Confronted to the speculation we observe in financial markets, I began a series of columns on the ravages of financial capitalism. In the first, I demonstrated the harms of speculation, especially the relationship between it and the economic and financial crisis raging on the planet since summer 2007. In the second, I talked about the birth and evolution of capitalism and oft he stock market, and compared two forms of investment in a high tech company. In this third column, I present the financing needs of companies involved in technology. Of course, these findings also prove accurate in other sectors of economic activity.
I have already outlined the fact that today technological development requires massive injections of capital, available only to States and major financial players, such as banks, mutual funds and a few wealthy investors, amongst whom we find both entrepreneurs and speculators. Small technology companies are struggling to find capital for their development; they rely on state subsidies, bank loans, venture capital and a few private investors. When they reach a certain size, they seek to get listed on the stock market through an IPO; from then on, they are subjected to the dictates of investors demanding an increased profitability year after year. Failure to deliver will cause their shares to be dumped, their capitalization diminished and their development compromised.
Several flourishing companies have disappeared over the years. Even large companies, sometimes listed on the stock market for decades, are vulnerable; some have collapsed, their shares sometimes dropping from hundreds of dollars to a few cents. Consider Norton Telecom (Nortel) a jewel high-tech company in Canada. Market speculation is perhaps not the only culprit in Nortel’s bankruptcy, but it is a major factor. Without the excessive demands of some large investors with respect to a short-term excessive profitability, business decisions made by management would probably have been different; they would have been better suited to a more harmonious long term development of the company. Companies, technological or otherwise, should not have to finance through the stock markets and see their business decisions dictated by a handful of speculators who care only about their own short term profit, often at the expense of the company itself.
What other avenues might there be? I have already said that technological development can take place in a capitalist type economic organization, while remaining beneficial to society as a whole. However, to remain the privileged method of economic organization, capitalism must transform, be associated with State imposed social measures, and above all eliminate, or at the very least restrict, speculation. This new paradigm is already emerging in the form of responsible capitalism and new values; in my next column, I will present its broad outlines.
Showing posts with label capitalism. Show all posts
Showing posts with label capitalism. Show all posts
Monday, February 15, 2010
Sunday, February 7, 2010
Speculation: The origins of capitalism and the stock market
Confronted to the abuses that we witness daily in the world of finance, I began last week a series of columns on the ravages of financial capitalism. In the first, I demonstrated the harms of speculation, especially the relationship between it and the economic and financial crisis raging on the planet since summer 2007. In this column, I’ll talk about the birth and evolution of capitalism and oft he stock market, and compare two forms of investment in a high tech company.
Mumford situates «the birth of capitalism and the transition from a barter economy - facilitated by a local and variable currency – to a monetary system with an international credit structure (Mumford, 1950) », in the fourteenth century in Northern Italy. Regarding the stock market, he tells us that «two centuries later, existed in Antwerp, an international stock exchange intended for speculation on vessel armament in foreign ports and on currency. » Others trace the birth of this financial institution at an even earlier time. Some, for instance, report the existence of «courratiers» (ancient form of the French word courtiers), brokers, in Paris in the twelfth century, «concerned with managing and regulating the debts of agricultural communities on behalf of the banks» in France, then for the exchange of state debts by Lombard bankers in the thirteenth century. A first stock exchange is said to have existed in Bruges in the fourteenth century. According to many, According to many, the term «bourse» (stock exchange) origins from the name of the Van Der Beurze (De La Bourse in Walloon) family, the house in which Bruges commodity traders met. However interesting, all these socio-historical references are however little importance in light of speculation, inherent to the stock market.
