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Wednesday, August 07, 2002

Observations on the Current State of Capitalism

A few huge companies go belly-up, a few mealy-mouthed laws are passed, and we are told that all is well with corporate America. Worldcom and Enron weren’t aberrations; they are the tip of the iceberg. Keep your money under the mattress and out of the stock market, it isn’t safe to go back in the water just yet.

In a nutshell, the problem with this form of American capitalism, the publicly held company, is that it really isn’t capitalism for the corporate heads. Capitalism implies risk: you buy or sell in the open market with some people winning and others failing. The way many corporate salary packages work the executives get paid huge amounts even if the companies fail. There is no risk involved.

Capitalism implies ownership yet these executives do not own the companies they manage. Shareholders own the company but because they are so numerous they have little or no say in the way in which the company is run. That is determined by the officers. The board of directors, for most companies, is generally a pretty toothless means of oversight and boards are generally more honorary than authoritative. They are paid well to look the other way as the officers pay themselves a king’s ransom from the shareholders’ coffers.

Think about it. How could any business executive be worth the astronomical salaries being pulled down by these people? What private business can afford to allow its employees to fly first class let alone buy them a corporate jet? Think about that the next time you are on your way to the cheap seats in the back of the plane. Ask the passengers in first class if they are flying at the expense of their publicly-held company and then cross that company off your list of possible investments. And we thought that only the government is capable of waste and excess.

The whole house of cards started crumbling with the dotcom bust. Before the dotcom’s, most public companies actually made something. The dotcom’s were selling little more than ideas. Most of them really had no need to go public as they had no need of capital. They had no real need for growth as they weren’t really selling much of anything. They went public, they money came rolling in, and they spent it.

Seattle was a prime beneficiary in this gold rush as tech companies here were stepping over each other to buy expensive office furniture and costly advertising campaigns. Lots of businesses artificially inflated their employees’ roles simply to impress investors with their rapid “growth.” This charade lasted a few good years until people realized that most of these companies were over-priced and thus a pretty shitty place to put your money.

The downward spiral isn’t over yet and investors have every right to lack confidence in the market. Investors have been swindled by the companies as well as the go between companies like Merrill Lynch.

The really pitiful result of this whole swindle is that now it is extremely difficult for a company with a solid business plan to get venture capital. It is also tragic to think of what a great leap forward this nation could have made if the companies that wasted all of their stock money had actually used some of it to fund research and development. What we received instead are a few more ethically challenged multi-millionaires and lots of used office furniture.

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