[yorkedork]

While I'm not intending to be heavy-handed and reductionist, I think the (macro) trend(s) we've seen in (domestic) startup investment since 2008-2009 can satisfactorily explain this behavior.

Disinflation & deflation, capital flows and political friction preventing effective (any?) fiscal policy have produced an environment where private capital set on a given rate of return on investment is chasing increasingly risky organizations [1][2].

Large firms have been sitting on enormous sums of cash; e.g., why is it that the most capitalized company on earth isn't investing aggressively. In lieu of investment, many of these firms have been focused on engineering stock buybacks.

So, the thesis: why are so many firms pouring money into startups with increasingly questionable fundamentals? Because hands previously gripping bundles of capital have (nominally) more capital than they did with decreasing options for productive investment and downward pressure on returns.

1. http://www.economist.com/blogs/freeexchange/2015/04/puzzles

2. http://krugman.blogs.nytimes.com/?s=low+inflation+return+inv...

P.S. I recognize that I'm probably a bit left field for this group as I'm not a libertarian, I support strong regulation and I question the marginal value of lots of Valley products.

[idlewords]

I think this is a pretty clear failure of capitalism, since the whole point of having greedy, top-hat-wearing capitalists chasing profits is to have them re-invest that profit in the hopes of making more. In the meantime, they compete with each other and end up magically allocating resources in a socially useful way.

Instead, big companies sit on their profits (like you say), while startups compete for the attention of a small group of investors who behave for all the world like the central planners of old, deciding how to allocate money based on their own tastes, interests, and gut feelings, rather than anything resembling a market test.

Goes off to have red flag dry-cleaned

[sbuttgereit]

A failure of capitalism? I have to question the premise. Capitalism does not have as a goal some social-utilitarian purpose. Capitalism is practiced by individuals for their own self-interest. Sometimes they work together for a shared self-interest (e.g. corporations, investor groups) or they work against each other as needed (competition). But you cannot take self-interest out of the equation and still have capitalism. Every trade (be that stock for cash, or work for cash, etc.) is predicated on each of the parties fulfilling their individual needs and wants to the degree that they can. On it's own terms, capitalism hasn't failed at all.

What you can say is that capitalism has failed to mollify those that seek non-capitalistic goals. This is true of some so-called capitalists who experience guilt in pursuing their self-interest as well. If your view is that capitalists are "greedy, top-hat-wearing" types that fail to meet your social welfare goals, then my bet is your characterization masks a larger purpose. Primarily at bringing them down, probably in favor of the central planners of old (or some degree thereof).

Perhaps the real question should be: why would companies and individuals with captial choose to sit on it, or choose to spend it on relatively worthless start-ups? Why would a capitalist choose to sit on cash or buy-back shares if there are other, more profitable avenues to invest those funds? I think if you take a critical look at it you might find that there's still a fair amount of central planning behind what we'd like to think is a capitalist economy.

[cwyers]

I mean, when Adam Smith says "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," he's not saying that in support of self-interest, he's saying that in support of OUR DINNER. The point of capitalism as economic system is not that self-interest is inherently good but that self-interest can be yoked to "some social-utilitarian purpose."

Of course, Adam Smith's opinion of corporations was "The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own," and he thought they'd all die out unless they were propped up like the East India Company, so it's not like the Wealth of Nations is much of a guide to what we call capitalism nowadays. But still.

[sbuttgereit]

Adam Smith was wrong with the regard to the moral case for capitalism. He rightfully recognized why people acted, but he failed to recognize any substantive moral basis is such self interested actions; instead he resorted to the precise premise that the post I originally responded to pre-supposed. That argument must fail because one cannot act with self-interest AND altruistic interest consistently. The capitalist must always fail on these terms as there is always someone with a perceived greater need, and perceived greater right, to the capital of the capitalist.

