Miles Saltiel is a former investment banker and a Senior Fellow at the Adam Smith Institute
Marx was dead right about one big thing: capital allocation matters. But his followers were dead wrong about everything else, throwing in with the wrong scheme. Not everyone will agree with my test of capital arrangements: those which maximise economic growth through Schumpeter’s “creative destruction”, specifically the formation, expansion and extinction of companies. I like this yardstick as I want everyone on the planet to enjoy my standard of living or better; and nothing but economic growth for another century or two will achieve this.
I expect there could be more, but as best I know the modern world embraces six methods for allocating capital to enterprises. They are:
Governments
Banks
Industrial companies
Families
Criminal organisations
Markets
At one time or another, most economies have resorted to most of them. All have mixed fortunes.
Governments are in disrepute as allocators of capital following the conspicuous failings of communism as an economic system (including its de facto abandonment by China), as well as the undistinguished record of socialism in such manifestations as post-war Britain, France under Mitterrand, post-independence Africa and India, and so on. Governments turn out to be capable of supervising catch-up policies (Russia from the twenties to the sixties; France during les trente glorieuses), but too weak to resist subsequent pressure from the industries they purport to supervise. At present, the mixed approach of China is testing this limit. Britain is a textbook example of such failings; heaven help us in our current reversion.
Banks look like the real thing: marble halls and corner offices are inherently more dignified than screaming dealers. But inspection shows up capital allocation by banks as troubled, most conspicuously in its salient post-war models, Germany and Japan, largely because of the conflict of interest attaching to banks as lenders and owners. They are reluctant to allow borrowers to go bankrupt, with each country having thousands of zombie companies and several zombie banks. Both countries are now ex-growth.
Industrial companies: Growth from the retained earnings of conventional enterprises runs up against the limits of managerial expertise, eg, Jack Welch’s General Electric in the US, or Philips and Siemens in Europe - all before reconstruction.
Conglomerates such as the zaibatsu / keiretsu of Japan or the chaebols of Korea are configured to share risk internally. They are also brushing up against their limit, as their economies have attained levels at which they no longer profit from such organisations. This said, similar arrangements seem to be emerging in Russia, combined with criminality (see below).
Families: When it comes to mature companies, proprietary sources have had marked failures, eg, throughout Latin America. There have also been some successes, eg, in Sweden, where the “Wallenberg Sphere” dominates the industrial landscape; and more tentatively in the countries of the Chinese diaspora and in liberalising India. Eventually proprietary families become unable or unwilling to continue investing, giving rise to capital insufficiency which threatens growth. Proprietary companies in the German Mittelstand restricted their ambitions accordingly and prospered until the Zeitenwende. For decades the Wallenbergs addressed capital insufficiency by penalising third-party investors with junior paper, ie, with restricted voting rights. At present, tech founders want the same privilege.
Until recently, “friends and family” were the only investors willing to take start-up risk. In the last forty years, Silicon Valley (and to a lesser extent elsewhere) has developed successful organisations for accumulating and actively managing start-up funds, subscribed by risk-tolerant private persons, for choice also offering pertinent expertise. The most successful of these companies are now demonstrating the familiar problems of monopoly.
Criminal organisations also weigh in. The most familiar example would be Las Vegas from the 1940s to the 1980s. Elsewhere, criminals operate openly in Russia: much of the economy is a de facto criminal enterprise; and discreetly in Italy: organised crime forces minority investments upon private firms. I am not aware of this last interfering with everyday management, though I expect money laundering distorts operations in cash businesses. Similar arrangements apply in those parts of Latin America in which narcotraficantes prevail.
Where applying to mature enterprises, the five methods set out above are inherently self-protective. This means they make for oligarchy or monopoly - or, to put a more positive gloss on it, fraternité: order, social solidarity and stability, valued more in some places than others.
