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Failures of capitalism
#1
A bit wonkish, but not too bad. I figured I'd throw this out to get a reaction. This is a study on attitudes of executives. link

Quote:First, there is statistically significant evidence of short-termism in the pricing of companies’ equities. This is true across all industrial sectors. Moreover, there is evidence of short-termism having increased over the recent past. Myopia is mounting.

Second, estimates of short-termism are economically as well as statistically significant.
Empirical evidence points to excess discounting of between 5% and 10% per year.

Let me just break this down. The extra 5 - 10 points are a risk premium. Executives are adding the premium because shareholders demand it - shareholders are demanding it because they don't trust the executives.

Quote:The result is that projects with long-term payback, beyond the 30 to 35 year timeframe, are treated as having no value. No wonder we don’t fund basic science, infrastructure, or climate change related projects.

Well, I know how these sorts of ideas play around here, so let me add a more concrete example. Mortgages are 30-year investments. This seems to imply that there would not be a market for 30-year mortgages without government support (or financial instruments that are somebody's bad investment).

Fire away.
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#2
This seems to sum things up in one paragraph.

Quote:The irony is that China, with its command economy, is more willing to make long-term investments than capitalist economics which rely on the supposedly superior wisdom of having the capital markets play a dominant role in the pricing of risk funding. Now I’m of the school that China will likely have a bad stumble; there’s ample evidence that its unprecedented level of investment, which is fueled by lending, is scoring lower and lower returns. But the West’s short-sightedness increases the odds that this massive gamble might work out pretty well by moving into the type of projects that myopic capitalists are unwilling to take on.

But I'm still trying to see where this is in fact 'failures of capitalism'.

Sorry for not giving anything a detailed examination, but I am recovering from a piece of metal in my right eye, that had to be removed by an opthamologist day before yesterday. I can't see very well yet.
___________________________________________________________________________________________________
"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#3
China may have tons of shiny white elephants, but our infrastructure is rated a solid D. Here was the first comment for that link:

Quote:“The result is that projects with long-term payback, beyond the 30 to 35 year timeframe, are treated as having no value”

As a civil engineer, this drives me insane.

Talking about a water line project with a life of 30 years. Everyone want’s to save money, so the client asks for cost cutting. The only way that happens is to make the pipe cheaper, you can’t make the trench any cheaper.

The “costs” are broken out over the 30 year expected life of the cheaper pipe. Anything beyond thirty years in valueless.

I go over and turn the water on in the sink. “That’s not worth anything?” The existing pipes were installed over 70 years ago.

Never mind that it is “worth” exactly what we are spending to “upgrade” the current system, that’s what “you” are paying for it.

So I wouldn't worry about a Chinese or Japanese situation where the return on these investments approaches zero, at least in my lifetime.

Also, in addition to home mortgages, student loans are a good example of a market where the expected payback would come over a really long time. There are maybe 50 years from time of undergraduate graduation to whatever the retirement age might be decades from now.
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#4
Oh, and good luck with your eye.
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#5
This is not the failure of capitalism, it's rather that every great civilisation needs a form of governement to undertake pharaonic projects which are useful in long, very long and very very long term.
An aqueduc build by the Romnans is still in use somwhere in France. Undergroud facilities to store nuclear waste will still be apreciated in 1000 years. Preserving the environement has a benefit for an incalculable period.

The governement needs to help projects which would not be attractive for investors because of the amount of money it takes, the time it becomes profitable and the risk of miscalculation.
Think of high speed train. A typical example where private money participates in a governement sponsored project and sometimes become entirely private (look at the price for a ticket and you'll understand why).

Sewers, roads, railtracks, aerospace, etc are thing that capitalism alone would never fund. There is no civilisation to be reckoned with withour the initiative of great leader for expensive constructions. They look like a waste of money at times especialy now, sometimes they are (nothing is perfect) but they are often appreciated many years later with no regret.

