The problem is
that you are reifying money, treating it as if it had
objective existence when it is merely a consensual illusion.
A dollar bill is not capable of driving a truck or whatever.
It is only worth something if a human views it as a fair
exchange for work. For example, the Reichsmark which would
have bought something in 1917 was worthless in 1923-- and it
was the same piece of paper. The difference was mostly
a matter of cumulative war-weariness in the face of
defeat. The hyperinflation was the economic equivalent
of a draft riot. If you prefer, substitute
Confederate dollars for Reichsmarks, and use 1862 and
and 1865 as your dates. During the German
hyperinflation, the middle-class had their savings in
Reichsmark-denominated forms such as bonds. A big firm such
as Krupp would issue bonds, but shares would be confined to
a small group. The baronial industrialist of the time made a
sharp distinction between borrowing money, and surrendering,
even in part, his right to command. The result of the
hyperinflation was that the firm technically redeemed
all its bonds but actually repudiated its obligations. The
middle class found its savings wiped out.
By the same token, a factory is worthless unless people want
to buy whatever that factory makes. In the case of the
1990's telecom boom, investors' money was actually used to
pay crews who were actually digging ditches and
actually putting optical fibers in them. The
only difficulty was that, through certain
miscalculations, something like twenty different firms built
national networks, each of which would have been sufficient
to supply the total long-distance communication requirements
of the United States for the foreseeable future.
The natural result was ruinous competition, and a series of
bankruptcies.
Investors, once upon a time, used to be called "merchant
adventurers," which I think captures the ultimate
reality of the situation. The belief that buying
stocks somehow, ipso facto, constitutes investment, without
reference to what the money gets spent on, is a theological
proposition, rather than an empirical one.
The "individual investment" accounts will be invested in
securities chosen, not by the social security
recipient, but by some kind of officialdom. It seems quite
probable that the investments may be chosen for political
reasons, in a form of crony kleptocracy. Here is an
interesting case study of what may happen:
HNN post,
re: John Q. Barrett , How Social Security Was Defended by
Supreme Court Justice Robert Jackson
Some Additional
Questions for Mr. Lederer (02/22/2005 08:45 AM, not
previously published):
You are proposing to dump hundreds of billions of dollars
onto the stock market annually, for an eventual total of
trillions. This is a fundamentally different situation
from a country lawyer investing small sums for clients. In
this case, your actions are going to substantially affect
the market. You cannot just talk about a "balanced
portfolio." You have to produce a fairly specific plan for
what you propose to do with the money, and what the
effects will be.
Do you propose to pump the money into existing corporate
securities? Naturally, that will bid up the price.
Now, the investor's time horizon is generally defined by
his life expectancy, eg. retirement plans. The difference
between the age of decrepitude and the age of death is
unlikely to ever go over twenty years, especially as the
age of decrepitude is increasingly being defined in mental
rather than physical terms. Price-earnings ratios much in
excess of twenty are therefore not sustainable over the
long term. The present Dow-Jones price
earnings ratio, of nearly thirty (?) is probably at
the outer edge of the envelope. The present
stockholders differ from social security recipients in an
important particular-- they find work fulfilling. This
means that they do it well enough to be paid a lot, and it
also means that they enjoy work too much to retire, save
under coercion. If people like this reach the sense that
the stock market is fantastically overvalued, they will
divert money away from it. With the Social Security
Trust Fund unloading its T-bills for ideological reasons,
it should be possible to buy those cheaply. If you flood
the money into existing issues, the result will be a
bubble and a crash.
Alternatively, do you propose to take up large numbers
of new issues in new companies, 1990's fashion? In
that case, you need to produce a capital investment plan,
specifically describing what kinds of new industrial plant
you propose to build, how much it will cost, and the
extent to which it will be subject to competition.
Explain, in some detail, the probable effects of the rapid
growth of the internet, robotics, etc. However, if your
proposed investments are in these fields, explain why they
will not be subject to fratricidal competition.
Finally, what assurances do you have that the picking of
stocks will be done in an ordinarily prudent way?
Professional money managers tend to have the psychology of
margin traders, because their earnings tend to depend on
the rate of increase, or excess over bank interest.
Ideally, Social Security's investment policies would be
set by someone like Alan Greenspan. However, it
seems equally probably that the system would wind up
being run by someone like Alberto Gonzales or Condaleeza
Rice, under pressure to show short term results. In
that case, the system would tank up on highly speculative
ventures. Then there would be political favors. They would
invest large sums of money in Neil Bush's educational
software company, places like that.
02/24/2005 06:43 AM
I did some
googling, and came up with some rather different figures.
