Entrepreneurial capitalism - the greatest deal in all of history
We’re amused by this from one of those groupuscules insisting they’re bringing us new economic thinking. So, obviously we’ve got to tax the rich, tax companies more, stop profits and so on. Which does, to us, rather sound like some rather old thinking. But it’s this specific comment that brings us up short:
This shareholder-first model (famously called “the dumbest idea in the world” by former GE CEO Jack Welch), encourages executives and investors to treat companies like giant ATMs, pulling money out rather than reinvesting profits to create lasting value.
Consider Mark Zuckerberg. Nearly all of his mind-boggling fortune—the kind that just bought him a record-smashing $170 million mansion in Miami-Dade County near Jared Kushner and Ivanka Trump, and is funding a bombproof bunker/complex in Kauai that disturbs local wildlife —comes straight from owning stock in Meta Platforms. Meta has spent nearly $200 billion on stock buybacks in the past five years. Those buybacks have fattened the wallets of shareholders, including Meta’s top executives and professionals, while leaving the rest of society out of the gains (Meta is famous for its tax-dodging schemes).
And, well now. We agree Zucks has $200 billion and that’s a lot of money. A lorra lot even. But that idea that the rest of society is being left out of the gains is absurd.
One part of where the money’s made is Facebook itself. No one has to pay to use it so measuring how much we consumers get from it is difficult. But this has been attempted:
Facebook, the online social network, has more than 2 billion global users. Because those users do not pay for the service, its benefits are hard to measure. We report the results of a series of three non-hypothetical auction experiments where winners are paid to deactivate their Facebook accounts for up to one year. Though the populations sampled and the auction design differ across the experiments, we consistently find the average Facebook user would require more than $1000 to deactivate their account for one year.
OK, so the value users gain from Facebook is $1k a year, there are 2 billion of them, that’s two thousand billion, or $2 trillion in value a year. Of which Zucks has 10%, that $200 billion. Pretty good deal for us, really. But that’s not right, not at all. For Zucks’ money is a one off capital sum, the consumer benefit is an annual one. Fortunately, we know from Saez and Zucman how to turn an annual income into a capital sum - just multiply by an approporaite return to capital. Say, 5%, so 20x. So that’s $40 trillion in wealth value to consumers of which Zucks gets his $200b, or 0.5%. Which is really a pretty good bargain for us.
Stopping here wouldn’t be quite right though. For there’s also WhatsApp, which provides free telecoms to some 4 billion people - half the species. Which has some value to each and every one of them and which can and should be capitalised as well.
It’s also true that all the arguments about inequality count Zucks has having the $200 billion but apply a value of absolutely nothing - no, really, zip, nada - to the consumption value or wealth value of the output of the company.
If you want this in a more theoretical manner there’s this paper from William Nordhaus.
The basic outcome - empirical or theoretical - is that entrepreneurial capitalism is the greatest bargain in all of human history and us out here, we consumers, we’re on the right end of it.
Which is what confuses us about organisations like The Institute for New Economic Thinking. As they seem to have no clue of how it all works currently what are they basing their ability to think anew upon?
Tim Worstall