It's a Random Walk or Is it?

Comments

• vkt

  January 2016 edited January 2016

  With all due respect, this reads too much like the typical populist class baiting in the media with a suspect premise.
  
  Markets are like fantasy sports played with real money, loosely tied to physical reality but guided by (behavioral) game theory strategies. Outcomes in such gaming is determined by participant action and that is unpredictable but it is different from being random (mathematically speaking). Some strategies win and some don't. Just like in starting a company, playing the World series, etc. That is where risk taking comes in.
  
  The real problem is the premise that returns on capital are necessarily based on exploitation of labor and therefore the way out is more of it. It is a cyclic argument.
  
  My perspective may be skewed by dealing with wealthy people in the Bay Area rather than Wall Street. And "Exploiting the wealthy" (wealthy is a relative term here) to fund ventures that creates jobs.
  
  Most wealthy people don't go around planning how to exploit labor to increase profits. They are all trying to get returns on their capital some more ethically than others. The aggressive ones are trying to screw over other rich people as much if not more than trying to exploit labor. Most uses of capital by people who have them does not directly deal with or influence labor.
  
  When you and I along with a zillion other people from the entire wealth spectrum buy Apple shares, as a collective we are not deciding if and how much Apple may exploit labor. Apple executives are incentivized by the shareholder returns, which punishes them for a decrease in margins in one quarter. So they may decide to go and put a squeeze on their suppliers to get more for less which may result in poor labor conditions in the supplier factories or they may lay off people. This has nothing to do with the wealthy in particular trying to exploit labor. Any participant in the capital market is contributing to it.
  
  Further, there is a huge misunderstanding in the role of intent in organic ecosystems. If labor suffers in some contexts, it must be because someone planned it that way. Capital even in the current version of capitalism doesn't work that way.
  
  To understand this, let me take similar misunderstanding of evolution in pop media. There is the story of fish in some lake which got polluted and soon the fish evolved to be resistant to that chemical. In popular media, which confuses intentional adaptation with evolution, the fish somehow figured out how to deal with the chemical. The fish did no such thing. It could very well have become extinct in that lake but some random mutation amongst all the mutations that happen naturally was resistant to that chemical and so that strain survived while the others died. If that strain also survived by eating up all the other fish in the lake, it wasn't an intentional plan to exploit the other fish.
  
  Capital flows work the same way. All kinds of things are tried and some succeed and others don't. It is possible that in the ones that succeeded, labor suffered. But this is different from wealthy folks running around plotting how to squeeze labor by intent. Capital flows naturally to best chance of success and often that means efficient systems and capital has no conscience to affect decision nor is there a single point of decision. Ignorance and stupidity are unfortunately two forms of inefficiency and humans are spread along this spectrum from both nature and nurture reasons. So they do suffer from the flow of capital to more efficiency.
  
  All that the Government can do is to ensure that there are limits to that suffering (ban slavery for example) but it cannot ensure success for everyone.
  
  Regulatory capture by capital flow is a real problem. In a democracy the extent of this is proportional to the level of stupidity and/or ignorance and that unfortunately is not in short supply. It always amazes me how politicians can convince a group to promote policies (including policies that favor capital over labor) that is not in their best interests at all and suffer from it and yet they are happy to cheer for that policy with even more fanatical fervor than a typical baseball fan. That exploitation of ignorance and stupidity by the political system is the real problem not some postulated campaign by the wealthy to exploit and make a buck on the backs of labor.
  
  There is no guarantee that the wealthy will always find a way. There is no strategic, planning board for the wealthy that is strategizing for its survival. Capital just flows in all hopeful directions and some work and some don't. It is quite possible for the wealthy to bring down the whole economy to their own detriment and no way out. Just as we all can bring down the delicate climate balance to hasten our own demise.
  
  The hope is that the conflict between labor and capital via regulatory capture is a self-correcting and cyclical one and the pendulum can swing the other way when things get sufficiently worse, even if it means a bloody revolution.
• LewisBraham

  January 2016 edited January 2016

  @vkt By its nature, profits in a capitalist system involve some form of exploitation of labor if you consider making money for work you did not do exploitation. Others call that a return on risk capital as I said. But consider an outside investor in a smart phone manufacturer where the phone costs $300 and all the workers--assembly line, engineers, marketers, executives--collectively are paid $150 per phone and raw materials and overhead cost another $100--and the remaining $50 per phone is profit paid out to shareholders as either a dividend or as internal profits of some sort. Those external outside investors do not work for the company, yet collect $50 of gains either as a dividend or as a capital gain when the stock rises from increased profits. Some call that exploitation, others a return on risk capital. But either way, the outside shareholder is making money while doing no work and effectively extracting profits from other people's labor. Those workers produce $200 worth of value per cell phone, but only receive $150 worth of payment.
  
