11 ms·

The Value of Nothing: Capital versus Growth

125 points by ivank 5y ago

roenxi 5y ago
I found this article difficult to read. There seems to be a slightly disorganised approach of jumping between specific companies and macroeconomic ideas, then sweeping generalisations about what "American capitalism" means - a topic which rarely comes with consensus. It is unclear what the thesis of the article's author is, and why he thinks this evidence is linked to it. Although just personally - if the US does suffers a massive stock market crash then nobody has the right to be surprised.
- kqr 5y ago
  I'm just a layman but this sounds like a thesis to me: > A more comprehensive explanation would simply state that the U.S. economy is, to a unique extent, organized around maximizing asset values and returns on capital independently of growth My layman's translation of that would be "U.S. financial markets are driven by speculation/gambling, not well-researched long-term investment". I guess what makes that a weird thesis is that it's... so obvious. I would assume anyone who deals with this knows that there are many different participants in the market, many of which are only selling liquidity, i.e. speculating.
  - danbruc 5y ago
    I don't think that the main point of the article is the behavior of the financial markets but of the companies - instead of actually growing in some real sense which in turn would raise valuation, companies are increasingly trying to just maximize valuation without corresponding fundamentals. This seems a typical example of the metric becoming the goal.
    - kqr 5y ago
      Right, yes, upon reading further I realise the article is more of an exploration into potential causes and consequences of the central point I quoted.
  - UncleMeat 5y ago
    It isn't just about the participants. It is also about the policies and regulations. "Keep the stock market juiced" has become the new "keep the housing market juiced" because so many Americans have no alternative mechanism for surviving once they stop working without money invested in housing and stocks. So policymakers have an enormous problem on their hands if markets crash.
- hogFeast 5y ago
  I think the point is that the economy has become more-oriented towards financial outcomes. Companies are doing things which boost their stock price but don't actually result in a greater level of overall economic activity beyond higher profits. This criticism is always going to be scattergun because there isn't any one thing you can point to. I expected the article to be terrible but the conclusion/main points are basically sound (I actually assumed the guy wasn't a financial professional but appears to have been, it is a bit scattergun but actually covers a lot of ground well). You are seeing things today that make zero sense. Companies that have profitable businesses trading on 5x earnings and other companies that are never likely to be profitable are trading on 30x or 50x sales. I think people view the stock market as semi-relevant because it often isn't new capital being raised but it has a huge signalling effect for private sector activities. I remember five years ago when people said the stock market was dead. Well, it turned out those people need your money now. The tail is wagging the dog. And, unfortunately, one of the side-effects has been that it is impossible to raise money for anything profitable (the problem with profit is that they are never large enough, losses are fantastic because you can always say...but wait until we are profitable, the profits will be huge). The companies on 5x earnings are buying back, the companies on 50x sales are issuing stock (largely for employees and insiders to cash out). I am not sure if it is a huge issue because it will correct. But I think there will need to be a re-examination (once again) of the role of monetary policy, it has made everything significantly worse. Huge impact on inequality, created a fake shortage of safe assets which caused a bump in prices that led more money out of risky assets (this is the opposite of the intended effect of QE), etc. A total car crash. One thing that is perhaps understated is the extent to which the US market has globalized. A lot of stocks today are overvalued but GOOG was trading at 12x earnings ten years ago. And what people then under-estimated was the global growth potential. YouTube and Netflix are watched more than linear TV in some countries amongst young people, and live TV is still a very big business. That is why it is difficult to talk about the connection between growth in US equities and US economic growth, they are detached. Another things that is understated is the extent to which most institutional investors have totally