On this subject, Mumford wrote «international stock exchange intended for speculation »; his use of «stock exchange» and «speculation» within a short sentence and of the adverb «intended» to link both terms and point out the purpose of this financial institution, demonstrates the indissolubility he sees between «stock exchange» and «speculation». Mumford goes on to say that with the advent of financial capitalism, «all business took an abstract form. They did not deal in goods, but in imaginary futures and hypothetical gains (Mumford, 1950). » He continues with the mining industry, stressing that the expansion of operations and use of machinery using the latest technologies of the time, required an injection of capital that the workers could not provide: «This led to the admission of associates who brought capital instead of work: they were silent partners [...] This capitalist development was further stimulated as early as the fifteenth century by the rampant speculation on shares. Landowners and merchants practiced this new game (Mumford, 1950). »
This said, to base human and technological development on a capitalist form of economic organization does not inevitably entail speculation. This practice is not inherent to capitalism, but to human greed; of all times, it has been the doing of a few. It has now reached dizzying heights; creating no real wealth, it only allows a handful of individuals to get revoltingly rich to the point of destroying the system that allowed them to accumulate their wealth. It could be otherwise.
Consider two $100,000 investments made in high technology, the first in a small startup company involved in software development for data security, and the second in a mutual fund speculating on the prices of metals, a critical resource in computer manufacturing. For purposes of this comparison, assume that two investments are worth $ 500,000 after 5 years and that both investors liquidate their respective investment, cashing in a profit of $400,000. Both these investments were equally profitable and will receive the same fiscal treatment, i.e. a tax on only 50% of the capital gain. However, which of these two investments has been most beneficial to society? Which has created real value?
In the first instance, programmers, salespeople and other employees were hired, thus creating collective wealth; furthermore, these people have paid taxes on their incomes to various government and their consumption has fuelled other economic sectors. The value of the small business has increased from $100,000 to 500,000, a value based on tangible assets, although some proportion may be intangible, such as the software developed. Said software has allowed other companies to protect their data and hence operate more efficiently and securely. We should also not forget the fact that the investor will probably not liquidate his investment after 5 years, especially if he owns the business. Even if he did so, the company would not liquidate its assets; under the direction of a new owner, it would continue to prosper, to hire staff and create collective wealth.
In the second case, we can see only a small positive impact on society; as in the first case, merely the imposition of a tax on 50% of the $400,000 capital gain. Quite the contrary, the impacts on society are rather negative. For instance, the rising price of metals affects the development of several companies, raising the prices of several products they need. If the value of investment increased from $100,000 to $500,000, this gain represents no real increase in value, only an increase in the perceived value of metals, the result of speculation on their price. Is the imposition of an identical fiscal treatment to these two investments fair if one considers the benefits to society? Let’s keep this question open for now ... but we will get back to it.
In my next column, I will discuss the financing needs of companies involved in technology.
Mumford situates «the birth of capitalism and the transition from a barter economy - facilitated by a local and variable currency – to a monetary system with an international credit structure (Mumford, 1950) », in the fourteenth century in Northern Italy. Regarding the stock market, he tells us that «two centuries later, existed in Antwerp, an international stock exchange intended for speculation on vessel armament in foreign ports and on currency. » Others trace the birth of this financial institution at an even earlier time. Some, for instance, report the existence of «courratiers» (ancient form of the French word courtiers), brokers, in Paris in the twelfth century, «concerned with managing and regulating the debts of agricultural communities on behalf of the banks» in France, then for the exchange of state debts by Lombard bankers in the thirteenth century. A first stock exchange is said to have existed in Bruges in the fourteenth century. According to many, According to many, the term «bourse» (stock exchange) origins from the name of the Van Der Beurze (De La Bourse in Walloon) family, the house in which Bruges commodity traders met. However interesting, all these socio-historical references are however little importance in light of speculation, inherent to the stock market.
On this subject, Mumford wrote «international stock exchange intended for speculation »; his use of «stock exchange» and «speculation» within a short sentence and of the adverb «intended» to link both terms and point out the purpose of this financial institution, demonstrates the indissolubility he sees between «stock exchange» and «speculation». Mumford goes on to say that with the advent of financial capitalism, «all business took an abstract form. They did not deal in goods, but in imaginary futures and hypothetical gains (Mumford, 1950). » He continues with the mining industry, stressing that the expansion of operations and use of machinery using the latest technologies of the time, required an injection of capital that the workers could not provide: «This led to the admission of associates who brought capital instead of work: they were silent partners [...] This capitalist development was further stimulated as early as the fifteenth century by the rampant speculation on shares. Landowners and merchants practiced this new game (Mumford, 1950). »
This said, to base human and technological development on a capitalist form of economic organization does not inevitably entail speculation. This practice is not inherent to capitalism, but to human greed; of all times, it has been the doing of a few. It has now reached dizzying heights; creating no real wealth, it only allows a handful of individuals to get revoltingly rich to the point of destroying the system that allowed them to accumulate their wealth. It could be otherwise.
