The most common mistake in social sciences is measuring what is easy to measure, and then inferring that the result is relevant to performance.
When we smash an anthill, we guarantee full employment and frantic activity for the ants. Similarly, destructive hurricanes in Florida significantly increases GDP and employment in Florida. The activity of replacing destroyed homes and infrastructure is indistinguishable to economic GDP than the activity building new homes and infrastructure. Yet the latter increases the nation's wealth, while the former merely restores it.
Distinguishing spending between durable, maintenance, and waste spending can hope to measure productive economic spending even if it focuses on the conceivably measurable economic value rather than all imaginable human wealth increases. Measuring transactions measures to a large extent wealth transfer rather than value creation. Making a new car creates value if someone needs the new car. Buying a new car confirms that value creation and transfers wealth, and also increases capital for the car maker to make more cars. Its an exchange of value rather than a transfer of value. Transacting on a used car is also an exchange of value, but neither creates nor confirms value creation in the process. The depreciation in price (from new) is not a waste but rather a natural maintenance expense given current technology levels. The eventual need to replace doesn't negate a car's useful service life' value. Education also involves value creation whether paid or not. Any payment for the conversation or diploma grant can be viewed as a separate side-transfer of wealth. Legal and financial engineering where it permits the creation and consumption of value through contracts, charters and financing creates value by facilitating the creation of value. Food, shelter, and healthcare are at their core human maintenance expenses. The first two can all be viewed as value creating in that people would voluntarily purchase higher value options even if gruel and hovels were free, whereas healthcare can have a substantial extortion component in corrupted markets.
Gifts (negating satisfaction of benefactor) merely transfers value. Theft destroys value. The benefactor suffers stress and violation, and both the benefactor and beneficiary waste resources and anxiety over security (thief must avoid getting caught). Security in general must be viewed as a waste. Hiring a militia to guard your car does nothing to preserve or enhance the car's value, merely its possession. The security forces further lose the opportunity to engage in value creation activities. Both risk and corrupt market insurance are waste as well. Transfering risk to a third party is a mere transfer of risk. A social guarantee that a car accident has minimal financial impact on its actors has value, but the profit and bureaucracy involved in providing that guarantee is waste. Barriers to financial, technology and social arrangements that would reduce that waste are waste. Lies are similar to theft in destroying value. They require a (legal) security force/effort to guard against. When investors choose risky stock investment with inherent uncertainty, and vulnerability to management lies and betrayal, and perpetual refusal to issue sufficient dividends, they tend to gamble under delusion of greed. The appetite for risk is a misguided lack of recognition for the distaste of capital losses.
Enhancing trust creates value (roughly out of thin air). It lowers militia and legal security requirements, as well as diminishing concerns regarding lies and betrayal. The Natural Finance Comptroller function is one technology that enhances trust. Having a 3rd party control all enterprise agreements removes the uncertainty of avoiding obligations, and so makes suppliers, partners and investors more likely to trust deferred compensations, and more agreeable to partnerships with less upfront cash distributions. Reduction in legal costs, and extra opportunities made possible by enhanced trust from 3rd party control are likely to favourably outweigh the costs of 3rd party control.
Back to GDP calculations, when you eliminate waste you decrease the GDP calculated economic indicator. Distributing wealth widely accross society is a legitimate goal, and waste spending is one means to do so. A more useful means are to use government taxation to fund grants and loans to projects that will create value. In order to help re-employ those displaced by waste reduction. A similar misinterpretation of economic indicators occurs when imports are viewed negatively. If importing tube socks for $2, where the alternative is to produce them yourself for $5, then importing them gives you tube socks and $3 extra. Economic value is the goods and services that satisfy needs and wants, not the little green pieces of paper that make people provide these.
EDIT: the purpose of this post is to outline political corruption of the GDP statistic. That recessions are simply defined as 2 quarters of GDP decline, makes simple GDP manipulations through increased deficits a political tool to avoid the label recession. Waste spending can be labeled economic strength or growth. That national income transactions remain relatively stable can overlook the wealth destruction that has occurred in the same period (A durable wealth statistic is provided in comments), and so policy can misunderstand the health of the economy in its actions, or ignore simple innexpensive processes that can substantially increase wealth and value.
