Misallocation is a massive problem. I think a significant amount of money is going into advertising, pointless startups, entertainment and social media.
Basically, we are spending huge amounts of money getting numbed out of our minds instead of solving real fundamental problems.
In general, I think it reveals a deeper problem about capitalism; none of us understand value anymore (we have more junk in our lives than we could possibly need)... So we struggle to allocate capital properly. We just blindly follow trends. The people who are getting rich now are not those who want to make the world a better place; the winners are those who just want to make quick cash (short-term thinkers who take insane risks).
Does society prefer Snapchat or a cure for cancer? In the current economic environment, investors prefer Snapchat because Snapchat is pretty likely to get a ROI within the next 5 years.
The return on investment for a cancer cure is probably small (especially given the large amount of recurring revenue that big pharmaceuticals are currently making by selling cancer drugs). Also, it's much riskier than Snapchat... Could take 5 years, 10 years or 20 years.
Ultimately, we are satisfying people's short-term 'wants' at the expense of their long-term needs. We're a society of addicts who just want to get a quick buzz.
Capitalism has never been about making the world a better place. All systems deal with humans and humans inevitably prefer helping out themselves and people close to them over others, which leads to corruption regardless of the system. And capitalism seems the best method for controlling innate human corruption (see China's incredible economic growth once socialism was all but abandoned for capitalism in the 80's pulling a billion people out of abject poverty).
As for investors preferring Snapchat to curing cancer? The amount of money invested in cancer dwarfs Snapchat's investments by magnitudes. You don't just cure "cancer" you find cures for the hundreds of different diseases that fall under the umbrella of cancer. There's so much money invested in cancer there are often not enough candidates for a new clinical trials.
If we have a shortage of anything, it is medical research scientists. And the way to get more of those is to change the regulations so there is more room for profit medical research.
> capitalism seems the best method for controlling innate human corruption
Capitalism seems better than past failures. But it is surely a local maximum. We have thousands of years of social evolution in front of us. Experiments have hardly been exhaustive, and material conditions seem to be changing faster than ever.
I agree. Although it will be hard to separate the need for transparency to one's rights to privacy. You can deem that some actions inherently leave you no rights to privacy, but I'm afraid it'll be only a matter of time till everything you do is under the watchful eyes. On the other hand, humans are at the best when they know theyre being watched. Its a difficult tradeoff.
The printing press was one of the main factors making the reformation possible, which later on led to the thirty year's war. So it's actually a good example of how technology has unintended consequences.
Recent historians have been looking at how the printing press was more an instrument of state power than anything else. Remember that printing shops were state-controlled and heavily censored (_The Great Cat Massacre_ has a chapter on print shops in 18th-century Paris); most of their output was royal decrees, propaganda pamphlets, and books friendly to the regime in question.
The Reformation began for good reasons -- the Church had been dragging its feet on internal reforms for hundreds of years, and finally implemented these reforms in the Council of Trent, after the Reformation began -- but its spread was normally something that governments did to their people, not something that people chose for themselves. It wasn't an extension of liberty. Henry VIII and Edward VI flooded England with mercenaries, for example; in the Germanies, whether to turn Protestant or not was a decision made by rulers (who were legally entitled to compel their subjects to follow them; some converted to Lutheranism, seized Church property, and then switched back to Catholicism, and persecuted subjects who were slow to make the change each time). First-wave Protestants -- Lutherans and Anglicans -- generally had less religion rather than a different religion; even today, there are conservative branches of the Lutherans and Anglicans who are negotiating with the Catholic Church to return as whole congregations.
Calvinism was (if I remember rightly) never imposed from the top down, and typically took power through revolts by the middle class or the lower aristocracy; but Calvinist states tended to be oppressive, warlike, aggressively-middle-class theocracies -- very bad places to be poor or dissident. (_Albion's Seed_ is revealing on this; the modern Islamic Republic of Iran is a less theocratic, less anti-commercial, less oppressive place than 17th-century Puritan Massachusetts was.)
This is not very constructive. I can tell you're being sarcastic, but if you disagree with the parent comment, then perhaps you could enlighten us why?
The fundamental problem is trying to cast individuals in heroic narratives. The mechanism for status is beside the point. People in Russia had ikons of Stalin.
I feel like somehow biasing towards nonfiction is one way to improve this, but that may just be bias speaking.
We can't be all that coherent about "greed" anyway - if we do create consumer surplus through business, then this is a good thing. If we enrich ourselves by rent-seeking and cheating, it is a not. Deciding which is which is pretty hard.
Didn't Jimmy Carter just go into complete remission from what used to be a death sentence, stage 4 melanoma? It was in his brain and liver, and now it's undetectable. He's 91 years old and a decade ago he would have stood almost zero chance of recovery.
I'm sorry the situation is so bad in research, but it does produce miracles.
