Another potential flaw in current economic theory...

Hi,

It occurs to me that there is another potential flaw in current economic
theory and business practice.

Currently (ala Friedmann) the parties that reap the benefit of a succesful
business are the shareholders, this is currently seen to exclude the
employees in many cases/companies.

This approach undervalues the business worth of the employees commitment to
the business.

A more reasonable approach (and one that might make free-markets more
workable, though not by itself) is to consider the employees shareholders
even if they don't hold a single piece of stock. And no, their paychecks are
not sufficient.

Consider, another way to look at a business' goals is "to make every
shareholder a millionare so they don't have to work at anything else". What
business do you know has the specific goal of making their employees (all
the way down to the janitor) sufficiently wealthy from their commitment to
the business so that at some point they don't have to work any more either
(and we are NOT talking about some measly 401k retirement program)?

What would the impact be to the current business models if we include this
axiomaticaly?


    ____________________________________________________________________

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       The Armadillo Group       ,::////;::-.          James Choate
       Austin, Tx               /:'///// ``::>/|/      ravage@ssz.com
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On Tue, 6 Oct 1998, Jim Choate wrote:

> It occurs to me that there is another potential flaw in current economic
> theory and business practice.
> 
> Currently (ala Friedmann) the parties that reap the benefit of a succesful
> business are the shareholders, this is currently seen to exclude the
> employees in many cases/companies.
> 
> This approach undervalues the business worth of the employees commitment to
> the business.

Not labor any more than capital.  I think what you refer to is often
called "stakeholders" which includes suppliers and customers in addition
to employees. 

However you do not need to play games to justify proper treatment of
employees.  If you consider capital such as a machine, it is usually
better to keep it well maintained and in good repair instead of letting it
wear out and rust - the quality of your goods will suffer, profits will go
down, and shareholders will dump management.

The same applies for labor.  If you treat employees badly, and they are in
a free labor market, you will be left with those who will tolerate your
abuse, or ignore it.  These are likely to be as less productive as the
rusty machine.

And employees usually create mental capital.  Except for the most menial
tasks, they will know who to call and how to get some otherwise trivial
things done much more efficiently than someone new.  And they will be able
to identify ways to make their niche more efficient for little extra cost
(v.s. having a bunch of consultants go through to obtain the same
information).  Lose a long term employee and you have lost a lot of
knowledge which you will pay dearly to replace.  High turnover is bad for
almost every business.  Maltreatment is universally bad.

Our current stock market bubble - which is in the process of popping -
distorted this.  My concept of Usury (yes, another mideval or earlier
idea) is loaning in the abstract.  You just want 5% or 10%, and try to
find a piece of paper (or electronic book entry) that will return it
regardless of what is behind the paper.  This can include ponzi schemes if
they aren't recognized as such.

If people were really investing in the non-usurous sense, they would be
concerned with the company as an organic whole, with the suppliers, and
customers, and employees, and the physical plant and everything else,
since the overall health would have a direct impact on the return on their
investment - and this would typically give a dividend yield a few percent
above something like a 10yr treasury.

If I want milk, I will be very concerned with keeping the cow happy and
healthy, and doing so rationally - pampering the cow too much won't give
any more milk and maybe make the cow less healthy, but starving it or
beating it would be worse.

But now people own mutual funds, and probably don't know what positions
they are in today.  They simply assume it will go up 10% "over the long
term" regardless if they invest in CocaCola, RJR Nabisco, Yahoo, or GE, so
why bother checking what is behind the stock certificate - if they miss
their earnings, the fund manager will simply swap it for something else
not based on the company or employees, but just on a few abstract numbers 
reported each quarter.

I like Yahoo and Amazon, but can't concieve of any logic to their market
capitalization.  They would have to grow at double digit rates to long
past my retirement to return to a rational valuation (assuming the stock
price didn't go up further).  I haven't heard a reason connected with
something tangible (dividends, book-value, cash flow) for someone to own
such a stock.  Only that "it the internet".  And I think this decoupling
is at the center of what you are getting at.  Paper v.s. people, and when
it comes time to decide, the paper wins.

