Re: OWNERSHIP: A Personal Summing Up

[John Médaille <john@medaille.com>]

At 04:01 PM 4/8/01 -0400, Dellerman@worldbank.org wrote:

>5. As an aside, the idea that a loan to buy a capital asset could be paid off
>with a truncated portion of the cashflow thrown off by the asset is in 
>theory a
>non-starter for the simple reason that the value of the capital asset is 
>usually
>taken to be the discounted present value of all the cashflow thrown off by the
>asset.

I am trying to think of one single case where this is true. I'm sorry, but 
I can't. The computer on which I type this note is a capital asset; its 
price had not a single thing to do with the "pv of all cash flow thrown off 
by the asset." The same is true of my fax machine, my car, my home, etc. 
The same is true of a factory; the cost to build it has nothing to do with 
its future cash flows. (The decision to build it does, but that's a 
different matter.) You are thinking of the purchase of "on-going concerns" 
(as if that were the only form of "capital asset.") There the maximum price 
is normally given by the discounted values. Even here, the truth is the 
reverse of what you state. For example, if one is buying a rental property, 
the maximum price one is willing to pay is indeed related to the discounted 
cash values of the rental income. But what determines the rental income? 
Generally, it is a derivative of the housing market; you can't charge more 
rent than it would cost to build or buy the home. And the cost of building 
or buying the home has nothing whatever to do with the "future cash flows." 
Any more then the cost of my computer has something to do with the use to 
which I put it or the value I expect to receive.

Discounted cash flow is the standard used only if you have a sucker on the 
line. To the intelligent investor, the question is, "what is the cost of 
recreating the asset?" If one has a widget factory that produces a net 
income of a million/annum, the seller might think himself entitled to the 
dcf of its remaining life, a discounted million per year. But he will never 
get that. If the buyer can recreate the asset for a million, then that's 
all he'll pay, with perhaps some premium for sparing him the trouble of 
building it. If the cost of re-creating the asset is greater than what the 
seller wants, we will get it only if the discount rate is higher than the 
what he could earn with other alternatives. Thus it is the discount rate 
that is negotiated.

>  That is not rocket science.

You're right. Its not. But it is science, and scientists should 
occasionally glance at the empirical world to see if any of the 
abstractions they propose hold up in practice. I work with both buyers and 
sellers. The sellers always talk of dcf, but buyers never do and won't pay 
it. Everybody knows that dcf is a negotiating ploy, with little meaning to 
the actual price. In my business, buyers look for what flows enough cash to 
pay the note of the acquisition and the operating expenses. They rely on 
appreciation to provide future income. Obviously, not every business works 
that way (since for most assets, depreciation is the dominating factor, not 
appreciation). Nevertheless, dcf is only used as a limiting factor, not a 
pricing mechanism.

>   The whole idea of a leveraged purchase only
>works when the buyer can add some value not available to the seller and thus a
>larger cashflow stream will be generated in the hands of the buyer than the
>seller.

But that's what businesses do! A business that could not add some value not 
available to the seller would not be a business. What is it doing in 
business, if not "adding value"?

>   This "added value" could include tax breaks or below market interest
>rates available to the buyer but not to the seller.

It could, but there is no reason in binary theory why it should, save as a 
temporary measure to offset inequities in the present market.


>6. A further wrinkle in the dilution discussion was that I then showed how the
>ESOP could be modified (the "DESOP"  idea) so as to eliminate the dilution
>effect--essentially by recognizing a debt of the ESOP back to the company 
>in the
>amount of the dilution which would be paid off out of dividend payments on the
>shares held in the ESOP.  Non-true-blue Binarians, not to mention ordinary
>business people, are intuitively aware of the dilution involved in an 
>ESOP.  How
>could there not be dilution when the workers end up with shares paid for 
>by the
>company and the tax breaks do not add up to 100% of the share value?

