6 responses to “Quote of the Day – Capitalism Edition”

1. 

   Steve Verdon

   April 1, 2009 at 11:28 am

   That’s the bottom line of a post arguing a point Dave Schuler has been making frequently on OTB Radio and on his own site: That companies who are in good shape should not be cutting their workforce right now just because times are bad and doing so will be rewarded in today’s stock price.

   Yeeeahhhh….I’m going to toss this poit in though:

   Profit maximization implies cost minimization at the profit maximizing level of output. As such, if the current situation has induced some firms, who are profitable, to take a look at their operations and see some “fat” and cut it. That isn’t a bad thing. It is a good thing, it is what firms, in a capitalist system, are supposed to do. And in doing so, they should see a boost in their stock price.

   Keeping workers working simply because it lines up with larger societal objectives (reducing unemployment or at least slowing its rate of increase) is most emphatically not what firms do in a capitalist system.
2. 

   James Joyner

   April 1, 2009 at 11:58 am

   Keeping workers working simply because it lines up with larger societal objectives (reducing unemployment or at least slowing its rate of increase) is most emphatically not what firms do in a capitalist system.

   True. What Dave objects to is cutting people for the sake of boosting the short-term bottom line and demonstrating to stockholders that you’re doing all you can to give them an immediate return on investment in a bad market. That’s short-term smart, long-term stupid.
3. 

   odograph

   April 1, 2009 at 12:05 pm

   This is not a small point: “firms” are not necessarily “capitalist.”

   Capitalist in the original meaning is about a billionaire (with capital) like Mr. Cuban controlling an entity and bending it to his well. Steve Jobs at Apple. Bill Gates at Microsoft.

   They generally are founders and their firms evolve beyond them. HP was capitalist when controlled by Hewlett and Packard. It was less so when it was controlled by a manager, Carly Fiorina.

   Given how rare true capitalist bird are these days, I think we are better off talking about “managerial capitalism” or a managerial market economy.

   Steve can fill you in on the Agency issues this implies.
4. 

   odograph

   April 1, 2009 at 12:07 pm

   Shorter: Mr. Wagoner did not own GM. He was not a capital-ist.
5. 

   Steve Verdon

   April 1, 2009 at 12:09 pm

   I agree, but how do you tell the difference? You can’t simply by looking at the behavior. For example:

   Company A:
   1. Healthy
   2. Has some “fat”
   3. Trims “fat”
   4. Stock price goes up.

   Company B:
   1. Healthy
   2. Has no “fat”
   3. Trims “non-fat” employees
   4. Stock price goes up.

   If all we see is 3 & 4 we can’t tell which company is doing the right thing. Further, I’d argue that what Company B is doing is fundamentally un-healthy. If there is any teeth at all to the efficient market hypothesis company B’s unhealthy behavior will soon come back on itself.

   In other words, for the situation with company B to be pervasive and long lasting you also have to believe that investors are allowing themselves to be hoodwinked time and again by the same old ploy. That they are, at a fundamental level, stupid.
6. 

   steve

   April 2, 2009 at 2:07 am

   Hard to argue with Cuban as a general principle. However, what we have seen in practice is different. People were able to male enough money in just a few years, that there was no consideration for long term results. The penalty for failure is a retirement larger than most people will make in three lifetimes. Look at Wagoner. His company stock price went from about 70 to 3 over 8 years. So the board decided to decrease his pay during that time and decided to replace him? Hardly.

   Steve