The Financialization of the American Elite
americanaffairsjournal.org
americanaffairsjournal.org
I think what a lot of these articles lack is a discussion of the role that monetary policy plays in the financialization of the American (and, indeed, global) economy. While I agree that there are other factors that lead to the rise of shareholder primacy, I think the most important one is the distortion of relative capital proportions in the economy largely caused through the mechanism of monetary inflation.
I find it odd how there is so little literature on this apart from books and papers from the relatively fringe (but no less accurate) Austrian school of economics. Inflation is not something that happens everywhere in the economy at the same time (the Cantillon effect). Inflationary central banking policies benefit those who are closest (relatively) to the money printer, and in modern Western economies this is almost always financial firms and those who marshal capital. Large inflows of money (inflows that have vastly increaed sinced 2008 after the advent of extensive quantitative easing) allow those close to the central bank to have a larger purchasing power than the rest of the economy as inflation has not "trickled down" yet. This allows said financial firms to purchase assets, invest in companies, and capture value in ways they would otherwise not be able to do and in scales that are completely unnatural. And yes, this includes venture capital firms (for many of us who work in startups, we are among those who are relatively closer to central banks, hence the ridiculous salaries). As there is much more money flowing in the system but less "real" wealth, much of this money heads to equity markets to chase returns, and the result is what is described in the article.
This distortion of the capital base allows financial firms to hold and direct more capital than they otherwise would, so it is no wonder that the financialisation of the American economy and increases in general economic inequality globally largely began after the gold standard was abolished in 1971 and central bank printing presses were set free.
Indeed, I would go so far to say that the real fix to this problem is to abolish inflation targeting (and by consequence the central planning of the money supply through central banks).
We are very comfortable as technologists and other high-paying (read: inflationary) professionals, but there is a large class of people who are getting thoroughly shafted by these monetary policies and they are your Uber drivers, the people who work at the coffee store, the factory workers in the midwest, and the homeless. The exponential rise in rents in cities are not a natural consequence of the capitalist marketplace, rather its a consequence of loose monetary policy whereby money has entered real estate markets to gain returns by exploiting ridiculous rents.
https://www.epi.org/productivity-pay-gap/
Again, no coincidence that productivity and wage increases started to diverge significantly after the gold standard was abandoned.
Our modern loose monetary policy and inflation targeting is probably the greatest regressionary redistributional scheme in the history of mankind, and will go down in history as such.
The deeper problem is the opportunity cost - the small businesses that were never started, and the inventions, innovations, and other developments that never happened because financialised markets were more interested in speculation, wealth capture, scamming, and gambling than in fringe high-risk speculative R&D.
In fact the financialisation and corporatisation of the research that does happen has distorted the research process and made it far less effective. Without it we might have had game-changing advances in fundamental physics, AI, medicine, aerospace, robotics, bioengineering, and even arts and culture that were decades ahead of where we are now.
My younger cousins were a lot more well off than my side of the family, went to private or high competitive schools from kindergarten on, and are super smart.
I used to hang out with them and their friends from time to time, and it struck me how uniform their aspirations all were. Investment Banking, Consulting or medicine. Maybe a few wanted to be lawyers.
It struck me then and now as an incredible waste of talent.
When the books are written 100 years from now, they will explain this period as a hyperinflation that our HBS-trained leaders in government and finance managed to trap mostly in financial assets, all the while counter-intuitively justifying their money-creation activities based on a theoretical potential to leak gradually out to the broader economy. Hyperinflation here to maybe generate useful inflation there, but really useful primarily in creating robber-barrons and oligarchs, who perpetuate the system through 'soft bribery' and 'reputation laundering' described in the article.
This article and the speeches etc. discussed in it should be a clarion call for folks to accelerate imagining what will come next, which may well go beyond increasingly cosmopolitan admissions and instruction at HBS.
No, they won't, because it wasn't.
If high finance generated a ROI of 9% x 2 on average since 1982, through asset price gains magnified by leverage ... that would be 64% every 3 years, on average for almost 40 years. That's a remarkable inflationary event, however you choose to define 'hyperinflation.'
> In economics, hyperinflation is very high and typically accelerating inflation.
> It quickly erodes the real value of the local currency, as the prices of all goods increase.
This is in process. You seem to think there's a specific periodic minimum that is absolute. If the period is decades, it looks the same.
> This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies, often the US Dollar.[1] Prices typically remain stable in terms of other relatively stable currencies.
Given this has affected every currency (not counting some closed off systems like NK) the flight currency is property/land/gold/etc
Right. And Jesus is coming back any day now.
