"Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!"
- Gordon Gekko, Wall St. film, 1987, Teldar annual stockholder meeting
Today, I am going to explain how the meaning of this statement, more specifically the highlighted portion, made in fiction conditions of 1987, plays a direct role in a majority of the non-fictional fiscal problems in the U.S., today.
There is an economic theory to which I strongly subscribe and endorse, known as the "labor theory of value". The theory asserts that "the value of an object is solely a result of the labor expended to produce it. According to this theory, the more labor or labor time that goes into an object, the more it is worth." It dates back to classical economics, however Karl Marx is commonly credited for popularizing the concept. Anyway, I'll cut straight to the point, so this blog doesn't become to valuable (lol). America, especially its financial sector, has lost its sense of risk, simply because the people responsible for taking them aren't really taking them. They are risking / betting / gambling on securities with OPM BABY! (Other People's Money). I am not generalizing; some fund managers and even traders commit to putting their own personal funds into every trade they make. But, on average, people are working with other people's money on the table. This is the case for Corp. America too (again, there are exceptions). What this means relative to the the labor theory of value is that the people using OPM do not value that money the same way they value their own simply because they did not experience any labor, or expend any labor, to produce it. So they are more willing to risk it, or, in other words, losing it won't hurt as bad as if they lost the same amount of their own money, money they did have to expend labor to get. If an object's worth is proportional to the labor expended to get said object, and 0 (zero) u (choose your units) of labor were expended, then what is the object worth to that individual? 0 (zero) u (choose your units). If something has 0 u in worth to you, do you value it? No. It is therefore safe to argue people using OPM, which is 99% of the financial sector, and most of Corp. America, can't value OPM the same as they do their own money (this is also how credit card companies trap people... more on that later... oh, and Gov't. too).
And here is how I prove that.
I'll start with a few unsophisticated, elementary examples, and progress upward from there.
You're a teen.
1. You spend an entire summer landscaping (I can relate... :-). I'm talking $6.85 / hour, 6:00am - "whenever the job is done":00 pm, in the 102 degree summer heat, humidity, bugs, sweat, ex-con co-workers, no benefits, etc. Come end of summer, you've saved a few thousand dollars, and my God, a few thousand never felt like more like a few million!! You cringe at peeling off $1 for a candy bar... remember how hard the work was to earn that dollar? It pains me to recall such experiences!!
Modify the example, slightly.
2. You spend an entire summer working retail, where you stood at the door and greeted patrons (I can also relate). Same pay, minus the manual labor component; no 102 degree heat, humidity, bugs, etc. Come end of summer, you've saved the same few thousand dollars, and my God a few thousand never felt like more like a few million!! You cringe at peeling off $1 for a candy bar... remember how boring the work, how long it took to earn that dollar? How many "welcome to XYZ clothing" phrases you had to say, with faked enthusiasm, to earn that $1!! It still pains me to recall such experiences!!
Now, rotating the concept 180 degrees.
3. You are walking through the Wal-Mart parking lot, and you see a $20 bill blowing across the street. You pick it up. Wow. $20. Right here. Didn't have to be anywhere doing anything, regardless of labor type, for 3 whole hours, to obtain this $20.
4. Christmas Day!! Santa so generously stuck a $20 in your stocking (still relating to this, and I'm 28... :-). Wow. $20. Right here. In my hand. Didn't have to be anywhere doing anything, regardless of labor type, for 3 whole hours, to obtain this $20.
Now, picture the few thousand you earned that summer, either landscaping or greeting, in cash, all $20 bills, on your kitchen table. 2 feet to the right is the $20 you got from the Wal-Mart parking lot or from Santa, sitting on the same table. I ask you to choose a $20 bill for an investment in a penny stock. From which pile do you pull?
:-). Me too.
It's real psychology - meets - economics. Call it whatever you want. Marx just titled the relationship.
Now, let's step up our degree of economic impact in a new example.
3. You evaluate investments in start-up companies. For sake of conversation, a start-up is defined to be a company with $0 in sales. Pretty risky stuff. Now, you are paid a salary to perform this job, and its your boss's money you will be risking in the event you recommend the purchase of stock in a start-up, but you get a small % of the quarterly dividend your boss collects from the start-up, should one be paid out. In other words, you're basically covered on the front (salary, pre-risk) and the back (% of dividend, post-risk). You find a company that you think will dominate a sector, but, again, no sales. You recommend it to your boss, and he pulls the trigger.
Now, rotating the concept 180 degrees.
4. Same scenario, only now your boss requires that you put in, in cash, the % you would like to see in dividend, should the company pay one. You want 10% of the dividend, you must put in 10% worth of stock purchase price, in cash, today. You commit. Boss pulls the trigger.
Now, the company you recommended goes bankrupt. In scenario #1, no harm to you; same salary, only no % of dividend. But your boss loses a few hundred thousand. You keep your job. Time for lunch.
However, in scenario #2, harm to you; same salary, but you just lost a healthy chunk of your own, hard-earned cash. You keep your job. Time for lunch.
What menu are you ordering from now?
Today, management has no stake in the company!
Are you starting to understand why:
- the Gov't. so easily breezes through trillions
- Corp. America CEO's weigh the risk of breaking the law in terms of legal costs vs. short-term revenue
- credit card users consume 100X their personal cash assets in credit card balance
- Wall St. bankers risk hundreds of millions of OPM, everyday, all day
- your spouse, having never paid for anything in your relationship, so easily dumps you
- VC's and private equity employees dump billions into high-risk companies
- banks lend mortgages to highly unqualified applicants
- nepotism breeds flight risk, drug use, irresponsibility, and fiscal carelessness
the list goes on....
Can you identify who is management and who is the company in each of the aforementioned examples? Can you see how the people, or "management", taking the risks for the "company" clearly have "no stake" in it? Did Obama earn any of the money he gives to welfare? Did the CEO of GE put up a penny of his own capital for GE before it was cash-flowing in the billions? What easier to spend; $10,000 handed to you after filling out a 5 minute application on line for a credit card, or the $10,000 you have in the bank that took you 6 months to save? Do Wall St. bankers, primarily compensated when their trading with OPM profit, have anything at stake when they make that trade? Does your spouse, who has been saving your entire relationship, while you paid for all the lunches, dinners, movies, tickets, trips, clothes, jewelry, etc. have anything to lose when he / she dumps you, leaving you with a fraction in savings compared to the beginning of the relationship? VC's don't even ask how much money the Founder has put in anymore. Banks handed out mortgages like lemonade, and why? Whose money was gong to closing? Not theirs. The only math they were doing was "0.01 times the loan principal = MY CUT". Don't get me started on rich kids...
I have a number of more concrete scenarios to present in addition to the 4 above, that will likely help bridge any gap between teenage summer jobs and Wall St. hedge funds, but I want to make you think.
Today, management has no stake in the company!
It will only get worse. Carnegie, Mellon.. they would be absolutely disgusted. And so should you.
(you can verify the accuracy of the Gordon Gekko quote where I found it, at
http://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html)
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