to an unknown audience
The Greed Cycle/  /September 23, 2002

I was hoping to link to an online copy of The New Yorker article "The Greed Cycle" (from the Sept. 23 issue, on my incorrigibly-West-coast doorstep late last week) but they seem to have pulled a fast one on me, skipping ahead already to next week's issue.

For those who might have missed it, this was a remarkably astute article about what draws capitalists to capitalism. Rather than blithely pro-market, like The NYer's Financial Page, or stubbornly anti-, this article started with a sober account of what makes capitalism effective, and then went on to detail the history of executive stock options and why they should help the interests of the ordinary punter, and why instead the great industrial captains are making out like bandits at the expense of everyone else.

"In a well-regulated system, greed keeps the economy expanding," says John Cassidy. At first reading, my ear heard this: "In a well-regulated system, greed keeps feeding wealth to the rich," but that's not what he meant. For an economy to expand is for people to be doing more stuff. If we look at the economy not as the circulation of money, but rather as the determination for what people do, the study of that economy becomes very important, even for the not-rich. During the recent boom years, hundreds of thousands of people suddenly got to do something for a living that they enjoyed, more than what they were doing before. Why should this be so? Because having a good economy essentially means capital is ready to hand. The rich are loose with their money: they let you borrow it easily, to do your projects. If you're like me, what's important is not the money, but the project. Start a quirky restaurant or a theatre company; dabble with new technologies; try something that's never been done before. In a boom time, the rich (who possess free capital) catch on to what the humans (who have creative ideas) are doing and they want to be a part of it. When a recession comes, rich people clam up, and the only things you can get paid for are the trustworthy essentials: food, clothes, lodging; sometimes not even those. After the stock crash of 1929, rank and file citizens didn't trust the institutions that held their wealth, and ran to take their cash out of the bank. Poppy the Plant Manager preferred to keep it under his mattress, where it did nothing, than to let Ellis Entrepreneur borrow it and make her dreams come true. This meant that no one's dreams were coming true and everyone had a little cash under their mattress.

Even though everyone had cash, nobody was happy, because the cash wasn't circulating. Cash circulates when people are getting what they want: a cup of coffee, a storefront renovation, an hour of drumming by Art Blakey, the right to print copies of a novel. A thousand pounds of radishes.

Ideally, every activity would be its own reward; but in life, some things just aren't fun, and nobody wants to do them. Pulling radishes out of the ground, for example. Who wants to do that? I don't. If greed keeps the economy expanding, it's as an incentive for ambitious dilettantes to fill these needs. Our dilettante can garner some capital (s/he doesn't need to possess any—so long as investors are loose) and put it to use making people's lives better, perhaps in small ways. The opportunity for that ambitious dilettante to jump into the emerging toilet paper dispenser industry and perhaps to retire comfortably, with all the (hollow?) fruits the modern material world can offer is such an incentive. This means that, as consumers, we have those trinkets available, and that as workers, we have something to do, even if we're not interested in quirky restaurants, theatre companies, or web consulting.

Perhaps it's a bit inequitable that such dilettanterie should be so well rewarded in our society, when anyone can see how much harder the workers toil. But consider also that capitalism has niches for different lifestyles. Whereas a heavily socialist society might have a couple of roles (worker and party administrator) and everyone would be expected to output and receive the same, a capitalist system allows us to choose our own adventure. For the ambitious dilettante, there is the roulette spin at a chance to be materially rich. For the conservative bourgeois, you can trade the chance at riches for stability and comfort; persistence and a bit of hard work will be rewarded with a comfortable home, a comfortable car, a good insurance policy, and a large-screen TV with surround-sound. For the outright lazy, there is a place as well. No one is required to work at an "average" or even a "minimum" pace: if you are willing to consume less, you can set your pace. There are smaller homes, there are Greyhound buses. There are also soup kitchens and homeless shelters, there are countless people who give change to panhandlers. Capitalism, American style, offers a home for the lazy.

Of course, if you have a rich parent, you can be lazy and still bathe in material wealth. This is something of an injustice—and is actually contrary to the ideals of capitalism, but it's endemic to the principles of family, property, and heritage (which are much, much older than capitalism).

But all of this is background for an article about stock options, which have an interesting history. As Cassidy tells it, managers of the big companies of the 50s through the 70s were rewarded for the wrong things: they poured lots of money into plush executive offices, corporate jets, company parties, etc., because they could. By bringing in more profits, they could make their jobs more comfortable. But as economists began pointing out during the 70s, they were using other people's money to do so. A CEO is (supposed to be) nothing more than a lackey—one who executes—for the interests of another group, the stockholders, who might include some spoiled day-traders, but also include lots of joes. A machinist at Boeing, for example, has entrusted that scintilla of excess income that the capitalist captains have offered him (in homage to his back-breaking labor) to a 401(k) plan that manages his money in a pool with Rockefeller's grandkids. The toilet-paper-dispenser company turns hard work into material reward, but depends on this free capital, which comes, in part, from the Boeing machinists, and those Boeing machinists deserve to share in the budding fruits of this ever-expanding economy. It is a testament to our system that a worker can buy a share of stock as easily as a rich investor can. When formal stock in a venture was first sold to investors, in the 1600s, it was done through a true old-boys' network; an explorer wanting to mount an expedition would ask a couple of well-known money-hogs if they wanted to give him something, and share in any profits he might bring back. Today, our market has institutionalized open access to ownership of these enterprises, and buying a share in a venture is not much harder than buying a piece of furniture or finding a book in a library.

At some point, the stockholder became the most important person in any public company. To create profits and spend them was no longer acceptable. Executives should return profits to the shareholders, some of whom live in Peoria, IL, and some of whom are hoping to buy their children a bicycle for Christmas. How then to motivate CEOs to maximize shareholders' value, rather than expense perks for themselves? The answer of the 80s and 90s was to issue stock options.

But although options do give CEOs an incentive to optimize the market value of the stock, they also have a more nefarious effect. Because our stock is, alas, traded on an open market, which is open continuously seven hours a day, and which responds radically in a matter of minutes to public statements, and because the value of a share of stock is not solely the current profits of the organization but also all speculation on future value—and in fact because its value is mostly speculation (by a factor of 20- and sometimes 30-to-1 in today's market), and further because CEOs' option packages are so bloody enormous (Larry Ellison cashed in some 700 million dollars worth of options in 2000, according to the article), these fine gentlemen have an enormous incentive, not just to create value, but also to exaggerate it, and to create bookkeeping strategies that keep everyone in the dark about how valuable the company is.

Read the article. You'll enjoy it.

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