Investors vs. Workers: Is there a better way?

[danaeris]

I realized a few months back something I'm sure any of you who have studied political theory and finance already knew.

The stock market system makes it possible for people to use workers -- of any kind -- to turn a profit without doing any work. The worker essentially becomes a cog in the machine that spits out profits for the benefit of the stockholder/investor.

This not only seems unjust and dehumanizing, but it can also lead to all sorts of abuses of workers. It means that those who do not choose to become entrepreneurs or businessmen are always getting fucked by the system (unless they get hired by a coop, such as Come As You Are or Good Vibes). Some companies fuck you gently and take care to give you pleasure; other companies will fuck you up the ass with no lube. Either way, you're getting screwed -- profits that come from your sweat and tears are going to some fat cat off in an office somewhere, and you're getting a raise that barely matches inflation. I believe that it is this system that is primarily responsible for the shrinking middle class.

The problem is that without the investor system, I see no sensible way for a poor man with great ideas to start a new company. In this day and age, companies will often take great whopping amounts of money to startup due to the cost of equipment, etc. Very few people would be able to start a company without the help of an investor, and those that could would be already rich. We'd end up with a plutocratic hierarchy within each company. This is also unjust... it makes the system feel much more classist -- and yet, at least your income will be directly in proportion to the quality/quantity of work you put out. In a system like this, new employees could be offered a percentage of the company, and salary would be according to that percentage of the company's total profits, after money for improvements pr new hires is taken into account. Unreliable, hard to budget for, but much more rewarding. Much more fair.

But that still doesn't address the problem of creating a system where the worker is treated fairly AND anyone can start a company. And I'm no financial-political Einstein. None of my ideas seem particularly groundbreaking or brilliant. Business loans and business grants could be more readily available from the government, for instance. That's one possible solution. But I'm never sure that bloating the government even more is a good answer.

Anyway, there you have it. My political procrastination rambling of the day.

Comments

[furious-g.livejournal.com]

Unions were created as a means for workers to protect themselves from being taken advantage of by the companies they worked for. Unfortunately many of these unions have gotten so powerful they dictate a certain amount of policy to the companies they were design to serve as protection from.

Also the investor system can work to the advantage of the workers as they can invest in thier own companies and thereby gain the benefits of the work they themselves do, hense stock options. It is also a good idea from the company point of view as this tends to encourage workers to work harder as they reap the benefits directly.

Also, most people have no desire to work for themselves. Many people I have found are quite content to be cogs in the industrial machine as long as it doesn't interfere with thier weekends.

Just random thoughts I had after reading you post. =)

[danaeris.livejournal.com]

You make good points. And I didn't mean to discount the other aspects of the system we have today -- its a complex system with many checks and balances.

As for the no desire to work for themselves thing... that may be true. But personally, I'm not one of them. Essentially, we're willing to trade our rights to the fruits of our labour if only our benevolent overlords will give us a steady paycheck and some security. Doesn't that make you nauseous?

People don't always want what's good for them. Security may feel good, but in the long run, is it really best?

[nathanjw]

Describing investors as "Turn[ing] a profit without doing any work" glosses over a lot; notably, the risk of losing your money. I think that a good idea is for there to exist different points on the risk/return continum. You can invest in risky ventures that may make a lot of money; you can invest in non-risky ventures that will probably make a little money; or you can work, investing your time for a guarantee of money (as much as it sucks to not have stable work, when you lose a job you get to keep all of the money you've been paid up to that point). The downside of course of the model where you get paid as a percentage of profits is that you're screwed if there aren't any profits - and many businesses fail or have dry spells.

There are certainly a lot of things that could change for the better for workers, but I don't think that they're fundamentally in conflict with the idea of investment.

[danaeris.livejournal.com]

I'm aware of all of the factors you list.

I guess what fundamentally bothers me is the potential unfairness of the system. I could work my ass off for a company, and as a direct result of my efforts, they could turn a million dollar profit, and I might get a 5 per cent raise, which corrected for inflation might be 3 per cent. How is that reasonable?

I like stock options. I think that's great.

