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I recently read "The Value of Nothing: Capital vs Growth" [1]. (Edit, it was here on HN [2] a week ago). It helped me understand the disconnect in the modern ec

I recently read "The Value of Nothing: Capital vs Growth" [1]. (Edit, it was here on HN [2] a week ago). It helped me understand the disconnect in the modern economy; the primary goal is to increase the value of assets and returns on capital rather than the underlying performance and economic growth. It's a long read, but here are a few paragraphs that look an awful lot like this split of GE into three separate companies: > ...A corporate sector dominated by institutional asset managers and executives whose compensation is based on near-term equity returns is highly incentivized to engage in activities intended to expand valuations even if there is no impact, or a negative impact, on earnings. Such strategies include spinoffs that aim to “unlock” value simply by isolating business units expected to trade at higher valuations, or other forms of financial engineering like stock buybacks. ... > Consider, for example, the case of IBM, which plans to spin off its IT infrastructure division this year in order to “focus on high-margin cloud computing.” The move is being cheered on Wall Street because it is believed that the two businesses will be worth more as separate entities than as one. In particular, the remaining IBM cloud business should command a higher multiple once freed from lower-margin, slower-growing divisions. > IBM has followed this same playbook for years: “We divested networking back in the ’90s, we divested PCs back in the 2000s, we divested semiconductors about five years ago . . . ,” said IBM’s CEO, explaining the spin-off. As a result of this strategy, IBM’s revenues and net earnings are lower today than they were in 1998. But its stock price and P/E ratio are higher. This is a positive outcome for their financing arm - they've generated an increase in the value of their assets without having to risk any capital expenditure. Investors can speculate up the value of GE shares in the energy industry, or healthcare, or defense, without worrying about the other two holding their investment back. Whether the resulting companies is any more productive of actual goods and services than the unified company is irrelevant. [1]: https://americanaffairsjournal.org/2021/08/the-value-of-nothing-capital-versus-growth/ https://americanaffairsjournal.org/2021/08/the-value-of-noth... [2]: https://news.ycombinator.com/item?id=29053503 https://news.ycombinator.com/item?id=29053503