If you consider first and foremost your own happiness and life as a moral value worthy of pursuit, you loose the hang-ups that Adam Smith had with capitalism. There's a whole separate discussion that goes down that path about what constitutes self-interest in the large (and no, defrauding innocents is not your best interests); but that's a bit out of scope to what the original poster stated.

[philwelch]

I think the Ayn Rand viewpoint--that self-interest is intrinsically a moral good and that capitalism is justified by this moral good--is not very widely held as a justification for capitalism.

[eropple]

I think modern American political discourse makes this a harder position to take. Which is not to say it's correct, because it's transparently not, but selfishness-as-Godliness is a firm part of the American right wing, self-styled libertarians included.

Greed's been good since the eighties, didn't you get the memo? =(

[kijin]

Well, modern states do "prop up" corporations with all sorts of perks, such as limited liability and tax benefits. So Adam Smith might not have been altogether wrong about that. How many of us would even consider incorporating if the law did not guarantee limited liability?

[threatofrain]

The discussion on that concept of "rationality" has also moved far beyond that, such as with Daniel Kahneman's two-system theory.

[Retra]

>Capitalism does not have as a goal some social-utilitarian purpose.

Not intrinsically, no, but it is justified by it in the face of alternatives. When you present people with an economic system that does have a social-utilitarian purpose, those people will select capitalism over it on the basis that capitalism is better at fulfilling that purpose.

And most of the time, the argument is "capitalism self-optimizes for that purpose." Except that it self-optimizes in ways that result in central planning, monopolies, and deception. Capitalism is not convergent on social goals, it is divergent, and we have to keep pushing and prodding, regulating and deregulating in order to get anywhere near our goals.

Capitalism fails every day. And we just roll up our sleeves and get to work fixing it because there is no other option.

One wouldn't ague that a hole in the boat is a good thing because it keeps the crew fit trying to bail the water out. Especially when there's a whole world of other skills we'd rather have a crew be proficient at.

[sbuttgereit]

Capitalism requires no further justification than individuals acting to dispose of their time and property in ways that they see fit. I absolutely guarantee you that when I trade my labor and expertise with an employer or client for cash, I have no other objective that maximizing the return I get on that effort. I do not ask if my engaging in such a trade has some greater social good and I need no justification other than the trade being in my self interest. If I go to the store, I don't first ask who needs me to spend money on their products, I first ask, 'What do I need?', 'What do I want?'. I don't consume on anyone else's behave nor do I need some external justification for my own existence. Period.

Capitalism does not converge on monopoly, central planning, or deception any more than any other system, and in fact it does so a lot less. Again the assertion that capitalism is broken is just false; that it doesn't meet your non-capitalist goals is correct. My cable company has monopoly-like powers not because it's run by evil capitalists, but because there's a government agency that gives them a monopoly in my area. That's not capitalism. Microsoft, "a monopoly", wasn't defeated by the government regulators, ultimately, but by better alternatives appearing on the market and their own self-inflicted irrelevance. Same arguably with IBM. That was capitalism dealing with outmoded incumbents. I see a lot of crying in these threads about how VCs or corporations seem like central planners, yet the answer being proposed seems to be engage real central planners with the legal use of force in their tool box. Indeed, the only part that I seem people really dislike about capitalism is that it's voluntary engagement... when they'd really rather force someone to act against their best interests.

[Retra]

Telling me that you make poor, short-sighted decisions isn't an argument that capitalism doesn't require justification. It means you have low standards for an economic system.

You could just as well try to argue that every word out of your mouth doesn't require justification simply because you accept it all as true without it. Well good for you.

>Again the assertion that capitalism is broken is just false; that it doesn't meet your non-capitalist goals is correct

...? Just what the hell do you think I mean by 'broken' if not failing to achieve our collective goals?

Just because it does what it is described to do doesn't mean it's doing what it's supposed to.

[simonh]

> Telling me that you make poor, short-sighted decisions isn't an argument that capitalism doesn't require justification. It means you have low standards for an economic system.