Stocks:
http://www.google.com/search?hl=en&lr=&q=%2B%22stock+market+capitalization%22++%2Bnyse+%2Btrillion&btnG=Search
N.B. I used the word trillion as a convenient filter to
eliminate references to particular companies, rather than
the market as a whole
http://www.treasurer.ca.gov/publications/NoDividends.pdf
http://www.cross-currents.net/charts.htm
These suggest a figure of 10-15 trillion for the stock
market
Derivatives apparently account for the higher figures.
http://www.usagold.com/gildedopinion/Faber.html
http://registeredrep.com/mag/finance_regulators_warn_margin/
Bonds:
http://www.google.com/search?hl=en&lr=&q=%2B%22bond+market+capitalization%22++%2Bnyse+%2Btrillion&btnG=Search
---
World bond market reckoned as ~30 trillion
http://www.findarticles.com/p/articles/mi_m0EIN/is_2000_April_12/ai_61454346
---
Figures mined from the World Almanac:
Bank deposits about five trillion
Federal dept, about six trillion
Consumer credit outstanding, less than two trillion
U.S.
Holdings of foreign stocks, two trillion
Corporate profits, after tax, five hundred _billion_
I think it is possible that derivatives, people borrowing
money to exercise options, etc. may account for a good
deal of double and triple counting.
Your figure of something on the order of a hundred
trillion, is immediately suspect, because it would
work out to something like a million dollars per
worker for the entire United States workforce, let alone
the smaller number of workers who work for corporations.
Someone who uses that much capital, ie. a piece of
equipment orders of magnitude bigger and more expensive
than an automobile, is a "worker aristocrat," e.g. a
locomotive engineer or airline pilot. Office and retail
workers, who, together might represent at least half the
workforce, have capital usage on the order of $10,000 each
(mostly real estate), exclusive of goodwill and similar
intangibles. Of course one could argue that their real
capital is actually mental capital, but, absent slavery,
that does not enter into the scope of finance. It is
a well-known phenomena that internet-based interlopers are
able to break into many of these kinds of businesses with
capital of only $1000 per worker, or, alternatively, to
shift the paperwork off onto the customer and reduce
their headcount by a factor of ten without any
appreciable capital expenditure.
By contrast the Social Security Trust Fund seems
comparatively well documented, and twenty trillions over
forty years might be significant.
02/26/2005 07:35 AM
Looking at
the page you cited, which, after I had "defenestrated"
it (*), reduced to:
http://www.nyse.com/marketinfo/1022963613722.html
This does not seem to have a set of footnotes,
indicating how the figures were arrived
at, but it looks as though the boundaries between
American capital and European capital are very porous,
and of course the major manufacturing corporations are
globally integrated in any case. In any case,
corporations hold eachothers' stocks and bonds,
representing yet another layer of investment. I am not
sure whether you could compute a value exclusive
of other listed companies from the 10-K data.
Of course, as T. S. Kuhn would say, data is a product of
a hypothesis, a paradigm, and if you change your
paradigm, you naturally have to collect new data. The
mindset in which people cook up derivatives is not one
which spends a lot of time thinking about the actual
underlying labor and production process. Rather, it is
one of arbitrage, in which the internal rules of the
game take precedence. As you noted, the trading
volume works out to everything being sold more or less
annually. Company fundamentals generally do not change
that fast. By company fundamentals, I do not mean the
numbers in a 10-K report. I mean the basic underlying
facts, not necessarily in quantitative form, which a
thoughtful person would use to assess long-term
prospects. For example, General Motors manufactures very
much the same kinds of automobiles it manufactured last
year, and the year before, for that matter. It has no
realistic prospect of selling a high-end vehicle which
would enable the buyer to go two hundred miles in an
hour's time without selective special training, or
contrarily, to do work requiring the use of hands and
eyes while traveling. I would argue that if you do not
think about investments at this level, you are
bound to be blindsided by illusions generated by
management, a la Bernie Ebbers.
Microsoft represents 1-2% of the stock market
valuation (278 bil), about 3/10 % of the GNP (25
bil ?), and 1/20 % of the workforce (50,000). Its
ultimate value rests on one question: "will Linux become
good enough for nearly all users?" With a reasonable
number of similar questions, I think I could probably
nail down the greater part of the total capital
valuation.
