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The problem with "unsustainable" capitalism
Topic Started: Feb 17 2012, 09:10 PM (501 Views)
Chris
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Fire & Ice Senior Diplomat
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I agree with Al Gore, well, at least partly.

Al Gore takes aim at "unsustainable" capitalism:
Quote:
 
Former U.S. Vice President Al Gore wants to end the default practice of quarterly earnings guidance and explore issuing loyalty-driven securities as part of an overhaul of capitalism which he says has turned many of the world's largest economies into hotbeds of irresponsible short-term investment.

Together with David Blood, senior partner of 'green' fund firm Generation Investment Management, the environmental activist has crafted a blueprint for "sustainable capitalism" he wants the financial industry to adopt to support lasting economic growth.

At a briefing ahead of Thursday's launch, David Blood said capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis.

The former CEO of Goldman Sachs Asset Management put forward five key actions which he hoped would revive the discussion on how to clean up capitalism and put companies, investors and stakeholders on the path towards long-term, sustainable profit.

These include ending quarterly earnings guidance from companies, which the authors said incentivized executives and investors to base decisions on short-term factors at the expense of longer-term objectives.

Companies have also been encouraged to integrate financial reporting with insight on environmental, social and governance policy so investors can clearly see how performance in the latter can contribute to the former.

I agree 100% that "short-termism" (time preference) is a major problem these days. There is too much focus on short-term profits to the detriment of long-term growth. And certainly companies should be encouraged to be concerned about environment, society and governance.

But let's step back a moment and ask is this prelude to government guiding business toward failure again?

Again?

As the The misguided practice of earnings guidance reports
Quote:
 
The practice of issuing earnings guidance became more common during the latter half of the 1990s, after the US Congress protected companies from liability for statements about their projected performance. 3 ...

3 The Private Securities Litigation Reform Act of 1995...

The Private Securities Litigation Reform Act of 1995? Once again it was government interference in business that created this mess. So it was government that caused "capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis."

So while I agree with Gore that this interference should be dropped by companies, I disagree we need new government "guidance."
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Mountainrivers
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Chris
Feb 17 2012, 09:10 PM
I agree with Al Gore, well, at least partly.

Al Gore takes aim at "unsustainable" capitalism:
Quote:
 
Former U.S. Vice President Al Gore wants to end the default practice of quarterly earnings guidance and explore issuing loyalty-driven securities as part of an overhaul of capitalism which he says has turned many of the world's largest economies into hotbeds of irresponsible short-term investment.

Together with David Blood, senior partner of 'green' fund firm Generation Investment Management, the environmental activist has crafted a blueprint for "sustainable capitalism" he wants the financial industry to adopt to support lasting economic growth.

At a briefing ahead of Thursday's launch, David Blood said capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis.

The former CEO of Goldman Sachs Asset Management put forward five key actions which he hoped would revive the discussion on how to clean up capitalism and put companies, investors and stakeholders on the path towards long-term, sustainable profit.

These include ending quarterly earnings guidance from companies, which the authors said incentivized executives and investors to base decisions on short-term factors at the expense of longer-term objectives.

Companies have also been encouraged to integrate financial reporting with insight on environmental, social and governance policy so investors can clearly see how performance in the latter can contribute to the former.

I agree 100% that "short-termism" (time preference) is a major problem these days. There is too much focus on short-term profits to the detriment of long-term growth. And certainly companies should be encouraged to be concerned about environment, society and governance.

But let's step back a moment and ask is this prelude to government guiding business toward failure again?

Again?

As the The misguided practice of earnings guidance reports
Quote:
 
The practice of issuing earnings guidance became more common during the latter half of the 1990s, after the US Congress protected companies from liability for statements about their projected performance. 3 ...

3 The Private Securities Litigation Reform Act of 1995...

The Private Securities Litigation Reform Act of 1995? Once again it was government interference in business that created this mess. So it was government that caused "capitalism has been blighted with short-termism and an obsession with instant investment results, which had ramped up market volatility, widened the gap between rich and poor and deflected attention from the deepening climate crisis."