0xB31B1B 5y ago
By increasing value like this, they can raise more funding/sell debt to fund growth. The moves themself do not impact the company but the downstream impacts can be great. Most large businesses run on debt, most growth is fueled by debt, and increasing the total amount of money that investors are willing to give to companies by reorganizing organizations to make more attractive debt sales is a nearly costless way to fund growth.
GDC7 5y ago
Stock buybacks are just a tax efficient way to give money back to shareholders in lieu of dividends. Also this sort of phenomenons are rarely top-bottom. The American consumer is less and less prone to consume and more and more keen to invest. If you talk to people and look at discussions on the interwebz it seems to me that the goal is not so much making purchases today with the aim of enhancing quality of life, but accumulating potential spending capability in the form of paper net-worth which you have the option (but not the obligation) to spend on quality of life at a later date. Just look at Tesla, Bitcoin, real estate, interest rates etc. Basically every financial indicator says that people are more and more rejecting the marsh-mallow today, hoping to have multiple marsh-mallows in the future, which they'd also reject in the hope of having hundreds of marsh-mallows, which they'd also reject and on and on and on. The anticipation of pleasure and quality of life becomes the goal, and the anticipation is fed by people circlejerking over their net-worth number or their gains on their paper gains on the stock market. When you signal to executives that the company's most successful product is the stock that they sell, then it's not that hard to imagine that executives will be very receptive in treating the stock as a product, that's because they already have incentives as it is, then on top of that you have the populace asking to do exactly that and elevating those who do so as some sort of technoutopian cult leader making them rich (every reference to Lord Musk is incidental)
- ItsMonkk 5y ago
  From 1945 to 1971 the value of assets was increasing faster than the value of gold mined, and dollars were directly connected to gold, so everyone wanted more dollars, so the stock value of companies was low even though they were growing at a much faster rate than companies are today. From 1971 to today, being off the gold-standrd, the count of dollars is increasing at a rate much faster than the value of assets created, so everyone wants more assets. If you don't want to encourage rent-seeking behavior, you need to ensure that the count of dollars increases at a rate equal to the value of the assets being created.
  - rileymat2 5y ago
    Does the count need to increase or simply the velocity of those dollars?
H8crilA 5y ago
I think there's a fundamental misunderstanding as to what capitalism is. Capitalism is a system in which the capital decides what gets done, within limits. If the market really thinks the company is better off split then that's what you as a company should do - the capital has spoken. If it's a bad idea then maybe next time the capital will take the opposite position. Same with bankruptcies, they're usually healthy. If your bonds trade at 50c on the dollar with an inverted yield curve you should file for it. Or the opposite - companies enjoying super low cost of capital (prime example - Tesla), if the capital thinks the company is so great the management should be trying to sell more shares and lock in some of that capital that's chasing it, assuming it can deploy additional capital in any meaningful fashion. And (existing or potential) competition should take notice. In short, the capital tells you what to do. Even the Fed is kind of subject to the market, every time they stay behind or ahead of the curve (like when the yield curve inversion happens) there are usually consequences down the line for such trespasses against the consensus.
missedthecue 5y ago
"the primary goal is to increase the value of assets and returns on capital rather than the underlying performance and economic growth" They're the same thing. Getting more productivity out of a given asset is by definition an increase in performance and efficiency.
markus_zhang 5y ago
I think Capitalism, from its birth, only cares about "increasing the value of assets and returns on capital". It happened to focus on technological advancement during the last few centuries, simply because technological advancement brought about the biggest returns on investment (capital), and nothing else. If technological advancement does not satisfy the return of capitals, it simply turns its focus elsewhere, be it making wars, dealing drugs or slaves, or whatever that brings about the biggest return of capital within acceptable risks. Nothing more, and nothing else. Technological advancement and others are simply by-products.
- EricE 5y ago
  >Technological advancement and others are simply by-products. lol - and what by-products those are! Before widespread adoption of capitalism look at the pace of technological and economic development. How many people were in poverty - and I mean real poverty, not the ridiculous definitions of "poverty" we have today. Freedom, self-determination, governance - capitalism was the grease that unlocked the true human potential - everyone working collectively towards their own enlightened self interests. Search YouTube for Milton Freedman and the pencil - he does an amazing job of outlining just how remarkable the free market is when you think about it - even for something as simple as a pencil. Decentralized/cooperative beats the hell out of central planning every time - simply because there are far too many variables, even with todays modern technology. Is capitalism perfect? Nope. It's simply leaps and bounds better than any other systems we have used before it. It's not even close! >If technological advancement does not satisfy the return of capitals, it simply turns its focus elsewhere, be it making wars, dealing drugs or slaves, or whatever that brings about the biggest return of capital within acceptable risks. How is war, killing your customers with drugs or even slavery remotely profitable? Especially since the capitalistic countries rejected slavery ahead of most other non-capitalistic countries. You need to bone up on history a bit more and stop buying into political propaganda.
  - markus_zhang 5y ago
    I think selling drugs and weapons is still good business? You need to read history a bit more. I'm not saying Capitalism didn't advance technology or make our life better, but again, as I said they are just by-products and we should not treat it as guaranteed.
sofixa 5y ago
I kind of don't get the fascination with spinoffs and narrowing company scope. Why is a company "focus" more important than diversification and lowering risk? Especially for GE, where one of their main businesses, aviation, is heavily susceptible to downturns. What happens next pandemic/ 9/11 / oil price jump / recession when they lose the majority of the Aviation business? They pray to have enough reserves? Why not have another entity in an unrelated sector like healthcare to help with that? And it even makes more sense to share resources on turbines for aviation and power, besides the redundancy.

0xB31B1B 5y ago

By increasing value like this, they can raise more funding/sell debt to fund growth. The moves themself do not impact the company but the downstream impacts can be great. Most large businesses run on debt, most growth is fueled by debt, and increasing the total amount of money that investors are willing to give to companies by reorganizing organizations to make more attractive debt sales is a nearly costless way to fund growth.

GDC7 5y ago

Stock buybacks are just a tax efficient way to give money back to shareholders in lieu of dividends. Also this sort of phenomenons are rarely top-bottom. The American consumer is less and less prone to consume and more and more keen to invest. If you talk to people and look at discussions on the interwebz it seems to me that the goal is not so much making purchases today with the aim of enhancing quality of life, but accumulating potential spending capability in the form of paper net-worth which you have the option (but not the obligation) to spend on quality of life at a later date. Just look at Tesla, Bitcoin, real estate, interest rates etc. Basically every financial indicator says that people are more and more rejecting the marsh-mallow today, hoping to have multiple marsh-mallows in the future, which they'd also reject in the hope of having hundreds of marsh-mallows, which they'd also reject and on and on and on. The anticipation of pleasure and quality of life becomes the goal, and the anticipation is fed by people circlejerking over their net-worth number or their gains on their paper gains on the stock market. When you signal to executives that the company's most successful product is the stock that they sell, then it's not that hard to imagine that executives will be very receptive in treating the stock as a product, that's because they already have incentives as it is, then on top of that you have the populace asking to do exactly that and elevating those who do so as some sort of technoutopian cult leader making them rich (every reference to Lord Musk is incidental)