  Now before you jump to any conclusions about my words being some sort of populist rhetoric, let me state that I think some exploitation is necessary for our system to function. The question is how much and in what fashion. Suppose in the above example of the smartphone workers the CEO who is not the founder of the company but a hired gun collects $30 per cell phone and a $20 per cell phone bonus this year for temporarily increasing profits by laying off workers and shipping their jobs overseas. That seems unjust exploitation in my view, especially if it is only a short-term fix.
  
  My point is those external shareholders deserve something for risking their capital, so I am not against some exploitation. But it is interesting to note that many shareholders don't actually contribute any new capital to a company for producing cell phones. If you purchase your shares on the secondary market and not when the company IPOs or offers new shares, you are effectively not contributing any new money to the company to help it grow. Most shareholders in today's market are actually liquidity providers to other shareholders and not really helping companies and our economy grow. This is especially so in mature blue chip companies where most people invest. But the system in its current design will continue to reward the wealthy over time regardless whether it is speculation--paper trading hands--or real investment--giving new capital to companies to help them grow, create jobs, etc. I believe in the latter more than the former. So if you know venture capitalists in the Bay Area actually creating new jobs and businesses for profit as opposed to merely extracting profits by laying off workers, I'm all for it.
• vkt

  January 2016

  @lewisbraham, if people were to catch us on our lamenting moments, they would probably find us deploring injustice and unfairness in the world in the same way. But having said that, you are caught up in your own definition

  By its nature, profits in a capitalist system involve some form of exploitation of labor if you consider making money for work you did not do exploitation

  Since you determine what is fair and justified and what the value of the contribution of a participant is you deem it unfair by nature. This is different from identifying the unfair practices that happen in the system. The difference is significant because you could be completely wrong about the first based in your exposure/experience to how the system works and completely right about the second because it only needs specific examples.
  
  Unfortunately, the former is a populist opinion especially amongst those that aren't exposed to all the roles even if when they find specific examples of it. No system is perfect including labor co-ops or union organized structures. This feeling, in my opinion, is actually counterproductive to finding solutions that reduce the exploitative situations within the system.
  
  Divorces are messy because each feels they were exploited by the other and unable to see it from the other's point of view since they define exploitation in their own ways.
  
  Obviously, you aren't familiar with how startups and venture capital works given your last statement. Venture capitalists in any typical venture funded startup don't layoff anybody. They may have a board seat and as a board may decide to replace the CEO if they feel the CEO isn't doing the right job. But they are almost never involved in any hiring/firing decision of the startup employees. Can you have tough negotiations with a VC and can they behave unethically? Sure. Have had many such experiences which is why they get the "vulture capital" nickname. But I have also had touch negotiations with people I hired and have had employees behave unethically. And I have had tough negotiations with bosses and have had bosses behave unethically. This isn't a capital vs labor issue or the fault of "profit motive". It is human nature to behave in self-interests. Just that self-interests differ.
  
  On the other hand, one can very well by definition consider the system being exploitative of the VCs. VCs lose money in most ventures. On the other hand, the founders and employees get to explore their dreams and freedom with a high potential upside while getting market salaries for their work (at least in this climate). When 9 out of 10 companies go bust often because the people in the startup fail to deliver, they have got "fair" compensation and VCs lose all their money. Would I label the system exploitative by labor over capital in such a case? It would be equally silly for me to do so.
  
  We would probably agree on specific cases of "unfairness" or "injustice" when not colored by definition. But labeling the entire system with a loaded generalization like exploitative makes one a populist at best. And it distracts one from contributing to the right solutions to prevent real exploitation situations.
  
  In fact, most people trying to do so effectively are people that have gone through the system in multiple roles to get the big picture than people throwing rocks and labels from one corner and this is the real problem with union management negotiations that has led to union's downfall in this country. You can blame the capitalist system and the machination of the wealthy for this but it would be missing reality.
  