Consider two $100,000 investments made in high technology, the first in a small startup company involved in software development for data security, and the second in a mutual fund speculating on the prices of metals, a critical resource in computer manufacturing. For purposes of this comparison, assume that two investments are worth $ 500,000 after 5 years and that both investors liquidate their respective investment, cashing in a profit of $400,000. Both these investments were equally profitable and will receive the same fiscal treatment, i.e. a tax on only 50% of the capital gain. However, which of these two investments has been most beneficial to society? Which has created real value?
In the first instance, programmers, salespeople and other employees were hired, thus creating collective wealth; furthermore, these people have paid taxes on their incomes to various government and their consumption has fuelled other economic sectors. The value of the small business has increased from $100,000 to 500,000, a value based on tangible assets, although some proportion may be intangible, such as the software developed. Said software has allowed other companies to protect their data and hence operate more efficiently and securely. We should also not forget the fact that the investor will probably not liquidate his investment after 5 years, especially if he owns the business. Even if he did so, the company would not liquidate its assets; under the direction of a new owner, it would continue to prosper, to hire staff and create collective wealth.
In the second case, we can see only a small positive impact on society; as in the first case, merely the imposition of a tax on 50% of the $400,000 capital gain. Quite the contrary, the impacts on society are rather negative. For instance, the rising price of metals affects the development of several companies, raising the prices of several products they need. If the value of investment increased from $100,000 to $500,000, this gain represents no real increase in value, only an increase in the perceived value of metals, the result of speculation on their price. Is the imposition of an identical fiscal treatment to these two investments fair if one considers the benefits to society? Let’s keep this question open for now ... but we will get back to it.
In my next column, I will discuss the financing needs of companies involved in technology.
Saturday, January 30, 2010
The ravages of financial capitalism
Consumption, technology and finance are intimately related; exceeded by the abuses that I witness daily in the world of finance, I begin today a series of columns on the ravages of financial capitalism.
Technological development, the driving force of consumption, is linked to available funding, especially since the 19th century’s industrial revolution; however, it was not always so. In «Consommation et nouvelles technologies — Au monde de l’hyper», a book I published in November 2009, I write: «Capitalism and technological development can exist without the other: "Capitalism has existed in other civilizations whose technical development was relatively low. Technique made steady progress from the tenth to the fifteenth century without needing the nudge of capitalism (Mumford, 1950)." But the nature of current technological development and the speed with which it takes place requires a concentration of capital available only to States and large investors (Ellul, 1990). » A source of funding is needed for technological progress; it can be public or private.
This said, State communism has shown its limits; capitalism has thus proved to be the least evil form of economic organization, despite the fact that it gave birth to the consumer society, then to hyperconsumption, and is undermined by speculation. This is why Robert Rochefort said: «The consumer society is the least evil form of society tested so far (Rochefort, 1995). »
Consequently, as I wrote in «Consommation et luxe – La voie de l’excès et de l’illusion» in 2007: «It is not my intention to criticize capitalism or the stock market as a whole. This mode of financing is necessary for the operation and growth of businesses. » I was then content to denounce the greed of a few large investors that feeds a speculation phenomenon. Two years have passed, and, if I still strongly believe in the merits of one form of capitalism, responsible, my opinion of the stock market has further deteriorated since then, because, more than ever, speculation is raging on Wall Street, Bay Street and all stock exchanges.