The drugs that helped President Carter has a 33% success rate for people in his condition. It's only been around since 2011 and brought the survival rate up from near 0%. That's some real progress.
Yep, the miracles are what draws people to the work in the first place, but they can't sustain people forever, generally. With enough lucky breaks, it's possible.
I have to disagree with you about research funding. There is not nearly enough-most people are dissuaded from pursuing research as a career because it is unbelievably competitive to get research grants, which is why we don't have enough research scientists.
The caveat is that we are training more than enough research scientists, but we simply don't have enough jobs for them. There are some jobs in industry, but biology is not like engineering-you can't know when you will find the next breakthrough. Pharma companies are more focused on iterating on established pathways and targets (much lower risk and higher short-term ROI) and are absolutely dependent with government-funded basic research.
The clinical trials bit that you mentioned is a red herring-recruiting patients is often challenging for completely unrelated issues. I've also never heard of being unable to conduct a clinical trial for lack of patients.
When Value is defined as "more money", then this will happen.
Money often functions as a lack of efficiency and is prone to re-produce itself.
For example: if cancer was cured with a pill, forever, the total revenue from curing cancer is pill sales price * people born, which would be less than current treatment costs.
The problem is that technological disruptions like this pose a threat to the economy as it is organised and run today. In particular, modern economy cannot cope with unemployment. The masses of laid-off people would either have to engage in yet more pointless jobs, or "disrupt" the social order. This is very unlikely to increase efficiency overall.
Why would a cure for cancer be a small return on investment? You're assuming that the only people who could enter the market and find a cure would be the current players who are profiting from the current treatment or some global conspiracy to keep the cure hidden. If someone were to discover a very effective treatment, they would surely profit nicely. Hepatitis C was recently cured, a brutal disease that affected some of the most marginal people in society [0]. And it was done thanks to a profit motive. Barring extreme price controls on drugs by politicians, this type of progress can be greatly encouraged by the profit motive.
[edit] I would also like to add, the non-profit approach [IMO] has failed to produce anything but the abundance of the color pink and self congratulatory galas for wealthy donors. Perhaps the profit motive and choice that has served society so well in practically all aspects of our lives can be equally leveraged on solving hard problems like disease.
Whenever I think of profit motives being a good thing I'm reminded of the Steve Job biography where it speaks of his time at a commune. He would sleep under the kitchen table and watch people sneak in at night to take food from the fridge which was supposed to be shared. People want as much as they can get for their work, and not a single apple less.
>If someone were to discover a very effective treatment, they would surely profit nicely.
That would depend on how much it cost them to develop the treatment, and how much money the patients can pay. It's not sure that it would be profitable.
It's not about 5 year return, it's about the fact that the potential cancer cure simply has low returns and huge risks. People are absolutely willing to make long term bets (e.g. snapchat, which has negligible revenue right now, and is entirely just hope for the future), they just need to be good bets.
Molecular targets are getting harder to find. Getting a drug through the FDA is insanely difficult, costs huge amounts of money, and often fails. Further, there is significant political risk once you get it through - very few countries will pay full price for your drug (mostly just the US), and who knows where the US is going?
Pharma is both a scientific and a regulatory challenge - making money involves the stars aligning.
If you want more cancer cures, make it easier to become very rich by selling them.
Is this because we've already harvested the low-hanging fruit? Are there any new paradigms on the horizon that could change this?
> If you want more cancer cures, make it easier to become very rich by selling them.
It's an odd thing about Americans, though. They really don't seem to mind if Jobs or Zuckerberg get insanely rich (although there was some grumbling about Gates back in the day), but they loose their collective fecal matter if an evil capitalist with a cure for cancer even tried to recoup the capital invested in its development.
"People are dying because it is not free!", they would screech. And the (US) government would cap the price because by that time they will be the sole domestic channel for any new therapy's delivery and done and done. Big pharma knows this, and if they don't, their investors do. Better off improving female viagra or something.
It's mostly a combination of low hanging fruit all being plucked, and also the fact that it's harder to measure smaller deltas in efficacy.
I.e., if there is already a drug that cures 75% of cancers and a new drug cures 85%, a clinical trial to detect that 10% difference will require a lot more people (and cost a lot more money). Additionally cost-efficiency is not a valid reason to allow a new drug (according to the FDA), you've got to be better than the last one.
> if there is already a drug that cures 75% of cancers and a new drug cures 85%, a clinical trial to detect that 10% difference will require a lot more people (and cost a lot more money).
That makes sense. Thank you.
> Additionally cost-efficiency is not a valid reason to allow a new drug (according to the FDA), you've got to be better than the last one.
Really? I did not know that. On the face of it, that seems absurd. If Treatment A cures at a 75% rate and costs $1M and Treatment B cures at a 72% rate (worse) and costs $10, it seems as if it would still be valuable to the market, no? Or am I mis-reading you?
