician pass the regulations and appoint the bureaucrats who implement these regulations. Finally, the system is inherently flawed: the for profit motivation
which are essential properties of businesses and the stocks they issue, this result in various business ploys to increase
profits, dividends, and the squirreling away of profits. All these entails an
economic burden borne by consumers and workers.
8). Normally upper management including the board of directors owns a share of the
corporation. This supposedly insures good management. However, the effect is to encourage short-term planning which will soon have a positive effect upon profits,
and thus the value of their stocks. Capital-intensive, long-term development
often is not pursued even when prudent. It was this kind of thinking which resulted
in the Ampex not developing a consumer line of VCR equipment after they had developed studio equipment. Product development lowers profits in the short term. In Japan,
however, there is less an impact of short-term decline in profits upon stock prices (there is much more of the buy-and-hold
approach in their stock market); thus they developed consumer VCR equipment. The
directors in the U.S. are much more concerned with the short-term performance than they are in Japan. This is one example of how short-term earnings impacts decisions.
Another example is that of corporate buyouts. Funds available for internal
developments are siphoned off in buyouts so as to create the illusion of growing revenues and earnings due to internally generated
expansion. Business are bought which have a favorable earnings to revenues ratio. Corporate planning is distorted by the drive for rising earnings and revenues.
9). The theory that the
maximization of profits is the best way of serving the public wheal; this is a chimera.
Stock prices reflect the success, within a sector, of a company’s efforts in maximizing profits. The theory holds that for a company to increase profits, it must cut costs, streamline production, and
offer superior value. But that is not true. If it were, then all that would be needed would be an independent laboratory rating showing that the product
in question would for its price range out performs competitors. But as we have already shown
the drive for profits results in the production of shoddy parts, the lack of interchangeable parts, making the product difficult
to repair, planned obsolescence, a large percentage of the price going for advertising, are principle the ploys for maximizing
profits. Environmental concerns, conditions of employment, and wages are all
adversely impacted by the drive for profits. Moreover, the impact upon management
of stock prices produces less than ideal corporate planning when measured by public wheal.
The profit system needs to be replaced by one which places all human values first, not just the one value
of lower prices, and then damns the environment, the worker, and the nation.
Conclusion
Remember, there are no free lunches. What appears free is carried by all of us. Is
television free? The 17 minutes per hour of product advertisements are paid for
by higher consumer prices. Incredible the fools are thankful for what
they consider to be free programming. They are paying for the interruption of
programming by ads for products. Most people pay double, for there is the monthly
cable or satellite bill. The junk mail for credit cards is paid for by higher
interest charges and the one to two percent charged the retailer. Every failed
commercial development, every factory closure, ever job shipped overseas, every wasted minute of program viewing, every advertising
dollar spent by corporations, all these are part of the costs of our profit driven system.
And yes, every brokerage house is maintained by the sweat of the workers who lay the material foundation. The capitalistic system is far from transparent: it is very
inefficient.
[i] Many of the example above
fulfill in varying degrees more than one of the three categories. Lawyers and
military are over represented. We don’t need 10 times the per person ratio
of attorneys compared to Japan or a military proportionally larger than that of Canada’s or Japan’s, and being
over represented they are to that degree minimally useful. Advertising does not
contribute to the wealth of the country and could easily be dispensed with. . Not of the above sectors or types of employment contribute directly—as a farmer
or factory worker does--to the material wealth of the nation.
AFTERWORD: an alternative
The design of an alternative system to the
markets ought not be placed in the hands of the politicians—the socialist economies grew up to the limits of the politicians’
competence, than collapsed. Politicians are venal and duplicitous. Nor should, as just shown, the system proceed blindly with its goal of maximization of profits. The two traditional solutions, minimally regulations and extensive bureaucratic controls work up to their
unsatisfactory limit.
I propose that the brightest and most knowledgeable about businesses and economics,
a blue-ribbon panel of university-economic professors selected by their peers would direct the economy. Issues of what is produced would be decided by them as well as issues about transportation, pollution,
distribution, wages, and advertising/product ratings. They would set the economic
goals.
The actual running of the factories would be turned over to lower management who
would select upper management. An independent personnel department would hire
and fire lower management. A limit would be set on rewards given management to
that of 3 times that given the lowest worker. Each factory in an industry would
compete with others for bonuses, bonuses based upon the quality of the items manufactured, the design, and the cost. However all would have comparable working conditions and pay scales. Piecework as an incentive for greater productivity would be far more common. The bonus system, and other measure, would be used to create a team spirit.
The bonus system would be under the direction of the professors directing the economy.
Another change would be to remove research
and development from the grasps of a particular company. There would be, like
with our universities, independent research centers whose results would be shared with all factories and industries.
Many people have been inculcated with the belief that planning is a bugaboo. But we cannot get away from it. Each
corporation makes plans on how to increase its profits. Politicians make plans
on how to raise revenues and spend them. What I have suggested is that those
who by training, goals, and intelligence are better suited to make economic plans, that they be empowered to do so.
The system has convicted itself. The world is full of myopic apologists, ones who forget the fabulous scandals. The S&L collapse of the early 90s cost the U.S. government directly $350 billion,
and with interest on the funds our government borrowed to cover this, nearly $500 billion.
The brokerage house of Drexel Lambert issued a flood of junk bonds until the collapse of a number of the unsound corporations
so funded produced a panic that resulted in the collapse of the junk bond market and the imprisonment of Milikan, who head
their bond division. Billions again were lost.
Then there was in 2000 the collapse of e-commerce and electronics technology stocks.
Over a trillion dollars in funds vanished as stock prices plummeted.
Executives of MCI World Com, Global Crossing, ENRON, and TYCO have been in the news for violation of SEC regulations
governing accounting. Their stocks plummeted in value and 10s of thousands of
jobs were lost. But these are only recent scandals, every decade since the administration
of President Grant has produced like financial disasters. But those who have
faith in our economic system ignore its history.