Part of the definition of hyperinflation is that it happens fast. Price increases that take place over decades is not hyperinflation, it's just regular old inflation.
https://www.federalreserve.gov/releases/h6/current/default.h...
Between 1980 and 2000, California median home prices increased at a rate of less than 1% a year [1]. Over that same period many states saw price drops in real estate.
In Southern California between 2000 and today, house prices increased at an average of about 5% a year [2].
Even health care is only going up at about 5% a year on average. Tuition is going up at about the same rate.
None of this is even remotely in the same ballpark as hyperinflation.
[1] https://www.cnbc.com/2017/06/27/how-much-housing-prices-have...
[2] https://www.latimes.com/business/la-fi-southern-california-h...
[3] https://www.kff.org/other/state-indicator/avg-annual-growth-...
it a reinforcing self-cycle. Rich people used to rule the world. Then we created democracy. Now rich people manipulate democracy from the inside. They define what is acceptable and what is not by owning prestigious schools, selectively funding research, and selectively funding ventures that re-inforce this self-importance.
You need money to make money. Being smart has nothing todo with it. An idiot with a billion dollars is going to make more money in shorter time then the most acedemic investor with $1 to their name.
Perhaps fiat isn’t your ideal, but it’s almost certainly better than pegging to a rare earth metal.
The problem with the glut of cheap credit is that it created the means to leverage capital on a scale that essentially embed rent seekers into every facet of life to the detriment of those without.
Those already with property were able to become landlords on a massive scale because credit was cheap, pushing up demand and pricing out those seeking their first home.
Fund managers were able to borrow massive amounts to buy into every business possible to the detriment of other business stakeholders and often the business itself. The economy as a whole suffered as generating quarterly returns and accumulating wealth trumped business growth and production. Because this occurred on a global level the social compact was broken.
I can only see two ways out of this:
A tax on wealth (70%+) might be the means to creating a "spend it or lose it" attitude and force the promised "trickle down" promised when the laws were changed to allow this aberration.
Or we need a multi-trillion dollar debt forgiveness program to reset the economy back to a place people are not so burdened by debt (from putting a roof over their heads, getting an education or requiring healthcare) that they can't afford anything.
The idea is to match the money supply to the real wealth in the economy. I don't disagree with your assertion that we are seeing a decoupling of money from real wealth, but the gold standard is no guarantee against inflation - or worse, deflation.
Expand, contract. I think it is a great way for the state-sanctioned stewards of the economy to understanding the size of the market and the current limits of global resource distribution by having so much data.
I wish there were entertaining videos on this concept that weren't also trying to "wake people up" to something "bad". Where is the "here is the effect of the business cycle", "here are the tools to play this game more effectively".
The real cuplerate is that when a bank creates a loan it creates a loan check, and through a confluence of politics and leverage, businesses are motivated to use other people's money to make investments and pay only the interest. As the sum of the interest on accumulated loan checks build, you end up reducing the velocity of capital (people's willingness to spend money) because eveything becomes too expensive due to price reflecting the businesses load of interest, until, eventually, you end up with a liquidity problem; too many loan checks and promises, to little returns, and cash evaporates. Everything becomes too expensive when resold through the bank a dozen times.
Governments have tried every system known to man kind to constrain this including war and genocide. The Privately-owned federal reserve has in their corporate charter a requirement to keep steady interest rates and they refuse to maintain them; The 2% yearly inflation is artificially caused by the continuous expansion of credit and prices never correct or deflate because they always capture the correction by printing or lending ever larger sums of money they never intend to collect. They disregard their charter and do whatever they want because they have the money to do so.
By having this monetary policy, you enable equity pirates, often led and initially funded by foreign countries who harbor the viewpoint that enslaving and killing your population is no big deal, to expend vast sums of capital asset stripping everything; businesses, machinery, people, equipment. Fertility rates are down to 1.7 today in the US; when the USSR collapsed they were down to 1.2. 2.1 is replacement. You have 60-100 million men who will never have kids or get married if GAO Retirement security studies are to be believed; they break out demograhics in some of those studies and there's a double digit and growing demographic of men who cannot make enough money by the age of 45 to have a family. Over 50% of female Latino immigrants (illegal or otherwise) do not have kids. Some of that is 3rd wave feminism (half of men with an 80th percentile income or higher never procreate, and a lot of that is, when you have money, girls throw themselves at you, and you lose respect for all women due to that). CDC had a statistic SJW's forced them to take down in 2011; quarter of women with bachleors degree's don't have kids (her school debts become a dowry most men can't pay), but a heck of a lot of it is profit motive. Turning people into products for corporate executives also turns them into trash once you've consumed them; you take from them the concept of self respect and dignity, and as we've found with C-PTSD research, once the structure of the brain has changed due to trauma, it takes a large investment of time and energy to get it back to normal. Historically, People who do not have those concepts don't know how to engineer a society with those values which is how you get the pattern of the french revolution and subsequent reign of terror repeating thoughout history so often.