I think, based on some very provisional tabulations,
that there is a certain type of firm which seems to have
much more than its share of capital valuation. Wal-Mart
would be another good example. Such a firm has usually
expanded about as far as it can expand, without
significantly changing its business model. That
is, it has come to hold half or more of its market. The
firm has done so by employing the same business logic as
its competitors, only with greater efficiency,
consistency, and clarity of purpose, and in the process,
it has devoured its competitors. Within that market, the
only place to go is down. Breaking out into a different
market generally requires different qualities, and
proves unexpectedly difficult. Also, by the time a
business principle reaches the level where success comes
from applying it consistently rather than sporadically,
it is generally approaching exhaustion. Wal-Mart's great
weakness is the rise of internet shopping, offering
goods just about as cheap, only in the comfort of the
buyer's own home.
In this connection, one should note that a lot the stock
of such companies are held by "paper billionaires." For
example, Bill Gates has a large chunk of
Microsoft, but if he were known to be unloading too much
of it, this would adversely affect the share price. Much
the same goes for the Walton family. That said, the
portion of the stock of a "young turk" company which is
actually "in play" may be a lot less than the number
of shares outstanding. A paper billionaire,
like the captain of the Titanic, is practically
obliged to go down with the ship.
Another example of a type of company with high market
valuation would be the "Baby Bells," the Regional Bell
Operating Companies, that is, Verizon, BellSouth, SBC,
and Qwest, with a joint market valuation of somewhere in
the ballpark of 400-500 billion dollars. These companies
no longer have a distinctive technology or skill base,
and their position in the face of new consumer
technologies such as WiFi and VOIP (which you can buy at
Radio Shack today) is increasingly untenable. These
companies' principal assets are their public utility
franchises, and their emerging business strategy is to
exploit their nuisance value in the hope of being
nationalized. It is hard to say how this will play out,
but they don't have a whole lot of time, maybe
five years at the utmost. By contrast, the four
big American railroads have a market valuation of
about sixty billions, but there is no technological
"magic bullet" threatening them in the immediate short
run. Motor transportation is a comparatively mature
technology, and it has fewer surprises hanging fire.
(*) Defenestrate, vt, to throw out of a
window, 1) literally, as in the case of the
Bohemian uprising of 1618, or 2) figuratively, to strip
data out of a containing structure, such as an operating
system window, or, in this case, a Java-driven frameset.
HNN post re:
Max Skidmore, Why Privatizing Social Security Is a
Terrible Idea, HNN, February 28, 2005
http://hnn.us/articles/10297.html
https://web.archive.org/web/20060109193340/http://hnn.us/articles/10297.html
(includes table of comments, comments themselves lost)
My comment (03/01/2005 10:05 AM
Another exchange with John Lederer.
That is to miss the whole point. Of _course_
Social Security is not a funded actuarial
plan. It is secured by the power to tax, to conscript,
to eminent-domain, and to print money. If
necessary, pension payments can be funded out of a
"millionaire's tax." During the Vietnam War, there was a
special "doctor's draft," to procure sufficient M.D.'s.
Over the last few years, the Social Security Trust Fund
has lent money to the general revenue, enabling the
reduction of tax rates applicable to rich people. There
is no reason why the process should not run in reverse
if necessary.
Similarly, your calculations about ratios of workers to
nonworkers, even if correct, do not mean much.
Luxury goods, produced in small quantities, tend
to employ much more hand labor than mass-produced
necessities, mostly because the conditions for
automation are not present. At this stage, manufacturing
in general is so automated that manufacturing per se is
probably not an issue. The difference is mostly in the
bundled services. Of course the real issue would
be in services per se. If it were necessary to economize
on labor, there would be a lot fewer waitresses, a lot
more self-service, that kind of thing. I gather the
Germans are doing a partial preview of this sort of
thing, because they have an educational system set up in
such a way as to discourage teenagers from working at
dead-end jobs. They are forced to do things like
discovering the extent to which a store can be converted
into a vending machine. Similarly, in parts of
Switzerland, there are unmanned convenience stores run
on the "honor" system.
What impresses me about your posts on Social Security is
the extent to which you rely on classical
macro-economics at the expense of practical
details. We do not have one big
undifferentiated lump, called Labor. We have a variety
of different occupations, some of which are more
essential than other occupations. Similarly, we do
not have a big lump, called Share Capital. We have a
variety of industries and companies, each of which have
their particular circumstances. I realize that reasoning
from Adam Smith may be a lawyer's way of thinking
about issues, but I am very doubtful whether it is valid
in economics. I think Barbara Ward was a much greater
economist that Milton Friedman, for example. See for
example, her classic work on village shopkeepers in
Malaysia. Instead of drawing abstract supply and demand
curves, she looked at what village shopkeepers actually
did, and considered what the implications of this would
be.