Showing posts with label social commentary. Show all posts
Showing posts with label social commentary. Show all posts
Monday, September 13, 2010
Monday, September 6, 2010
How capitalism harms innovation/capitalism
The relationship between financiers and entrepreneurs harms capital allocation, innovation, and entrepreneurial success is the longer title. I dislike using the word capitalism because it is ephemeral, and without common meeting, and has practical corruptions that differ from its theoretical purities. Capitalism harms or is anti capitalism becomes a sensible sentence.
Common shares determine ownership in a corporation. Both in terms of voting power, and share of distributions (dividends or proceeds from sale of corporation). They have the same failing as general democratic institutions in that a majority shareholder or majority forming cartel obtains decision authority over the corporation. The basis that all shareholders must be paid equally if they are paid is insufficient to ensure that majority decisions benefit all shareholders. Entrepreneurs, managers and Financiers have different general objectives. The financier wants to be paid back. Entrepreneurs would tend to have grander vision and aspirations of empire than managers, but both seek employment benefits.
Corporate governance is on its face, a board of directors appointed by shareholders to monitor management's duty to maximize shareholder value. In practice, for public corporations, management is very influential, often naming all board members with the president as chairman. This occurs because most investors find it easier to sell their shares than to seek control of the board or fire management. There is no widespread motivation to expose stock ownership as a scam since financiers need other gullible financiers in order to divest. Hope and greed that delusions of stock value persist, prolongs the cycle of further financier participation in the scam. We invent the matrix, and reinforce it.
The major conflicts that occur between management sympathetic directors and non controlling shareholders are reinvesting surpluses (into for example buying other companies) instead of paying dividends, and diluting investors by issuing more shares (many to employees). Proof that buy and hold shareholder strategy fails is that The average large corporation lasts 40 years before bankruptcy, and dividend payouts rarely compare to bond payments (which include repayment of principal at end of term). The only genuine hope for corporate investor returns is through a takeover. Both bankruptcies and takeovers are quite cyclical, but bankruptcies outnumber takeovers in both value and instances. If buy and hold is foolish for 100 years, then it is necessarily foolish for 5 or 20 years. Insiders, professionals, and stock promoters can sometimes make money by selling prior to collapse, but it is at the expense of foolish passive investors, and either through corruption or luck. Proof that management of public companies control shareholders rather than perform their facial duty is they do not pay very high dividends with the confidence that shareholders will reinvest into the company.
For private corporations, companies who have yet to grow enough to become public or entrepreneurial startups, shareholder financiers need majority control, because they don't have the option of secession present in public ownership (they cannot easily sell shares) if they are dissatisfied. Because of the ease of selling/secession and no duty to monitor management, most financiers prefer investing in public corporations despite it being a scam. Entrepreneurs have difficulty finding financing for projects, because there are few willing financiers who fear the pitfalls of public company investing, and they need to insist on a high majority (controlling) share, which is unappealing to entrepreneurs.
Entrepreneurial funding is time consuming. There is imperfect competition in that the first investor that shows interest is likely to be able to dictate terms. Just as poor people are more likely to fail due to the high interest of sub-prime loans, ventures with too little return for effort are more likely to be abandoned by entrepreneurs.
Traditional debt financing has problems as well for both investors and entrepreneurs. For investors and entrepreneurs, other and future debt, or shareholder dividends, makes the security of the debt completely unknown, and so pricing of the debt either must approach worse case scenarios, or be unfair to the lenders in the event of present or future management substantially increasing leverage. Debt financing further tends to be limited to company asset value.
Real innovation depends on startups and private companies. Public companies that survive often do so by blocking innovation through barriers to entry, or often through the only known free market: the market for politicians. The artificial attractiveness of public corporate funding hurts the financing available for startups and private corporations, and thus hurts innovation and entrepreneurship: capitalism harming innovation/capitalism.
