Well yeah, but advocating for partial employee ownership isn’t the same thing at all as railing at billionaires solely for having money.
I’m for what you’re describing, but I think there needs to be some education and explanation that if the stock price fluctuates, that it doesn’t mean people are losing money. My first job out of college was in a company that did actually have substantial employee ownership like you describe, and IMO, people were way too concerned about the stock price, despite nearly all of them having little to no ability to influence it in the least bit. They’d get super anxious when it would fall a little, and then rise a little. And our company’s stock kind of sucked as an investment in the first place; had I been there long enough to vest, I’d have sold it all that day, and bought index fund shares.
That didn’t work out so well for employees of some companies (Enron, for an extreme example), as some employees had a substantial part of their investments in their employer. On the other hand, some employees may want to cash out their company stock immediately, while others hold on and may see enormous gains.
Not direct control, but as you say, there is influence. If the CEO of a profitable company decided they wanted to use those profits to give all the employees a raise, the stock is more likely to decrease in value than if the CEO uses those profits for something like a stock buyback or paying out a dividend.
But the way many billionaires got their money was to retain ownership of a company the started or had a hand in starting, but which was built up to huge by the effort of thousands, or tens of thousands of others. Almost none of whom received any ownership share for their efforts.
As I argued in a post upthread, if company-founding ownership was treated a bit like patent or copyright, in that it had a sunset date after which the benefits would be societized, not privatized, the world would be a more equal place.
Unlike the sudden-cliff of patent expiration, I’d favor something where the founder(s) keep their ownership as is now done for some fixed number of years, then must gradually transfer it to the former and current employees who created the great value it became.
Yes, a la Enron there are risks. Capitalism where everyone is a capitalist is inherently fairer, and potentially far better policed for fraud, than is a “capitalism” that consists of 0.1% of the people owning almost everything, and 99.9% owning substantially nothing, being simply wage workers.
Introducing a sovereign wealth fund as an intermediary to pool all the shares of all the companies and all the risks & rewards for the benefit of everyone is another way to achieve the same “everyone’s a capitalist” goal with fewer risk concentrations.
FWIW, I agree. Not getting the belaboring of the hypothetical. Pick another one. The question is pretty straightforward, though it requires, perhaps, a more nuanced answer.
The question about whether or not one can become a billionaire in a moral fashion is separate. I would say becoming a billionaire may or may not be done via ethical means. But there’s no way to morally remain one.
One more point of clarification: A just society would not permit one to legally become a billionaire, even if one did so through some benign, life-affirming industry. Unfettered capitalism is not ethical or unethical. It’s simply ruthlessly efficient. Nothing prevents us from changing the guardrails.
The fundamental issue is the ‘make it, take it’ nature of unfettered capitalism, to use a schoolyard basketball phrase.
But the issues with doing it other ways are the issues with property ownership- let’s say that I start my business with my own capital - let’s say it’s money I inherited from the sale of my parents home after their deaths, diligently work at it and make it a successful, if not huge business.
Then there’s some sort of sea change in my business, and suddenly it goes from being a sleepy but successful business to one worth a billion dollars based on offers to buy the company for that much, but not making a billion dollars in revenue.
Now I’m a billionaire on paper. I don’t actually have a billion dollars to spend, I don’t make a billion dollars in salary, and nor does the company. It’s just valued at a billion dollars by people who want to buy it.
What gives anyone the right to swoop in and effectively STEAL part of my business from me, and give it to anyone else? That’s BS- it doesn’t matter how much I own; the government can’t go around effectively stealing people’s property because they’ve arbitrarily decided I have too much and others have too little.
Beyond that, what if there’s another sea change, and suddenly my company isn’t worth a billion anymore- it’s back into the seven figures range in value. Do I get back that which was taken from me?
What gives the government the right to first issue, then expire, a patent or copyright? Once given, why are patent rights temporary, but e.g. land title permanent?
Why? Because that’s what we’re used to. Nothing deeper than that.
While we are designing the perfect ethical society, someone should think about the whole concept of land ownership and resource extraction. Why should people alive today have an advantage over people who aren’t born yet. What makes them so special?
There’s a whole branch of futurist ethics on exactly that point.
The nature of the Net Present Value calculation is that a decision to commit to utterly destroying the Earth a la the Death Star in, say, 10K years and foreclosing all of humanities’ future and future economic activity from that time forever forward, is a net money maker if it produces $10 of non-bankable spend-only value for each person alive today.
Economics should be part of society. But when all of politics and ethics is reduced to economics, or worse yet, to financial economics, something essential is missing from the total compass of human life, behavior, & thought.
I feel these were conscious decisions that were deliberated at one point. People decided that society would benefit by having ownership of intellectual property be temporary. They felt that “ideas” should be free for anyone to use, while recognizing that temporary exclusive ownership encouraged people to create new ideas.
