From: tzeruch@ceddec.com
Date: Tue, 20 Oct 1998 12:31:15 +0800
To: Jim Choate <ravage@EINSTEIN.ssz.com>
Subject: Re: Another potential flaw in current economic theory...
In-Reply-To: <199810061317.IAA07423@einstein.ssz.com>
Message-ID: <98Oct19.235259edt.42154@brickwall.ceddec.com>
MIME-Version: 1.0
Content-Type: text/plain



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.