5 ms·

> If you buy some shares in M&S or BP on the stock market, the money you pay goes to the previous owner, not the company. You are what Keynes called a ‘function

> If you buy some shares in M&S or BP on the stock market, the money you pay goes to the previous owner, not the company. You are what Keynes called a ‘functionless investor.’ When such so-called ‘investments’ pay off they extract wealth from the economy without creating anything in return. This doesn't seem very coherent. How could a company ever sell stock to raise capital, if the people who bought that stock didn't have a functioning market to resell it on? Obligatory link to Hans Rosling's economic play-by-play of the last 50 years: https://youtu.be/hVimVzgtD6w?t=4m12s https://youtu.be/hVimVzgtD6w?t=4m12s

EliRivers 10y ago
How could a company ever sell stock to raise capital, if the people who bought that stock didn't have a functioning market to resell it on? It could be a lifetime or time-limited right to a dividend, with voting rights attached. This would prioritise sustainable profit generation with a long-term view, and eliminate the current malaise of seeking short-term spikes in share price.
- jonknee 10y ago
  ... And it would further concentrate global wealth into the hands of a few (after you're no longer getting the dividends where do you think they'll go?).
  - EliRivers 10y ago
    Given that there are no owners, to the employees seems reasonable. With shares eliminated like this, we can have a such a system. Perhaps through some kind of all employee profit sharing system that all the employees agree on. Alternatively, if there has to be ownership, ownership of the company can be split between all employees, and the profits shared amongst them accordingly. I should divulge that by HN standards I am a screaming commie. I think unions are a good idea, and I think inheritance tax should be pretty much 100%. I'm not necessarily in favour of this employee-owners profit redistribution system, but it's an answer to the question of where profits should go if there are no rentier shareholders.
    - ommunist 10y ago
      I would only agree on inheritance tax if you simultaneously maintain quality free public education and social lifts.
    - hueving 10y ago
      >Given that there are no owners, to the employees seems reasonable By what standard? Does a new employee get the same percentage as every other employee? If so, how is that fair when certain positions objectively have much more impact on the success of the company? If not, who decides allocations for new employees and who the allocations should come from? Also, who is going to put up the capital in the first place to start the business if there is no return?
      - EliRivers 10y ago
        These are all questions that have answers. Such companies do already exist in Western liberal democracies operating roughly capitalist economies. You can find these answers yourself if you choose to. You can probably even think of some ideas yourself. We don't have to accept the economic system we are told is the one true way. We've seen where treating the economy like a religion leads.
        hueving 10y ago
        If there were reasonable answers, you would have provided them. The reason you haven't is because they generally aren't sustainable and do not work. If they did, that model would quickly take over because employees would exclusively seek out companies where they are granted ownership without any capital commitment.
        EliRivers 10y ago
        Companies do exist that are owned by their employees, and yet people do also get jobs at other companies that are not owned by the employees. These facts would appear to contradict your statements.
MichaelBurge 10y ago
I think capital allocation is sometimes too abstract for people to see the value in. If I bought some land, built a windmill with my bare hands out of stone and wood that I cut and shopped myself, and became the flour producer for the entire region, people tend to say it's a deserved reward. If I bought that company, paid people to do all the work setting up a dozen more windmills, paid people to manage the new bigger company, and then sold it again to the highest bidder, now suddenly I'm rent-seeking and profiting off of the poor. Even if those things wouldn't have gotten done without this intervention. It's like a Ship of Theseus: If you split up the flour company into its constituent pieces and slowly hire other people to do them, at what point does it become unethical rent-seeking? Even someone who buys an income stream solely to ride it out with the minimum amount of maintenance is at least taking a risk to their capital. And even if they protect it with an insurance policy or similar, they're at least locking up the money for a dedicated purpose usually for an extended period of time. People are often afraid of taking risk or limiting their options, so people who do so are providing some value.
- maxerickson 10y ago
  Rent seeking is jargon. It doesn't refer to running a business. https://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Economic_rent https://en.wikipedia.org/wiki/Economic_rent It refers to the economic consequences of things like regulatory capture and corruption.
  - aoeusnth1 10y ago
    The original article is naively expanding the definition to include simply "owning things which are worth money/time", i.e. the time value of money is somehow rent-seeking corruption.
  - force_reboot 10y ago
    You are are applying the standard definition of rent/rent seeking used by economists. But MichaelBurge's post is using the language of the original article, which claims that renting out an apartment, or making capital gains from a business, "rent seeking". So MichaelBurge is making a valid critique of the original article, whether or not the article was correct in using the term "rent seeking"
notahacker 10y ago
A better way of putting it would be that your investment might improve the economy only via side effects (e.g. the investor who you purchase the shares from is able to invest that money in a new business venture or buying actual goods, or a boost to the company's share price from your buying activity [if you're a massive fund owner] encourages new businesses to start up in that industry or makes it cheaper and easier for them to raise capital) Your contribution to the wealth of the economy from buying the stock is only the effect of the marginal increase in the speed of transaction and price from the share owner selling to you rather than having to wait for the next, possibly lower bidder on the share. The contribution to the economy made from you passively holding the stock is only the effect of the marginal boost to the share price from you not selling on entrepreneurs, lenders and investors. The average gain you make from share price appreciation is likely to be more than that; the difference is economic rent. Given there are already enough stock investors for trades to be made in microseconds with tiny spreads, the positive effect of an individual secondary market stock trade is so close to zero as to make the "functionless investor" characterization broadly correct.[1] Moreover, since your decision to purchase secondary market stock has an opportunity cost; you might otherwise have invested it directly in producing something in a market without such ready access to capital, its effect on economic growth might be net negative. [1]of all the circumstances where economists treat transfer payments as irrelevant, this one might be the most justified
- morgante 10y ago
  The margins are where economic points must be argued though. Your same logic could be applied to consumers. Any one individual buying products does not keep the economy functioning. We could say they're "functionless consumers." Except if you extend that logic to all consumers, there is no economy. Similarly, any one secondary investor might not make or break the existence of functional capital markets. But if you extend that logic to all secondary investors, suddenly there are no longer any primary investors.
  - notahacker 10y ago
    Sure, all economic activity is measured at the margin, but all businesses depend on the marginal consumer pushing them into profitability to survive. On the other hand, most businesses function perfectly happily without any secondary market investors or any realistic prospect of selling on the secondary market in the foreseeable future. Absence of secondary market liquidity reduces the sources of investment available to growing businesses, but doesn't drive it to zero, and thus the real economy tends to be much less sensitive to the marginal dollar invested in blue chip stocks than the marginal dollar consumed. Perhaps even more importantly, I also pointed out that (i) the marginal contribution of buying secondary market stocks to the growth of the economy is substantially less than their average 7% annual return for the passive investor and (ii) because the risk adjusted return of this economic rent is an attractive alternative to investing in creating new capital, it can in certain circumstances even have a negative effect on economic growth. Those were the real points Keynes was trying to make.