03/02/2005 11:34 AM
Age groups
are not different classes. They are as likely as not
to be members of the same family, and families have
linked economic interests. Exemptions, progressive
rates, taxation of benefits, etc., can be
cranked in and out to create whatever degree of net
progressivity you happen to want.
At some point, someone has to say the obvious. The
stock market is in a prolonged period of doldrums.
Investors who were previously tolerant of their
stockbroker's percentage are becoming intolerant,
because the market is no longer rising, and are
insisting on lower fee schedules. The whole point of
Social Security "Reform" is to bail out Wall
Street by pumping in lots and lots of new money.
As politics, this is foolish. The Wall-Streeters would
vote Republican in any case-- they haven't got any
alternative, and there is nothing much to be gained by
appeasing them. On the other hand, if the lower
middle class is made to invest its retirement savings
in high-tech companies which have no real assets, and
which are in the process of being rapidly
outflanked in the marketplace, they may
very well lose 80-90% of their money
within five years. The consequence will be that the
Republican Party will be reduced to minority status
for a generation, the way it was after 1929. Bear in
mind that the most vital cluster of ideas running
around the high-tech world at the moment is
open-source, not just in software, but increasingly in
genetics and molecular biology. You cannot buy into
the probable winners, because they are not for sale.
The modern corporation was a product of a definite set
of historical circumstances, having to do with the
rise of mass production. The whole idea was that you
took a complex job of work, and broke it down into a
lot of simple jobs, to be performed, monkey-fashion.
Eventually you added "fixed automation," tools
designed to one micro-job and one micro-job
only. As an engineering idea, mass-production is
practically dead. The practice of mass-production
lives on, but only as a legacy, the "mangy mule in the
back pasture," as the railroad writer Don
Phillips phrased it. Nowadays, engineers are
thinking in terms of small machines which can
automatically do many things, and which are cheap
enough to be owned by individuals. The computer is of
course the most perfect example, but there are others,
such as prototyping machines.
In the year 1800, corporations were still confined to
a narrow area of economic activity. Generally
speaking, they did not exist in manufacturing,
merchandising, or most services. The wealthy working
proprietor, the small businessman, provided as much
economic organization as was needed. Textile machinery
existed, but it was still not of sufficient scale to
drive corporatization. An individual who owned a steam
engine, carding machine, spinning frame, and power
loom was in a position to set up in business making
cloth. The Lowell Company, the first modern
manufacturing corporation, was an anomaly because it
was driven by a large scale hydropower development.
This involved building dams miles away to give a
reliable flow on the Merrimack River.
Corporations existed in transportation infrastructure
(canals and turnpikes), finance (central banks, such
as the Bank of England), and in quasi-governmental
colonial operations (eg. the East India
Company).
I would argue that corporations have essentially
surrendered the initiative. For example, in the field
of education, I can only think of only one reasonably
prestigious degree-granting corporate school,
Embry-Riddle Air University. Even that is a
special case, because flight training is economically
a matter of renting airplanes. There are a number of
proprietary schools which give training in business
administration, but no one would consider them
remotely comparable to the Harvard Business School, or
the Wharton School at the University of Pennsylvania,
or to the MBA program of the local state university,
for that matter. When corporations cannot even
dominate the teaching of their own key subject, that
is a sign of intellectual decadence. This
intellectual decadence has been building for fifty
years or so. Corporations have become
increasingly dependent on universities for basic
research. The significance of open-source
software was that academic research reached the point
of becoming a usable product without having to pass
through a corporation first.
I think corporations are going to go into a period
of long decline, rather like agricultural
landlords in the nineteenth century. In the production
of knowledge, they will be unable to compete with the
university; in the production of services, unable to
compete with small businesses; and in the
production of goods, unable to compete with the third
world. The survivors will be the ones who ruthlessly
reduce their costs faster than their income, like the
nineteenth-century landlord who stayed afloat by
rapidly turning out the peasants and replacing
them with sheep, even at the cost of his personal
prestige.
HNN
Post, re
Jonathan
Rees, The Real Problem with Outsourcing,
HNN, 4-12-2004
http://hnn.us/articles/4573.html
https://web.archive.org/web/20041208130524/http://hnn.us/articles/4573.html
My Response (04/15/2004 01:47 PM)
A Still
Vaster Problem
Outsourcing is simply one aspect of a much larger
economic implosion.
Outsourcing has strong affinities to automation. That
is, successful outsourcing depends on analyzing the
work to be done, and writing explicit specifications
so that the external contractor has to do a
satisfactory job in order to get paid, despite his
incentives to do otherwise. This writing of explicit
specifications is substantially similar to writing a
computer program to do the work. The main difference
is that the specifier reduces everything to a computer
language instead of reducing it to lawyer's language.