So while I agree with Gore that this interference should be dropped by companies, I disagree we need new government "guidance."
I guess you think corporations are going to go for that without government mandating it, eh, Chris?
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Chris
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"I guess you think corporations are going to go for that without government mandating it, eh, Chris?"

From the second link:
Quote:
 
Our review of approximately 4,000
companies with revenues greater than
$500 million found that about 1,600 had
provided earnings guidance at least once in
the years from 1994 to 2004. The number of
companies that did so increased from only
92 in 1994 to about 1,200 by 2001, when
the rate of growth leveled off. The number of
companies in our sample that discontinued
guidance has also increased steadily, growing
to about 220 in 2004 (Exhibit 1)


Exhibit 1:

Posted Image
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Deleted User
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Well the basic down to bare essentials fact is you cannot have infinite growth in a finite environment, so sooner or later we have to move to a solid state economy. The question is how? Our society is not structured for it.
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Chris
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telcoman
Feb 17 2012, 10:58 PM
Well the basic down to bare essentials fact is you cannot have infinite growth in a finite environment, so sooner or later we have to move to a solid state economy. The question is how? Our society is not structured for it.
True provided you see economics as as win-lose activity, with a limited pie to slice up.

I can't think of an economist who thinks that way, can you refer me to one?

Most I know see it as win-win whereby wealth is generated in each exchange.
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Mountainrivers
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Chris
Feb 17 2012, 10:47 PM
"I guess you think corporations are going to go for that without government mandating it, eh, Chris?"

From the second link:
Quote:
 
Our review of approximately 4,000
companies with revenues greater than
$500 million found that about 1,600 had
provided earnings guidance at least once in
the years from 1994 to 2004. The number of
companies that did so increased from only
92 in 1994 to about 1,200 by 2001, when
the rate of growth leveled off. The number of
companies in our sample that discontinued
guidance has also increased steadily, growing
to about 220 in 2004 (Exhibit 1)


Exhibit 1:

Posted Image
So, out of approximately 1225 companies, about 225 have stopped providing guidance. That could be a trend, but I suspect that analysts will require that most companies continue to provide guidance on a quarterly basis. It's a terrible practice and should be discontinued, by law, if necessary.
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Chris
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"So, out of approximately 1225 companies, about 225 have stopped providing guidance. That could be a trend, but I suspect that analysts will require that most companies continue to provide guidance on a quarterly basis. It's a terrible practice and should be discontinued, by law, if necessary."

Yes, undo that portion of the Private Securities Litigation Reform Act of 1995 as Gore advises.
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Deleted User
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Quote:
 
True provided you see economics as as win-lose activity, with a limited pie to slice up.

I can't think of an economist who thinks that way, can you refer me to one?

Most I know see it as win-win whereby wealth is generated in each exchange.


Its basic physics. I am of course assuming that we only have access to finite resources. Technology may change or postpone that. But the assumption is we will eventually reach a limit.
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Chris
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telcoman
Feb 17 2012, 11:31 PM
Quote:
 
True provided you see economics as as win-lose activity, with a limited pie to slice up.

I can't think of an economist who thinks that way, can you refer me to one?

Most I know see it as win-win whereby wealth is generated in each exchange.


Its basic physics. I am of course assuming that we only have access to finite resources. Technology may change or postpone that. But the assumption is we will eventually reach a limit.
Economics is not physics. It's not biology. It's not really even science. Using such analogies and metaphors is scientism.

Yes, resources are limited. Economics is the study of allocating limited resource against unlimited wants. Allocation, use, trading, exchange all produce wealth.
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Deleted User
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No, but the planet & its resources are basic physics and economics runs within those parameters whether it likes it or not. Exploitation, utilization & sale of resources, that is what it all comes down to in the end.
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