There's 2 ways you constrain this.
The first is bankruptcy. You shred the loan checks and let the rot fall out of the system.
The second is by limiting the revenue of private companies through income tax like we did in the 60's; you make more than 250k a year congrats you've won the game, every dollar you make more is going to be taxed. Now. Go do something nice for society. You also require public companies to have 66% or more their stock owned by employee's. Doesn't have to be voting stock, but total stock and allocation of revenue. We figured out in the 30's when you pay people a "keep what you catch" wage, they work really hard and efficiently and when the downturn comes, they stick with the company and survive it well then on the upswing, they invest. If constrains who goes bankrupt during the boom\bust cycle.
Getting there, however, means putting a lot of executives and rich people in jail (for fraud, so they can't keep comitting fraud or spending their money to interfere with the process), and pruning a lot of large companies. It also means widespread rehabilitiation and family education and planning resources. We are well over the point where all of that can snowball into a violent political revolution; the consequences of that is are all bad.
Few people in the tech community say "This guy exploited a security bug. Therefore, we shouldn't listen to his bug reports."
In fact, you can't really understand a bug except by trying to exploit it. I suspect the same is true in business. Everyone agrees vaguely that there's some kind of short-term thinking problem in big American business. But this guy understood the problem deeply enough to exploit it, while everyone else just is just waving their hands.
I think PoC||GTFO applies to business advice too.
In particular, the argument is that the critiques offered in conferences like this are insincere and aimed at preserving the insiders' status rather than actually changing any of the things they're talking about: "His career tells us how he would advise those beginning their careers to navigate these challenges: Loudly criticize political dysfunction, but make no effort to explore its structural causes or remedies...[his] prominence conveys that incongruence between words and actions is tolerable, even desired." And further, that it would be "foolish to listen" to said finance people's self-serving political solutions.
A closer equivalent in the tech community would be more like "this guy has spent decades running shady adtech and addictive gaming companies, and continues to traffick personal information and addict kids to pay-to-play games, but is now also running an organization dedicated to digital privacy and is building a reputation as an expert in parenting in the digital age and voluntary gaming regulation".
And as a security person, I don't think that's a bad thing. We have laws around these kinds of issues specifically because having the raw technical capability to ruin lives should not be viewed as tantamount to permission to do so. So should it be in the financial realm.
To some degree I think we see this in the startup world where a lot of the aspiration seems to be: Operator -> Angel Investor (on the side) -> VC.
The reason many (most?) people aren't shareholders is because they simply can't afford to save. You can't eat AAPL. You can't clothe your baby in JNJ. People should "pay themselves first" as savings but the reality for the normal person working 3 jobs in order to hold their household together is there's no room to pay yourself first--you barely make enough to survive. Even if you have $100 in your pocket at the end of the month, if you use it to buy a stock you're -10% right off the bat due to brokerage fees.
What are some ways a company can try to "make" their employee into one of the shareholder class?
Well, they can just give their employees company stock in lieu of some other compensation, but then the employee is stuck with this risky single-equity portfolio which they either need to sell (minus transaction fees and taxes) then use to buy some other diversified investment (minus transaction fees), or hold on to and risk being the next Enron casualty.
They can offer a 401K and even match contributions, but this requires the employee to deliberately elect to participate, which only makes sense if your basic needs are already met. 401Ks seem to mostly benefit middle class and affluent people who already budget for saving. Plus most 401K plans I've seen are loaded with expenses that eat a significant percentage of participants' savings.
Maybe the government can step in. People talk about Basic Income... Maybe instead of cash basic income offer basic equity: every American could be issued N shares of SPY every month or something. Let everyone have some basic baseline skin in the financial system game. This helps everyone benefit, not just employees.
Maybe instead of tax refunds being a big lump of cash, they can default to being issued as treasury bonds.
I don't know. "Tax breaks to corporation, hoping they in turn act nice" hasn't worked out very well for us.
From about 1920 to 1980, American business was scared of communism as an alternative system. In the 1950s and 1960s, when the USSR looked to be surging ahead, there was heavy PR about how capitalism delivered a better life for workers. (Some period cheerleading from when the USA really was #1: [1][2]) Businesses were in fear of being broken up, having executives arrested for price-fixing, or even being taken over by the government. The British government took over and ran big parts of the steel and railroad industries. British telecom was government-owned already. US businesses feared that might come to the US.
