We’ve been thinking more about this New Era capitalism. In the old capitalism, owners were stingy. The idea was to exploit labor…not to be exploited by it. But that has changed too. The capitalists seem to have lost their heads; they think their new Zoo-Capitalism is all upside. And since it is all upside, there is no reason to worry about the downside.
Control costs? Heck, they’re all going to get rich; why bother to be a skinflint? They also have an outsize faith in money and financial incentives. So, they figure if they pay managers…or money managers…excessively, somehow they will get outsize returns. Give the corporate managers big stock options, they believe, and these hacks will make big profits. Likewise, give the hedge fund managers a big percentage of the gains…and they will make big gains.
As a logical matter, it seems absurd. If a manager can’t deliver profits at a salary of $1 million a year, how can he do so if you pay him $2 million? Why would he be holding back? And why would competent managers need to be paid so much more than they were before the New Era arrived? Every generation must have a number of successful managers; if salaries were only $1 million a year, rather than $10 million per year, what would they do…become crane operators?
And what about the hedge fund managers…and other financial professionals? Even if their salaries were only half as high, they wouldn’t likely give it up to become short order cooks.
The whole idea of the New Capitalism is a humbug. You can’t set aside common sense and standards of prudence just because some yahoo tells you the new free market will make you rich. The old free market can make you rich, but not if you ignore the old rules that go with it.
The Daily Reckoning Australia