This post has mostly been addressing the principal-agent problem. Agents (management) have their own agenda despite a pretense of duty to Principals (shareholders). It's a pervasive social problem, and present in all agency relationships.
Natural finance solves the principal agent problem by making management/labour the only encouraged shareholders, and therefore a principal only relationship. Financiers are paid first, and as quickly as possible. Individual financier investments have a known value proposition (far easier to evaluate than common share proposition) at the time of investment, and can never be diluted. By providing entrepreneurial control and freedom, the necessary motivational drive for successful innovation is present.
Introduction to natural finance
Common shares determine ownership in a corporation. Both in terms of voting power, and share of distributions (dividends or proceeds from sale of corporation). They have the same failing as general democratic institutions in that a majority shareholder or majority forming cartel obtains decision authority over the corporation. The basis that all shareholders must be paid equally if they are paid is insufficient to ensure that majority decisions benefit all shareholders. Entrepreneurs, managers and Financiers have different general objectives. The financier wants to be paid back. Entrepreneurs would tend to have grander vision and aspirations of empire than managers, but both seek employment benefits.
Corporate governance is on its face, a board of directors appointed by shareholders to monitor management's duty to maximize shareholder value. In practice, for public corporations, management is very influential, often naming all board members with the president as chairman. This occurs because most investors find it easier to sell their shares than to seek control of the board or fire management. There is no widespread motivation to expose stock ownership as a scam since financiers need other gullible financiers in order to divest. Hope and greed that delusions of stock value persist, prolongs the cycle of further financier participation in the scam. We invent the matrix, and reinforce it.
The major conflicts that occur between management sympathetic directors and non controlling shareholders are reinvesting surpluses (into for example buying other companies) instead of paying dividends, and diluting investors by issuing more shares (many to employees). Proof that buy and hold shareholder strategy fails is that The average large corporation lasts 40 years before bankruptcy, and dividend payouts rarely compare to bond payments (which include repayment of principal at end of term). The only genuine hope for corporate investor returns is through a takeover. Both bankruptcies and takeovers are quite cyclical, but bankruptcies outnumber takeovers in both value and instances. If buy and hold is foolish for 100 years, then it is necessarily foolish for 5 or 20 years. Insiders, professionals, and stock promoters can sometimes make money by selling prior to collapse, but it is at the expense of foolish passive investors, and either through corruption or luck. Proof that management of public companies control shareholders rather than perform their facial duty is they do not pay very high dividends with the confidence that shareholders will reinvest into the company.
For private corporations, companies who have yet to grow enough to become public or entrepreneurial startups, shareholder financiers need majority control, because they don't have the option of secession present in public ownership (they cannot easily sell shares) if they are dissatisfied. Because of the ease of selling/secession and no duty to monitor management, most financiers prefer investing in public corporations despite it being a scam. Entrepreneurs have difficulty finding financing for projects, because there are few willing financiers who fear the pitfalls of public company investing, and they need to insist on a high majority (controlling) share, which is unappealing to entrepreneurs.
Entrepreneurial funding is time consuming. There is imperfect competition in that the first investor that shows interest is likely to be able to dictate terms. Just as poor people are more likely to fail due to the high interest of sub-prime loans, ventures with too little return for effort are more likely to be abandoned by entrepreneurs.
Traditional debt financing has problems as well for both investors and entrepreneurs. For investors and entrepreneurs, other and future debt, or shareholder dividends, makes the security of the debt completely unknown, and so pricing of the debt either must approach worse case scenarios, or be unfair to the lenders in the event of present or future management substantially increasing leverage. Debt financing further tends to be limited to company asset value.
Real innovation depends on startups and private companies. Public companies that survive often do so by blocking innovation through barriers to entry, or often through the only known free market: the market for politicians. The artificial attractiveness of public corporate funding hurts the financing available for startups and private corporations, and thus hurts innovation and entrepreneurship: capitalism harming innovation/capitalism.