EliRivers 10y ago

How could a company ever sell stock to raise capital, if the people who bought that stock didn't have a functioning market to resell it on? It could be a lifetime or time-limited right to a dividend, with voting rights attached. This would prioritise sustainable profit generation with a long-term view, and eliminate the current malaise of seeking short-term spikes in share price.

jonknee 10y ago
... And it would further concentrate global wealth into the hands of a few (after you're no longer getting the dividends where do you think they'll go?).
- EliRivers 10y ago
  Given that there are no owners, to the employees seems reasonable. With shares eliminated like this, we can have a such a system. Perhaps through some kind of all employee profit sharing system that all the employees agree on. Alternatively, if there has to be ownership, ownership of the company can be split between all employees, and the profits shared amongst them accordingly. I should divulge that by HN standards I am a screaming commie. I think unions are a good idea, and I think inheritance tax should be pretty much 100%. I'm not necessarily in favour of this employee-owners profit redistribution system, but it's an answer to the question of where profits should go if there are no rentier shareholders.
  - ommunist 10y ago
    I would only agree on inheritance tax if you simultaneously maintain quality free public education and social lifts.
  - hueving 10y ago
    >Given that there are no owners, to the employees seems reasonable By what standard? Does a new employee get the same percentage as every other employee? If so, how is that fair when certain positions objectively have much more impact on the success of the company? If not, who decides allocations for new employees and who the allocations should come from? Also, who is going to put up the capital in the first place to start the business if there is no return?
    - EliRivers 10y ago
      These are all questions that have answers. Such companies do already exist in Western liberal democracies operating roughly capitalist economies. You can find these answers yourself if you choose to. You can probably even think of some ideas yourself. We don't have to accept the economic system we are told is the one true way. We've seen where treating the economy like a religion leads.
      - hueving 10y ago
        If there were reasonable answers, you would have provided them. The reason you haven't is because they generally aren't sustainable and do not work. If they did, that model would quickly take over because employees would exclusively seek out companies where they are granted ownership without any capital commitment.
        EliRivers 10y ago
        Companies do exist that are owned by their employees, and yet people do also get jobs at other companies that are not owned by the employees. These facts would appear to contradict your statements.

