10 October 2008

Why I Hate Capitalism*, Part 1

Outside of the ability to borrow money from banks, or to feel like the money you have saved in a bank is safe, the current financial crises will effect other aspects of our lives pretty soon, and a lot of this will be caused not by the credit crises directly, but by the power that the stock market has over most aspects of our lives.

The stock market is all about gambling on future outcomes. A company's stock price is never a reflection of how well it is doing at the moment, rather it is a reflection of how well people think it will do in the future. Most investors buy stock in the belief that not only will a company do better in the near future, it will continue to do even better in the longer term thus creating a demand amongst other investors for the shares that he now owns. He can sell the stock quickly and let the next buyer worry about the longer term.

If you take the example of my previous employer, since the company went public a number of years ago each quarter has seen significant improvement over the previous, and profit has continuously risen. Given the economic slowdown over the last 12 months while profit has continued to increase, it hasn't been increasing at the rate it was last year. Thus for investors the potential for future growth isn't as high as it has been historically, and the share price drops in spite of increased profitability.

If we call the level at which stock in my former employer was trading at one year ago "X", then when I left at the end of April it had dropped to about .75 X a share. This morning it stood at .42 X a share, ie even though it continues to be highly profitable, the company has lost 58% of its market value in less than a year. In fact the share price hasn't been this low since early 2005!

Thus anybody who bought shares in it at any stage in the last three years now has essentially worthless pieces of paper in their hands (or at least, will loose money if they try and sell them), and will start to demand that the company takes action to try and drive up profits - even though profits are already ridiculously high. Rising profits show potential investors that the company can do better in the future than today, so the shares become valuable again as they have the potential to be sold at a profit in the future. Existing shareholders become happy as they now can offload their currently loss-making shares at a profit.

However in this economic climate the only way to drive up profits further is to cut back on costs - basically their customers are already spending all that they are on the product, it is highly unlikely that in a recession customers will increase their budget. The first costs to go in the company are the easy things, like company off-sites, holiday events and conferences. Next on the chopping block will be free food, lunches etc. Then hiring will probably be put on hold, so all existing employees have to work twice as hard as they did before without any of the perks they had before.

Unfortunately the company paid pretty poorly by industry standards, relying on stock options (oops) and perks like free food, annual off-sites and holiday events (double oops) to keep everybody happy. Without happy employees, suddenly productivity drops off because nobody is as excited about working 60 hour weeks any more, and so revenue starts to drop which offsets any cost savings that were made in the first place (oops squared).

Once you have cut back all the non-essential items you can, they only way to get any further short-term savings is to start cutting back on essential items, like employees. This, the stock-market likes. Less employees mean lower costs and higher short term profits, and investors are happy to ignore the long term damage caused to an organisation by the increased workloads for remaining employees, institutional memory-loss and decreased organisational flexibility.

So this is the picture in a company with no manufacturing costs, oodles of cash sitting in the bank and thus largely unaffected by the credit crunch, and running one of the highest profit margin business of all time. Think about how bad its going to be for companies not so fortunate.

All of this because of the inherent flaws in the capitalist system and its enslavement to the stock market; even in companies that are consistently profitable employees are sacrificed so that investors can make a quick buck.

And that is why I hate Capitalism* (Part 1).

* And by association, Freedom.

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