checked out of...well, investing. Not just ETFs but in Japan, they just buy CLOs...in Taiwan, they just buy CLOs...in Germany, CLOs (and private loan funds). All this money is flowing into private equity but not lending to the real economy (and it is fair to point out, that lending to private equity is just transferring money from X to Y...it creates nothing). QE has facilitated this, it made investing in risk-free assets very profitable, the drop in interest rates since the early 80s did the same, these flows of foreign money haven't improved investment, they have just siphoned wealth out of the US (totally counter-intuitive but economic models operate under the assumption that supply of savings creates demand for investment, unf the supply of investable ideas is quite fixed but private equity will create the securities if there is enough capital...it can't go on forever). This is the irony of saying the US should copy the "Asian Growth Model"...that model only works because exporters can invest the dollars and create the overseas investment income.
adminscoffee 5y ago
some people will pump something up just to make money while other won't because they know that their name is important at least to them. when people are cautious about telling you what they do or about their idea, sometimes they are just filtering the money hungry people from the actual believers, people who aren't just there for a quick buck, but are there fir change. if a real startup person, someone who didn't ask for things but still put themself out there or at least presented them self in such a way but seemed "inconsistent" or over explaining something but not in the traditional word throwing brand keyword way, then those people may open up enough to let you in, if that is the case then you may have found a unicorn. but, if you are afraid and which you should be cautious for good reason, than the real individuals may hold back and look for someone who trust them enough to invest. it's tricky but lions sometimes lay low before they feast. if you can find them before they gorilla it on their own, then you may have found something really really rare. but be careful because, they are use to arrows, doubt and people investigating/trying to pry to see if they are "the right fit" and just may be annoyed enough to throw you a false signal out of annoyance and for more fuel to their hungry; which resides not purely in money, but something deeper that few see clearly. but i am just some dude on ycom if it looks like a duck, is something they may know, but who wants to be used, so i get it
paulpauper 5y ago
Indeed, with the exception of the immediate aftermath of the 2008–9 crash, valuations have remained at elevated levels since 2000 (relative to previous history), despite the fact that this period has been characterized by a financial crisis, weak productivity gains, and ongoing narratives of “secular stagnation.” Whch goes to show how useless this metric is. I think such high valuations can be explained by companies having more dominance and less uncertainty, such as through moats, network effects, scalability, and reliable automated recurring revenues, so the uncertainty of competition is lifted, hence higher valuations for big, dominant companies. Also, the end of business cycles. Post-2009 has been a perpetual boom, the longest ever.
- Blammar 5y ago
  Wouldn't the moats, scalability, reliable revenues all contribute to increased earnings and thus (perhaps) lower PE ratios? Anecdotally, many companies have grown their earnings per share by buying back their stock. That causes an interesting feedback effect as these purchased shares become more valuable as the stock price rises (i.e., the company's book value increases as its stock price rises because they own the shares they purchased.) I didn't realize that Japan had its central bank buying equities and flooding the market with cheap yen, with only minor effect on the Nippon Index. I had assumed that the main reason for the U.S. stock market rise since 2008 was both due to low interest rates driving investors to higher returns in the stock market (a self-fulfilling effect) and due to the Fed pumping cash into the economy, which also needed to go somewhere better than banks. But if that didn't work for Japan, then I have no idea what is going on. Apologies for talking about markets on HN. But this place is a good one for reasoned discourse, so I hope an exception can be made.
  - jandrewrogers 5y ago
    Revenue growth is financed by earnings, so you would expect P/E ratio to be higher for companies that are still scaling regardless of their size. A high P/E does not indicate an over-valued company prima facie, which is accounted for by investors. P/E ratios are more indicative of value when revenue growth is hovering around 0%.