MichaelBurge 10y ago

I think capital allocation is sometimes too abstract for people to see the value in. If I bought some land, built a windmill with my bare hands out of stone and wood that I cut and shopped myself, and became the flour producer for the entire region, people tend to say it's a deserved reward. If I bought that company, paid people to do all the work setting up a dozen more windmills, paid people to manage the new bigger company, and then sold it again to the highest bidder, now suddenly I'm rent-seeking and profiting off of the poor. Even if those things wouldn't have gotten done without this intervention. It's like a Ship of Theseus: If you split up the flour company into its constituent pieces and slowly hire other people to do them, at what point does it become unethical rent-seeking? Even someone who buys an income stream solely to ride it out with the minimum amount of maintenance is at least taking a risk to their capital. And even if they protect it with an insurance policy or similar, they're at least locking up the money for a dedicated purpose usually for an extended period of time. People are often afraid of taking risk or limiting their options, so people who do so are providing some value.

maxerickson 10y ago
Rent seeking is jargon. It doesn't refer to running a business. https://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Economic_rent https://en.wikipedia.org/wiki/Economic_rent It refers to the economic consequences of things like regulatory capture and corruption.
- aoeusnth1 10y ago
  The original article is naively expanding the definition to include simply "owning things which are worth money/time", i.e. the time value of money is somehow rent-seeking corruption.
- force_reboot 10y ago
  You are are applying the standard definition of rent/rent seeking used by economists. But MichaelBurge's post is using the language of the original article, which claims that renting out an apartment, or making capital gains from a business, "rent seeking". So MichaelBurge is making a valid critique of the original article, whether or not the article was correct in using the term "rent seeking"

notahacker 10y ago

A better way of putting it would be that your investment might improve the economy only via side effects (e.g. the investor who you purchase the shares from is able to invest that money in a new business venture or buying actual goods, or a boost to the company's share price from your buying activity [if you're a massive fund owner] encourages new businesses to start up in that industry or makes it cheaper and easier for them to raise capital) Your contribution to the wealth of the economy from buying the stock is only the effect of the marginal increase in the speed of transaction and price from the share owner selling to you rather than having to wait for the next, possibly lower bidder on the share. The contribution to the economy made from you passively holding the stock is only the effect of the marginal boost to the share price from you not selling on entrepreneurs, lenders and investors. The average gain you make from share price appreciation is likely to be more than that; the difference is economic rent. Given there are already enough stock investors for trades to be made in microseconds with tiny spreads, the positive effect of an individual secondary market stock trade is so close to zero as to make the "functionless investor" characterization broadly correct.[1] Moreover, since your decision to purchase secondary market stock has an opportunity cost; you might otherwise have invested it directly in producing something in a market without such ready access to capital, its effect on economic growth might be net negative. [1]of all the circumstances where economists treat transfer payments as irrelevant, this one might be the most justified

morgante 10y ago
The margins are where economic points must be argued though. Your same logic could be applied to consumers. Any one individual buying products does not keep the economy functioning. We could say they're "functionless consumers." Except if you extend that logic to all consumers, there is no economy. Similarly, any one secondary investor might not make or break the existence of functional capital markets. But if you extend that logic to all secondary investors, suddenly there are no longer any primary investors.
- notahacker 10y ago
  Sure, all economic activity is measured at the margin, but all businesses depend on the marginal consumer pushing them into profitability to survive. On the other hand, most businesses function perfectly happily without any secondary market investors or any realistic prospect of selling on the secondary market in the foreseeable future. Absence of secondary market liquidity reduces the sources of investment available to growing businesses, but doesn't drive it to zero, and thus the real economy tends to be much less sensitive to the marginal dollar invested in blue chip stocks than the marginal dollar consumed. Perhaps even more importantly, I also pointed out that (i) the marginal contribution of buying secondary market stocks to the growth of the economy is substantially less than their average 7% annual return for the passive investor and (ii) because the risk adjusted return of this economic rent is an attractive alternative to investing in creating new capital, it can in certain circumstances even have a negative effect on economic growth. Those were the real points Keynes was trying to make.