I don't think you can look at a subset of capital expenditures and then conclude "capital is misallocated."
You would have to look at all the businesses funded and see where the money is going. Also I would caution you about falling into the trap of confusing "valuation" with "capital". SnapChat might have had a $16B valuation but really only "allocated" a bit more than a billion dollars.
If you subscribe to the 'too much money is idle' point of view like continuations does, then you should be very bullish on the startup eco-system growing for all kinds of businesses, and that gives the capital a chance to be allocated to something useful, like another Watsi.
If you see a large amount of money (as in 100+ of billion) flow in and significantly substandard returns then it was misallocated. The VC industry has seen substandard returns over the last 20+ years. So, it's not a good allocation of money.
PS: Some people get rich at Vegas, that does not mean gambling is a good investment.
I don't disagree but would like to understand your metric, "substandard returns" suggests you have a metric in mind, how do you arrive at the 'standard' ?
Risk adjusted ROI. The bond market is the classic example, if you look at the class of bonds paying 10% vs 2%. If your risks where in line with the 10% bonds, but the payouts where inline with the 2% bonds it's a low ROI investment.
Now, looking ahead you don't know what the risks are. But, you can examine the ROI for 1990 investments and you can see which 2010 investments have already failed.
Ok, fair enough, but today's Risk Adjusted ROI is quite low. And comparing returns from a couple of decades in the past with current returns seems unhelpful to me.
My point is that your standard has to be for your choices of the capital today versus historical returns. So if you compute for expected value of a million dollars sitting in a bond fund today, versus sitting in a basket of startups, are the returns less in the latter case?
You can't compare things to today’s bond market, because you don't know what the risks are. It's all historical data vs. other historical data.
As to solid returns today, regulated public utilities companies have ok returns and low risks. It's not zero risks and the upside is limited, but many people consider them the benchmark for low to moderate risk investments. (Though you still need due diligence as leverage can still kill them.)
Effectively zero risk investments on the other hand have a huge price premium.
PS: The 2/20 aka 2% management fee and 20% performance is the real killer. Huge VC funds are a great way for VC's to get rich so they are all about selling them. There are also a few back channels to do insider deals.
But we used to have a large number of $20-$40 million-per-year companies where people had decent jobs and worked. When that becomes a marque of a schmuck then we have a problem.
I think some of these overvalued... frankly, Pet Rock companies aid and abet this. Don't get me wrong, WE are the problem here but the effects are not good.
I read this that you have a preference for a number of mid-cap companies which employ modest numbers of people at "decent" jobs. (decent in quotes because as a subjective description it's hard to pin down what a given individual considers decent and another individual doesn't).
The current economy supports a large number of those. And they provide steady employment for a large number of people. But often times in this forum (HN) companies providing jobs which are considered "CRUD" are not held in high esteem and so you don't hear about them. So perceptions can be biased as well.
I worry more about non-allocation when you can't get credit from banks and you companies sit on giant hordes of cash. That slows the economy down and makes it hard for new experiemental companies to get going.
A little girl and her grandfather, an economist, are walking down the street. Suddenly, the little girl tugs on her grandfather's tweed blazer and says, "Look, Grandpa! There's a $20 bill on the sidewalk! Somebody must have dropped it!"
"Nonsense!," said the grandfather. "If that were a real $20 bill, someone would have already picked it up!"
I think two big contributing factors are the so called "active investors" and corporate taxes.
Active investors force companies to optimize for short term gain which of course hurts growth.
Corporate taxes are too low. The private sector is not generating enough growth and to fix that the government does the exact opposite of what it should do. It hands the private sector more capital instead of taking it away. The private sector is already at a loss with the capital it already has at its deposition. I bet most of it goes into speculative Wall Street financial vehicles and I do not think any of it ever gets to entities that are short on capital or it goes to the wrong entities that are short on capital because most academics would be more than happy to get 0.01% of the capital that goes to social media startups.
Yes. Water, water, everywhere but only a handful are allowed to drink. We live in a contradictory age where more capital has accumulated than ever before (and thus can be said to be plentiful), but where it has at the same time become increasingly concentrated within a relatively small socio-economic network. Capital continues to evaporate away from the 99% to the 1%, but no longer precipitates back out.
' I think a significant amount of money is going into advertising, pointless startups, entertainment and social media.'
My suspicion is that a lot of it is going into housing, driving up the costs for home buyers with no productive benefit for the economy.
Well that is obvious after 2008. Last I checked there are around 5 vacant houses for every homeless person in America. According to anthropologist David Graeber, the real original (pun intended) meaning of the phrase "real estate" was royal estate, referring to the British monarchies' royal estate in the 17th century.
The number of people who Do Things That Matter is just dwindling - most people are basically seat-fillers. This is especially true of say, a Congrefsperson or other equally high-profile functionary like a CEO. Even high status professional work like medicine and law is just rubber-stamp boredom with moments of sheer terror.