  - 5y ago
marco_yolo 5y ago
irrationality is the sign of free and healthy market. ascribing the subjective theory of value I believe value is determined by the individual. so what seems like an irrational move to an outsider looking at the fundamentals is meaningless because what looks irrational to one set of people could be the completely correct decision long term. specifically, the possibility of profit is the immediate value. can this be speculation, yes, but speculation is what drives innovation imo. that's the beauty of healthy market different people trying different endeavors and the cream rising to the top. the reality is irrationality can only last for so long because if a company is an impostor or playing accounting tricks they will crumble(unless government bails them out with taxpayer dollars). so even when the market is overvalued or irrational there are corrections. and this a good thing. there is no such thing as risk free universe.
- Nevermark 5y ago
  The problem with that view is subjective value based on financial engineering isn't sustainable, for business investments. Financial engineering is not sustainable because it cannot compound. Financial engineering also increases asset risk, as it doesn't reflect real returns. It can take a long time for inflated prices to deflate to the mean PE, but they will. Then someone pays for that. In the meantime, the misallocation of capital to financially engineered assets slows growth. Art has subjective value that may, in some cases, compound indefinitely due to the fact that the greater the wealth in an economy, the greater the most rare subjectively valued things will be worth.
  - marco_yolo 5y ago
    slows growth comparable to what? how do you know the slower growth isn't actually an appropriate correction? slower growth without innovation is probably bad. slower growth with innovation is probably good. but i generally agree that there are potential negative outcomes but I accept the risk I don't pretend that I or anyone would be better at the allocation of others capital.
    - Nevermark 5y ago
bloodyplonker22 5y ago
P/E Ratios, DCF, Aswath "Dono"daran. These things are all a part of an ancient religion that do not work for growth tech companies anymore (which also happens to include large cap tech companies, by the way). These valuation metrics leave out everything that has to do with the potential market growth and product expansion into new verticals. People look at the S&P500 and keep parroting tired phrases such as "the P/E ratio is now higher than ever before in history", yet they don't consider that a massive part of the S&P500 is now tech growth companies rather than Exxon Mobil like it was 15-20 years ago.
- newswasboring 5y ago
  Pardon my ignorance, but what is the end goal here? I feel like the end goal to hold a share today is to sell it to someone else for a higher price. It just doesn't sit right with me. Feels like a ponzi scheme to be honest.
  - repomies69 5y ago
    Selling to someone else with higher price is always part of capitalism, and there's nothing wrong with that. Speculation is good for the economy. Why I invest in tech stock? Because I believe the current tech companies might be 10x or 20x times the sizes in 20 years, and in 40 years they might be 1000x times the current size. Basically they could own governments and become world rulers. At least in metaverse.
    - newswasboring 5y ago
      Holy shit dude! I hope you are wrong on all accounts, especially the world rulers bit. But more on point, what do you mean by size? Just valuation of their stock? Speculation on an asset makes sense when we don't know its inherent value. I can't figure out what is the inherent value of a stock any more. Does value not derive from utility now? Utility of a stock can be governance say (voting stocks) or a share in the profit. These companies with massive valuations don't generate any profits (see: Uber). So what are people speculating on actually?
deleted 5y ago
[deleted]
throw0101a 5y ago