Speculation is a phenomenon which is inherent to stock market trading, because it is rooted in human desires for power, money being a form of power. Extremely harmful to our societies, it is responsible for the subprime mortgages crisis, which arose in summer 2007, then degenerated into an economic and financial crisis a year later; speculation is also responsible for most preceding crisis and for the bad reputation that many have made to capitalism: «Later, and more destructive to the reputation of capitalism in the United States, was the visibly insane Florida real estate speculation, the rising corporate and industrial voice and, most important, the stock market explosion of the late 1920s. Then came the world resonating crash of 1929 and, for ten long years, The Great Depression. (Galbraith, 2004). »
Closer to us, take for example high-frequency trading, a practice that is now spreading on Wall Street: « Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense. These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk. Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer (Stock Traders Find Speed Pays, in Milliseconds). »
Thus, it is likely that much of the gains on the stock market in 2009 may be attributed to speculation and market manipulation. Such practices create no tangible value, only a hypothetical value based on an imaginary future, hence the creation of speculative bubbles, technological, real estate or other; those inevitably burst sooner or later, causing the usual parade of economic and social problems. Said practices will ultimately destroy our economies and our societies if we do not put an end to them.
Speculation and market manipulation, which have flared up after the stock market crisis of fall 2008, will inevitably lead to an even worse crisis, from which Western economies may not recover, if States do not exercise tighter control over these practices.
In my next column, I’ll talk about the birth and evolution of capitalism and oft he stock market, and compare two forms of investment in a high tech company.
Technological development, the driving force of consumption, is linked to available funding, especially since the 19th century’s industrial revolution; however, it was not always so. In «Consommation et nouvelles technologies — Au monde de l’hyper», a book I published in November 2009, I write: «Capitalism and technological development can exist without the other: "Capitalism has existed in other civilizations whose technical development was relatively low. Technique made steady progress from the tenth to the fifteenth century without needing the nudge of capitalism (Mumford, 1950)." But the nature of current technological development and the speed with which it takes place requires a concentration of capital available only to States and large investors (Ellul, 1990). » A source of funding is needed for technological progress; it can be public or private.
This said, State communism has shown its limits; capitalism has thus proved to be the least evil form of economic organization, despite the fact that it gave birth to the consumer society, then to hyperconsumption, and is undermined by speculation. This is why Robert Rochefort said: «The consumer society is the least evil form of society tested so far (Rochefort, 1995). »
Consequently, as I wrote in «Consommation et luxe – La voie de l’excès et de l’illusion» in 2007: «It is not my intention to criticize capitalism or the stock market as a whole. This mode of financing is necessary for the operation and growth of businesses. » I was then content to denounce the greed of a few large investors that feeds a speculation phenomenon. Two years have passed, and, if I still strongly believe in the merits of one form of capitalism, responsible, my opinion of the stock market has further deteriorated since then, because, more than ever, speculation is raging on Wall Street, Bay Street and all stock exchanges.
Speculation is a phenomenon which is inherent to stock market trading, because it is rooted in human desires for power, money being a form of power. Extremely harmful to our societies, it is responsible for the subprime mortgages crisis, which arose in summer 2007, then degenerated into an economic and financial crisis a year later; speculation is also responsible for most preceding crisis and for the bad reputation that many have made to capitalism: «Later, and more destructive to the reputation of capitalism in the United States, was the visibly insane Florida real estate speculation, the rising corporate and industrial voice and, most important, the stock market explosion of the late 1920s. Then came the world resonating crash of 1929 and, for ten long years, The Great Depression. (Galbraith, 2004). »
Closer to us, take for example high-frequency trading, a practice that is now spreading on Wall Street: « Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense. These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk. Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer (Stock Traders Find Speed Pays, in Milliseconds). »
Thus, it is likely that much of the gains on the stock market in 2009 may be attributed to speculation and market manipulation. Such practices create no tangible value, only a hypothetical value based on an imaginary future, hence the creation of speculative bubbles, technological, real estate or other; those inevitably burst sooner or later, causing the usual parade of economic and social problems. Said practices will ultimately destroy our economies and our societies if we do not put an end to them.
Speculation and market manipulation, which have flared up after the stock market crisis of fall 2008, will inevitably lead to an even worse crisis, from which Western economies may not recover, if States do not exercise tighter control over these practices.
In my next column, I’ll talk about the birth and evolution of capitalism and oft he stock market, and compare two forms of investment in a high tech company.
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