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As despicable as that sounds, I can't blame someone for being good at the game. I have to blame the people who wrote the rules. Oh, wait, that'd mean blaming the expansion of federal government and the inevitable corruption that resulted. We're suppossed to be pro-big government, right?
Oh I have no issue with the morality. If anything Romney gets points from me for playing the angles properly.
My question is more to why the rules are in place.
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As despicable as that sounds, I can't blame someone for being good at the game. I have to blame the people who wrote the rules. Oh, wait, that'd mean blaming the expansion of federal government and the inevitable corruption that resulted. We're suppossed to be pro-big government, right?Oh I have no issue with the morality. If anything Romney gets points from me for playing the angles properly.
My question is more to why the rules are in place.
Actually, reconsidering, I do blame him.
Just because the law allows you to screw people over doesn't mean you have to. Making tons of money isn't the be-all and end-all of life. People with actual moral integrity don't profit by destruction even if it is legal.
"Don't be a dick." If you're gaming the system and hurting people because of it, you're being a dick.
The thing is, people are always going to game the system. This is why libertarians are wrong.
On the other side, unchecked consolidation of power leading to dictatorship is why the communists are wrong.
What bothers me is that this is an obvious gaming of the system, but people try to defend it as the free market working as it should.
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The thing is, people are always going to game the system. This is why libertarians are wrong.On the other side, unchecked consolidation of power leading to dictatorship is why the communists are wrong.
What bothers me is that this is an obvious gaming of the system, but people try to defend it as the free market working as it should.
Libertarians don't claim that we can create a system which people will no longer game. We believe that, since gaming is going to happen, we should create a system which limits the damage that will be/can be done by it. The way to do that is to restrict the power and reach of the federal government.
What Romney has done depends on the fact that the market is NOT free.
The invisible hand has never worked throughout the whole of history, so why would one believe it would work now?
Money and power consolidate unless regulated.
Private Equity Capitalism's Misunderstood Entrepreneurs and Catalysts For Value Creation
hits on most of the typical gripes about the Buyout Firms.
"Among a growing number of myths about and allegations made against private equity, four of the most common are:
• Management and buyout firms collude in decisions to go private at the expense of existing investors.
• Club deals, which involve a consortium of private-equity groups that purchases public companies, stifle competition.
• Buyout groups destroy jobs and create unemployment.
• The profits or “carried interest” of buyout groups’ general partners represent a payment for services and hence should be taxed as ordinary income at a higher rate, 35 percent, not as a capital gain, at 15 percent.
Let us now assess these claims."
What about Irving Fisher's debt deflation theory that debt makes recessions worse and into depressions when they occur.
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People aim to be the most competitive. When the government creates regulations, then the people can hide behind them (all they have to do is meet the regulations) when the government doesn't create regulations, then the people have to consider the probability of someone getting harm and the expected loss incurred from that harm.
I thought Hardin debunked the whole invisible hand good government bad lockean myth back in 1968 when he wrote the Tragedy of the Commons :)
http://www.sciencemag.org/content/162/3859/1243.full
In economic affairs, The Wealth of Nations (1776) popularized the "invisible hand," the idea that an individual who "intends only his own gain," is, as it were, "led by an invisible hand to promote . . . the public interest" (5). Adam Smith did not assert that this was invariably true, and perhaps neither did any of his followers. But he contributed to a dominant tendency of thought that has ever since interfered with positive action based on rational analysis, namely, the tendency to assume that decisions reached individually will, in fact, be the best decisions for an entire society. If this assumption is correct it justifies the continuance of our present policy of laissez-faire...Tragedy of Freedom in a Commons
The rebuttal to the invisible hand...is to be found in a scenario first sketched in a little-known pamphlet (6) in 1833 by a mathematical amateur named William Forster Lloyd (1794-1852). We may well call it "the tragedy of the commons," using the word "tragedy" as the philosopher Whitehead used it (7): "The essence of dramatic tragedy is not unhappiness. It resides in the solemnity of the remorseless working of things." He then goes on to say, "This inevitableness of destiny can only be illustrated in terms of human life by incidents which in fact involve unhappiness. For it is only by them that the futility of escape can be made evident in the drama."