The Value of Everything by Mariana Mazzucato may be of some interest: > In modern capitalism, value-extraction is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximise shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means. Once a central plank of economic thought, this concept of value – what it is, why it matters to us – is simply no longer discussed. * https://marianamazzucato.com/books/the-value-of-everything https://marianamazzucato.com/books/the-value-of-everything > In this scathing indictment of our current global financial system, The Value of Everything rigorously scrutinizes the way in which economic value has been determined and reveals how the difference between value creation and value extraction has become increasingly blurry. Mariana Mazzucato argues that this blurriness allowed certain actors in the economy to portray themselves as value creators, while in reality they were just moving existing value around or, even worse, destroying it. > The book uses case studies - from Silicon Valley to the financial sector to big pharma - to show how the foggy notions of value create confusion between rents and profits, a difference that distorts the measurements of growth and GDP. * https://www.goodreads.com/book/show/29502362-the-value-of-everything https://www.goodreads.com/book/show/29502362-the-value-of-ev... One interesting anecdote she brings up: the US government gave a $456M guaranteed loan to Tesla, which Tesla paid back. But now that Tesla is "successful" and Musk is super-rich, does the US government get any credit for helping its success? How much 'value' did the folks at Tesla create versus the US government in helping to fund it? Her previous book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, also has an interesting thesis: > This book debunks the myth of the State as a large bureaucratic organization that can at best facilitate the creative innovation which happens in the dynamic private sector. Analysing various case studies of innovation-led growth, it describes the opposite situation, whereby the private sector only becomes bold enough to invest after the courageous State has made the high-risk investments. * https://www.goodreads.com/book/show/17987621-the-entrepreneurial-state https://www.goodreads.com/book/show/17987621-the-entrepreneu... * https://marianamazzucato.com/books/the-entrepreneurial-state https://marianamazzucato.com/books/the-entrepreneurial-state
- LeifCarrotson 5y ago
cs702 5y ago
The article documents a well-known fact: Since the 1980's, returns on US financial assets have become disconnected from underlying economic performance and corporate profits. The question is, why? No one knows for sure -- by which I mean, a lot of really shrewd, smart, knowledgeable people disagree about the reasons. At one extreme, there are those who feel nothing is wrong, because they believe we're on the cusp of a shift to much faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. At the other extreme, there are others who think the current arrangement is a result of regulatory capture by the wealthy, at the expense of everyone else. There is no consensus as to why. The author posits one possible explanation: Judging by trends in corporate behavior, financial market incentives, government regulations, and federal reserve policies, the US economy has become increasingly organized around maximizing asset values and returns on capital independently of growth. Decisions everywhere are now being made, or not made, based mainly on whether they impact asset prices and returns on capital. In my view, it's not a bad explanation.
- boppo1 5y ago
  >No one knows for sure Asset purchase programs and keeping interest rates low are a really really good guess.
  - cs702 5y ago
    There's no disagreement about the fact that the Fed is buying bonds to keep rates low. But why are they doing that? Is it the right thing to do? What's the underlying motivation? That's where a lot of smart people disagree. Please don't take phrases out of context.
  - JackFr 5y ago
    He makes a pretty compelling case for this - that corporate hurdle rates are too high and disconnected from the cost of capital. The stock market rewards firms who return profits to shareholders rather than reinvesting them in (not necessarily) risky enterprises. The mystery that remains is where does the money go? A share buyback just shifts the decision of reinvesting profits from the firm to the investor, so when Apple buys back shares where does that capital go? (Also cheers to the author who refreshingly avoids sanctimonious moralizing about share buy backs.)
ArtTimeInvestor 5y ago
The European Central Bank has also maintained low rates, and many European sovereign yields are lower than U.S. Treasury yields, but European equity valuations are not as high The reason could be cultural. When I talk to Europeans, they often see investing as "gambling". Which has a negative, scary connotation.
jkhdigital 5y ago
> For capitalism to remain oriented toward growth and live up to its “Smithian” justifications, the private sector must be subordinate to and take direction from the state. In liberal capitalism or plutocracy, on the other hand, the oligarchs will use their power to resist development. There’s some depth and valid points in this article, but the above sentence was my confirmation that the author is starting from a fixed ideological position.