Parenthetically, lawyers often make very good
programmers.
As Monty Python puts it, to
use the Holy Hand Grenade, "Thou shalt count three,
and three shalt be the number that thou shalt count.
Thou shalt not count four, nor shalt thou count one or
two, save that thou goest on to three. Five is right
out!"
Offshoring work is not
technically outsourcing, but it has much the same
properties, because it typically involves foreign
workers who cannot speak English. Assembly line work
is also similar, simply because the conditions of an
assembly line make workers profoundly unwilling to
give active cooperation. Like outsourcing, these forms
of work function successfully only which the work can
be explicitly specified, and in both cases, the work
is likely to be amenable to automation.
Some jobs can be explicitly
specified, and some cannot. Outsourcing jobs which
cannot be explicitly specified is usually a formula
for disaster, as businessmen are generally coming to
recognize. Customer service does not outsource very
well, because one cannot control or anticipate all the
things the customer might say or do. For jobs which
cannot be explicitly specified, the formula of choice
is franchising, where the employee becomes the
businessman, and the former employer ceases to have
direct contact with the customers.
Outsourcing is therefore about jobs
which are amenable to automation. Additionally, tools
are becoming more general-purpose. The specialization
is migrating into computer programs. The end user is
more likely to buy a program, at a price commensurate
with its use value, to run on the computer he already
has, than he is to buy a specialized piece of
hardware. If a job can be successfully outsourced,
user-owned equipment is likely to drive the wage rate
down to about twenty-five cents an hour anyway.
For example, the long-distance
telephone companies are all switching over to VOIP
internally. Large corporations are doing the same for
their internal switchboard systems. That is, they
are all discarding their traditional telephone
switching hardware and skill base in favor of standard
internet gear. Of course, standard internet gear
is likely to be manufactured in the far east anyway,
so this too is a kind of outsourcing.
The airlines are in the
process of going definitively bankrupt. Their
lucrative business travelers are all gradually
migrating to the internet, because it is faster and
more convenient, as well as being cheaper. This
leaves the airlines with unprofitable leisure
travelers, students going back to college, etc., who
are not about to pay economic rates. It was always the
business travelers who paid the bills, and these
latter-day Wily Lomans never really wanted to be
wherever it was that they were going. Stage people
have an expression "papering the house," that is,
giving away large numbers of tickets so that the
actors don't have to play to an empty theater. Well,
that is what the airlines have been doing ever since
9/11, mostly with borrowed money. The airlines are
presenting their workers with one demand for pay
reductions after another. At some point,
the workers will simply refuse outright, deciding to
retire instead, and the airlines will be forced out of
business. At that point, of course, the airlines will
have to be federalized, a la Amtrak (AmFly?).
Similarly, the present demand for
automobiles is based on the assumption that the
automobile is the "prime connective," ie. the
assumption that practically every other activity is
mediated via the automobile. At a certain level, one
might call this "drive-in" culture. "Drive-in
culture" is being superseded by "download
culture," with computers and telecommunications as the
prime connective. This is potentially disastrous for
the automobile industry. Automobiles are not going to
vanish, but if telecommuting took hold, they might be
driven only half as far, and therefore last twice as
long. Equally to the point, computers have the
power to destroy the "symbolic authority" of the
automobile, and are rapidly doing so. An automobile
will come to be viewed in much the same terms as
a refrigerator or a washing machine. No one suggests
that you can become a different person by buying a
more expensive refrigerator. Popular magazines are not
filled with refrigerator advertisements. Similarly,
laundromats do not carry the kind of stigma that
public transportation carries outside of the biggest
cities. On the other hand, internet cafes are
beginning to be zoned against, and treated as a public
nuisance. There was recently an interesting case in
Southern California. City fathers and state judges
said, in effect: "people like us have laptops and use
Wi-Fi nodes, and therefore don't need internet cafes.
Ergo, the people who use them must be low-rent types."
Now, the economic impact of this is that even the most
expensive laptops are much cheaper than
automobiles.
http://yro.slashdot.org/article.pl?sid=04/01/31/1930205&mode=thread&tid=103&tid=123&tid=158&tid=99
There are other examples. It has
come to my attention that the organized dry cleaners
(The National Clothesline,
http://www.natclo.com/)
are afraid of the internet. They fear that
telecommuters will not have to abide by dress codes,
and will therefore not go in for expensive dress-up
clothing.