On the same note, CEOs often make really inordinately larger salaries than their employees. And when I was looking at salary increase statistics just now, I noticed that, across the board, CEOs were getting larger percentage raises than the other workers in their sector. But, they're already making more than they could possibly NEED, and way more than the probably deserve, and certainly way way more than other people in the company. And that amount is increasing at a faster rate, apparently, than the salaries of other people in the company. Again, that really bothers me.

Anyway, I'm babbling.

[nathanjw]

Well, your first case is (close to) reasonable in my view because you get your salary even if the company posts a million-dollar loss instead. If you really are directly responsible for a million-dollar gain, though, a smart company will in fact reward you directly for that, with a bonus or option grant.

CEO pay is definitely nuts, but that seems neither here nor there relative to workers and capital. Current thinking among the cranky types I read is that the problem of excessive CEO pay has its roots in the clubbiness of the CEO world and the general lameness of director/shareholder oversight.

[payoolay.livejournal.com]

I remember having a discussion a few years back about the unfairness of our current society and somebody suggested (or read about) that it would be cool if rather than having an inheritance system, like we currently have, that when people die, the money goes into a big pot, out of which a certain amount comes for each person born, thereby starting us all on equal footing.
I know this doesn't directly relate to what you wrote, but it reminded me of this, cause then things like startup costs and the system we currently have (investor/stockholder) might not be as necessary.
Anyway ... came to mind and I thought I'd share. :)

[danaeris.livejournal.com]

It would be fairer. You'd never convince people to vote for it on a platform, though. :)

[etherial.livejournal.com]

That's a punishment for people who die unexpectedly. Those that have the time and money to prepare for their deaths can ensure that not a bloody cent enters the pot. Those that don't, i.e. the overworked and urban poor, will lose everything their family owns.

[payoolay.livejournal.com]

That's assuming that the rest of our economic system would be as it currently is ...

[inki.livejournal.com]

The basic premise of capitalism (this would be the "capital" part) is the problem you are describing here, namely that the people who invest the money in a venture up front are the ones who own it.

This means that the investors always take a certain amount off the top (and often, that amount is quite large), and in most cases workers are never paid the full value of their work. This is what Marx termed "alienation".

And yes, it's a problem, and yes, it's unfair, and yes, it often gets downright exploitative.

I think your ideas of finding ways to rework the concept of investment are good. Perhaps this is how we could move forward into a more equitable society without abandoning other favorable aspects of capitalism, like the mostly open market.

[tunape.livejournal.com]

1) There's a fair bit(understatement, more like a mountain) of literature about this topic. It's one of the major branches on economics - contract theory. The premise goes that workers get some sort of benefit(monetary, insurance, leisure time, protection from market fluctuations, etc...) to work for someone's behalf. Employers contract employees to do the work for them. Investors, implicitly, hire the employers by investing in them. As you pointed out, investors tend to go for the "grab and run" strategy, aka "quick profit". In their defense, it's not the investor's job to worry about the long term of the company. It's the investor's job to manage risk and hopefully make a profit(note that over 50% of investors do not make a profit!). It's through this specialization of tasks that supposedly the market is efficient, and the market as a whole grows. Of course, where the money goes(distribution of the money) is a whole big argument, but the belief is that society as a whole is getting better, and hence justifies it.(I have issues with this as well!)

2) You're right that each of the three parties want to f* the other parties for their benefits(employers can game both the investors and employees), but the hope is that over time, there is less incentive to f* the others since you will have to deal with them, or your reputation later.(investors can also be known to be a "hit and run" type, but the successful ones are much smarter than that!)

3) The key to all this is what are the choices of each party. The employees can: stay at home(and/or get welfare!), work for a mom-pop shop(privately-owned company) or co-op, work for a public company, change jobs or start their own company. The assumption is that employees are smart off to find their best option from the entire choice space.

4) As for firm entry, it is more possible in the US system since most banks are happy to loan $100-500k for small businesses. This is usually enough to get a small operations with a solid business plan going. If you declare the company as a corporation, it means that you will also not be personally liable for the debt the company incurs(whereas other types like a partnership or LLC, the bank will come after your house!). Many believe that entry(and exit) is the key to economic success. If you suck, you die(firm or employee). If you are good, you stay. Evolution also states this, and is probably a harsh critique of morality statements.