  I just find it rather naive and not very constructive and gets worse when policy decisions are made based on such cognitive biases. This is different from saying everything is fine and justified as a rabid capitalist fan might say. A messy divorce situation indeed between two extremes.
  
  You are correct about the markets these days dealing for each other's asset inflation. I have said this many times in earlier post in what I call the "bigger fool" system of markets than one based on underlying company fundamentals. It is like ETF trading based on a basket of shares except there is no mechamism to keep the ETF price and underlying fair value in sync except frequent and violent corrections that hurt many.
  
  But to somehow make this a conspiracy of the wealthy is tin foil hat material. Not so wealthy may get wealthy playing this, wealthy may get less wealthy playing this. What determines it is not the wealth itself but rather knowledge of how things work and using it.
  
  And it has as much (or little) to do with exploitation of labor as the stupidity of people not advancing their careers in labor misled by the paper gains in financial or real estate. And blaming the system to be rigged against them when the less stupid benefit from it.
• LewisBraham

  January 2016 edited January 2016

  @vkt, I am not talking about an opinion. I am talking about a structural fact of the system we have. Profits are made for any outside investor by extracting value from workers doing the labor to produce those profits while the outside investor does no work himself. If you Google the definition of exploitation: https://google.com/?gws_rd=ssl#q=exploitation what I just described fits it perfectly: "1.the action or fact of treating someone unfairly in order to benefit from their work. 2.the action of making use of and benefiting from resources." Workers are being exploited in our system. But I don't think you actually read what I said very carefully as I said: A. Some exploitation is necessary for our system to function and B. I think what venture capitalists do is fine. In fact, I think of all the kinds of capitalistic investing, venture capital is the most admirable: "So if you know venture capitalists in the Bay Area actually creating new jobs and businesses for profit as opposed to merely extracting profits by laying off workers, I'm all for it." What I was criticizing was the short-term speculation in the secondary market for most blue chip stocks where no new new capital is created and investors are rewarded for encouraging management to think short-term and lay off workers or buyback stock instead of reinvest in the business to help it grow. That is exactly the opposite of venture capital. I am not talking about any "conspiracy" of the wealthy. The way the system works, for better or for worse, is quite out in the open.
• vkt

  January 2016

  we can assume that in general the wealthy will over the long-term figure out new ways to exploit the poor/labor and squeeze more profits out of them.

  This isn't a fact, it is a populist opinion. It comes from a self-fulfilling definition/axiom/premise.

  Profits are made for any outside investor by extracting value from workers doing the labor to produce those profits while the outside investor does no work himself

  First, you are confusing two different things. Role of capital vs capital markets.
  
  1. The direct contribution of capital to a company is one of the necessary requirements in addition to labor. Both are needed until the company becomes self-sustaining in its operations like Apple did or needs capital for new growth or markets. Even if not clear, I think you are saying that this kind of direct investment is not exploitation in your definition. If so, then you will see the limitations of your definition itself. This type of investor is not doing any work either other than providing capital. So, it can't be just based on just some inconsistent notion of "doing work". Contribution to a company comes from many different skill sets and resources, not just time clocked. This is capitalism at work. There is nothing structurally wrong with it although abuses are possible by any participant in it. Capital markets came up because of that need rather than depend on a few bankers making autocratic decisions. You need capital markets.
  
  2. The evolution of capital markets into a betting parlor where participants are betting against each other. I agree with you on this. You feel that this is contributing to the exploitation of some workers. I even agree with this in specific instances. The problem is you are trying to justify it with a broad self-serving definition and swipes at "wealthy". Your definition is wrong because it is inconsistent with case 1 above that you agree is valid and not based on just "work done". VCs don't do any work either. Your definition is also wrong because potential bad influence of current capital markets are not just caused by the wealthy but everyone that participates in it. Presumably every member of this board, and everyone that has a pension plan or a 401k or does investments whether wealthy or not. So, are you saying the members of this board because they are participating in that capital market will figure out new ways to exploit the workers? Do you see how convoluted that logic gets from that poor definition?
  
  Let us get to the bottom of your discomfort, that the profits in capital markets are coming from extracting value from the underlying companies which otherwise might have been shared within the workers. See no loaded, broad generalizations or inconsistent/vague definitions needed.
  