Things That Matter are more or less on autopilot - see "How It's Made". So the differentiator becomes rent-seeking in nature. This makes things volatile - how is there anything like a "fundamental" to Snapchat - and this increases uncertainty. But “All of humanity's problems stem from man's inability to sit quietly in a room alone.” - B. Pascal.
Preferences are real and we don't understand them ( in the sense of "I cannot understand myself" in Zen). But we can certainly see their aggregated effect.
and in a way, it's worse even than that - cure cancer. Now something else comes along to replace it. Maybe that's Alzheimers. Cure Alzheimer's? Something else.
Advertising, startups, entertainment, and social media (ie thinly-veiled consumer research) all produce material of value directly or indirectly.
Their value is generally high because the output of a small number of individuals has an impact on a very large number of people. In addition to the services they provide directly, they usually create secondary benefits for society such as releasing new technologies into the open source community.
If you want to tackle waste, you'd be better off by looking into non-profits. How many funnel a significant portion of their funding into 'administrative costs'? How many exist to dodge corporate taxes in the name of 'good will'? How many are thinly-veiled advertising agencies for political special interest groups? How many aim to provide value to the greater populace rather than a very small subset of the population?
What about religion? Not banging on people who follow any specific religion, but nobody ever asks just how much value they're capable of extracting from their followers. How much of that funding goes to providing non-religious services such as entertainment, or backdooring funding to political special interests that support their own worldview.
How about subsidizing post-secondary education that abuses pricing as an entry barrier to exclusivity? Why have degrees become a default requirement for most/all middle class jobs? Why the hell does it still follow a strict 4-year rule for undergrad degrees? Why does everybody still waste the first 2 years learning arbitrary 'core requirements' unrelated to their specialty? How can we realistically subscribe to a fire-and-forget model that assumes everything can be taught up front prior to a lifetime of work. The 'waterfall' model has been proven ineffective in technology, why is it still overwhelmingly supported in education?
I live in San Diego, a hub for biotech research companies. From what I've seen talking to people who work in the field, funding isn't the issue. If anything, there's already too much capital floating around and the larger companies are swallowing the smaller companies en masse to eliminate competition.
I personally knew a guy who works in bleeding-edge cancer research. New advances won't come in the form of a pill or operation. The next generation of treatments hack biology in a way that makes cancer visible to the host's immune system. In addition, cancer is a blanket term to label a class of diseases so one treatment will only treat one/few forms of cancer. Throwing more money at the problem is like trying to hasten software development by throwing more developers at a project.
ROI for healthcare is huge, especially now that insurance is mandatory and basically charged as a 'tax for being alive'. The cost for Snapchat is minimal/nothing whereas healthcare via insurance + medicare/medicate costs make up a significant percentage of individual income.
High frequency trading gets shat on frequently. It's stupid. This is only a tool that evens out price differences across geological distance. If someone buys significant amount of AAPL stock in New York, the price goes up in NY. Then someone from London can profit by buying small amount of AAPL stock in London and selling it in NY.
High frequency trading is this, but with very high speeds and lots of competition. This means they have to exert value out of almost infinitesimal price changes.
>As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012.
That's 0,007% of U.S. GDP. And probably going down.
>"DEFINITION OF HFT:
1. a strategy which trades for investment horizons of less than one day
2. a strategy which seeks to unwind all positions before the end of each trading day
thus HFTs can't deploy large amounts of capital"
Themis trading wrote a report saying HFT is evil? This is about as persuasive as the taxi industry releasing a document saying that Uber is worse than Voldemort or the hotel industry saying AirBnB is the devil.
Furthermore, many of the issues described there are fairly innocuous in reality.
I'm not really knowledgeable to have an opinion on HFT, but there's something I'm still not clear about.
HFT firms are not that big; the ones I've seen pointed as the largest have net incomes of less than $100M. Why wouldn't the other market participants, particularly the largest Wall Street firms, allow HFTs to ruin their game? The link you posted mentions "corrupt SEC regulators", but why would they be corrupt in favour of HFTs?
Large Wall Street firms view these guys the way a rhinoceros views the birds snatching bugs off its back. It's not a competitive relationship, they coexist.
To push the analogy, sometimes the rhino gets annoyed and pecked too hard, but overall it's happy to live without as many bugs everywhere.
I skimmed some of the evidence there. Nothing seems to condemn the HCF industry as a whole. Some linked articles about it in Wall street journal and Financial Times are behind paywall. And even if HFC would be bad, it's not significant. Your source also says HFC can't hold much equity.
You could have explained me why HFC is bad. Just slamming around some link with lots of "evidence" is not very convincing. Given how easy it is to find evidence about anything these days. It's bit unfair to assume I should gather your argument for you.