The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.
As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, "What is the utility to me of adding one more animal to my herd?" This utility has one negative and one positive component.
1) The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1.
2) The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of −1.
Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another... But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit--in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.
Some would say that this is a platitude. Would that it were!
...
That morality is system-sensitive escaped the attention of most codifiers of ethics in the past. "Thou shalt not . . ." is the form of traditional ethical directives which make no allowance for particular circumstances. The laws of our society follow the pattern of ancient ethics, and therefore are poorly suited to governing a complex, crowded, changeable world. Our epicyclic solution is to augment statutory law with administrative law. Since it is practically impossible to spell out all the conditions under which it is safe to burn trash in the back yard or to run an automobile without smog-control, by law we delegate the details to bureaus. The result is administrative law, which is rightly feared for an ancient reason--Quis custodiet ipsos custodes?--"Who shall watch the watchers themselves?" John Adams said that we must have "a government of laws and not men." Bureau administrators, trying to evaluate the morality of acts in the total system, are singularly liable to corruption, producing a government by men, not laws.
Prohibition is easy to legislate (though not necessarily to enforce); but how do we legislate temperance? Experience indicates that it can be accomplished best through the mediation of administrative law. We limit possibilities unnecessarily if we suppose that the sentiment of Quis custodiet denies us the use of administrative law. We should rather retain the phrase as a perpetual reminder of fearful dangers we cannot avoid. The great challenge facing us now is to invent the corrective feedbacks that are needed to keep custodians honest. We must find ways to legitimate the needed authority of both the custodians and the corrective feedbacks.
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• The profits or “carried interest” of buyout groups’ general partners represent a payment for services and hence should be taxed as ordinary income at a higher rate, 35 percent, not as a capital gain, at 15 percent.
I think its a simple question. If you are in the business of managing capital then the income you earn from that business is business income. Or barring that, income from an Adventure Or Concern In the Nature of Trade and therefore business income. But I don't think you yankees follow our entirely sensible source definition of income for taxes.
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Without regulation how can there be anything but a commons?
What is a true invisible hand market place?
The only one I can think of is the market for tuna caught on the high seas and that's not a particularly good model to follow - over capitalization, resource rent dissipation, immanent stock collapse etc.. But it has nearly 0 regulation and operates on a pure private property model (based on the law of capture).
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Hmmm no that's not quite what I meant. Fish are a bit of a problem because they are res nullius until they are captured, and even when fisheries get privatized its the right to fish that gets sold not the actual fish themselves.
I'll drop that for now.
What do you mean by a true invisible hand market place? I think that's probably more interesting than arguing about how Hardin used the word commons in his thought experiment.
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The tragedy of the commons is rational individual economic choices having a cumulative effect that is negative for society as a whole. High enough discount rates (present if interest rates shoot back up to where they were in the 1980s) can make it worth a private owner's while to destroy a renewable resource.
For example:
http://eprints.port.ac.uk/2072/1/Clark_et_al.pdf
Let me know if you can't access the article, I'm at a university so I can see it.
Clear cutting your forest and not replanting or catching the last spawning fish of the fishery you own and then moving on to a different industry can be a rational decision even if you own the resource. The invisible hand isn't guiding the resource owner to promote the public interest.
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Two points on the clear-cutting: First, who's to say you can't walk away from the land at that point (having extracted your maximum profit from it)? So what if the land is seized for back taxes? Second, clear-cutting in the Pacific NW is one of the things that's damaged the area's salmon fisheries, by silting up the rivers. But it's a diffuse problem; if you sue any one property owner, that person will point out that their responsibility for the overall fishery failure is small and unquantifiable, and therefore they should not be liable for damages.
ETA: My first point parallels what thejeff already said.
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Clear cut your forests and you'll be paying property taxes on land you can't sell for eternity.
