Market Capitalism is Broken: Why Adam Smith Would be Outraged by Modern Finance
Really interesting and informative interview with Rana Foroohar about her new book, Makers and Takers: The Rise of Finance and The Fall of American Business. Some highlights:
If you think about it, capitalism as defined by Adam Smith was a system by which the capital markets would take the deposits that you and I put in the bank, and invest it in real businesses that create real jobs and growth. But only 15 percent of all the money flowing through financial institutions today ends up in businesses. The rest of it is staying within the closed loop of the market itself. It’s being traded.
The mortgage market essentially funds the purchase of old assets, houses. It doesn’t grow the economy. That’s one part of it. The other part of it is the securities market. The securities market is stocks, bonds, collateralized debt obligations and so on. They’re all the things on paper that the financial system trades in a closed loop. Again, those are assets that are not creating real growth. In the last few years, you’ve seen this disconnect with the stock market at record highs, and yet income growth being flat, and overall GDP growth being flat.
One of the reasons that no big New York City banks went under during the Great Depression is that they were holding about 25 percent of their assets in cash. Banks today hold less than five percent in something called Cash or Cash Equivalents. That’s point number one. Point number two is, yes, trading is really risky, but it’s also a lot more profitable than lending, and that’s why the securities industry has taken off exponentially, the amount of lending has decreased, and also bank deposits have decreased, as a percentage of what’s on the balance sheet.
You’ve gotten 40 years of policy decisions that have encouraged that, that have protected this industry, and that’s one reason why this industry creates 4 percent of jobs and takes 25 percent of the corporate profit pie. That is just breathtaking. If you need one number to sum up where the problem is, it’s that.
[re: share buybacks] Until 1982, it was considered market manipulation. It’s amazing that something that used to be illegal is now basically the status quo for corporate behavior. Share options — which push CEOs to think short term — make up somewhere between 30 and 80 percent of how the C‑Suite in America gets paid. It creates a cycle where they have every incentive to jack up share price in the short term.
The bean counters made a number of decisions at GM that led to the ignition switch crisis. They stopped thinking about “How do we create the best products, and how do we serve our consumers?” That ended in tragedy. It’s something Mary Barra, the new CEO of GM, who happens to be an engineer, is trying very hard to rectify. GE is in some ways America’s original innovator. Thomas Edison founded the company. It brought us an incredible number of innovations in the first half of the 20th century. Later on, Jack Welch — Neutron Jack, who laid off about 200,000 people — decided that finance was the business to be in.
One of the most telling statistics that I came across in researching the book was a difference in how much investment a company made in CapEx, R&D, factories, and in worker training when you compared private companies with similar public ones. The private companies made twice the investments into the real economy as public companies did. To me, that blows out of the water all of these arguments that large corporations and business lobbyists make about taxation and regulation. “Oh, if only the tax rates were so much lower, we would invest,” or, “Oh, if only this or that red tape was different.” Private companies are out there investing under the same tax and regulatory frameworks. They see plenty of opportunities.
[on whether Uber is a maker or a taker] A taker. I’m not saying that there’s not some innovation here, but this is software that has enriched a very few number of people. I’m not saying that everybody at Uber is bad, but its model doesn’t support an economy that’s made up 70 percent of consumer spending.
Comments
stock scam
Wall Street always warns that taxing stock trades will reduce "investments" which will hurt companies, but it's easy to see that the vast majority of stock dealings are not investments at all, because the stock isn't purchased from the issuing company so no money goes to it. If Congress wants to spur investment in companies, tax all stock transactions except those bought at market price from the issuer. "market price" is important -- IPOs are typically sold to VCs and their friends for a fraction of their estimated street price, and executives are often paid in stock grants or options, where they can buy stock for pennies on the dollar and keep it or resell it immediately for huge profit, and that profit is taxed at the low low capital gains rate.
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Or ...
tax capital gains on "non-investment" transactions as regular income. Let the actual investments get a reduced rate if they hold the stock a year (to pull a number out of my number hole).
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B-b-but if we did that, it would undermine our austerity program
That is the case already
Short term gains are taxed at the ordinary income rate - for ordinary mortals. Exception - Hedge fund managers - like Rmoney - get the "carried interest" loophole and are only taxed at 15%
As Adam Smith Wrote
Vowing To Oppose Everything Trump Attempts.