5) Since my area of research is more in consumer side(not necessarily in contract theory, in fact, I opted to avoid the advance course in it!), the reason why many people think it f* the employees is because there's simply too many freakin' people and too much competition for the same job! Take China, for example. with almost 3B people, the local, small universities accept <1% of applications(The top US schools accept 5-10% of applicants!). This number translates further into the work force where they start having almost arbitrary requirements like height just to efficiently weed out people. It will always be a difficult tradeoff between mouths to feed and resources.

[tunape.livejournal.com]

(stupid LJ word limit, cont.)


5a) Somewhat related is allocation of resources, and implicitly search. First is where should resources go? To those who need it most, or to those who deserve it most?(eg. the hungriest or the hardest worker?). By search, I mean that how do you find these people who need it or deserve it, and also how do the people find the resources they need. It's a matching problem. India produces more food than its people need(yes, it's true!), yet 1/3 of their citizens are starving! The government buys the crops, and burns it to artificially keep the prices high! They do this because otherwise the pay for the farmers is so low that NO ONE would be a farmer, and hence the whole country would starve. Now, hypothetically, if the government can find the hungriest people who need it, and give them the food instead of burning it, it could be socially beneficial. But they most also control the food such that it doesn't get sold in the black market(which is a very hard thing to do since, again, allocation is not perfect. some people need more food, and others lesson. by trading, people can be happier).

6) Yes, labor unions are meant to help the employees(in fact, Walmart in China just allowed labor unions in China! whereas Walmart fights any and all unions everywhere else!). But if you look at Europe where unions are probably too powerful for their own good, there are really weird effects like strikes when the weather is nice, certain subway lines shutting down while others still run(individual lines are managed by separate unions), and the inability to fire lazy workers.

I think the trouble is not that the employee/employer/investor model works well, but that people don't know of alternatives which can work better. A lot of these socially-aware corporations are becoming popular, but it's not clear how to measure the social benefit, and what that really means.

anyways, this is getting long. before starting grad school, I was also very bitter and skeptical about the economy and politics, now I'm realizing that there's not necessarily better alternatives.

[tunape.livejournal.com]

one last thing, if you have not done so already, check out the book Freakonomics. It's kind of a fun read on some research which had weird results like to decrease crime rates, you should allow for abortions!

[ghudson.livejournal.com]

The counterarguments which come to mind are:

1. As a salaried employee, if your work winds up *not* contributing to the company's bottom line, you still get paid for the work you did, and you still get to eat. Think of being a worker as like buying a form of insurance: yes, the insurance company (or the investors who backed your company) will skim some off the top, but they also provide you with some amount of security. If employment were "fair" in the sense you've been proposing, employees would have to bear the downside risk as well as the upside reward of their labor, and that risk is exactly why a lot of people don't choose to be entrepreneurs.

2. The free market operates on a different concept of "fairness" than the one you've been proposing: the value you receive for a good or a service is not how much it benefits the recipient, but the amount you were able to negotiate for it. If you buy a chair from me at a yard sale and it turns out to be an antique which was worth a hundred times the sale price, is that fair to me? I think so. You didn't deceive me or force me to sell the chair at that price; I just didn't put in the research to find out how much the chair was worth. And if I had, I would also have had to find a buyer for it, which is way harder than just selling it for cheap at a yard sale.

(Of course, employment is not really a free-market system in reality, but the "unfairness" of employees not always being paid close to the value of their work arises from free-market principles.)

3. It's hard to convincingly argue that the investor/employer system is responsible for the erosion of the middle class (if the middle class is indeed being eroded) when it's been around for as long as the middle class has. One could as easily argue that it *created* the middle class.

I'm not a free market fanatic; I'm willing to accept that most people are not rational actors and people often have very limited information and frequently one party has way too much control over a sector of the market. But I also don't think it can be dismissed so readily as being exploitive of workers.