You can abandon ownership or donate it to ducks unlimited. Or include the cost of property taxes into the opportunity cost of investing in a different industry. If making widgets is still more profitable than growing trees, its in your interest to liquidate the trees and put the money into widget factories.
Also aren't taxes are a form of regulation (in this case they sound like environmental regulation - distorting your choice to clear cut or not to clear cut)? I thought we were moving away from government regulation and towards free market solutions. :)
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Two points on the clear-cutting: First, who's to say you can't walk away from the land at that point (having extracted your maximum profit from it)? So what if the land is seized for back taxes? Second, clear-cutting in the Pacific NW is one of the things that's damaged the area's salmon fisheries, by silting up the rivers. But it's a diffuse problem; if you sue any one property owner, that person will point out that their responsibility for the overall fishery failure is small and unquantifiable, and therefore they should not be liable for damages.
ETA: My first point parallels what thejeff already said.
Well, if there was a private owner of the salmon, Coasian bargaining should still get us to the economically optimum amount of silt in rivers. Salmon fishers just need to pay loggers enough to make it worth their while to not silt up the rivers.
Bella Sara Charter Superscriber
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Ah, this makes sense now. I wondered how on Earth a thread about private equity had generated so many hits. I see now that it's a politics thread disguised as a private equity thread.
And here I thought I might actually be able to contribute to a topic for a change. Oh well.
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Bella Sara Charter Superscriber
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Um...er...
You weren't supposed to call me on that. I was trying to sound all corporate lawyer-y to keep up the pretense.
I don't have anything in particular to say, I just thought there was a lively debate going about them and was going to join in. I've set up private equity funds (and other types of funds) and have a few private equity clients.
Yay. That's the way it works. Welcome to Capitalism.
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Edit:
Oh. This thread isn't really about Private Equity.
Because if it were I would like to get two sub-topics going.
One about Valuation Methods, and another about Real Options.
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Edit Edit:
And since Sebastian is here, maybe he can tell us bit about the law
and Corporate Governance.
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Real options? Is that like applying black-scholes-merton to a right of first refusal? Or just recognizing opportunity costs?
Because if it were I would like to get two sub-topics going.
One about Valuation Methods, and another about Real Options.
Instead of me re-typing all the basic concepts, I highly recommend you
start with > this <..
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For instance, the net present value of a
project does not capture the values of the options to delay, expand or abandon a project. When comparing across investments, the traditional approach of picking the model with the highest return or net present value may shortchange investments that offer a firm more flexibility in operations and investing. A financing model that focuses on minimizing the current cost of capital does not consider the value of financial flexibility that comes from having excess debt capacity. In a similar vein, firms that hold back on returning cash to their stockholders and accumulate large cash balances might also be guided by the desire for financing flexibility. The value of equity, obtained from a discounted cash flow valuation model, does not measure the option to control, and if necessary, liquidate the firm that equity investors possess, and it ignores other options that might be owned by the firm, including patents, licenses and rights to natural reserves. In acquisition valuation, the strategic options that might be opened up for the acquiring firm, as a result of the transaction, are often not considered in valuation.
In light of these options that seem to be everywhere, there are some theorists and many practitioners who believe that we should consider these options when analyzing corporate decisions.
Okay, that's pretty neat stuff.
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I see the article goes into disputes between bondholders and shareholders over valuation. That's pretty topical - We actually had a big case up here that was a conflict between bondholders and shareholders over a massive leveraged buyout. End result is that the board of directors now has a duty to consider stakeholders other than shareholders when making decisions. This real option stuff might come in handy legally speaking.
I see the article goes into disputes between bondholders and shareholders over valuation.
Bond holders get paid before stock holders. Owning shares of stock is
called a residual ownership interest, because they don't get paid untilafter Bond holders get paid.
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Hmmm in this case the existing shareholders were being bought out at a large premium so they didn't care about priority in the case of a bankruptcy. The current debentureholders of the company were upset that the credit rating of their bonds was being downgraded due to the deal. So the situation was flipped.
Shouldn't issuing debt be a positive in some companies? You aren't diluting ownership...Although I've only seen that said with regards to junior mining companies.