Sorry for being too obvious but...
I see your Smith and raise you a Lincoln...
Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.
From his First Annual Message to Congress, Dec 3, 1861
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Or, as the IWW put it so well:
"US govt/military = bad. Russian govt/military = bad. Any politician wanting power = bad. Anyone wielding power = bad." --Shahryar
"All power corrupts absolutely!" -- thanatokephaloides
Or, as Einstein said
::
The labor contract must include a share in the value of the output, including profits from increases in productivity. Otherwise, wealth will begin to concentrate in the hands of the capitalists at the top. They in turn will use their wealth to separate the electorate from the legislators, whom they will enlist to service the needs of the corporations. Workers will be disenfranchised from government. Their needs will no longer be anticipated or represented.
To this, there is no political solution. Your government has now been colonized by corporations that serve their shareholders, not you. Voting will not help you, but you do receive an "I Voted!" sticker. So, that's something.
Love a good Wobbly!
They still exist, by the way.
Life is strong. I'm weak, but Life is strong.
Wobblies are still around
They have a website here, and the Preamble to the IWW Constitution, that clarion call to arms for all of the 99%'s working people, can be found here.
"US govt/military = bad. Russian govt/military = bad. Any politician wanting power = bad. Anyone wielding power = bad." --Shahryar
"All power corrupts absolutely!" -- thanatokephaloides
Smith talked out of both sides of is mouth.
Read Michael Perelman's The Invention of Capitalism for a taste of this. In his own words, he contradicted pretty much all of the "good" things he says above, and all too frequently.
He was more than okay with the fundamental immorality of capitalism, which is that some persons can own other persons, their bodies, their time, their work, and decide for them their value as humans. He also frequently tried to shame "the peasants" in the Britain of his day, who were, pre-capitalism, able to self-provide, choose when to work, when to play, and worked for themselves, not others.
Smith has been romanticized beyond all recognition, from where I sit.
There is in me an anarchy and frightful disorder. Creating makes me die a thousand deaths, because it means making order, and my entire being rebels against order. But without it I would die, scattered to the winds.
-- Albert Camus
Smith
I didn't read this interview as an acclamation of Smith, so much as a discussion of how what we have evolved into contradicts on the most fundamental levels his frequently cited economic philosophy.
The smaller the mind the greater the conceit. --Aesop
Its amazing
that anybody even needs to ask what Uber is.
Very simply, they exist by screwing businesses that are required to pay a minimum wage, by hiring anybody who will do it for even less. The longer they are allowed to exist on that model, the more taxi cab drivers who are working wages they might be able to live with get fired, and the more people are working who can only do that job because they are living with their parents, or have some other crutch to live on.
Its a way of screwing every worker out there. Uber should never have been allowed to get away with this. The company should be destroyed, and would have been if any vestige of sanity was left in this country.
Who gives a shit whether its a new idea or not? How can anybody argue that it isn't a way to screw people out of a living in favor of a tiny number of people who own stock? Why do we even have a minimum wage anymore, if we will never enforce it?
Uber drivers make many times more than taxi drivers.
Uber dispatches rides "reserved" by cell phone and it collects the fares, which pass through directly to the driver's debit cards.
Riders do not need to stand in the street and flag down vehicles or compete with other riders for transportation. Uber drivers do not roam the streets competing with taxis to pick up riders.
The taxi business model is antiquated, as is its old-technology methods of communicating with consumers. The chief problem, however, is that the ratty old fleet of taxis is owned by the corporation. It supplies fuel and minimal upkeep and the cars are driven until the springs are shot and they are thoroughly dead. The drivers are low paid workers who have no responsibility for- or pride in the vehicle. They do not need to be polite to customers or even speak the same language. The taxi corporations do not monitor their rides. This old-fashioned business model will be finished off by Google's self-driving cars, not by Uber.
Uber drivers must own and operate relatively new cars and keep them very clean and maintained. Both cars and drivers are highly monitored. Every rider files a report on the driver and the vehicles every time they pay for the service with their cell phone. No money changes hands, adding an element of safety for everyone. This provides a consistently top-notch experience for the consumer and a living wage for the drivers. Taxes are paid instantly.