Bollocks. Given fund managers are obligated to obtain "best execution" under MiFID (and regulations in general) if HFT were impacting that then they would raise merry hell. The fund management industry is orders of magnitude larger and more influential than all HFTs.
Whenever I see a discussion like this a HFT-supporter, like yourself, will usually come along and say that any links which are made to suggest HFT is bad are terrible (often the book flash boys is mentioned), but I never see any evidence of this terribleness, or alternative information sources. Do you have any?
Sorry to piggyback on your point and rip off Matt Levine a little bit, but most of the cage rattling seems to ultimately come from people who are mad that it's harder to slip in their huge orders without having a price impact like it should.
Sorry, I'm on my phone, but you could start with "Trading and Exchanges" which is available on Amazon (really, any of the highly rated books on market microstructure are pretty good IMO). Also IMO, It would be helpful to use traditional market makers as a baseline when making any kind of comparison to HFT, and asking if it's really worse. For example, total HFT profits have declined from like $5 billion to a little over $1 billion per year, whereas vanguards fees alone allow savers to keep roughly $40 billion per year. There are also a multitude of interviews with large, institutional investors who are extremely sophisticated and who are arguably the main people affected by HFT activities, for example this interview with cliff asness of AQR, which manages $100 billion ++ in quant strategies. https://soundcloud.com/bloombergview/masters-in-business-aqr... I think he starts talking about it around the 30min mark.
Also, my own experience working on a trade floor as a source.
Yes the value of notional sizes of derivative trades have little to do with either their actual values (which net to zero for all the parties involved), their risk or the amount of capital actually involved.
Latency arbitrageurs do not provide the value you claim they provide.
They consume liquidity by identifying that one individual is willing to buy at $10.02 at point A and one who is willing to sell at $10.00 at point B. These individuals would discover each other naturally in (literally) the blink of an eye; but HFTs pay to colo everywhere, they pay for 40Gb connects and ASICs. They pay for the fastest possible connections between those colos.
This means that instead of those individuals who truly create liquidity and who truly drive the market finding each other; the HFTs are able to wedge themselves into the middle of the transactions. This works because the NBBO system is slower than their systems. It works because of complex order types that benefit only HFTs (no actual investor requires a hide not slide... that's just a tool for HFTs to cut the line).
HFT does not create liquidity. It does not even out price differences. It is an entirely predatory tool to extract value that was generated by other, better men.
HFT is a place where self-righteous nerds pick everyone's pockets.
HFT is useless trash.
The only place I agree with you is that HFT-based theft, like car radio theft, is a relatively minor crime and one that is declining over time.
True market making is often algorithmic and automated, and it operates quickly. But it is completely different from the nonsense that is HFT.
> High frequency trading gets shat on frequently. It's stupid. This is only a tool that evens out price differences across geological distance.
1. That's a valuable evening out prices may be a valuable function, but one reason HFT gets shat on is because of the enormous effort put into attempts to arbirage over shorter and shorter time intervals. How does society actually benefit if the prices are equalized over a 1ms interval vs a 1s interval?
2. There are other, more parasitic HFT strategies than arbitrage. One I read about consists of the HFTs putting small tripwire sell orders on some exchanges to detect buy activity, then front running big orders by buying up all the stock on other exchanges and offering it at a higher price. The HFT performs no function besides inserting themselves as a middleman. It's like being on Amazon, clicking buy on a $10 item from seller A, then either having your order fail or be filled by seller B (who themselves just bought from seller A) at a higher price.
In contrast to other Michael Lewis fare, Flash Boys sounds poorly researched and based of the anecdotal experience of about 3 people.
You'd have to do a _lot_ of buying on other other exchanges to move exhaust the order book to the point that you can make a profit, and there is no way of knowing that the "buy activity" that your "tripwire" detects is, in fact, a harbinger of larger orders on the way to other exchanges. It could just be a single buy order at your tripwire exchange. You have no way of knowing.
Read "Flash Boys: Not so Fast" for a highy detailed rebuttal of Flash Boys. It's written by an HFT trader, so it's not intending to be unbiased, but from a logical perspective it does seem to demolish Lewis's points.
front running is illegal, and flash boys is a book packed full of ignorance. there is no outrage over one consumer buying a house or an apple ahead of another. there's no demand for "fair" auctioning of toyota corollas. speed isn't illegal, and it's been a determining advantage in markets for eternity.
If Flash Boys is full of ignorance, perhaps you could recommend a better book?
It also sounds like the term front running refers to many different practices, this is from the Wikipedia article:
> One common practice of high-frequency traders (HFT) is a form of front running, where they peer into various exchanges and try to detect orders as they propagate from a broker's order router.
> HFT traders place many small orders that indicate buying/selling pressure. Those with the shortest lag in reaching other exchanges then place orders on those exchanges to catch the rest of the order, at a more advantageous price.[6] According to Harvard Political Review writer Austin Tymins, HFT hedge fund Citadel LLC made billions of dollars front-running the trades of large institutional investors, many of which are investing on behalf of middle-class clients.[7]
It would not change anything significant about HFT besides removing the H. There would still be a technology race to execute trades as close to exactly 1 sec as possible.