125 points by ivank 5y ago

I found this article difficult to read. There seems to be a slightly disorganised approach of jumping between specific companies and macroeconomic ideas, then sweeping generalisations about what "American capitalism" means - a topic which rarely comes with consensus. It is unclear what the thesis of the article's author is, and why he thinks this evidence is linked to it. Although just personally - if the US does suffers a massive stock market crash then nobody has the right to be surprised.

kqr 5y ago
I'm just a layman but this sounds like a thesis to me: > A more comprehensive explanation would simply state that the U.S. economy is, to a unique extent, organized around maximizing asset values and returns on capital independently of growth My layman's translation of that would be "U.S. financial markets are driven by speculation/gambling, not well-researched long-term investment". I guess what makes that a weird thesis is that it's... so obvious. I would assume anyone who deals with this knows that there are many different participants in the market, many of which are only selling liquidity, i.e. speculating.
- danbruc 5y ago
  I don't think that the main point of the article is the behavior of the financial markets but of the companies - instead of actually growing in some real sense which in turn would raise valuation, companies are increasingly trying to just maximize valuation without corresponding fundamentals. This seems a typical example of the metric becoming the goal.
  - kqr 5y ago
    Right, yes, upon reading further I realise the article is more of an exploration into potential causes and consequences of the central point I quoted.
- UncleMeat 5y ago
  It isn't just about the participants. It is also about the policies and regulations. "Keep the stock market juiced" has become the new "keep the housing market juiced" because so many Americans have no alternative mechanism for surviving once they stop working without money invested in housing and stocks. So policymakers have an enormous problem on their hands if markets crash.
hogFeast 5y ago
I think the point is that the economy has become more-oriented towards financial outcomes. Companies are doing things which boost their stock price but don't actually result in a greater level of overall economic activity beyond higher profits. This criticism is always going to be scattergun because there isn't any one thing you can point to. I expected the article to be terrible but the conclusion/main points are basically sound (I actually assumed the guy wasn't a financial professional but appears to have been, it is a bit scattergun but actually covers a lot of ground well). You are seeing things today that make zero sense. Companies that have profitable businesses trading on 5x earnings and other companies that are never likely to be profitable are trading on 30x or 50x sales. I think people view the stock market as semi-relevant because it often isn't new capital being raised but it has a huge signalling effect for private sector activities. I remember five years ago when people said the stock market was dead. Well, it turned out those people need your money now. The tail is wagging the dog. And, unfortunately, one of the side-effects has been that it is impossible to raise money for anything profitable (the problem with profit is that they are never large enough, losses are fantastic because you can always say...but wait until we are profitable, the profits will be huge). The companies on 5x earnings are buying back, the companies on 50x sales are issuing stock (largely for employees and insiders to cash out). I am not sure if it is a huge issue because it will correct. But I think there will need to be a re-examination (once again) of the role of monetary policy, it has made everything significantly worse. Huge impact on inequality, created a fake shortage of safe assets which caused a bump in prices that led more money out of risky assets (this is the opposite of the intended effect of QE), etc. A total car crash. One thing that is perhaps understated is the extent to which the US market has globalized. A lot of stocks today are overvalued but GOOG was trading at 12x earnings ten years ago. And what people then under-estimated was the global growth potential. YouTube and Netflix are watched more than linear TV in some countries amongst young people, and live TV is still a very big business. That is why it is difficult to talk about the connection between growth in US equities and US economic growth, they are detached. Another things that is understated is the extent to which most institutional investors have totally checked out of...well, investing. Not just ETFs but in Japan, they just buy CLOs...in Taiwan, they just buy CLOs...in Germany, CLOs (and private loan funds). All this money is flowing into private equity but not lending to the real economy (and it is fair to point out, that lending to private equity is just transferring money from X to Y...it creates nothing). QE has facilitated this, it made investing in risk-free assets very profitable, the drop in interest rates since the early 80s did the same, these flows of foreign money haven't improved investment, they have just siphoned wealth out of the US (totally counter-intuitive but economic models operate under the assumption that supply of savings creates demand for investment, unf the supply of investable ideas is quite fixed but private equity will create the securities if there is enough capital...it can't go on forever). This is the irony of saying the US should copy the "Asian Growth Model"...that model only works because exporters can invest the dollars and create the overseas investment income.

adminscoffee 5y ago

some people will pump something up just to make money while other won't because they know that their name is important at least to them. when people are cautious about telling you what they do or about their idea, sometimes they are just filtering the money hungry people from the actual believers, people who aren't just there for a quick buck, but are there fir change. if a real startup person, someone who didn't ask for things but still put themself out there or at least presented them self in such a way but seemed "inconsistent" or over explaining something but not in the traditional word throwing brand keyword way, then those people may open up enough to let you in, if that is the case then you may have found a unicorn. but, if you are afraid and which you should be cautious for good reason, than the real individuals may hold back and look for someone who trust them enough to invest. it's tricky but lions sometimes lay low before they feast. if you can find them before they gorilla it on their own, then you may have found something really really rare. but be careful because, they are use to arrows, doubt and people investigating/trying to pry to see if they are "the right fit" and just may be annoyed enough to throw you a false signal out of annoyance and for more fuel to their hungry; which resides not purely in money, but something deeper that few see clearly. but i am just some dude on ycom if it looks like a duck, is something they may know, but who wants to be used, so i get it

paulpauper 5y ago

Indeed, with the exception of the immediate aftermath of the 2008–9 crash, valuations have remained at elevated levels since 2000 (relative to previous history), despite the fact that this period has been characterized by a financial crisis, weak productivity gains, and ongoing narratives of “secular stagnation.” Whch goes to show how useless this metric is. I think such high valuations can be explained by companies having more dominance and less uncertainty, such as through moats, network effects, scalability, and reliable automated recurring revenues, so the uncertainty of competition is lifted, hence higher valuations for big, dominant companies. Also, the end of business cycles. Post-2009 has been a perpetual boom, the longest ever.