It's just the way it is.
The horse and buggy companies complained, too, when they were replaced by motored taxis. But the consumers wanted to get around using an easier, cleaner, faster way to do so. The customer is generally right when it comes to business models and markets.
Uber drivers pay a lot in vehicle maintainance
The hidden costs of being an Uber driver.
We can’t save the world by playing by the rules, because the rules have to be changed.
- Greta Thunberg
They do, indeed.
It's a big responsibility that Uber drivers have — and taxi drivers do not.
That matters.
The appearance and condition of his car, for the Uber driver, is of utmost importance. He must impress the rider with an excellent experience, because he is graded on that by each passenger. Not so, for the poorly paid taxi driver.
This excellent experience is the reason for Uber's popularity among consumers. Business must compete — even Taxi companies — because customer service is now key.
Consumers will not be forced into a swaying Soviet-era junker with a grunting driver if they can get good service every time with Uber. They don't want to talk to a rude dispatcher. Consumers prefer to tap their phone just once and an Uber driver quickly shows up, knowing exactly where they are waiting and what their name is.
customers can be fooled
Pardon?
I've never had to flag down a taxi. I have a phone. Real taxis have dispatchers, which is what the Uber app is. It's my understanding that in most cities, it's not legal to offer a ride for money if you're not badged, which is why they started out with the "ride-sharing service" claims, and why you can't flag down an Uber ride.
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It's ride sharing because each driver owns a factory.
The Uber driver puts his factory into business by producing quality rides for riders. Each driver is an entrepreneur and they compete with other Uber drivers (not taxis) who are also close to the GSP location of the rider's cell phone signal. Metered taxis and their human dispatchers occupy a different world altogether.
It is the consumer who decides.
Taxis will always have a place, Their business model is moving toward hired cars. Many former taxi drivers are now Uber entrepreneurs, working the hours that they want to work, in the area they want to work, and are making good money from the car they invested in.
Because riders are also graded by each driver, women, especially single mothers, also make up a larger share of the Uber workforce. They can see in advance who the rider is, their reputation, and where they are going. They can drive only other women, if they chose to do so They can go off the clock when it's time to pick up the kids from school or make that dental appointment. Flexibility makes all the difference for women workers.
Uber drivers should have commercial licenses and be bonded.
They are really unlicensed taxis. Sure you can make money that way, but look at all the reports of uber drivers raping and robbing passengers. Despite living in Chicago with about a dozen murders a week, I can't recall the last time anyone accused a licensed taxi driver or assault or armed robbery.
I've seen lots of changes. What doesn't change is people. Same old hairless apes.
Your community must be very different from mine
We have two taxi companies. They have very nice cars. You can call and reserve a taxi by phone for, say, tomorrow morning at 8. Otherwise the wait times when you call can range from 5-10 minutes up to maybe 25 minutes at rush. They seem to pay pretty good wages; at least, one of my neighbors parks a cab out front of the house regularly, and it isn't a bad neighborhood. The rates are determined by local government. An increasing number of their cabs are hybrid vehicles. If your car needs a jump (like you left the lights on all night), that's another service they provide. Yes, a number of the drivers are immigrants. They all seem to speak adequate English for the job and know their way around; these days they also have electronic way-finding and tracking devices on-board. They never run that "all out of change" scam and they now take credit cards. In 28 years in this community, I've never had a problem with a cab ride. Yes, I know cabs in city centers can be ill-regulated, unreliable and in some cases, unpleasant. Here, it seems a pity to see yet another set of community enterprises struggling. We have already lost almost all bookstores, for example. Of course, we do now have more cell phone stores and payday lenders.
Euterpe2
Sounds to me like your taxi companies can compete
…very well with Uber, which also uses a high number of hybrids. Your town sounds really nice. I know what you mean about the bookstores. That really was the signal that big change was coming. Now Amazon owns us all.
Me? I don't live in Mayberry. My taxi towns are New York, San Francisco, and LA. Whenever possible, I prefer to drive myself. Urban Millennials prefer Uber, especially when they go out at night. It's a cell phone/GPS thang and a friendly driver, ofter one of their peers.
How wonderful for you.