Land and other physical property didn’t fall under this principle because of their different nature. Ideas can multiply; if you have an idea and I use that idea, you still have your original idea. I was able to copy your idea without you losing it. Physical copy doesn’t work like that. If you sell me something like a piece of land or a car or a hammer, the object is transferred from you to me and you no longer own it or have the use of it.
Yes, there is some underlying logic as you rightly say.
But a company (especially the joint-stock corporate form of company) is different yet again from an idea or from a piece of land. It grows and shrinks and shape-shifts in ways a plot of land does not.
You’re also right that an idea in and of itself is not diminished by being copied or imitated. But the whole and entire point of patent or copyright is that the economic value of an idea is reduced, or at least diluted, when copied. Patents and copyrights make the copying of ideas strictly illegal. Why? To preserve all the economic value of the idea to the originator. But only for awhile.
At some point, enough is enough when it comes to what’s essentially a form of “first mover advantage”. Why are these forms of first mover advantage time-limited and others are not?
I know that I don’t have a coherent plan here. Certainly not a serious fleshed-out proposal. But good ideas flow from hard questions. Which often are questions that call into question what appear to be eternal verities that on closer inspection aren’t really so eternal nor verit.
Ok, first of all that isn’t what a Net Present Value calculation is.
Secondly, economics is the study of how societies choose to allocate resources to meet the wants and needs of the people who live in that society. And IMHO ultimately a lot of politics and ethics is reduced to economic decisions because it is in those decisions where societies choose how to maximize “the total compass of human life, behavior, & thought”.
Patents and copyrights came into being because those works were literally being stolen for use by other people as soon as they came into existence.
Ideas for businesses are allowed to be stolen. Therefore they are considered of lower value to society. Walmart’s business concept was stolen in its entirety from Pricemart, just as Sam’s Club was taken directly from Price Club, which was merged into Costco, also directly taken from Price. Giving those ideas rights, even temporarily, for exclusive use, would raise their value tremendously. You would create more wealth, more billionaires, and more inequality.
Not sure who you’re replying to or how that maps into the thread. But you’re certainly correct in isolation.
Yes, business process patents (and ridiculously wide software patents) have a nasty and pernicious history and have mostly been shoved aside by the icebreaker of history. And rightly so.
One of the problems with this question, as asked, is that you’re putting forward a scenario, and asking a large group of people specifically to object to your scenario. But any large group of people is going to include any manner of objection. You’re openly inviting the childish, the envious, the risibly ignorant.
If you specifically ask for objections, they will appear. But they won’t necessarily be helpful. There’s some good info already in this thread, but there is also the opposite.
The way to go about this – if you want factual information – is to ask a broader question. One possible interesting question here is How and why can an initially small investment eventually become worth much more? This question subsumes the other, because if you have a sufficiently broad answer to this question then you automatically have an answer to your original question.
Asking about how the general system works is a more difficult route to go down. But it’s also more worthwhile.
The price of an asset is going to reflect something like: the expected risk-adjusted “present value” of the future flows of value from that asset.
Financial assets are valuable today if there’s an expected chance that they’ll be valuable tomorrow.
For example, if there’s a machine that will create 10 gumdrops a year for the next 10 years, then that machine will be valuable today, because it will produce valuable future gumdrops. An interesting point here is that the machine will become progressively less valuable over the course of its lifetime. After 10 years, its life of gumdrop-creation will be behind it, and its only value will be in any salvage cost from its materials (if any).
Cars start out valuable. Then they depreciate.
Now imagine a different machine, which will create 10 gumdrops a year indefinitely.
This machine is more valuable than the first. Yet it is not infinitely value, for basically the same reason that land of indefinite future fertility is not infinitely valuable. A gumdrop next year is not as valuable as a gumdrop today. Prospective gumdrops that are further and further into the future will be worth progressively less to someone holding the machine today. The present value calculation of this machine is an “infinite horizon” problem. Formally, it involves calculating the infinite series of discounted estimated future gumdrop values. Adding up these infinite terms will result in a finite price today.
Interesting point here: As long as the “interest rate” in the economy is relatively constant, the price of the machine will likewise be stable. The machine will always be worth roughly the same (real) price. Rather than the machine losing value along the course of its lifetime, the indefinite future lifetime will result in an indefinitely stable price.
Put this asset in your portfolio, and its price will keep steady.
(There are some wrinkles here. The nominal price of the machine can vary enormously with the value of money. Or if an enormous number of similar machines are created, then the marginal value of producing one more gumdrop will strongly diminish, and this will push down the value of present and future gumdrops, which will depress the value of the machines that make gumdrops. Or for a more technical point, if the machine pays its dividend once a year, then you’ll have some price fluctuation within the year: a small, discontinuous drop in price immediately after this year’s dividend is paid, and then the price steadily increasing until the next dividend. But these points are all a little off topic from your main question.)