Blammar 5y ago
Wouldn't the moats, scalability, reliable revenues all contribute to increased earnings and thus (perhaps) lower PE ratios? Anecdotally, many companies have grown their earnings per share by buying back their stock. That causes an interesting feedback effect as these purchased shares become more valuable as the stock price rises (i.e., the company's book value increases as its stock price rises because they own the shares they purchased.) I didn't realize that Japan had its central bank buying equities and flooding the market with cheap yen, with only minor effect on the Nippon Index. I had assumed that the main reason for the U.S. stock market rise since 2008 was both due to low interest rates driving investors to higher returns in the stock market (a self-fulfilling effect) and due to the Fed pumping cash into the economy, which also needed to go somewhere better than banks. But if that didn't work for Japan, then I have no idea what is going on. Apologies for talking about markets on HN. But this place is a good one for reasoned discourse, so I hope an exception can be made.
- jandrewrogers 5y ago
  Revenue growth is financed by earnings, so you would expect P/E ratio to be higher for companies that are still scaling regardless of their size. A high P/E does not indicate an over-valued company prima facie, which is accounted for by investors. P/E ratios are more indicative of value when revenue growth is hovering around 0%.
- 5y ago

marco_yolo 5y ago

irrationality is the sign of free and healthy market. ascribing the subjective theory of value I believe value is determined by the individual. so what seems like an irrational move to an outsider looking at the fundamentals is meaningless because what looks irrational to one set of people could be the completely correct decision long term. specifically, the possibility of profit is the immediate value. can this be speculation, yes, but speculation is what drives innovation imo. that's the beauty of healthy market different people trying different endeavors and the cream rising to the top. the reality is irrationality can only last for so long because if a company is an impostor or playing accounting tricks they will crumble(unless government bails them out with taxpayer dollars). so even when the market is overvalued or irrational there are corrections. and this a good thing. there is no such thing as risk free universe.

Nevermark 5y ago
The problem with that view is subjective value based on financial engineering isn't sustainable, for business investments. Financial engineering is not sustainable because it cannot compound. Financial engineering also increases asset risk, as it doesn't reflect real returns. It can take a long time for inflated prices to deflate to the mean PE, but they will. Then someone pays for that. In the meantime, the misallocation of capital to financially engineered assets slows growth. Art has subjective value that may, in some cases, compound indefinitely due to the fact that the greater the wealth in an economy, the greater the most rare subjectively valued things will be worth.
- marco_yolo 5y ago
  slows growth comparable to what? how do you know the slower growth isn't actually an appropriate correction? slower growth without innovation is probably bad. slower growth with innovation is probably good. but i generally agree that there are potential negative outcomes but I accept the risk I don't pretend that I or anyone would be better at the allocation of others capital.
  - Nevermark 5y ago

bloodyplonker22 5y ago

P/E Ratios, DCF, Aswath "Dono"daran. These things are all a part of an ancient religion that do not work for growth tech companies anymore (which also happens to include large cap tech companies, by the way). These valuation metrics leave out everything that has to do with the potential market growth and product expansion into new verticals. People look at the S&P500 and keep parroting tired phrases such as "the P/E ratio is now higher than ever before in history", yet they don't consider that a massive part of the S&P500 is now tech growth companies rather than Exxon Mobil like it was 15-20 years ago.

newswasboring 5y ago
Pardon my ignorance, but what is the end goal here? I feel like the end goal to hold a share today is to sell it to someone else for a higher price. It just doesn't sit right with me. Feels like a ponzi scheme to be honest.
- repomies69 5y ago
  Selling to someone else with higher price is always part of capitalism, and there's nothing wrong with that. Speculation is good for the economy. Why I invest in tech stock? Because I believe the current tech companies might be 10x or 20x times the sizes in 20 years, and in 40 years they might be 1000x times the current size. Basically they could own governments and become world rulers. At least in metaverse.
  - newswasboring 5y ago
    Holy shit dude! I hope you are wrong on all accounts, especially the world rulers bit. But more on point, what do you mean by size? Just valuation of their stock? Speculation on an asset makes sense when we don't know its inherent value. I can't figure out what is the inherent value of a stock any more. Does value not derive from utility now? Utility of a stock can be governance say (voting stocks) or a share in the profit. These companies with massive valuations don't generate any profits (see: Uber). So what are people speculating on actually?