Uber hasn't made much of a dent in Pueblo yet. I am driven to and from my assisted care facility by people who work for the one and only taxicab service in down. They work for approximately minimum wage themselves, and they work 12-hour shifts, slightly less than 40 hours. Uber hasn't hit here yet, only the forces of capitalism.
Why don't we all have a nice conversation about how its okay for Uber to circumvent labor law. I bet Plato's Republic over there will quote more capitalist philosophy. In another five years or so that many more people will have their lives destroyed as we find new and better ways to force people to pay for maintenance that used to be the employers.
But we can ignore that... because it's cool and new. And because WE get to pay less for a cab ride, and he can spend many years pretending that the working man isn't taking part of the hit.
It will also take him years no doubt to hear the horror stories about how Uber treats some of its venders.
There's nowhere left for me to go anymore. Fuck it.
Attack Uber, okay? — not fellow c99er Pluto’s Republic. n/t
That is utter total bullshit.
http://www.salon.com/2014/11/30/i_quit_miseries_of_an_uber_driver/
I know people who drove for Uber, and frankly, that's some of the most ridiculous economic drivel I've ever heard... what the hell? I weep for America that people like you can consider yourself progressive.
First of all, you are making the classic error of believing the propoganda of a few success stories that have been widely circulated, while ignoring allt he people who get screwed.
Second of all, they don't compete with taxi drivers? Are you bereft of all common sense? Do you have critical reasoning left at all, or do you just believe what you read?
When someone chooses to get a drive with Uber instead of taking the taxi, does that somehow not involve competition? That's got to be the one of the most ridiculous things I've read in years.
I feel like I'm back in Kos. Good god.
Is there anywhere I can go to avoid neoliberalism? Are we all fools now? Jesus. Jesus...
Maybe its just time to give up.
Here's another link, since we've abandoned critical reasoning.
http://www.ocregister.com/articles/uber-713672-cab-taxi.html
Apparently, Uber is competing with taxicab drivers! Shocker! Just because it involves "cutting edge" software doesn't remove them from the rules of economics.
One of the other state of the art improvements Uber has is that they can ignore regulations intended for cab services and just do whatever the hell they want since they are a cool new 'disruptive' service. It's also a way of turning the people doing the driving into independent contractors. They pay for the maintenance and service on their car, but no matter what Uber always gets their cut, whether the driver is meeting expenses.
How innovative.
A central part of the link you might want to read..
"When ride-hailing services entered the market, cab drivers occasionally bumped into Uber and Lyft drivers.
When they did, shouting matches often ensued over territory, said John Williams, who drove a cab for 26 years. The shouting has stopped as the independent drivers have become ubiquitous, their prevalence taking a sizable bite out of cab fares, he said.
“I’ve seen the industry go from a millionaire’s job to now I’m lucky if I get $50, and it’s all because of Uber and Lyft,” Williams said of his daily earnings. “Uber comes in and there are absolutely no rules, whatsoever. Twenty years ago you could make $300 a day without any problem at all. If Uber wasn’t around, it might still be the same.”
Soon after Uber and Lyft arrived, Williams called it quits. Years ago he worked 12-hour shifts, six days a week, but when the ride-sharing services arrived, he started driving almost around the clock to make ends meet.
“I got so frustrated, I just gave up the business,” said Williams, who wants to get back behind the wheel of a taxicab. “I want to go back in because I want to clean up this industry.”
Former high school teacher David Whitworth sees Uber’s entry as an opportunity to make pocket money in retirement. For four years he has driven his Mercedes-Benz for UberBlack, the company’s luxury vehicle service, entertaining riders with a history book on Newport Beach and sending them on their way with refreshments.
“I love it,” Whitworth said. “It’s a great way to get a little extra money to take out my girlfriend.”
For its part, Uber said the service provides riders with an affordable alternative to traditional cabs."
So the guy who worked rough hours for $300 a week is taken out of work by somebody making a little extra money. Uber pockets some, and one less person can afford to raise kids.
Welcome to America of the 21 century. All you have to do is buy a lot of advertising and make certain that guys like Plato can save some money, and it's all okay.
I want to avoid neoliberalism for the rest of the night, so I'm going to leave this site, and I'm not going to get within site of Kos for days. I can't turn on the television.
I'd like to go socialize, but the other disabled people I live in are nearly brain dead. I don't own a car, and they keep this center for disabled people about five miles out of town... because the property rates are lower. So we are all marooned out here.