Now we’re finally getting closer to the heart of it.
Suppose the next machine is expected to produce more gumdrops every subsequent year, for a long period of time. Everyone knows, in advance, how the machine works and that it will reliably produce more and more and more gumdrops every year for the next fifty years.
Will the value of the machine increase over time?
Yes.
Compare two machines: one creates 50 gumdrops a year, indefinitely. The other produces 1 gumdrop this year, and 2 next year, and 3 the year after, and so on, until 50 years later it will be producing 50 gumdrops a year indefinitely thereafter. Which is the more valuable machine today? Naturally, the one that is already mature. But the second machine will eventually turn into the first, and when it does, it will be priced (in 50 years time) the same that the first machine is priced today.
This is one way that an asset can increase in price over time.
Is anyone “harmed” by this? No. Obviously not.
On a better earth, it would be obvious that that’s not the case. But in this fallen world, it is worth a few moments to work through: Gumdrops are valuable. Therefore the machine that creates them will be valuable, too. As the machine gets better at making gumdrops, it becomes more valuable. (The same would be true of whatever other goods or services you want to substitute into this hypothetical: healthcare is valuable, having a place to live is valuable, an education is valuable, etc. Therefore hospitals and MRIs are valuable, homes are valuable, schools are valuable, etc.)
Having more of a good thing is generally good. That means that having the thing that produces more good things is also good. If that capital good becomes even better at producing good things, then it becomes even better.
If the gumdrop machine magically materialized in the world, its property rights mystically assigned to one person, then this one person would be significantly better off. But all gumdrop lovers, everywhere, would also be better off, because there would be more gumdrops. More of a good thing is good. (The relative benefit to consumers could be measured in theory by the increased “consumer surplus” resulting from the additional gumdrops. See a good Price Theory book, like David Friedman’s, for the more in-depth explanation.)
But these sorts of machines don’t materialize out of nowhere. Someone had to risk their initial investment on the chance. If the cost of the initial investment exceeded the eventual value of the machine, then the original investors of that machine actually lost out, on net. The people who like gumdrops gained, but the original investors were losers.
This actually happens quite a lot. The final consumers normally benefit (on net, collectively) significantly more than the investors themselves. This can be hard to see, because the benefit to the investors tend to be concentrated, and the benefit to the consumers diffuse across all of society. But for an extreme example, you can look at the 19th century railway investment craze that created the first modern transportation network which completely changed the world. After the initial windfall, many of these railroad companies went bankrupt, but the rails continued to serve the public. Return on railroads started high, but then blew away. Returns to users stayed high.
In the case of a hugely successful firm, consumer surpluses tend to be even more massive. (This is, of course, why the firm succeeds: people value this firm’s gumdrops very highly.) It’s easy to look at the fortune of someone like Jeff Bezos and gawp at the size of it. But Amazon directly serves hundreds of millions of people. Indirectly, they serve billions. If you are even remotely connected to modern infrastructure, Amazon has influenced your life. If you watch an early YouTube of Bezos talking books logistics, you’re going to realize very quickly that he lived and breathed this stuff.
Efficient warehousing and delivery infrastructure (not to mention web services) is valuable to its customers. That’s why their customers bought half a trillion gumdrops dollars of goods and services last year.
This brings us to risk.
This is the next reason why an initially small investment can grow to become much more valuable. It can be uncertain whether an investment will work. People can design a machine that will perhaps produce 10 gumdrops, and perhaps produce 0. Say it’s a coin-flip whether it’s one or the other.
Then before it is known whether the machine will work, its value will be approximately 5 gumdrops. If the cost of building the machine is 4 gumdrops, it’s probably reasonable to pay the cost for the opportunity to flip that coin. The expected value is positive.
In the case of a company like Amazon, you see combinations of both of these effects, both maturity time and also risk. Amazon was unprofitable for the first decade+ of its existence. It was producing fewer gumdrops than the number of gumdrops used to build and maintain it. And yet the “machine” of the firm was valuable anyway, and trending toward being even more valuable. Why?
Partly because of the long expected maturity time. We’re talking about a machine that might eventually produce hundreds of billions of gumdrops every year (as it does now). So in addition to needing to wait for the machine to mature (which took a massive amount of work, not just waiting), there was also the question of whether the machine would function properly after its maturity. (There was never any question that an online bookstore (or everything-store) might be valuable. The question was always whether it would be valuable enough to justify all the gumdrops used to build it.)