Easily. The same way they acquire any other asset without dilution. Your 
"example" did not even compare the income of the company before an after 
the asset acquisition, which means that not only was it not an "example" of 
binary theory, it wasn't even an example of sound bookkeeping. It you care 
to recast your example so that it bears some faint resemblance to financial 
accounting, we can take a look at it. But if you don't even know whether 
the asset was productive, your example is not "analysis", it is pure 
polemic. It is quite true that if a company exchanges stock for an asset 
that produces no (or insufficient) income, the existing shareholders will 
suffer dilution. This occurs whether or not the stock is "binary."

>   Hence this
>new way to avoid the dilution might well have a positive effect on the 
>uptake of
>ESOPs (stuck for many years at around 10% of the workforce) and be much easier
>to implement as an ESOP option than the grandiose Federal Reserve free credit
>schemes to make up for the dilution in that manner.  It should be recalled 
>that
>the two-payments argument assumes no change in worker productivity or in wage
>and benefit compensations.  I would think that a good part of the ESOP 
>uptake is
>because the dilution is counteracted by current or future changes in
>compensation (e.g., very explicit in the United Airlines deal) and 
>productivity,
>or simply that the old owners do not mind the dilution for non-economic 
>reasons
>(e.g., rewarding past employee loyalty).  In any case, my friendly suggestion
>was met with complete silence--which I find interesting.  Why?

Could it be because when you were asked to correct your first example, 
there was stony silence on your part?


>I surmise that
>the problem is that the suggestion corrects a flaw which Binarian theory does
>not recognize in the first place.  Hence for Binarians to take the suggestion
>seriously would mean facing up to the dilution problem and thus 
>backtracking on
>all the rhetoric about "self-liquidating credit" and the like.  This 
>reminds me
>of a line from Sinclair Lewis' "Arrowsmith" quoted on p. 339 of James' Scott's
>"Seeing Like a State": "They said...that he was so devoted to Pure
>Science...that he would rather have people die by the right therapy than be
>cured by the wrong."

Very interesting, except that I suspect that when the "economist" turns to 
psychological arguments, it is because he is avoiding the economic ones. 
Further, the problem with such psychological arguments is that any number 
can play; they work just as well (or just as poorly) in either direction.


>7. Another thing I learned from the Ownership discussion was the depth of the
>anti-labor distain or animus in the hard-core Binarian position.

No you have something. It is quite obvious that the people who want to turn 
over the ownership of corporations to the laborers must obviously have an 
"anti-labor animus." Why didn't I see this before? It is but a clever plot 
to undermine the worker by making sure that he lives the empty life of the 
capitalist and dies of a bad case of gout. Those clever binarians! They'll 
get the working class to drink themselves to death on fine wines.

>   I would think
>that most of the people sympathetic to employee ownership come to it out 
>of some
>sympathy to the labor movement and some misgivings, no matter how inchoate,
>about the whole employer-employee relationship (but perhaps I have a biased
>sample?).  In short, they are people of the Left broadly speaking.

Or people who have transcended such puerile categories as "right" and 
"left". Really, David, you descended into psychologizing before, and now 
you must forgive me if I do the same (I told you that two could play): If 
your thinking is still trapped in "left" and "right" then you are not 
thinking at all; you are not engaging in economics, but in politics. 
Politics is for partisans, and partisans give not examples but polemics, 
which brings us back to your "example", doesn't it?

>  The
>Kelsonians have always stood out as being of a rather different 
>stripe.  Indeed,
>they differ from the standard mainstream capitalist thought by being more
>capitalist or ultra-capitalist rather than less.  When one sometimes hears
>Binarian rhetoric about "doing away with the wage system" it turns out to mean
>something quite different than how the phrase might be interpreted on the 
>Left.
>Instead of seeing any problem in the hiring or renting of people per se,
>Binarians simply mean getting enough capital assets into the hands of working
>people so that they don't have to depend as much or at all on wage income.
>Carried to the limit, it is as if when people come out of school instead of
>entering the workforce they would immediately retire on a pension for the rest
>of their lives.  It is that sense that Binarian thinking talks about
>"eliminating the wage system."  Thus I came to appreciate how there might be
>coincidence of rhetoric when people mean entirely different things.  For
>instance, the workers in the Mondragon cooperatives do not receive any wage
>income but receive advances on their shares of their net labor product; 
>they are
>members of the company, not employees.  That example of "doing away with the
>wage system" is fundamentally different than the Binarian notion of people
>living mostly off of capital income.

