Saturday, February 26, 2011

Publicly Traded Companies

Possibly Matt Yglesias most meaningless sentence ever:
I think there’s something deeply weird about the idea of the publicly traded firm, and the more we get funds and algorithm-based trading in financial markets the weirder it becomes.

But then there's the complete fucking silliness in the comments that blows that away. Comment #1:
There is nothing weird about publicly traded joint stock corporations if you understand that their purpose has little to do with raising capital but rather they come into existence in order for the founders to capitalize their asset. If Microsoft had never gone public Bill Gates would be a very rich man, but on no list of the worlds richest. Microsoft didn't need a dime of the IPO money either.

The decline in number of public corporations has to do with the ever growing trend of established corporations buying young corporations or even better ones not yet gone public. In the latter case the founders get to capitalized their asset without all the fuss and muss. Most tech companies are founded on the hope of such a buyout.

As wealth has concentrated in fewer hands the desire to capitalize assets is declining as at some point have more money than God is a diminishing return sort of thing. At some point having power is more attractive.

Again, like FLG has been saying over and over about liberals, this comment is predicated on static analysis.

Look, FLG agrees with the first sentence of the comment:
There is nothing weird about publicly traded joint stock corporations if you understand that their purpose has little to do with raising capital but rather they come into existence in order for the founders to capitalize their asset.

But then there's this whole rich getting richer argument that assumes static class structure that doesn't quite work. Look at the case of Google. Google was founded by two immigrant grad students. They founded a company and wanted to make their equity liquid. So, they went public.

In fact, the Anglo-American, market-based, arm's-length financial system provides an exit to successful investors. The availability of an exit encourages new businesses. FLG has long said the secret sauce of Silicon Valley isn't the Stanford-Berkeley computer and engineering school ecosystem. People have tried to recreate that in plenty of places with little success. Rather it's the angel investor, VC fund, and IPO market ecosystem that is most important. In fact, the only thing similar to Silicon Valley that's been created is the Cambridge Cluster around the University of Cambridge, which obviously is located in another Anglo-American financial system.

FLG still isn't sure why Matt is so suspicious of public corporations. Perhaps he longs for the stakeholder capitalism along the lines of Japan, Germany, and France, but if you don't have public corporations, then it's pretty impossible for the average person to acquire equity. Thus, you end up with is a bunch of large, family-owned enterprises, like they have in Germany. That doesn't seem like a good way for average people to acquire assets.

Well, now that FLG thinks about it, maybe it does make sense. Who owns the capital isn't all that important if you create various laws, like they have in Germany, that puts worker representatives on the board and have various labor protections. But in that case, for all intents and purposes, the owner of the company doesn't have the same control of their company, and so doesn't have as strong property rights. So, instead, they are too some extent only nominal owners and the de facto owners are the various social partners.

FLG guesses that makes sense, but he hates the idea. He understands the appeal of the stakeholder capitalism model to those with short time horizons. It provides a governance model that mitigates the effects economic fluctuations on workers, but FLG believes the evidence indicates that this comes at the cost of higher unemployment and less growth over the long run.

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