If you’ve got the Amazon IPO in your portfolio, there’s really only two plausible outcomes for you. Either it’s going to work out, and it will be worth significantly more over time as the firm matures and the risks all work out. Or else it will stall, and then crash, and then you’re looking at a big fat crater in your portfolio where that asset used to be.
A real-world company isn’t just one coin flip, but many. People re-evaluate the risk every year. Or even every day. That 0 at the bottom is always calling out. Entropy is a constant force. “Things fall apart; the centre cannot hold”.
Can the general public be hurt by this process? Potentially yes… if the investment fails.
If you’ve got a machine that can create a billion gumdrops, then that production will be enjoyed by people who like gumdrops. But if the investment fails, that means the machine doesn’t work as well as was hoped. All of the capital allocated toward building that machine turned out to be a bad idea.
This is precisely why capital allocation is so hugely important for human society. And that, in turn, is one reason why the returns for the people who are good at allocating capital are so enormous. The reason why labor is valuable is obvious even to children. It’s a tangible thing that anyone can understand. But most people can’t handle the abstraction of capital allocation (just like most people cannot understand calculus). Capital is allocated dynamically over time. Good capital allocation is a force multiplier that can (if it’s done well) not only help directly guide the power of tens of thousand of workers directly, but it can also multiply that labor power many times over. Capital allocation is an insanely valuable skill. That’s why it’s returns can be so large.
And of course, luck is also present everywhere.
People often think that the presence of luck should diminish the rewards for the skill, but the exact opposite has to be the case. Think back on the machine that has a 50% chance of producing 10 gumdrops, and a 50% chance of failure. The machine (before testing) will have a value of approximately 5 gumdrops.
Now imagine a machine with a 0.0001% chance of producing a million gumdrops. Before testing, this machine should have the value of approximately 1 gumdrop. And therefore if it works, the return to the owner will be a million times the initial investment. The same is true for human skills applied to risky enterprises. The more absurdly implausible Amazon’s success seemed before the fact, the more significant the multiplier effect on the value of the investment after its success. Luck is a multiplier of returns, not a diminution.
To return to the prospective of your personal portfolio: most of the harebrained ideas you invest in will go to 0.
But if you have either luck – or very importantly, the insight – to invest where other people are mistakenly undervaluing a project, then your reward will be disproportionately large.
And all of this is a big part of the story why an asset in your portfolio can go from worth a little to worth a lot.
We have private markets in capital allocation because we don’t know in advance which endeavors will work out, and which not. Your own portfolio is part of this process. Private markets allow those who are most skilled at the task to accumulate more capital – which is to say that if they’re good at recognizing potentially good gumdrop machines, they will in future have the funds to finance even more prospective gumdrop machines of great potential. Their personal benefit is ownership of the gumdrop machines (or in the case of corporate stock, ownership of the firm that owns the gumdrop machines, or the logistics infrastructure, or whatever else).
The public’s benefit is having orders of magnitudes more wealth than our ancestors.
Is your portfolio becoming more valuable a sign that others are worse off?
No.
You are the primary beneficiary, but your own portfolio becoming more valuable is (generally, on average, most of the time, in the balance of things) a sign that conditions are getting better for all the gumdrop lovers out there, too.
If we are going to talk about morality - the those 1.5 million people that Amazon employs - a large chunk of them are paid wages that are unsustainable. Large numbers are contract employees not eligible for benefits - these people then have to rely on Medicaid and other public assistance. No unions to protect them
“Market forces” will be the obvious answer - but that does not make it moral. Inherently all extremely rich people are exploitative.
I disagree. Not everyone is an innovator. Some people are extremely better at innovating new ideas than the vast majority of the population. For the most part innovators don’t develop new things because of altruism, they do it for financial rewards.
If you limit or classify the best of our best in society as immoral because they create new and wonderful things that benefit society, then you will limit innovation within our society.
When you’re getting free value that other people aren’t, specifically because you already have property, then you’re increasing wealth inequality, decreasing many people’s access to a variety of goods & services, & typically compensating capital at the expense of labor.
“Value creation” is kind of a convenient fiction; prices and pay scales are made up. But it has real-world consequences, and it matters how we distribute this made-up stuff we call value, credit, money, etc.
Society benefits when innovation occurs so our laws should encourage innovations.
Some people are really good innovators.
These really good innovators are mainly driven by the desire to become wealthy.
What conclusion derives from these premises?
We should raise taxes on the wealthy.
According to your argument, society benefits from innovation and innovators are the ones who produce that. So we need to keep these innovators motivated to keep working. Society doesn’t want them to just innovate for a few years, acquire a lifetime’s worth of wealth, and then stop. We want them to keep innovating year after year. They should have to keep earning their wealth. I’m not talking confiscation. I’m saying we should tax them enough that they have to keep working and can’t just sit around on what they’ve accumulated.