deleted 5y ago

[deleted]

throw0101a 5y ago

The Value of Everything by Mariana Mazzucato may be of some interest: > In modern capitalism, value-extraction is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximise shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means. Once a central plank of economic thought, this concept of value – what it is, why it matters to us – is simply no longer discussed. * https://marianamazzucato.com/books/the-value-of-everything https://marianamazzucato.com/books/the-value-of-everything > In this scathing indictment of our current global financial system, The Value of Everything rigorously scrutinizes the way in which economic value has been determined and reveals how the difference between value creation and value extraction has become increasingly blurry. Mariana Mazzucato argues that this blurriness allowed certain actors in the economy to portray themselves as value creators, while in reality they were just moving existing value around or, even worse, destroying it. > The book uses case studies - from Silicon Valley to the financial sector to big pharma - to show how the foggy notions of value create confusion between rents and profits, a difference that distorts the measurements of growth and GDP. * https://www.goodreads.com/book/show/29502362-the-value-of-everything https://www.goodreads.com/book/show/29502362-the-value-of-ev... One interesting anecdote she brings up: the US government gave a $456M guaranteed loan to Tesla, which Tesla paid back. But now that Tesla is "successful" and Musk is super-rich, does the US government get any credit for helping its success? How much 'value' did the folks at Tesla create versus the US government in helping to fund it? Her previous book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, also has an interesting thesis: > This book debunks the myth of the State as a large bureaucratic organization that can at best facilitate the creative innovation which happens in the dynamic private sector. Analysing various case studies of innovation-led growth, it describes the opposite situation, whereby the private sector only becomes bold enough to invest after the courageous State has made the high-risk investments. * https://www.goodreads.com/book/show/17987621-the-entrepreneurial-state https://www.goodreads.com/book/show/17987621-the-entrepreneu... * https://marianamazzucato.com/books/the-entrepreneurial-state https://marianamazzucato.com/books/the-entrepreneurial-state

LeifCarrotson 5y ago

cs702 5y ago

The article documents a well-known fact: Since the 1980's, returns on US financial assets have become disconnected from underlying economic performance and corporate profits. The question is, why? No one knows for sure -- by which I mean, a lot of really shrewd, smart, knowledgeable people disagree about the reasons. At one extreme, there are those who feel nothing is wrong, because they believe we're on the cusp of a shift to much faster economic growth, driven by new technologies like AI, quantum computing, cheap sustainable energy, and space exploration. At the other extreme, there are others who think the current arrangement is a result of regulatory capture by the wealthy, at the expense of everyone else. There is no consensus as to why. The author posits one possible explanation: Judging by trends in corporate behavior, financial market incentives, government regulations, and federal reserve policies, the US economy has become increasingly organized around maximizing asset values and returns on capital independently of growth. Decisions everywhere are now being made, or not made, based mainly on whether they impact asset prices and returns on capital. In my view, it's not a bad explanation.

boppo1 5y ago
>No one knows for sure Asset purchase programs and keeping interest rates low are a really really good guess.
- cs702 5y ago
  There's no disagreement about the fact that the Fed is buying bonds to keep rates low. But why are they doing that? Is it the right thing to do? What's the underlying motivation? That's where a lot of smart people disagree. Please don't take phrases out of context.
- JackFr 5y ago
  He makes a pretty compelling case for this - that corporate hurdle rates are too high and disconnected from the cost of capital. The stock market rewards firms who return profits to shareholders rather than reinvesting them in (not necessarily) risky enterprises. The mystery that remains is where does the money go? A share buyback just shifts the decision of reinvesting profits from the firm to the investor, so when Apple buys back shares where does that capital go? (Also cheers to the author who refreshingly avoids sanctimonious moralizing about share buy backs.)

ArtTimeInvestor 5y ago

The European Central Bank has also maintained low rates, and many European sovereign yields are lower than U.S. Treasury yields, but European equity valuations are not as high The reason could be cultural. When I talk to Europeans, they often see investing as "gambling". Which has a negative, scary connotation.

jkhdigital 5y ago

> For capitalism to remain oriented toward growth and live up to its “Smithian” justifications, the private sector must be subordinate to and take direction from the state. In liberal capitalism or plutocracy, on the other hand, the oligarchs will use their power to resist development. There’s some depth and valid points in this article, but the above sentence was my confirmation that the author is starting from a fixed ideological position.