That's pejorative and uncalled for. There's nothing in that post that indicates those choices are either poor or short sighted, just that they are motivated by the exercise of free will. What alternative criteria would you impose on the poster's decisions?

>You could just as well try to argue that every word out of your mouth doesn't require justification simply because you accept it all as true without it. Well good for you.

I'm deeply concerned about your blatant disregard for the freedom of expression of others. Who should the poster be _required_ to justify their words to? You?

Capitalism is only one characteristic of our modern global economy out of many. Typically developed western countries have capitalist corporate structures, regulated markets, centrally planned social welfare systems and the occasional monopoly. Capitalism is justifiable on two premises.

The first is the exercise of freedoms. The freedom to own your own property and invest your own earnings and property as you see fit is a basic right that is widely recognized in the western world. It's hard to see how restricting or curtailing that right can be morally justified. The second premise is that capitalism is overall an efficient way to allocate resources because it engages the creativity and energy of the maximum possible number of people rather than restricting it to a politically selected few. And yes, Capitalism does engage a vast swathe of the population. The local shop owner down the road I buy my milk from is just as much a capitalist as any banker. That doesn't mean capitalism allocates resources perfectly, just that it's more efficient than the other methods that have been tried. As Winston Churchill said of Democracy - it's the worst system, except for all the others.

[kenko]

> When you present people with an economic system that does have a social-utilitarian purpose, those people will select capitalism over it on the basis that capitalism is better at fulfilling that purpose.

No one has ever offered people that choice, as far as I know, certainly not in a way that wouldn't in many cases be confounded by rational or irrational attachment to the present mode of social organization. (And in fact plenty of people seem to like social democracies just fine. And, for that matter, plenty of people seem to want socialist or communist modes of social organization.)

[eru]

> (And in fact plenty of people seem to like social democracies just fine. And, for that matter, plenty of people seem to want socialist or communist modes of social organization.)

Plenty of people seem to want more socialism for the country they live in, but given the choice many move to countries that have less socialism. (Ie richer countries.)

[Daishiman]

This is a non-sequitur. Most wealthy countries have economies that are extremely well regulated, and their effectiveness is much more conditioned to factors beyond regulation. Scandinavia has very high levels of regulation and is one of the wealthies regions in the world and the one with the highest standard of living.

[Retra]

Well, that's why you have to argue against capitalism. If you don't present any alternatives, you won't know that they're worse than the way things are. There are important things that it doesn't do well, and we have enough information to know that.

[ori_b]

> A failure of capitalism? I have to question the premise. Capitalism does not have as a goal some social-utilitarian purpose.

Yes, I think that's the point. Generally, when you evaluate a means of organizing production for a society, you evaluate it on how society will benefit.

[dunkelheit]

Capitalism (i.e. accumulation of resources in private hands with the goal of employing it for generation of profit) should not be conflated with free market (i.e. roughly equal individuals engaging in voluntary transactions). They are in fact antithetical! For capitalism to work some individuals must be entitled for more resources than others so that these individuals can tell others what to do. Of course you can then argue that everybody is still engaging in voluntary transactions. But is it really so when the balance of power is so skewed?

[idlewords]

I think you may have misunderstood my point, which we actually agree on: Our so-called venture capitalists right now are behaving a lot like central planners.

[snowwrestler]

I don't understand this. When big companies "sit on their profits," that capital is invested somewhere. It's not like companies have big Scrooge McDuck tanks full of gold coins.

The capital might be invested in fairly generic, low-return assets but it's still invested and doing work somehwere. It doesn't mean it's a failure of capitalism. Capital allocation doesn't need to agree with your (or anyone in particular's) preferences at every point in time, for capitalism to work.

[idlewords]

As best I can tell, it's invested in US treasuries and corporate bonds [http://www.theguardian.com/business/2015/feb/02/apple-cash-m...]. It's doing much less work than if Apple paid it out as a dividend, or spent it on Bentleys for all its employees, or invested it in creating some new product category. And we don't see a penny of it paid as taxes.