Capitalism is able to create value, for less large but still important things, beyond what is percieved as profitable or short to mid term. The theory is wrong that capitalsim deems as worthless investments beyond the lenght of the bond maturity.
This is false because capitalism is not only based on return on equity (ROE) it's also based on assets. The net asset value (NAV) a major component in stock analysis, is the value of something less the debt linked to it.

This is extremely important. Let's say a private company builds a tunel and collects a toll for it. It won't be profitable before 10 or 15 years. Extra costs eventualy put the company in defaut on its 15 years notes that funded the digging of the tunel. After 15 years ROE was almost null for bondholders or much less than anticipated. But the company still own the tunel and another conglomerate decides to buy it.
If the tunel was properly build and maintained it will be worth almost the same price as 15 years ago, maybe more if adjusted for inflation (fighting against inflation is one of the primary goal of capitalism).
If it was build with cheap cement and starts to crack, it will be worth much less and the buyer will know that in another 15 years it will need major repairs.
30, 60, 100 years later the successive repurchase value of the tunel is still defined by the work done at the begining. And at the beginning quality and long term vialbility played a role, an important role for the investors, when they re-sold the facility.

Even high tech factories where machines are obsolete within a year or two, the infrastructure is still a valuable asset.
Another example: a web game desing company installs its offcice in a building which was used 150 years ago for textile production. The textile company was long gone, but the value of the bulding remained, even increased, and was an important factor for the successive owner companies. Maybe the descendants of the textile company founder are still getting the rent.
That was a long term investment done entirely with capitalist means.
It's just one that doesn't change the world.

A third example focus on unkown, yet to be verified extra long term investments. Things that we still don't know they will still be usefull in 100 or 200 years.
Let's say an optical cable is dug in. The telecom company hesitates on costs because it fears that in 10 years a new hot stuff will come. But if they are lucky this cable will still be used in 100, just as copper wires are still used today. Or not.
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#6
(05-21-2011, 05:33 PM)Fredledingue Wrote: This is not the failure of capitalism, it's rather that every great civilisation needs a form of governement to undertake pharaonic projects which are useful in long, very long and very very long term.
An aqueduc build by the Romnans is still in use somwhere in France. Undergroud facilities to store nuclear waste will still be apreciated in 1000 years. Preserving the environement has a benefit for an incalculable period.
Even a more prosaic example, like funding student education, needs government support. That's even supposing it is known exactly how much a difference in salary somebody will have after graduating from college.


Quote:Capitalism is able to create value, for less large but still important things, beyond what is percieved as profitable or short to mid term. The theory is wrong that capitalsim deems as worthless investments beyond the lenght of the bond maturity.
This is false because capitalism is not only based on return on equity (ROE) it's also based on assets. The net asset value (NAV) a major component in stock analysis, is the value of something less the debt linked to it.
This has nothing to do with the length of a bond.

NAV, and all other valuation techniques, subtract the opportunity cost - the amount you would make simply by parking your money in the stock market, and investing in something equivalent. That means future money is worth less than money today - one of the core principles of finance. If something has a NAV of 200 in 10 years, that means a NAV of 150 today. And if you go long enough into the future, it has a NAV of zero, or as close as you care to get, today.

According to the article, stuff is being discounted at what you could get in the stock market, plus a few percentage points. With enough time, those percentage points end up determining everything.
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#7
b5d said:
"Even a more prosaic example, like funding student education, needs government support. That's even supposing it is known exactly how much a difference in salary somebody will have after graduating from college."

A bit self serving?

The free market should rule: either your education is worth the debt you incur or it is not. No one should subsidize lackadaisical students. If you subsidize them, you will get more of them, as in Europe.

Or, perhaps you should work while going to college. If your grad school does not offer RA's or TA's to help pay your way, then you should be on the hook, not me.

There is absolutely no need for a lot of "highly educated" people for whom there is no job.