[tunape.livejournal.com]

"I'm willing to accept that most people are not rational actors and people often have very limited information"

Agreed. The question seems to be: 1) why are some people more rational or less rational than others, and 2) how do information asymmetry arise?

I'm beginning to research the latter topic as a potential research topic. Unfortunately, it's incredibly difficult to make any conclusions without huge assumptions. bleh.

(more blabbering below:)

I've been trying to look at the problem from the social network perspective. That is, perhaps people who are central to a network gain more information and can make better decisions. It's been shown that people are on the edge of a group are the most effective for propagating information, but it's not known about who has more information - the central ones, or the peripheral nodes - and who has more influence. Influence is a slight tangent, but it deals with information flow and how people process it.

Lastly, how do we observe such things? Does posting on LJ or forums: 1) form a social network by measuring who responds to who, 2) is an indicator for the flow of information, and 3) influences people's decisions(initially to buy, but can be generalized later)

Investing and the alternatives

[admiralthrawn.livejournal.com]

(divided into multiple posts due to length)
Suppose you decide one day that you're going to expand one of your articles into a book and publish it... This requires two thigns to have a chance of succeeding: your labor, in the form of doing the writing and editing, and some capital, in the form of cash to buy the things you need (paper, a computer to do the writing on, maybe an outside editor or ad agency, etc).

So, you come up to me and say "hey, can you spare $10k? If so, I can write this really cool book..." Of course, I've got other things I can do with my money, so I want something in return. There are three methods of setting up the deal:
1) Retained earnings. Basically, you do one job, and use the money from that to build up to a larger one. So, you come work for me writing articles or something, and save your pennies until you've got enough built up.
2) Loan. Basically, you promise to pay me back, with some interest, after some period of time (with thousands of variants on time, how intrest is structured, collateral, etc)
3) Investment. Basically, you offer me a share of the profits of your book (with thousands of variants including buyout provisions, offering me the copyright and so on).

Retained earnings have the issue that it takes time and effort. You are getting 100% of the fruits of your labor, but the whole point of wanting money was that your labor would be more fruitful if you had some cash. Because you are waiting and saving, you are vulnerable to missed opportunities (maybe your book idea is great now, but if you wait five years, someone else will have written something similar), and to the poverty trap (if you are unable for whatever reason to retain any earnings, because you are barely scraping by, you may never get the capital you need at all, while your competitors who acquired capital zip on by).

Loans have the issue that you're potentially screwed if your labor is in a risky area. Maybe your book won't sell, for whatever reason, and then you're stuck repaying the loan (or losing your car or your house or whatever you put up for collateral). You are assuming all the risk of the project yourself. Relatively safe businesses usually take this route.

Investment avoids the loss issue -- if you offer me a % of the book profits, then if the book never sells, I'm the one who is broke, not you. And it avoids the retained earnings issue, because it's pretty easy to find money if you make the % high enough. The downside, of course, is that if your book makes it big, I'm "exploiting" you by taking a million dollars from you on that 10k investment.

The beauty of the current system is that you get a choice: do you want to take a risk, or offload the risk onto me; do you want the money fast with strings attached, or slow with fewer/no strings? Nobody is forcing you to go to a VC vulture with your book idea...

(continued in next post)

Re: Investing and the alternatives

[admiralthrawn.livejournal.com]

There are two other things to consider that a lot of people don't realize or forget when discussing these things:
1) Investment is hugely risky. I went through the begging-for-venture-capital thing recently and did quite a lot of research; VCs are considered exceptionally good if 1 out of 10 investments in new companies give them _any_ return. So if you asked an investor to give you $10k for your book, he's got to ask you for a % that's going to net him over $100k if you even sorta succeed. Is this him exploiting you, by being greedy and demanding huge amounts in return for his little investment? Or is this you exploiting him, by taking his money, knowing that there's a more than 90% chance that you're never going to give him anything back?
You always hear about the investments that make it big, but the huge collection that failed tend to vanish quietly into the night.

2) That $10k I'm giving you for the book is the fruit of my labor. If you want the government to tax me and give the money to you as startup funds, ask yourself why you are denying me the fruits of my labor, and the opportunity to pursue the retained earnings route above. Essentially, I've decided to save up my pennies, and then instead of investing them in making my labor more useful, I'm investing them in making your labor useful, so your book success is a combination of your labor going into the book, and my labor going into the book indirectly via me doing programming for cash and handing you the cash.