[aetherson]

If it's effectively taken out of circulation, it deflates all other currency.

[irln]

I think this is a failure of anything that has very few actors making decisions. Central planning (not a political statement) does not work well in economies.

[rgarrett88]

I think the failure is in the tax code. Large corporations able are able hire expensive lobbyists and accountants to pay much lower taxes than smaller upstarts. This gives them an advantage and allows them to crush innovative smaller companies before they can scale. Until we fix the tax code to favor small businesses this problem will continue to grow.

[shawnee_]

Tax code isn't really a problem for companies that have little to no profit -- which is most "small upstarts". The great fallacy of most political debate on economics is that taxes hurt small business. Extortionate rents hurt small businesses far more than taxes do.

The way the original tax code was written was to give either individuals or the small businesses they work for a break -- up to a certain point [source: https://books.google.com/books?id=ogUNAAAAYAAJ&printsec=fron...]. But to necessarily kick in at some critical point where 1 + 1 = 1. This is a theoretical stage where potential for exploitation deserves a slight downward pressure (partnerships operating as a single business unit, corporations of 1+ people subjected to a single tax bill). Tax higher incomes at higher rates ... makes sense: Try and keep disproportionate wealth all to yourself, pay more in taxes (forced payments to social welfare). Generously reward your workers, and hey -- it's theoretically possible to pay everybody decently, reward external shareholders, and to minimize tax paid to the social welfare system.

But the problem is REITs, especially private ones. And especially when VCs are the landlords; they're making money even when "they're not" making money.

Which is the core of the issue that rgarrett88 got: lobbying - yes. The NAR, especially. But that's another tangent entirely.

[Double_Cast]

Capitalism does not oblige anyone to invest their capital immediately and whenever possible. If the majority of the market chooses to withhold its capital, then withholding capital is likely a rational response to market conditions.

> Hutt goes for the heart of Keynes’s prescription for recovery, which was to get idle resources moving, whether that is money, capital, or labor. If something isn’t being employed right now, it is being wasted.

> Hutt responded at length that there is nothing uneconomic or necessarily inefficient about an idle resource. It is the decision of the owner to hold back when faced with a long-term plan, a judgment call concerning risk, a high reservation wage, or a demand for larger cash balances.

https://mises.org/library/theory-idle-resources-0

[7Figures2Commas]

Correction for you:

I think this is a pretty clear failure of corporatism...

[seiji]

capitalism is capital-ism which is predicated on literally: the more capital you have, the more revenue you get in return (which lets you buy more capital, which lets you sell more things and receive more revenue).

Except, these days, nobody needs to continue buying capital or purchasing labor with their revenue. You can sit back on your unlimited money makers, receive hundreds of billions of dollars in profit, then just hoard it. In a knowledge/skills economy, you can't grow by throwing money at people (since only a chosen few hundred or few thousand are driving things forward anyway). In fact, once you're at virtual peak productivity, investing more would only make things worse due to increased internal coordination costs (meetings! knowledge sharing!) and internal politicking (no—I want to run the new project and I'll turn everybody else against you until it happens!).

If you don't have a use for $100 billion dollars today, why would you turn around and invest it to get $500 billion dollars you also have no use for?

[rodgerd]

No true Scotsman.

[slsii]

There's a very significant and logical reason why American corporations - particularly tech companies - are accumulating so much cash: repatriation taxes.

The cash is collecting dust abroad, and large tech companies are waiting for a tax holiday, for which there is precedent [0].

There are a number of fascinating reasons why companies may hold cash (e.g., it's been suggested that companies with CEOs that grew up during the Great Depression hold (held) more cash than those that didn't). [1]

That said, it does appear that taxes seem to be one of the more significant (if not the most significant) reason in our current economic climate.