ItsMonkk 5y ago
From 1945 to 1971 the value of assets was increasing faster than the value of gold mined, and dollars were directly connected to gold, so everyone wanted more dollars, so the stock value of companies was low even though they were growing at a much faster rate than companies are today. From 1971 to today, being off the gold-standrd, the count of dollars is increasing at a rate much faster than the value of assets created, so everyone wants more assets. If you don't want to encourage rent-seeking behavior, you need to ensure that the count of dollars increases at a rate equal to the value of the assets being created.
- rileymat2 5y ago
  Does the count need to increase or simply the velocity of those dollars?

H8crilA 5y ago

I think there's a fundamental misunderstanding as to what capitalism is. Capitalism is a system in which the capital decides what gets done, within limits. If the market really thinks the company is better off split then that's what you as a company should do - the capital has spoken. If it's a bad idea then maybe next time the capital will take the opposite position. Same with bankruptcies, they're usually healthy. If your bonds trade at 50c on the dollar with an inverted yield curve you should file for it. Or the opposite - companies enjoying super low cost of capital (prime example - Tesla), if the capital thinks the company is so great the management should be trying to sell more shares and lock in some of that capital that's chasing it, assuming it can deploy additional capital in any meaningful fashion. And (existing or potential) competition should take notice. In short, the capital tells you what to do. Even the Fed is kind of subject to the market, every time they stay behind or ahead of the curve (like when the yield curve inversion happens) there are usually consequences down the line for such trespasses against the consensus.

missedthecue 5y ago

"the primary goal is to increase the value of assets and returns on capital rather than the underlying performance and economic growth" They're the same thing. Getting more productivity out of a given asset is by definition an increase in performance and efficiency.

markus_zhang 5y ago

I think Capitalism, from its birth, only cares about "increasing the value of assets and returns on capital". It happened to focus on technological advancement during the last few centuries, simply because technological advancement brought about the biggest returns on investment (capital), and nothing else. If technological advancement does not satisfy the return of capitals, it simply turns its focus elsewhere, be it making wars, dealing drugs or slaves, or whatever that brings about the biggest return of capital within acceptable risks. Nothing more, and nothing else. Technological advancement and others are simply by-products.

EricE 5y ago
>Technological advancement and others are simply by-products. lol - and what by-products those are! Before widespread adoption of capitalism look at the pace of technological and economic development. How many people were in poverty - and I mean real poverty, not the ridiculous definitions of "poverty" we have today. Freedom, self-determination, governance - capitalism was the grease that unlocked the true human potential - everyone working collectively towards their own enlightened self interests. Search YouTube for Milton Freedman and the pencil - he does an amazing job of outlining just how remarkable the free market is when you think about it - even for something as simple as a pencil. Decentralized/cooperative beats the hell out of central planning every time - simply because there are far too many variables, even with todays modern technology. Is capitalism perfect? Nope. It's simply leaps and bounds better than any other systems we have used before it. It's not even close! >If technological advancement does not satisfy the return of capitals, it simply turns its focus elsewhere, be it making wars, dealing drugs or slaves, or whatever that brings about the biggest return of capital within acceptable risks. How is war, killing your customers with drugs or even slavery remotely profitable? Especially since the capitalistic countries rejected slavery ahead of most other non-capitalistic countries. You need to bone up on history a bit more and stop buying into political propaganda.
- markus_zhang 5y ago
  I think selling drugs and weapons is still good business? You need to read history a bit more. I'm not saying Capitalism didn't advance technology or make our life better, but again, as I said they are just by-products and we should not treat it as guaranteed.

sofixa 5y ago

I kind of don't get the fascination with spinoffs and narrowing company scope. Why is a company "focus" more important than diversification and lowering risk? Especially for GE, where one of their main businesses, aviation, is heavily susceptible to downturns. What happens next pandemic/ 9/11 / oil price jump / recession when they lose the majority of the Aviation business? They pray to have enough reserves? Why not have another entity in an unrelated sector like healthcare to help with that? And it even makes more sense to share resources on turbines for aviation and power, besides the redundancy.