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Here’s another open letter to Oren Cass:
Mr. Oren Cass
American CompassOren:
In your mass e-mail this morning announcing American Compass’s project that you tellingly name “Coin-Flip Capitalism [2],” you write:
The buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing. Their claim to value is purely derivative—by improving the allocation of capital and configuration of assets, they are supposed to make everyone operating in the real economy more productive.
With respect, this paragraph is a nest of nonsense.
Your most fundamental error is one that was exposed and debunked in the seminal 1965 article “Mergers and the Market for Corporate Control [3].” In this article, the late Henry Manne explained how mergers and other methods by which ownership rights over corporate assets are transferred are a principal means both of encouraging owners and managers to use corporate assets efficiently and to facilitate the transfer of poorly managed assets to owners who will ensure that these assets are managed better.
With no active market in assets, assets remain wherever they happen to be and used however they happen to be used, regardless of how productive or unproductive these uses are. And so for you to dismiss as “purely derivative” the market activities that transfer assets into hands that use those assets most productively reveals an oversight of a fundamental and beneficial function of capital markets.
Dismissing, as you do, the importance of such financial-market activities on the grounds that their “value is purely derivative” makes no more sense than dismissing as “purely derivative” the value of driving medical-supply delivery trucks to hospitals. Because diagnostic equipment, syringes, antibiotics, and other medical supplies become productive only when in the hands of people who use them to their best effect, all activities undertaken to get these supplies into the hands of physicians and nurses are productive no less than are the activities of the physicians and nurses who then manually use these supplies.
Do you believe that the driving of these delivery trucks is wasteful because its value is “purely derivative”? If not, you should rethink your indictment of the financial-market activities that you hold in such low esteem.
I know, I know: I’m just one of those neo-liberal market fundamentalists addicted to simplistic absolutisms. Perhaps. And so if I am mistaken in what I write above, then you have found for yourself a goldmine. With so many people being paid goo-gobs of money to perform activities that you have perceptively identified as valueless, you can make yourself incredibly rich while simultaneously improving the economy’s productivity.
Simply set up a firm that doesn’t use capital markets. If you’re correct, your firm – free of all the waste weighing down your competitors – will be extraordinarily profitable. Alternatively, hire yourself out as a consultant, advising existing firms on how to avoid all the waste that you believe clogs existing economic arrangements. Itching to get a leg up on her rivals, some perceptive corporate CEO will surely pay you big bucks for your unique insights on how her firm can increase its profits merely by refusing to participate in all the activities that you have identified as wasteful.
Sincerely,
Don