The General Economics Thread

The problem is not the existence of an investor class that gives companies money up front in return for a cut of their profits. The problem is when those investors are the only ones who have any say in how the company is run. The outcome there is inevitable — if the only people with a seat at the table are the people in it to maximize their return, then the company will behave in ways that maximize return and ignore every other consideration.

The only real way to fix this is to make it so that shareholders aren't the only people making policy for the company. Traditionally, labor unions are the major way to force companies to pay attention to their employees, but other methods like giving labor representatives a guaranteed spot on corporate boards could work as well. Ideally, you'd want some way to get other "stakeholders" on the board as well, but how you'd identify who has "enough" of a stake to deserve representation, and how you'd decide who specifically is going to represent them, is a non-trivial problem to say the least.

A separate problem in a similar vein is short-term shareholders. People who aren't buying stocks and holding them to get dividends in return, but people who are treating stocks like commodities — buy low, sell high. The problems here are numerous. This sort of speculation causes the stock market to be vastly more volatile than it would be otherwise. Stock price becomes divorced from reality — instead of being a rough indicator of the health and profitability of the company, it becomes a meta-price where the number reflects what people think other people think the number will be. (This is why you hear about stock prices tanking after very positive news like strong earnings reports, because it's not as strong as people thought it would be so the stock is suddenly considered over-valued.) Perhaps most importantly, only holding stocks for relatively short terms encourages extremely short-term thinking — the quarterly results become a be-all end-all judgement of a company that CEOs live and die by. Nevermind something silly like investing for the future or simply producing consistent, sustainable results. Short-term investors don't make any money unless stock price goes up, so that's what companies are forced to focus on.

Unfortunately, this is a systemic problem. You might be able to curb the worst of it with things like financial transaction taxes (eg, every time you buy or sell anything on a public exchange, you pay 10% of the value of the transaction in taxes) or requiring cooldown periods between transactions (eg, after buying a stock, you must wait X number of business days before selling it again), but those are sledgehammer patches on an extremely complex, longstanding system and I don't really know enough about the subject to know whether they would be effective or what their unintended consequences would be.

Thank you for that summary, Native, that was exceptionally clarifying. The underlying problem of capitalism, IMHO, is that to the extent that shareholder return is not maximized, investment capital disappears, as rich people find other avenues to increase their money. So an economy that does not maximize shareholder return is less productive in absolute terms than one that does, at least in the short term. That is why predatory corporations are often valued above more pro-social ones, and why for-profits are often valued above coops. The presence of additional members on the board of directors beyond the shareholders increases risk of reduced profits (in the eyes of those same shareholders) and therefore will be seen as a less valuable investment. This is the classic explanation of capital investment by laissez faire economists and market analysts.

What this doesn't take into account are the long-term costs to the labor force, the economy and the environment. Under-regulated markets are unsustainable because of the damage done to worker productivity, consumer spending, national infrastructure, and environmental degradation. Germany gets away with their model because the German public, including investors, have been well educated regarding Germany's long term social and economic interests (this may be one reason why they were so intolerant of Greece's deficit spending). In the US, the middle class has been exposed to the argument that anything which reduces corporate profits costs jobs and pay, for so long (without any meaningful pushback from the democrats), that this is the default assumption even in the mainstream press. And, to a certain extent, this is a self-fulfilling prophesy. EU economic policy protects German investors long term interests, but US policy does not (this includes over 100 years of US business case law). A lot would have to change to redress the balance, which isn't impossible, but someone in the US has to start making the argument. So far as I know, none of the Democratic candidates endorse that degree of change. Fundamental reform in economic policy is not a discussion that is happening here in the US.

What kind of reform? The German model is one, the Scandanavian experiment with employee owned coops is another. A third was proposed by Piketty: a strongly progressive global tax on capital to redistribute profits down the socio-economic ladder.

I'm broadly in favor of Piketty's model, in that it seems to require the least systematic reform and thus has the highest probability of success. Some candidates for the Democratic nomination in 2020 have proposed financial transaction taxes, which would help address the problem of short-term trading decoupling stock prices from the actual value of the companies being traded.

International tax reform is crucial to any systemic approach to fixing capital markets, and if it's going to be even remotely attainable, we need close and mutually beneficial ties with the countries involved. This sure as hell isn't happening if Republicans are in charge.

The problem with Piketty's model is that it requires global cooperation, from China and Russia to the Bahamas and other island microstates/tax havens. Otherwise, a patchwork of capital taxes will ensure a race to the bottom for the biggest agglomerators of capital.

The US doesn't need the entire world to go along, the EU alone would probably be good enough, as most global capital is invested in of those two places. Then, the US and the EU threaten sanctions against countries known to be used as offshore tax havens. Wouldn't get them all, but would get the great majority of them.

We'd also need Japan and possibly the UK (if it separates from the EU), but yeah.

The country it wouldn't get is China, so I'd also want a plan for dealing with China's increased competitiveness in the wake of a global capital tax.