Historically, societies that allowed only the retained earnings route (due to religious restrictions on charging interest that made loans impossible, cultural/legal restrictions on what you can invest in, and/or unsettled or unformed legal systems that made loans/investing/stock impossible) have had very static income distributions (rich people can self-invest, and so move up and down from kinda-rich to filthy-rich, poor people stay poor for generations), and have had little advance in technology (trying new things tends to require money, and is risky even for the rich). Restricting investment money but allowing loans just makes things that are investments in disguise (I'll loan you that 10k, at a 100% interest rate, with a 90% share of your copyright as collateral, knowing that you'll decide to default rather than pay stupid amounts of interest, leaving me in the same position as if I'd bought a 90% share of your authorship for the 10k). Restricting loans does the reverse (it's more complicated, but you can sell restricted or convertable stock that acts remarkably like a loan).

Government-funded (or insured or subsidized) loans can work to make the loan route easier, thus encouraging self-owned businesses. The downside of this is that governments have a horrid track record with using their money this way; they tend to make bad loans (it's not like the bureaucrat making the decisions cares if you're proposing to manufacture perpetual motion machines!), or corrupt deals (I'll loan you 10 million for writing your book, because I know you'll take me along on the signing tour. Aren't I a nice guy?). Provided you can figure out how to avoid those fates, it's a good idea.

(and continued in next post again)

Re: Investing and the alternatives

[admiralthrawn.livejournal.com]

Government-funded direct investment (where the government owns stock, or otherwise acts like a investor) is also done; it's prone to the same faults, but again, it lowers the amount you are giving up to get the money (if nothing else, the government is competing with private investors, which should drive down the cost to you of getting the money). This is fairly common for governments that want to encourage "strategic" industries, and much less so for encouraging random small business creation/growth; for example, various European governments own big chunks of Airbus, the governments of a lot of oil-producing-companies own oil companies, etc. It has all the downsides of government involvement in loans, with the additional downside of making your company politicized; do you want your book to be boycotted in Iran because it was funded by the eevil Canadian government? Or alternately, would you buy a book, knowing that the profits were going to the government of Sudan, and thus funding the genocide there? They're also prone to the fault with larger companies that nobody wants to compete with the government-funded-winner; would you start an airplane-manufacturing business in France, knowing that your competitor's profits are going to the government that decides the rules of the game for you?

Governments can also indirectly support the retained earnings route; lowering taxes on small businesses and low to mid income people lets you (or your little coop) save up more effectively, as does lowering taxes on interest (since it is likely that you're dropping the money into a savings account of some kind while you wait for it to build up). Or they can give a no-strings-attached grant to their friends, with all the caveats about corruption (so, how would you react if Bush signed something giving a grant to Halliburton, no strings attached?). Governments can also work on regulation-burden on small businesses; they're prone to creating a bunch of rules that are individually useful but add up to a lot of money/effort, which can increase the amount of money you need to ramp up, thus increasing the amount of control you need to give up... (for example to open a restaurant in cambridge, you need a business license, a common victualers license, a meat&dairy license, and an alcohol license; it would be a lot simpler to start a restaurant if they compressed this into one process). This tends to come and go in waves; you make things too streamlined, people start abusing the system, so you add a bunch of new rules, then the system is so complex and you get calls to simplify it.

If there's a system other than retained earnings, loans, and investment to fund your need for capital, I don't know what it is (it's possible the serious economists in your readership can enlighten me), so I think your best bet is to identify what you think is wrong with each of those three setups (and they do all have their problems), and think about how to reform the system to minimize those problems... If you dislike the idea that investors can end up with 100% control, you could force employees to own some minimum share (though think about the problem of large companies, and the fact that adding restrictions will make investing less profitable, and thus make some companies not get investment at all...) If you dislike the idea that banks can charge interest or require collateral, you could similarly restrict that, (though in practice this frequently means either the mafia runs loans, or no loans at all happen).