  I agree with you to some extent on this without playing class warfare or painting lending capital as necessary wrong or the "profit motive" being structurally wrong. These latter distract from trying to find solutions to fix it.
  
  Of course, there is no easy way to fix it because it isn't a simple system and almost everyone participating in capital markets benefits in many ways from it. Calling them "sinners" isn't a constructive way to fix it. Nor is knocking down what exists which is easy, building something is hard.
  
  I am not going to pretend I know the solution to this. There are some solutions if implemented would lead to better value flow that does not make it a win-lose situation.
  
  For example, rating companies based on growth in shareholder equity (which is directly tied to its health rather than stock price which as we agree is based on mutual betting) will allow CEOs to make decisions that are more about growing the company that helps labor and stop doing market manipulative things. By capital market regulation or third party rating agencies.
  
  Changing the tax system so that companies get partial tax credit for every new local employee so they can even repatriate funds to train and invest in employees here rather than wait for unrestricted tax breaks. The shareholders are then sharing some of their profits to create employment and so "doing work". If CEOs feel they can make more money even then by going off shore, then they have that choice but I will bet local employment and retraining will pick up. Apple CEO won't be able to make the kind of comments he made on 60 minutes.
  
  Career training in schools that prepare the work force on how to manage their careers and negotiate their compensations when possible for better distribution. I realize now that this is a serious gap in education just like financial illiteracy is and lets people be "exploited" or workers that are smarter or more knowledgable get ahead at their expense.
  
  Etc, etc.
  
  It is not easy. You only have to look at the arcane rules in baseball to see why even bad and inefficient systems persist. Even bad systems creates winners and losers. The winners are vested in maintaining status quo and will fight against change in self-interest.
  
  What you cannot do for solving the problem is class baiting or simply knocking things down with a shotgun approach.
• Old_Joe

  January 2016 edited January 2016

  Gentlemen: It is a real pleasure to see interesting extended and thoughtful discussions such as this without the descent into baiting, repetitious and meaningless "talking points" (usually merely parroting some totally biased political commentator) or other aggressive behavior. Not to mention the inane and inflammatory comments which are usually posted by a certain person with a rather short name.
  
  Regards! OJ
• little5bee

  January 2016

  @Old_Joe I agree...our politicians could learn from these two!
• MJG

  January 2016

  Hi Guys,
  
  Thank you both for your in-depth Exploitation exchanges. They exposed me to perspectives that were original for me. I learned something about the issue, and also something about you guys. Overall, it was an excellent set of postings.
  
  The issue of labor exploitation goes way back to Adam Smith. He said: “The produce of labour constitutes the natural recompense or wages of labour. In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him. …… But this original state of things, in which the labourer enjoyed the whole produce of his own labour, could not last beyond the first introduction of the appropriation of land and the accumulation of stock.”
  
  And Karl Marx built a powerful polemic on this foundation that did change the course of history. Marx called profits and interest “surplus value”. Who gets that surplus value and what fraction of it seems to be an endless debate without any likelihood of resolution. Economists still argue this issue. I sure don’t have an answer, or even a strongly held conviction. My opinion on this matter changes dependent on situation and circumstance.
  
  To lighten-up the discussion, allow me to tell a story about labor that always brightened my day. I toured the Jack Daniel’s distillery in Lynchburg TN several times. On each tour someone always asked about “how many folks work here?" The humorous answer went something like “ About half of them”. That was designed to only elicit a smile; the workers at the distillery earn their pay.
  
  Like the majority of folks, my wife and I were employees most of our working years. Based on our anecdotal experience, neither of us ever felt that we were being exploited. During this period I held 6 jobs, 7 if my military duty is included. My wife held 3 distinct jobs. I’m sure there were periods when we experienced pressures, demands, and assignments that were frustrating. But taken over the long haul, we were fairly paid for what we delivered. Exploitation never entered our minds.
  
  Of course, that doesn’t mean others are not exploited. During the early stages of the Industrial Revolution, that surely happened. I’m equally sure that such incidents are dramatically fewer and less serious these days. It is not yet perfect, but progress has been made. That's a characteristic of Capitalism.
  
  Thanks again for your informative postings.
  
  Best Wishes.
• FundStudent

  January 2016

  I have to work very hard to get investment profits. Ahhh! I must be doing something wrong.