Edited by Ramidel on Aug 21st 2019 at 12:46:05 AM

Given how many other restrictions China puts on foreign businesses, I don't think it'd be a major problem. The weight of this sort of international pressure grows exponentially with the number of nations applying it in solidarity. The threat of cutting off trade then becomes much more effective.

Yeah, on it's very best day, China cant begin to compete with the US and the EU combined, at least not in terms of return on investment. They just cant absorb that amount of new capital.

I don’t really understand why an investor class would still be needed if the reforms go as far as being effectively socialist.

I also want to know what exactly do you mean by “out-competed”. Because frankly, some economic contest (perhaps even most) are not worth winning given their externalities.

Edited by Mio on Aug 23rd 2019 at 12:15:49 PM

If you are going to start a business to provide a good or service, you need capital. If you want to expand an existing business, you need capital. Everyone doesn't have a nest egg or tons of excess cash from operations to fund such ventures. You need a way to get that funding. People don't give you money for free; you have to give something of value in return. In capitalism, this is either an ownership stake in the business (stock) or a promise of repayment with interest (loans and bonds).

Economies with an investor class who have lots of cash available to invest in businesses will grow faster than those without. This has been amply demonstrated.

Now, the government can act as the investor, but we've seen again and again that when this role is exclusive to the government, the system becomes subject to inefficiencies (corruption, favoritism, pricing errors) that compound exponentially, eventually rendering it unable to compete with more open capital markets.

Obviously, delivering a product as efficiently as possible to the consumer isn't the only measure of success, but it is a very hard one to beat in the short term.

Edited by Fighteer on Aug 23rd 2019 at 12:25:54 PM

I guess I can’t really argue with that since it seems pretty clear we have different economic priorities, and different conceptions of how things should be.

I wouldn’t necessarily mind having a full on Capitalism vs Socialism debate, but I’m too unsure about whether it can be had without it turning into a complete mess.

We can have a debate. I am not, however, going to engage in ought-vs-is conversations unless that's established as the premise. I'm talking about what works, not what "should" work in some idealized world.

Unless I am only meant to talk about derivatives of the Soviet Model (which I do not favor), I’m not really sure how I am meant to talk about Socialist policies without at least getting somewhat speculative.

Either way I don’t want to engage in an argument over which numbers were bigger during the Cold War and/or which numbers are more important measures to consider. Especially when in terms of how Capitalism works and what would be the “ideal” form of Capitalism we would agree on most things.

That is indeed the case - the only Socialist models that have been tried on a large scale have been derived from Marxism-Leninism.

Now, if you have an idea of what model you do want and how you think it would work, I don't think it'd be a bad thing to speculate (or even suggest an experiment). Or in other words, what do you want to see and how would you go about arranging it?

Edited by Ramidel on Aug 23rd 2019 at 7:14:13 AM

Random Star Wars thought.

So I recently watched A New Hope again.

Is it bad that when I watched the destruction of Alderaan again, the first thought was:

"Dude (The Empire), why would you do that? That's a planet worth of potential tax revenue and natural resources that just blew up!"

Then I realized that I was thinking less like the Rebel fighters but more like an Empirical bureaucrat.

A more pragmatic Imperial officer would instead be thinking "that's an entire planet of hostages we could use to force the Rebels to surrender! Kill them all now and we lose leverage!"

Empirical means something that's based on evidence by the way. Imperial is the adjective relating to an empire.

See, this is what happens when you neglect both science and philosophy.

Continuing on the topic of Star Wars, I found it odd how the movie never shows economic exploitation empires tend to subject their territories into.

That's because we see precious little of the Empire's actual worlds in the movies. In the old EU (now Legends) and in some of the new EU we do get glimpses of said worlds.

Spoiler: They're kind of shit.

Edited by M84 on Sep 19th 2019 at 12:00:52 AM

Also because as far as the movies are concerned, the Empire are just Buck Rogers/Flash Gordon villains dressed in legally distinct Wehrmacht uniforms.

Just as the physics of space flight are... idealized, shall we say... in Star Wars, so are the economics of a galactic empire. It's probably not worth dwelling on the matter. Heck, if you want an applied course in violations of thermodynamics, just look at Coruscant.

Edited by Fighteer on Sep 18th 2019 at 2:23:07 PM

@dRoy

I'd actually argue that you're hitting on Fridge Brilliance. A lot of people look at the Empire, realize its stupidity, and think of it as a plot whole. I'd actually argue it's the whole point:

The Galactic Empire is a regime that, on face value, appears intimidating, but in practice is actually rather incompetently run, akin to North Korea. Thus, despite having a ton of resources at their disposal, they're beaten by a Boring, but Practical rebel alliance run by people who actually get logistics and don't really on gimmicky, expensive superweapons.

The Empire is definitely inefficient, although this is discussed more in the EU than in the films. This is sort of the problem: you have your A canon that's basically a heroic epic with spaceships, and then hundreds of fan authors writing volumes of material to fill in that world, none of which has any official value at all if the films want to contradict it.

speaking of fictional economies, has any of you seen or read Spice And Wolf or Maoyuu Maou Yuusha?

Both are interesting manga about economics, but as media they're better suited for the Anime and Manga forum?