Surprise infection in capitalism

Posted on December 4, 2009
Filed Under Commentary, Economic & Political Philosophy | Leave a Comment

A couple of odd worms have infected capitalism as it is today. These worms are responsible for the explosive growth of huge industries and congomerates. They are also the drug that drives these firms to desperate, sometimes fatal, decisions.

You may be surprised to learn that the parent worm is quite possibly you. If you have a job, you contribute to the Canada Pension Plan, perhaps a company or government plan, and perhaps a Registered Retired Savings Plan. Perhaps you purchase life insurance, or take advantage of any of the other tax sheltering saving and investment programs set up by government to encourage you to save for a house or your childrens’ education.

All of these investment vehicles have created huge pools of investment capital owned by people like you and me. What most of us have in common is that we have no interest or expertise in the buying, selling and administration of stock and bond potfoliso. It is a bit of a socialist model when you think about it, isn’t it?

The natural result is that hundreds of firms have sprung up to manage our holdings for us. The Ontario Teachers Pension Fund is one of the largest investors in Canada. The Canada Pension Plan has a huge investment arm that recently attempted to buy New Zealand’s Aukland Airport. All of the banks and insurance companies have investment arms.

You may remember a recent bit of controversy with the Province of New Brunswick employee pension fund. The province is suing tobacco companies for contributing to health care costs. At the same time, the provincial pension fund invests in tobacco company shares.

These investment boards, banks or companies, representing you, search for the best investments to earn the management fees they charge you.

Their analysts study and monitor quarterly results from publicly held companies. Those analysts aim to exceed, or at least match, the results of analysts in all the other firms in order to keep your plan buying their services. If a company’s sales and profits trend up, they bid up the share price. If earnings per share are down, or even not up as much as expected, they abandon or reduce their holdings in that company, driving the share price down.

The pressure from analysts makes company management desperate to produce a steady stream of quarterly reports that show smooth and significant growth in sales and profits. It is almost impossible to do that, for any great length of time, by managing the company well. Not everyone can have a brilliant new idea for a product or service or a new technology quarter after quarter, year after year.

One thing management can do is pressure its bean counters to cut costs. The danger there is that it is easy for them to mistake meat for fat and cut so deeply that they kill the beast. Their expertise is numbers. They are no more capable than politicians, civil servants, you or me, to see what makes a business valuable.

The other management technique that can keep sales and profits rising is to make the company bigger by buying another company. This has the added appeal to management of justifying more money and perks for management. We are all most interested in our own welfare, aren’t we?

Competition is good but, taken to extremes, it can destroy value. There is cheap pizza and there is good pizza. There are newspapers with good content and there are newspapers with cheap content. There are good automobiles and there are cheap automobiles.

The result of all this is dramatic rises and falls in the fortunes of companies and industries. Sometimes the swings are based on reason. Often they are purely emotional like the frenzy and the sub-prime mortgage bubble.

The victims include the investors who didn’t get out in time and, dramatically, employees who lose their jobs, health plans, and, sometimes, pensions.

Meanwhile, privately held companies, like the Irving and McCain groups, avoid the short-term desperation. Their business plans can be for one, five, 10 or 100 years depending on how they see the value and potential over various times. If it is a good time to buy for growth, they do. If it is a good time to reduce holdings and hunker down, they can.

Yes, they have to compete for sales, so they work hard to control costs, inovate and market their services. Yes, they make mistakes, have to change direction, back away and eat losses. They do not, however, have to satisfy the market analysts who have to satisfy the investment funds who have to satisfy you four times each and every year.

I wish I had some wise solution to suggest to this tendency of your capitalism to attempt to eat its own tail. I don’t.

While pools of investment capital you own create some harm and desperate behaviour, it is impossible to see how progress could exist without them.

What invidual or family could and would afford to gamble, all alone, on the development of an inovation like Google, a communications satellite or a hybrid automobile? The only way these things are possible is if someone can get millions of us to bet a dollar rather than trying to get one of us to bet a billion dollars.

Progress has always killed some things we like. Fast food chains put some of our favourite burger and pizza joints out of business. We used to be able to call the telephone company and someone would answer the phone. Still, even though the population of the Miramichi has not grown for years, the products and services locally available to us now, are amazingly greater than they used to be.

It is, however, frustrating to watch valuable goods and services disappear because of the blindness of packs of desperate money hounds. I can clearly see what the newspaper industry did and did not do that led to its serious decline. Unfortunately, all newspapers suffer from the mistakes of the majority.

“Pogo,” Walt Kelly’s cartoon strip possum character once said, “We have met the enemy and it is us.”

Joni Mitchell, a supernatural human being wrote, “Don’t it always seem to go, you don’t know what you got ‘til it’s gone?”

Let us hope that social capitalism will rediscover and rebuild the best elements of traditional goods and services it has discarded. Where there is a need, someone usually finds a way to meet it.



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