Thomas Sowell weighs in
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#8
I few days ago I read an article saying that taking a student loan is not a profitable investment anymore because of the cost of private education (and even semi private or even public education) is so high, adding that to an interrest over 20 years, and you'll better off working as a scavenger than as a lawyer.
I posted it here, but forgot where...

Sop definetly yes, education is an investment that must be done at least partialy by the governement.

I don't understand you definition of NAV. A thing can carry a NAV growing over time, for example a real estate (subprime crisis nothwithstanding). NAV is not calaculated as an investment (ROE is). It's the value of all the things a compnay owns even if these things doesn't generate money. NAV discounts depreciation but it has nothing to do with a comparison with another investment. When depreciation is negative (eg an oil reserve that is worth more as oil prices increase) it's called appreciation and it's also factored into NAV.
I appreciation is lower than inflation you effectively lose money on an adjusted basis, but NAV still increased.
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#9
(05-22-2011, 05:44 PM)jt Wrote: The free market should rule: either your education is worth the debt you incur or it is not.

So, the argument above is essentially that there's a monopoly on services like financing for student aid.

(05-22-2011, 05:49 PM)Fredledingue Wrote: I few days ago I read an article saying that taking a student loan is not a profitable investment anymore because of the cost of private education (and even semi private or even public education) is so high, adding that to an interrest over 20 years, and you'll better off working as a scavenger than as a lawyer.
Well, you might in fact be better off working as a scavenger than a lawyer...

Quote:I don't understand you definition of NAV. A thing can carry a NAV growing over time, for example a real estate (subprime crisis nothwithstanding). NAV is not calaculated as an investment (ROE is). It's the value of all the things a compnay owns even if these things doesn't generate money. NAV discounts depreciation but it has nothing to do with a comparison with another investment. When depreciation is negative (eg an oil reserve that is worth more as oil prices increase) it's called appreciation and it's also factored into NAV.
I appreciation is lower than inflation you effectively lose money on an adjusted basis, but NAV still increased.

When you count depreciation from inflation, you are comparing a project with the alternative investment of carrying cash for that amount of time. Sometimes that's not the best measure - the more comparable alternative (in terms of risk profile) would be some kind of other investment. It's the same principle either way.
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#10
(05-22-2011, 05:49 PM)Fredledingue Wrote: I few days ago I read an article saying that taking a student loan is not a profitable investment anymore because of the cost of private education (and even semi private or even public education) is so high, adding that to an interrest over 20 years, and you'll better off working as a scavenger than as a lawyer.
I posted it here, but forgot where...

probably in the thread about prostitution spreading amongst german students, because those things are linked. good idea to sell body, anyway, prostituting mind and soul becomes easier.
why capitalism is doomed to fail, is because it's based on the liberal ideas of individual freedom and selfishness, and that's tearing societies apart. no matter how much the collectivists try to go against it with their conservative parties, nationalism, and religions.
"You know, Paul, Reagan proved that deficits don't matter." Dick Cheney
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#11
(05-23-2011, 11:02 AM)quadrat Wrote:
(05-22-2011, 05:49 PM)Fredledingue Wrote: I few days ago I read an article saying that taking a student loan is not a profitable investment anymore because of the cost of private education (and even semi private or even public education) is so high, adding that to an interrest over 20 years, and you'll better off working as a scavenger than as a lawyer.
I posted it here, but forgot where...

probably in the thread about prostitution spreading amongst german students, because those things are linked. good idea to sell body, anyway, prostituting mind and soul becomes easier.
why capitalism is doomed to fail, is because it's based on the liberal ideas of individual freedom and selfishness, and that's tearing societies apart. no matter how much the collectivists try to go against it with their conservative parties, nationalism, and religions.

[Image: images?q=tbn:ANd9GcS2DMOFggK_x3rLYCtCrDm...N6hMFw&t=1]
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#12
B5B,

1) Isn't China heading towards capitalism and away from central authority economically?