This post has mostly been addressing the principal-agent problem. Agents (management) have their own agenda despite a pretense of duty to Principals (shareholders). It's a pervasive social problem, and present in all agency relationships.
Natural finance solves the principal agent problem by making management/labour the only encouraged shareholders, and therefore a principal only relationship. Financiers are paid first, and as quickly as possible. Individual financier investments have a known value proposition (far easier to evaluate than common share proposition) at the time of investment, and can never be diluted. By providing entrepreneurial control and freedom, the necessary motivational drive for successful innovation is present.
Introduction to natural finance
Wednesday, August 25, 2010
Public healthcare is good, but...
technological advances in healthcare seem realistically to only improve medical effectiveness while not reducing its costs. A sad but inescapable truth about healthcare spending and longevity is that it guarantees further healthcare spending. If medical treatment prolongs life, then additional different end of life treatment will be necessary in the future. Deathcare expenses are innescapable. this link states the issue in a polite manner. Public healthcare faces a difficult obstacle in not wanting to refuse care, not wanting to raise taxes (pay for it), and declining birth rates impose a substantial burden on those most likely to pay the taxes necessary to pay for deathcare.
There is a possible fair and socially distributed solution though:
First, we can predict the costs of deathcare per individual. Not that I have an educated estimate, but say it is on average $20K per person regardless of cause of death. If each person paid that much into a government invested savings account such that it grew to $20K by the time they hit age 85, then each person would cover their own deathcare. Having high income people pay $25-30K, and low income people a smaller $15-10K is perhaps democratically preferable, but an insignificant detail. $100/year (tax payment) from age 20 to 85 grows to over $30K at just 4% rate of return. In socialized healthcare, the actual costs of deathcare would still be paid socially. Individuals simply fund the expected costs.
If funding deathcare becomes politically palatable, then individuals could also choose to optionally insure for specific expensive and experimental treatments. For example, you could choose to fund possible needed future cancer treatment, or choose to avoid cancer causing behaviours and not insure. The cost of cancer treatment times the likelyhood of contracting cancer might be $8000 per person. An alternative, that is unfortunately susceptible to horrifically evil medical corruption, would be to pay tax supplements for each month you survive cancer treatment in order to reflect the death avoiding healthcare you received and be proportional to the quality of benefits you received.
Without these direct, but still socially distributed, funding opportunities, managing healthcare costs will mean reduced healthcare (death panels) or higher general taxation. The funding proposals would encourage life extending medical research. Its a clear human benefit to enjoy life extending technology. We just need to pay for it if we want it. The high public debt in Ontario justifies these extra funding streams.
There is a possible fair and socially distributed solution though:
First, we can predict the costs of deathcare per individual. Not that I have an educated estimate, but say it is on average $20K per person regardless of cause of death. If each person paid that much into a government invested savings account such that it grew to $20K by the time they hit age 85, then each person would cover their own deathcare. Having high income people pay $25-30K, and low income people a smaller $15-10K is perhaps democratically preferable, but an insignificant detail. $100/year (tax payment) from age 20 to 85 grows to over $30K at just 4% rate of return. In socialized healthcare, the actual costs of deathcare would still be paid socially. Individuals simply fund the expected costs.
If funding deathcare becomes politically palatable, then individuals could also choose to optionally insure for specific expensive and experimental treatments. For example, you could choose to fund possible needed future cancer treatment, or choose to avoid cancer causing behaviours and not insure. The cost of cancer treatment times the likelyhood of contracting cancer might be $8000 per person. An alternative, that is unfortunately susceptible to horrifically evil medical corruption, would be to pay tax supplements for each month you survive cancer treatment in order to reflect the death avoiding healthcare you received and be proportional to the quality of benefits you received.
Without these direct, but still socially distributed, funding opportunities, managing healthcare costs will mean reduced healthcare (death panels) or higher general taxation. The funding proposals would encourage life extending medical research. Its a clear human benefit to enjoy life extending technology. We just need to pay for it if we want it. The high public debt in Ontario justifies these extra funding streams.
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