[0] https://en.wikipedia.org/wiki/Repatriation_tax_holiday [1] http://www.rhsmith.umd.edu/files/Documents/Departments/Finan...

[yorkedork]

>There's a very significant and logical reason why American corporations - particularly tech companies - are accumulating so much cash: repatriation taxes. Absolutely.

I'll claim no authority to speak on corporate tax policy (at least from the perspective of firms); on the face of it, I can imagine that it might be reasonable to suggest that tax policy is the major contributor to the dynamics of firm investment behavior.

I wasn't, however, really sincerely questioning why, e.g., AAPL is accumulating cash or necessarily correlating that fact with domestic investments. It was sloppy writing on my part, but my intent was only to give an obvious example of capital accumulation.

Surely, cash is not the only means of firms funding investments. Firm investment behavior will be guided by a variety of factors; my thought was to point to macroeconomic factors like insufficient aggregate demand, capital flight from EM and persistent deflationary pressure to provide simpler explanation to the conclusions of the OP.

[nazka]

To add more to that on MoneyMorning[1]:

"But why does the cash keep piling up? Why doesn't Apple spend it?

One issue is that Apple is holding most of that cash overseas to avoid paying the steep 35% U.S. corporate tax. As of Q3, almost 90% ($181 billion) remains offshore."

There is great video and article about it on Bloomberg[2]. A lot of companies are on the same boat not just Apple.

[1]http://moneymorning.com/2015/07/27/how-much-cash-does-apple-...

[2]http://www.bloomberg.com/news/articles/2015-07-22/tim-cook-s...

[darkmighty]

Yes and I believe even emerging markets have dried down a little recently. None of the BRICs is looking like a great opportunity (considering risks), interest rates have been very low both in EU and US. As much as the sums seem enormous, software startups are comparably cheap, which mitigates their high risk -- e.g. look at industries like oil, mining, real estate, chemical.

[eru]

> Large firms have been sitting on enormous sums of cash; e.g., why is it that the most capitalized company on earth isn't investing aggressively. In lieu of investment, many of these firms have been focused on engineering stock buybacks.

Ie they have essentially been paying dividends. Working as intended.

[yorkedork]

What is it that's working as intended? The process of buying back shares of your own company?

If you read what I wrote carefully, you should notice something that I didn't say:

  AAPL has a bunch of cash and is using it to fund its stock buyback program. Thus, capitalism has failed.

In fact, I was attempting to elucidate the OP's topic. I believe a reasonable interpretation to be: why are so many startups with weak fundamentals and/or specious business models receiving so much funding via private equity?

My response to this question was to observe macro-level phenomena and speculate that the _emergence_ of this dynamic was due to a broad-based failure in matching capital with desired investment risk and return. I mentioned Apple to demonstrate what a capital hoarder has done (which is to reinvest in its own equity) in relief against private equity firms. In a global environment where demand for safe assets exceeds supply, less risk-averse firms are chasing further risk to maintain their desired level of return.

None of these points, I thought, required a race to defend attacks against capitalism; however, in the interest of demonstrating my sincerity, I'll share a couple of my own positions I believe are loosely-relevant to the broader discussion:

  * Capitalism maximizes human capital: no
  * Efficient markets hypothesis: wrong-headed, at best
  * Moralizing capital: one of the most socially and politically toxic behaviors

It is my view that capitalism is a set of prescriptions which seek to define and regulate economic behavior. Further, it seems misguided to say simply that capitalism has succeeded or that it failed. A better alternative might be to say: given a set of expectations, a capitalist environment produced correct or incorrect results. Or, a more politically-charged example: capitalism has succeeded (or failed) in maximizing, e.g., environmental capital, human capital, social welfare or aggregate happiness.

In any case, I now regret side-tracking myself and I don't find it particularly relevant to be debating the merits of capitalism in this context.

[eru]

OK, sure, no need to side track.

> Capitalism maximizes human capital: no

Actually, it economises on that kind of capital, too.