You've asserted a difference, but have not demonstrated one. Again, this is 
mere polemic.

>  This difference also comes out in the
>rather bizarre attempt to co-opt Catholic social teachings to the Binarian
>cause.  The Mondragon co-ops grew out of an attempt to put Catholic social
>teachings about the priority of labor into practice.

Binary theory springs from the same source. What is it you consider 
"bizarre"? Again, assertion without example or explain remains in the realm 
of mere polemic.

>   The teachings about the
>priority of labor were re-emphasized in the Catholic tradition by the Laborem
>Exercens encyclical.  When I quoted from the website of one of the Ownership
>discussion participants about the priority of labor and pointed out the 
>conflict
>with the Binarians' view of the priority of capital, the whole topic got 
>dropped
>like a hot potato.

I don't know when this discussion took place, but I would be happy to 
discuss the Social Encyclicals with you to any depth you desire. But I can 
tell you that you are confused on this point. The encyclicals descry the 
fact capitalism (and socialism) decree that “human work is solely an 
instrument of production, and that capital is the basis, efficient factor 
and purpose of production.”(LE 34)  It is if the hammer was all and the man 
who wields it nothing, a clear confusion in the right order of things, of 
which the Pope says, “Precisely this reversal of order, whatever the 
program or name under which it occurs, should rightly be called 
‘capitalism’…” (LE 30) But binary theory is precisely a response to this 
problem. In fact, it embodies that solution that Laborem Excercans, and 
every other encyclical calls for, namely, insuring that the worker shares 
in capital. This has been the papal policy since Rerum Novarum in 1890. 
This just distribution appears in Rerum Novarum as the practical basis for 
peace between the classes. (RN 66) In Quadragesimo Anno, in a section 
provocatively entitled “Proletarian condition to be overcome by letting 
wage-earners attain to property,” the Pope says “Every effort, therefore, 
must be made that at least in future a just share only of the fruits of 
production be permitted to accumulate in the hands of the wealthy, and that 
an ample sufficiency be supplied to the workingmen.” (QA 61)
These ideas find their most complex expression in Laborem Excercans. After 
attacking the capitalist view that treats private property as an 
“untouchable dogma,” the Pope insists that the concept of ownership “should 
undergo a constructive revision both in theory and in practice.” (LE 66) 
What is this constructive revision? It is nothing less than the 
“socialization” of capital! (LE 65) In the Pope’s view, the only legitimate 
title to private goods “is that they should serve labor and thus by serving 
labor that they should make possible the achievement of the first principle 
of this order, namely the universal destination of goods and the right to 
common use of them.” (LE 66) The encyclical expands on this idea:
“In the light of the above, the many proposals put forward by experts in 
Catholic social teaching and by the highest Magisterium of the church take 
on special significance: proposals for joint ownership of the means of 
work, sharing by the workers in the management and-or profits of 
businesses, so-called shareholding by labor, etc.” (LE 67)
Socialization of property is not to be confused with “collectivization,” 
which would merely transfer power from the owners to a group of managers, 
(LE 68) rather, we can speak of socializing [of capital] only when “on the 
basis of his work each person is fully entitled to consider himself a part 
owner of the great workbench at which he is working with everyone else.” 
(LE 69)
I have to confess here to quoting my own article. You can find the full 
article at www.medaille.com/distributivism.htm under the Title 
"Distributivism and Catholic Social Teaching."



>8. Finally, the Ownership discussion has reconfirmed to me that the whole
>Binarian position has absolutely no connection with the idea of workplace
>democracy.

Right again. If the workers own the enterprise, the question of "workplace 
democracy" becomes redundant, doesn't it?

There are parts of my post which are distinctly bad-tempered. For this I 
apologize, but nevertheless will leave it as I wrote it. After all, if 
David is entitled a little "personal summing up," I should be allowed some 
leeway in going further than I ought.


John C. Médaille

"A dead thing can go with the stream...
but only a living thing can go against it."
         -G. K. Chesterton
http://www.medaille.com/distributivism.htm
john@medaille.com