There is a lot of ignorance, and it is rational in the short term - these
stocks are going up, so it would otherwise make sense to follow the trend.
But if the trend is all that is being watched, who is going to care if
they are using slave-labor? - to mention just one issue.

But that is investing in a bubble.  The same thing happened in 1720 with
the South Seas company in Great Britian and the Mississippi Scheme in
France.  The paper was appreciating daily, and that is all that mattered. 
Until the paper became illiquid.  Then it mattered very much if the
businesses were intrinsically sound and healthy and correctly valued. 

And I think we will see the same thing here and across the globe shortly.
Japan started to see this in the early '90s.

tzeruch@ceddec.com wrote:
> 
> On Tue, 6 Oct 1998, Jim Choate wrote:
> 
> > It occurs to me that there is another potential flaw in current economic
> > theory and business practice.

I see there are lots of interesting discussions on economy recently
on this list. But I miss stuffs relating to the currently existing
crisis of the financial market, topics like causes of failure of 
LTCM etc. etc.

M. K. Shen

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On Tue, 6 Oct 1998, Jim Choate wrote:

> Hi,
> 
> It occurs to me that there is another potential flaw in current economic
> theory and business practice.
> 
> Currently (ala Friedmann) the parties that reap the benefit of a succesful
> business are the shareholders, this is currently seen to exclude the
> employees in many cases/companies.
> 

Actually not.  There are quite a few business that have employees as
shareholders.  Most shares of companies are reasonably priced and
easy enough to get a hold of.  Selling them on the other hand is
not so straightforward.

> This approach undervalues the business worth of the employees commitment to
> the business.

Sounds Marxist to me.  Your percentage of equity in anything is
proportional to the risk level you take.  The employee risks none
of their own capital so cannot legitimately expect to be rewarded
with stock.  The employee is free to leave at any time and thus
discontinue their only investment in the company, their day to day
presense.

Of course that does not preclude the employer from offering stock
as an incentive to long term commitment or as an enticement to stay
when the market takes a downturn etc.  In that case the employee
is then taking a risk -- basically the opportunity cost of moving
to a more lucrative situation (one of which is working for himself
and becoming an "evil robber baron").

> 
> A more reasonable approach (and one that might make free-markets more
> workable, though not by itself) is to consider the employees shareholders
> even if they don't hold a single piece of stock. And no, their paychecks are
> not sufficient.

Hmmmm.  That would work like a charm when it comes to paying dividends.

> 
> Consider, another way to look at a business' goals is "to make every
> shareholder a millionare so they don't have to work at anything else". What
> business do you know has the specific goal of making their employees (all
> the way down to the janitor) sufficiently wealthy from their commitment to
> the business so that at some point they don't have to work any more either
> (and we are NOT talking about some measly 401k retirement program)?

What the business does it hire them so they don't have to risk their
own capital.  Of course the labor/socialist view is that they are
being exploited.  I encourage all workers who think the "from each
according to their abilities to each according to their needs" model
works well to emigrate to Russia.  As PJ O'Rourke says, "there they
boil stones for soup".  Go to China and see what kind of "profit
sharing" deal they will make you.  Better yet, try to become a 
prosperous self-employed person.

> 
> What would the impact be to the current business models if we include this
> axiomaticaly?
> 

Ask Marx.  Apparently you don't think capitalist models work.

jim

More PJ O'Rourke...

"And here is another shock.  Professor Samuelson, who wrote the early
editions [of "Economics"] by himself, turns out to be almost as much of a
goof as my friends and I were in the 1960s.  'Marx was the most
influential and perceptive critic of the market economy ever,' he
says on page seven.  Influential, yes.  Marx nearly caused World War III.
But perceptive?  Samuelson continues: 'Marx was wrong about many things
... but that does not diminish his stature as an important economist.'
Well, what would?  If Marx was 'wrong about many things' *and* screwed
the baby-sitter?"



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