This fear, and fear of unions, kept wages going up, and prices stable. It wasn't perfect, but there was a major force pushing back against corporate greed. With that threat removed, capitalism has a monopoly, and now acts like one.
[1] https://archive.org/details/4050_Meet_King_Joe_01_19_26_08
Lol, I tried searching to back this up and this popped up!
https://www.jstor.org/stable/25101819?seq=1#metadata_info_ta...
I read stuff like this is it feels like the West has utterly forgotten things that were well and clearly understood 100 years ago.
The monopolies generally aren't obvious. For example, we have three major car companies, but they all get their parts from the same suppliers. In 2009 Ford asked Congress to bail out Chrysler and GM, because if either of them went down, so would Ford's suppliers.
So the new system doesn't have to actually be better overall than capitalism, it just needs to provide some competition to light a fire under policy makers.
The countries that have hit stagnation, other than the US, tend to build good public infrastructure. This pumps money into the economy, but not through the banks.
Exactly. This led to much government regulation to keep big business from getting too heavy-handed. See the previous price discussion on insulin pricing for a modern example. Although drug prices have not been regulated, until recently there was an assumption that blatant overcharging would lead to government action. It didn't.
Unions used to have much more power in the US. They had money and votes. Business only had money, and couldn't use it directly without being accused of bribery.
Many little, and not so little, restrictions that used to keep businesses from getting too greedy have been removed in recent decades. Glass-Stegall, which kept banks and brokerages separate. Far fewer restrictions on banks. The removal of the restriction on "gambling" in stock markets, which limited derivatives. Allowing interstate branch banking. Repeal of the Utility Company Holding Act. The NYSE allowing multiple classes of stock (like Facebook, Google, etc.). Weakened telecom regulation. Weakened labor law enforcement. Unregistered hedge funds. Pension funds being allowed to invest in hedge funds. The Interstate Commerce Commission. The Civil Aeronautics Board. The list goes on.
Until you run into a hard wall trying to integrate new features that customers request which break the entire system and before you know it, you're still running on C# 3 while all of the other APIs and companies have long upgraded to C# 8 (or switched languages altogether). Then your wildfire turns into a firestorm and your customers start calling in.
And they're pissed.
The EU has a study which I cited in a previous posting indicating that price competition requires four substantial sellers. One is a monopoly, two tend to implicitly cooperate as a duopoly, sometimes there's competition with three but often two of those dominate as a duopoly, but with four, price competition usually appears. It takes at least four players to have a free market.
So, less than four players in a market, and Government constraints kick in. Breakups, blocks on mergers, restrictions on expansion, higher taxes and closer scrutiny for the top 3. The US used to do stuff like that. The EU now does.
Now that's a free market.
Capitalism is fine but this is not capitalism.
If anything, less so than the 19th Century form for which the word “capitalism” was coined. Capitalism has never been anything but deeply corrupted.
At least in America, many of the wealthy are able to make money due to inherited resources that they did not earn. For example, their ancestors claimed a tract of land or access to a natural resource. Therefore, Capitalism could be brought more in line with the meritocracy that it claims to be if we taxed on the unimproved value of these resources and potentially on profit gained by rent seeking
Capitalism claims the revolve around people freely exchanging their labor for pay. However, since most people do not have access to the resources or capital to support themselves (often due to the resources already having been claimed by someone else's ancestors) they aren't really entering into the exchange freely. Therefore, Capitalism could be brought more in line with its stated libertarian principles by using the proceeds of the previously mentioned taxes to provide people without those resources with the ability to support themselves independently. This could potentially take the form of capital grants, education, farm land. If it weren't possible to actually give people a reasonable opportunity to support themselves, then a guaranteed minimum income could also address the issue (although I don't think its as good of a solution).
The american dream is alive and well. I work with many many immigrants and their children all of whom put themselves on the path to success. The fact is most 'americans' whose families have been here for many generations are completely lazy and entitled. They want privileges they have not yet earned that they enjoyed while living with mom and dad.
The economic system that causes people to work harder will win. To be a challenger to capitalism you need to be serious about getting people to work, and not dream about a society where 90% of people are in the leisure class. Such a society would be defeated by capitalism again.
So how do you get people to work? Such a system must respect private property rights. You're DOA if you don't.
The main flaw in capitalism is in the name: it's a legal system that favors capital. Given that the holders of capital are few, this is a massive market distortion. What is an "undistorted" market? If your cost function is getting more people to work so that your society is more efficacious, and we know that most people are in the middle along whatever dimension you measure, then a system that favors the middle - because that's where the people are - rather than the right tail is better. The US briefly had such a system in the postwar era.