Capital markets: Taking the period since the Industrial Revolution as a whole, it has become clear that only capital markets reliably correct errors for established companies. If properly combined with arms-length regulation, there is no better system for correcting oligarchy and monopoly. Capital markets achieve this by pricing capital from day to day, cheapening the cost of new funds for established companies which are succeeding; and by extinguishing businesses which fail, through bankruptcy or takeover. No other method has the resilience to work satisfactorily in the face of the unanticipated circumstances of the long run - that is, after the success of initial catch-up which may attach to any of the other methods for a while.
The obvious defect is the tendency of markets to boom and bust, exacerbated in 2008 by defective regulation. But only the price formation arising out of liquid secondary markets for capital and derivatives turns out to offer the flexibility and detachment sufficient to allocate capital efficiently and consistently.
That’s a piece straight out of the mouth of someone with their head right in the lions mouth! I would have expected nothing less.
But it gives a false impression of what could be done. It fully explains what happens now except for one thing. We the people, us. All of us.
Trust a marketeer to ignite the one important thing. The SPENDING of the general public including the rich to invest in the businesses we all need to survive.
The example offered here is exactly what’s wrong with investment now. From an underfunded government and a banking system that likes other people’s money do they can leverage money from nowhere to loan as debt to the hand picked few who they deem worthy if it!
To, the cash rich wealthy businesses and the cash laundering of villains who allow themselves to hide money here and abroad as it’s in untraceable cash with the complete help of the worlds banking system who have no qualms using that laundered money to use themselves. And finally to the mega rich and cash rich individuals who seem to be bigger than nations and now Continents!
What a mess! What a terrible state of affairs that the few can hold the majority to ransom. Undemocratic if ever there was.
And no criticism if thus structure because it’s the lion the author has his head down the throat if.
I’m sorry to say it seems to be the best we can do. Is it, is it really!? Of course not! Of course we can do better and it’s rather easy.
It’s not just easy but it can make every citizen including the mega rich and those villains of today but everyone, much wealthier than now, if only they realised!
It starts with understanding money. Money is a token a swap for our work for the work of others. The token system is for the swap of work so has to involve the full complete, fair and FREE swap of the money that died that job. How? By SPENDING it.
Now we are indoctrinated especially by Banks and those with skin in the game that saving us key! NO ITS NOT.
The best thing is not to not enjoy our hard work now and refuse that to give our money to banks that withhold the spending if they money! And big just that they produce from thin air leveraged money, not from our government currency issuer but from banks with their ie. Snouts in our trough. So instead of us getting a free flow of money returned to us who provided it in the first lace but, we have to borrow it back instead!
Banks withhold money from us, and stop feeding it back, in part or at all, for their gain not ours! Free flowing un-indebted money rather than indebted money is then returned with debt interest and future profits given up for their gain. All because the money wasn’t SPENT in full in the same time frame as received.
And we are the investors! We are the ones who are patrons customers and consumers of those businesses and when we all spend we all invest in Those businesses freely. No debt!
It’s our money for all our use. We decide with choice who we spend with not villains bankers and funds. Us.
I don’t know how they get away with it. The few dictating to the many holding the many to ransom by withholding the free flow of money.
We should be paid more. Our governments should be well funded by a tsunami if SPENDING and our whole economy can free from the present bottom to the optimum best we can do.
And everyone will be wealthier from SPENDING money in full fair exchange of our work effort. Even the rich get wealthier. Not from holding money but by just SPENDING it.
I would suggest we introduce exchange controls removed by Thatcher. Then swap all money now cash coin and digital to a digital only currency in house in nation only currency. No money to leave our shores.
Then put a spend by date on the money. Spend it or lose it to government by direct debit. Make money move.
Earn as much as we can! I’m no communist. But once you’ve been paid you must return that money by spending it. So we all get it back to earn for us all.
With all that spending then our government can get four times their present tax take just from vat alone. No need for any other tax.
So let’s start making money move. That’s how to get growth!