HFT firms make money by being the first to grab trades for tiny price deltas. If the law said trades could only execute on one-second intervals, the deadline to be first to grab a trade would become a tempo defined by human law, instead of a steady lag due to physical law. But there would still be a deadline, so companies would still race.
That would push spreads apart a bit (increasing the costs of trading for everyone) but it's still clear that someone would be need to making markets. And it would still be cheaper to have computers do this instead of humans.
Most of the firms I worked for rested orders for days or weeks. Having to rest orders for a second would not materially change their trade other than make them slightly less likely to get into the top of the book, thus increasing the spread.
It's a sad situation. The world, in total, has more money than it needs, distributed to a wildly disproportionate few, who have no idea what to do with it, yet there are billions of people who suffer and struggle with issues that that money could solve. But "redistribution is bad", so we all just accept the status quo.
But those who have disproportionate amounts of cash don't consume as disproportionally as they earn. An individual can only personally consume so much. As more wealth is concentrated in fewer and fewer people, the money that trickles down as consumption declines. And as investment becomes more and more abstract, you've got algorithms passing money back and forth between algorithms, and the rate at which cash actually makes it out into the rest of the population also slows.
This is true, but if you take Piketty's argument that historically the return on that capital is greater than overall economic growth, then labor, being primarily reliant on economic growth for increasing their wealth, never catch up to the capitalists.
Central Banks have been pumping it out with near zero interest rates on and off for the past 14 years. The US Fed alone created about four trillion during quantitative easing. This cycle doesnt seem to have caused consumer inflation, but asset inflation: unicorns, high stocks, high houses.
Because those banks lend to banks, who lend to other institutions, which are owned by institutions or directly by wealthy people. Aside from pension funds and such, the vast majority of financial markets stand to benefit wealthy individuals almost exclusively. It wasn't always this way. Citizen stock ownership in the US was quite significant in the 50s. It's been on a downward trend ever since.
> That means we have massive amounts of capital available to invest in new endeavors. It explains why interest rates are low and there is fairly little that central banks can do about it unless they figure out a way to dramatically reduce investable capital – they can certainly shorten their balance sheets but even that impact is likely to relatively small in the overall scheme of things (eg US Fed about $3 Trillion).
I'll never understand this line of reasoning. It's completely backwards. Does anyone really think it'd be so easy to borrow money for consumer goods with suspect credit or outlandish business ideas without central banks pumping liquidity into the economy? Anyone looked into savings rates lately? You know, where natural capital formation occurs?
How the Fed interacts with the economy, I don't think is too different from any other speculator in the market. They just look at different charts, have more degrees, and have greater propensity for groupthink.
I know several local bankers who are retiring early because its too hard to make loans. They are sitting on tons of cash, but there are too many regulatory hurdles to lend the money. Loans which would have made total sense 20 years ago are no longer feasible. Many of our small businesses in this country are dying on the vine.
And yet there's a 50% tax break for capital gains in my country. What possible reason is there for such a massive subsidy for something that we don't need, other than corrupt influence on the political system by the wealthy to give themselves a tax break?
Letting you keep your own money is not a subsidy. That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
EDIT: I recognize this is a second reply to the same comment, it focusses on a different and important aspect and isn't really related to my other reply.
> That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
At least in the US system, there are two main distinctions made (there are some others, too, but these are the biggies) between labor and capital income, and both have some logic though better options, I think, exist.
(1) Between labor income and all other income (including, but not limited to, capital) -- labor income alone is treated as qualifying for certain social safety net program eligibility and benefits calculations (Social Security and Medicare), and is therefore subject supplemental taxes to fund those benefits. Alternative: make all income qualifying for those programs, and tax all income to fund them.
(2) Between long-term capital gains and most other income (including both short-term capital gains, labor, and other taxable income sources). Because the former are earned over a period of greater than one year, in a system with progressive marginal taxation on annual income, taxing them the same as the latter with no mechanism for accounting for the period over which they were earned -- especially when they are returns earned by sale of holding that aren't regularly repeatable, rather than sales of small subsets of a large pool of assets structured so that long-term gains can be extracted every year -- results in overtaxation when compared to regularly repeatable income streams like labor income. Alternative: tax all income equally, but allow taxpayers unlimited freedom to recognize (and pay taxes on) income in advance of realization, and limited -- but some -- freedom to defer recognition and taxation of some portion of windfall income for a period of years after realization. (This stops long-term capital gains from being a dodge to get low taxes on repeatable income from large holdings, while not unfairly taxing non-repeatable long-term gains, and also more fairly treating irregular labor income.)
