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If we don’t find productive enterprises soon, we might find we have another bubble

Pike Market Place by caseyyee via FlickrUnderstand why capitalism is failing

I don’t know how I got to be a good intuitive economist. My formal economics sucks.

So it is good when the economist bloggers catch up with me (:)) and I learn a bit of formal economics too.

Seeking Alpha writes today about the failure of capitalists to do their job as capitalists. OK, we agree. We are angry with ‘capitalists’ in an unfocused, diffuse way of non-experts. This is what the financial economists mean.

  1. A big company makes lots of money out of you and me. (We knew that already.)
  2. Internal looters (otherwise know as managers) pay themselves large salaries and bonuses and sit on the cash.  (We knew about the salaries; we were less conscious about the cash.  Note, even Warren Buffet’s company is sitting on cash.)
  3. The rationale of capitalism is that money acts as a “signal” about what is worth doing.
    1. A firm makes good profits.
    2. Profits tells to invest more money.
    3. The money we invest goes into the infrastructure of the firm (machinery, expansion, training people, research & development).
    4. More money is spent on building the productive base of the economy than on consumption and we all have a better lifestyle.  (We benefit from what the company does and by doing business with the company and using taxes on its larger profits to pay for roads, schools, armies, etc.)
    5. When the business of the company is approaching its “end-by-date”, profits start to fall and we follow our natural instincts to move our money to up-and-coming lines of work that are becoming more profitable (and we help them reach their potential).  There is a bit of a time lag here but we will swap over quite ‘naturally’.
  4. When a company sits on cash, or pays lavish salaries to its employees/managers, we know that putting more money into that business is not worth it. The people in the business know that new machinery won’t help.  New markets won’t help. New R&D won’t help.  The business is saturated.  It has reached its potential.  In strategy terms, it is a ‘cash cow’ that is turning  into a ‘dog’.  (Indeed, HR people will tell you that when salaries are very high, the business is already a dog.  We are bribing managers to stay and effectively end their own careers in a business that is coming to the end of its days and might collapse ignominiously.)
  5. We don’t have one or two companies sitting on cash. That would be normal.  We have lots and far too many companies are sitting on cash which is doing nothing. (See Seeking Alpha.)  The cash is not moving into healthy, growing up-and-coming industries (seemingly because there aren’t any or the powers that be don’t understand them. I suspect the latter.)
  6. Economists will tell you capitalism is failing because the famous hidden hand of the marketing should be waving, beckoning and saying over here, quick, over here, get in on this business while it is young and uncertain and you will make a fortune (and your money will help the prediction come true).  The hidden hand is nowhere to be seen.  (It is staying firmly in the old guard’s pocket . . . .)
  7. We are heading for a crisis of all time because big companies are taking cash out of the economy faster than George Osborne.  Money that should be going into inventing new enterprises suitable for the 21st century is going into personal pensions of a select few.  (This is the same formula as used by third world kleptocrats and does none of them any good because the economy crashes anyway taking their lavish lifestyles with it.)

Where are the industries that should be attracting the money?

Anyway, here is Seeking Alpha setting up the rallying cry – where are the industries that should be attracting the money? I claim to be a good intuitive economist (and a dunce formally) because I have been pestering economists asking them where are these industries?  What should young people be training themselves for?  Green is a bit vague.   Science and languages is a bit broad. Show me the door of these companies.

What will happen if the capitalists don’t start allocating capital soon?

I am not being a pessimist here.  I am just saying that the pundits don’t seem to have a map.  And if the people who say they are good at “allocating capital” (Warren Buffet’s phrase), the stick will come out.  This is what the stick will look like:

  • Taxes on corporate savings . . . if you keep money in the business and don’t invest in plant, machinery, training and R&D, we will take it away and put it into roads, schools, broadband, armies etc.  (Maybe a good idea).
  • Heavy taxes on any business that essentially just plays with money as figures on a spreadsheet (that might include second houses). (The public wants this but they haven’t thought about second houses and other ways they are playing the same game of sit-on-cash.)
  • Putting money into public infrastructure (like broadband, science education . . . oh I do like this part).

Could economists do better?

It’s a funny thing.  When I rewrite sociology, I end up thinking, “is this all?”. When I re-write economics, I think this is a frightfully elaborate system for something so simple.  Our capitalist system developed, as far as I understand it, to finance the big shipping companies that set up UK as a global trading country.  Companies and stock markets were a way of getting people to pool money and back enterprises that would grow the empire (casino trading in its time).

Maybe it is time to consider our place in the world and reconsider commercial law as a tool to our national goals.  I also read William Hague’s first speech yesterday.  I am yet to read critiques from experts. Hague’s strikes me as a good Oxford essay:  a comprehensive overview of what we must do.  I commend it to novices in international relations as a starting point.  At least it is positive.  At least it hints at this crisis in capitalism.  (Marx must dancing a jig in his grave.)

What is our vision of the future economy in the world (the empire-makers started with this question)?  What is the part we want to play?  What commercial structures do we need to play our part?

Don’t watch this space – I am not an economist.  But don’t hold your breath either.  Get involved.  Decisions are being made and you should be where the decisions get made.

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