2) Is the short termism more an American centric failure as opposed to capitalist failure? Example,if we were socialist,my guess is we'd retain the short termism.
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#13
China is chasing a dream carrying a lit bomb. They are trying the best of both worlds: succeeding in some things and bolluxing up others. The huge agrarian population is moving to the cities by the millions, and a jobs increase of hundreds of thousands per month is mandatory. A single month without that jobs increase will blow up the whole economy.

The Potemkin Villages being built was one way of handling the population surge to the cities - not to increase the size of the cities - but to provide construction jobs. Building code in the US would require untenanted buildings to be safed-off. We would need to virtually rebuild anything left empty for as long as these vacant cities are. I dunno - but I've never seen make-work government projects be successful.

Economically, business is focused on foreign investment. Chinese entrepreneurs are in the back seat - and often offload money to the Cayman Islands and secure projects in China through fake holding companies. Much of what they are doing cannot last - but the economy is so huge they hope diffusion across the country will reduce failure to a manageable level.
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#14
(05-23-2011, 07:47 PM)Palladin Wrote: B5B,
...
2) Is the short termism more an American centric failure as opposed to capitalist failure? Example,if we were socialist,my guess is we'd retain the short termism.

1) I believe the study linked above was done in Britain, though I haven't read it in detail.

2) Fine, but a concept is only as good as its best practitioners. If nobody can do it, then the conclusion is that it can't be done. This reminds me of the line about communism - show me a successful example.

3) What does this say about the student loan example? I can't think of a better systematic cure to short-term thinking than education.
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#15
I guess I would argue someone does "do it",capitalist states traditionally outperform socialist states in new wealth creation,even short sighted money worshipping Americans.
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#16
What has failed, in my opinion, is the government. In the US, the house, senate and president really do not represent the will of the people. Yes, they get elected, but once inside the beltway they forget the rest of the country. Thus the US no longer has a functioning representative Republic.

In Europe, much is left to the bureaucrats who are very insulated from the will of the people. A similar cancer is growing in the US.

Certainly capitalism need a certain amount of regulation, but it withers with cronyism, control and corruption.

The brutal fact is that capitalism pays the way for all of the social fantasies of politicians and the wages of the government regulators. The problem is to NOT kill the goose that lays the golden egg.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#17
That crony capitalism thing is the new wave. Our corporations wised up and made deals with the democrats and the repubs.

Good luck ever getting the corporations out of managing our nation. I am convinced most our wars are driven by economics myself,I guess I agree with the Marxists on that accusation.
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#18
Crony capitalism does seem to be on the upswing lately. I wonder if that is an artifact of the news or a fact.

Somehow, I think that the urge for politicians and big business to engage in that kind of corruption has always been there, an artifact of weak wills, the urge to power and greed. Hitler and Mussolini capitalized on it.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#19
b5d, no, depreciation counts the loss of value from a degrading asset be it through use or obsolecy, amortization counts the interrrest being paid for the funding of a given item. Inflation doesn't influence the value of an asset. However it helps asserts how effective an investment is. If you earn 2% a year and inflation is 3% you effectively lose 1% in buying power.
You can also compare it to 10 years treasuries rates. If you earn 3% and the yield of T bonds is 3.5%, you had better buy T bonds and do nothing and risk nothing.
Investing in T bonds or in gold these days has been a winning option but totaly useless on the long term, giving no benefit to the society whatsoever. Bascaly re-bailing the same governement and making South African mining conglomerates even richer.

Palladin, Socialism is not defined by long-termism, and american capitalism is not defined by short-termism neither.
Distributing unemployment benefits, pensions and labor protections is a short term socialist policy. It helps ensure that poeple won't protest in the most immediate future.

Invading Iraq (or whatever country the US military is sent to) is a long term american policy, based on the hope that in 50 years the US will be seen as the savior of the world. Or when funding exoplanet search in hope that in several hundreds years we can migrate on one of them to escape an overcrowded and overpoluted Earth.
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