Labor has linear returns. Capital has compounding returns. They're different. We should tax consumption instead, but the current tax distinction isn't madness.
I can see lots of reasons to distinguish between labour and capital. A big part of me thinks it would be appropriate to reward productive labour by reducing taxes and to discourage rent seeking by increasing taxes on investment income. There are practical reasons, of course, not to do this as we would rapidly chase investment from our country, but it is definitely worth thinking about these things.
I think capital gains should be taxed at a lower rate because of inflation. Let's say I buy something (anything, really) and hold onto it for ten years. In that time the CPI goes up 20%. If I sell that thing I bought for 20% more than I paid I really haven't gained anything - the spending power I have after ten years is the spending power I had in the beginning.
The reason why is risk. When you sell your time(labour), collect rent or interest, risk is lower so the tax rate is higher. If you invest in financial assets, like equities, risk is higher so the tax rate is lower. If that were not to happen, not many people would invest. Markets and compagnies would be under capitalized. Jobs and the economy would echo that.
I follow @Damn_Jehu and I've been talking with him about it. What I find scary about the situation is the fact that if all that "dead money" ever gets into the wider economy you can kiss the current capital valuations goodbye. It could possibly result in the largest devaluation in history (larger than the Great Depression and the several panics/scares before then combined).
For me this is amusing in a way since I work in financial services as a developer. So if/when that shoe drops my job is first to go for sure. Oh joy!
Such heaps of money could only be meaningfully invested in case of a large technological breakthrough that would enable the emergence of entirely new industries, skill-sets and supporting businesses. Think of the internal-combustion engine, electricity, and (we are already exhausting the potential of this one) the Internet.
Otherwise, the mere existence of that money (even if it never gets spent) serves no other purpose than to reinforce the status-quo.
Problem is that effectively if you spend that money you wind up devaluing any capital you already have invested in. So, why risk the devaluation? If I were Apple or Microsoft I would just quietly hum to myself and pretend it didn't exist. Or that I'm saving it for occasional dividend payouts. But beyond that, I'd stay as far away from active investment as possible.
In many ways this is akin to a mathematical singularity where all economic models break down. Can't tax it out of the economy or deficit spend it, both will cause misallocations from the speculative markets as they'll assume the dead money has worth which incentivizes them to spend it which again devalues existing capital invested which causes the markets to collapse. So, what to do? I assume at this point we're heading into a situation that's similar to a post-scarcity economy, so it's inevitable that prices will have to collapse whether we want them to or not. And that means certain norms such as property rights go away (along with the State institutions that prop it up). We'll get a Star Trek future, but only after the Mad Max nightmare between now and then is my guess (purely speculative and not of substance imo).
The huge capitals and the companies drowning in cash are certainly there, but the potentially profitable investment opportunities are scarce. Most of the infrastructure in the West has already been built, fertility is declining and no new groundbreaking tech is able to spur a new economic revolution. That gives rise to all kinds of speculative economic activity that are, at best, a zero-sum game.
Contrast that to the post-WWII years: you had an increasing population and a huge demand for new infrastructure. The Cold War space race was also a huge technological boost.
- I don't think you can use notionals to say that HFT is allocated a lot of capital. In general, if you're hedged, you don't have to put up all the capital. A typical figure is if you're long 1M and short 1M you have to post ~200K capital.
- Having said that the financial people I speak to seem to be swimming in capital. They all seem to want someone to trade it for them, or find deals to put the money in. On the other side, it's probably never been easier to get capital for certain kinds of project, but not every project qualifies as investible due to a certain kind of bureaucratic conservatism (old fashioned CYA requirements, lack of imagination, and so on). In particular stuff that banks are retreating from is leaving a big gap in the market.
- He makes a good point that when you get smarter about using capital, you need less of it. Perhaps that's where the missing productivity went?
The real question is: Scarce for whom? And that's the paradox at the heart of capitalism. It generates surpluses on the condition that they can belong, in large part, to a tiny minority. Solving for scarcity in the aggregate by no means solves for scarcity on the ground.
The author seems to be referring to financial definitions of capital rather than an economic definition of capital. It would surprise me if the physical capital stock of any country weren't at least 5 times larger than it's GDP. A global capital stock of USD 100 trillion against a world GDP of USD 80 trillion strikes me as too low.
Also, how does one add up the values of financial instruments? The capital he's referring to includes stocks, bonds and loans. What if I take a loan so that I might buy some bonds?
Lastly, not all assets are traded in each period, and some might never be sold, such that their values cannot be observed in financial markets.
The article overlooks the sovereign debt. The world has a total sovereign debt of about 50 trillion. The Government bonds and their derivatives account for most of the difference between available capital and GDP.