I guess I'd better work on my models. I can't go to any part of the media without hearing neoliberal propoganda, and after years in this place none of the people here are able to talk to one another anymore.
Is the reason you had to leave Mars
the fact that you are so rude?
Mundus vult decipi, ergo decipiatur.
Uber is the logic of capitalism in action.
That is, it must constantly grow or die, and if public goods, services, rules and regulations get in its way, get in the way of maximizing profits -- and they do -- they must be overcome. If they can't get the government to do away with these things, they'll make sure they start businesses which are outside of all government jurisdiction, at least until that government catches up. Then they'll start the process of circumvention once again.
All of this is in the service of the few, to screw the many, because capitalism must grow or die. It must eat its own or die. It must unify markets or die, and if those markets are "tainted" by too many rules and regulations, it must create markets that aren't. World without end.
Uber is a symptom of the cancer which is capitalism.
There is in me an anarchy and frightful disorder. Creating makes me die a thousand deaths, because it means making order, and my entire being rebels against order. But without it I would die, scattered to the winds.
-- Albert Camus
Market capitalism is doing just what it's supposed to do.
Look, the purpose of for-profit business is to make a profit. If for-profit businesses do so by leaning upon government and by screwing the masses, then they've achieved their purpose.
The real secret is that we can have a world without the obsession with money and profit and screwing people. Please see my earlier piece on the society of money.
Otherwise we're just painting a smiley-face on... well, Lily Allen explains it well:
The ruling classes need an extra party to make the rest of us feel as if we participate in democracy. That's what the Democrats are for. They make the US more durable than the Soviet Union was.
Your essay on the society of money...
what a good read!
"I’m a human being, first and foremost, and as such I’m for whoever and whatever benefits humanity as a whole.” —Malcolm X
Very true. Any form of capitalism is profoundly immoral.
That includes Smith's. Why he's been lionized is beyond bizarre. The man was an elitist snob of the worst order, and right up with his peers when it came to trying to shame "the peasants" into giving up their autonomy to go work in the deadly factories of his day. And he wrote pure drivel about how capitalism would function in a perfect world. Those who follow him are the real "utopians," not socialists, etc.
Capitalism starts with the premise that a person can own other human beings, their bodies, their time, and decide their value as human beings. It starts with the commodification of human beings. It gets worse from there.
There is in me an anarchy and frightful disorder. Creating makes me die a thousand deaths, because it means making order, and my entire being rebels against order. But without it I would die, scattered to the winds.
-- Albert Camus
Uber, Amazon etc. are just part of a broader pattern of evils
It's not the intertubez, it's the lack of regulation
Capitalists need to be required to pay all employees or "contractors" a living wage. Exploiters gonna exploit with or without the internet - Walmart's been doing it since forever. At least with the internet I can place weekly orders with a farmers' co-operative that delivers direct farmer-to-consumer, and buy goods directly from producers on eBay or etsy.
True, Lotlizard.
All too many people don't realize that by using online services like Amazon, they're destroying their own future.
And it's just math. Internet companies can do things with a dozen people that once required hundreds of people before it. It can do things with thousands of employees that once took tens of thousands. Over the course of many years, this obviously results in millions out of work and a shrinking workforce. There is no contrapuntal action happening to make up for the job losses, beyond a few extra jobs as engineers and programmers . . . and soon enough, with advances in robot technologies, those jobs will be lost, too.
The canary in the coal mine for us was likely -- and this may sound strange -- self-serve gas stations. It was the first major shift in the way consumers were also "laborers" of a sort in the same exact transaction. Not only did we purchase the gas, we did the job of pumping it ourselves, thus eliminating jobs. Throw in ATM machines, call centers with robots answering the phones, self-service in the grocery store, and then the much more "disruptive" services online like Amazon and Google.
It's not going to happen overnight, because the economy is so huge. But soon enough, young workers will be entering a job force with radically reduced possibilities, and their kids will have a fraction of what they had, until the entire thing comes crashing down.
There is in me an anarchy and frightful disorder. Creating makes me die a thousand deaths, because it means making order, and my entire being rebels against order. But without it I would die, scattered to the winds.
-- Albert Camus