Some may argue that because the right tail individuals are more talented, we should just keep rewarding them as they are more efficient. That ignores that these people's time is limited, and at some point you get diminishing returns. We are way past that point.
How do you favor the middle? The middle plays by the rules, so you need to enforce those rules and prevent elites from changing those rules. This means first and foremost campaign finance reform, up to and including public funding of political campaigns and a ban on political donations.
This is the hard part. The middle will never be as politically savvy and engaged as the elites. For the middle, the political system is exogenous. Thus making it as exogenous as possible for the elites is necessary.
A middle class society can defeat an elitist society because it mobilizes more people. Parliament defeated the king.
We need to stop obsessing about the modern right-left divide that has been in place since Marx first appeared. Marx got it wrong by focusing on exploitation of one class extreme by its opposite class extreme. He should have been thinking about maximum middle class mobilization if he wanted to replace capitalism.
Instead use our knowledge of the normal distribution of human ability to empower the middle where most people are. This may be a tough pill to swallow, but we need to accept that political engagement is not the middle class's strength. Therefore the more intrusive politics becomes, the more the middle gets sidelined by those who are adept at politics, whatever their alignment.
Democracy is a fabulous way to empower the middle class, since the middle class is numerous. We need more democracy, not less, and that democracy should be more expansive and not "guided" by bureaucracy. This is a huge blind spot among a certain set nowadays.
A market economy and a political system that favors the middle class over both the first and fourth quartiles could defeat our current system. Maybe you still call that capitalism... that's just a label to me.
That's pretty much been proven by Ch1na.
Regardless, its an interesting thought, and I think I'll see if I can find some additional reading on it.
Most of the industrialized world had been decimated. Continental Europe had been marched all over with bridges and factories destroyed. The UK was crippled and barely hanging on. Japan had destroyed huge swathes of China and the US nuked Japan.
On the Allies side, morale was high and the US was lending to the world to rebuild. Even better - economically - initially those countries had little production capability so they were consuming more than they were producing.
The US was guaranteed to win economically because we were the only one in the race.
By the 70s, much of the world was back on its feet and quickly improving even becoming competitive in numerous areas.
You can outsource cheap labor, so Asian workers have enjoyed continuous increases in per capita income while OECD workers have experienced stagnant wages and upside has been limited to capital holders.
Those two scenarios lead to two different levels of fear. I might care more about my workers to avoid getting shot. But if I'm too greedy and the only consequence is that I might get taxed, well, why not? I might even be more greedy to try to make up for the amount I'm going to lose in taxes.
Health care and education are two prime examples of markets that have been regulated into the ground.
Aren’t these all basically the same thing?
- Private equity firms invest in businesses that are not publicly traded. For example, they invest in startups that are seeking to grow and eventually IPO.
- Investment banks help existing firms undertake financial transactions such as issuing new debt or new shares, and serve as brokers for e.g. sales of small businesses to new owners.
- Hedge funds make speculative bets on existing financial assets they believe are over- or under-priced.
>At first glance, this is sound—even admirable—advice for aspiring business leaders. But a closer look at Klarman’s remarks, as well as the origins and trajectory of his career, suggests a deeply flawed messenger.
And I realized this was just another article which refuses to engage ideas and falls back to ad hominem. I don’t care if the messenger is flawed, or what somebody thinks his or her motivation is for delivering a particular message. I want to hear a critique of the message itself.
https://www.newyorker.com/news/news-desk/a-new-trumpist-maga...
Being BFF with Peter Thiel is a black mark, I'll give you that.
Especially not generic ideological comments, which tend to lead to generic ideological flamewars, which we want to avoid because they're so predictable.
> "At bottom, when many of our country’s wealthy citizens say “democracy,” what they really mean is “our class’s way of life.” If they respected democracy as fervently as they worship the “invisible hand,” they would see that the popular discontent simmering across the world today is the direct result of decades of elite hypocrisy and greed, hidden behind a façade of neoliberal economics.
> "The “center” is not where the best policy is made, or where public opinion converges; it is a place where political activity is fully dominated by financial elites and thoroughly subordinated to the market."
> "These are the same people who have left us with an upside-down economy and a weakened social fabric. Income inequality, financialization, and a socially inefficient distribution of both capital and talent are the legacies of shareholder capitalism. Although these elites now mourn the erosion of the political “center,” they actively participated in the erosion of the American middle class. To add insult to injury, they insist on telling us elaborate stories about their entrepreneurial spirit and good intentions, and invite us to celebrate their virtue when they give back a tiny share of their captured wealth."