"Capital is no longer scarce" sounds very absurd. There will always be more people chasing limited resources and whenever less men (labor) are required for a task, the society directs that "capital" to either arts or research
But are they really chasing a limited resource? If investors think you're product is going to be profitable, you're virtually guaranteed to get funding. The only reason chasing capital is difficult is because that's frequently a hard sell. Lots of capital doesn't mean investors are going to throw money at losing propositions.
Of course. There is not infinite value in existence, nor is there a means of creating value from nothing.
> If investors think you're product is going to be profitable, you're virtually guaranteed to get funding.
Well... this is always the case. The only difference is that as capital is more scarce, potential investors are more critical in their analysis of the product's potential.
> Lots of capital doesn't mean investors are going to throw money at losing propositions.
Right. As available capital approaches infinity, the expected ROI of ventures which obtain successful funding approaches zero.
This is an oversimplification of course - if an asset is deflationary, the limit is the rate at which the asset gains value; if an asset is inflationary, the limit is the rate at which the asset loses value (i.e., a negative rate). The mechanic holds true, though.
Capitalism has 2 fundamental weaknesses that people universally ignore.
1. A corporation is a living organism (ie in the abstract, not biological sense) that needs to be fed to survive.
In a system where resources are scarce (ie there's a hard limit on how much that can be extracted from the market), dominated by organisms that are expected to grow indefinitely or die; eventually one of three things are going to happen.
First, the market becomes completely saturated, the organism quits growing, capital is devalued, and the organism suffers a slow/painful death at great cost to the stakeholders.
Second, the organism diversifies and grows in size/power beyond the limits of the market so it starts consuming other organisms and/or artificially raises prices to extract more value at the current expense. Ie asset inflation which acts as a hidden tax on the entire ecosystem.
Third, the organization buys back the its shares, converts to a private company, and adjusts operations in a manner that emphasizes long-term sustainability over growth. This almost never happens 'in the wild' and never happens in the interest of 'sustainability'. Offering to buy off the existing stakeholders without uncontested majority voting rights is the same as handing them a blank check. A realistic 'best case' is that the value-producing stakeholders fork off and create a new private company.
People seem to be shocked that large companies act in an amoral manner. I'd be shocked to see a corporation continue to act in a moral manner after growing to sufficient size. Just try to see the corporation as a living organism. In terms of life-or-death decisions, survival is paramount to morality every time.
What's worse, when an organization grows sufficiently large enough to challenge/undermine the authority of governments. They can stimulate changes in government policy via corruption, park/move capital/operations to locations lacking restrictions, purchase large quantities of government debt and profit from the shortfall of the system that they've been actively starving of resources.
Capitalism is an amazingly successful model for fast-paced growth but self-defeating in terms of long-term (read multi-generation) sustainability.
2. In pure capitalistic terms, people are assets.
What happens when a market becomes diluted with more assets than demand can justify? The value of those assets goes down.
By virtue of competitiveness, companies will always strive for efficiency. To produce more value with less. It's a basic fact that with increases advances in technology, it requires fewer people to maintain and/or increase the current standard of living.
High-earning capitalists perceive themselves as winners of the race, and rightly so. Unfortunately, the greater their ratio of success the greater that success taxes the sustainability of the wider ecosystem.
In an ecosystem of scarcity we can either have fewer people with a higher median standard of living operating at a higher level of efficiency, a greater population living at a lower median standard of living, or a mix of the two where efficient producers are incentivized with special privilege to subsidize the non-contributing existence of the rest.
Either way, we're approaching an upper limit to the quantity of useless shit we can realistically expect people to willingly consume. Capital is being concentrated at an ever-increasing rate and it's being used to purchase assets at artificially inflated values and charge high rates for access.
In California specifically. Capital is being parked in 'investment properties', in many cases by foreign investors. Ever increasing rent rates are being leveraged to extract more from the working class. The people responsible for purchasing the most goods/services have less to spend. Even people who make double the national median income struggle to afford rent and have zero prospects of purchasing in the near and long term. Companies that produce goods suffer as their consumer base is starved. The cycle of capital concentration continues.
Basically, we are spending huge amounts of money getting numbed out of our minds instead of solving real fundamental problems.
In general, I think it reveals a deeper problem about capitalism; none of us understand value anymore (we have more junk in our lives than we could possibly need)... So we struggle to allocate capital properly. We just blindly follow trends. The people who are getting rich now are not those who want to make the world a better place; the winners are those who just want to make quick cash (short-term thinkers who take insane risks).
Does society prefer Snapchat or a cure for cancer? In the current economic environment, investors prefer Snapchat because Snapchat is pretty likely to get a ROI within the next 5 years.
The return on investment for a cancer cure is probably small (especially given the large amount of recurring revenue that big pharmaceuticals are currently making by selling cancer drugs). Also, it's much riskier than Snapchat... Could take 5 years, 10 years or 20 years.
Ultimately, we are satisfying people's short-term 'wants' at the expense of their long-term needs. We're a society of addicts who just want to get a quick buzz.