Every parent must sooner or later have a conversation with their children about how money works. What it is, where it comes from, and what they can do about it. For many years that conversation was confined to a few variables. Develop your skills, work hard and smart, get out of debt, save, and the rest of it will look after itself.
The classic capitalist ethos. Work hard and contribute and money will happen.
The world today is a bit different. Recently a story appeared in the New York Times that puts the lie to the old form of capitalism. Shuffle of Aluminum
Old capitalism was based on the premise of an exchange of values. I would buy from you at a negotiated price something that I valued at at least as much as the money I gave up. You on the other hand would try to meet my needs at the most efficient price possible. Hopefully make a profit. You make your money by providing value.
New capitalism retains that option. People who have made a lot of money recently, like Bill Gates, Larry Ellison, Sam Walton and many more acquired a great deal because they provided a great deal of value. Good for them and good for us.
New capitalism however, has built in another less useful methodology. Like the aluminum story indicates, under some circumstances it is now possible to “get money” without providing additional value. From the acquiring side, the money is the same. Whether you get it or earn it, it all spends the same way. There are choices.
Creating a business to make money is inherently failure prone. Not everyone will value the product highly enough to let you make a profit. Sometimes you cannot even make a sale, never mind a profit.
Getting money seems to be easier than earning it. Financial engineering, financial packaging, using the rules slightly differently than the makers intended, high velocity trading, and taking advantage of the inability of most people to keep up to the information flow, can be exploited. You may recall mortgage backed securities that turned out to be not much of an asset. All of this requires great skill but it is an empty skill. There is no new wealth. Merely a change of pockets.
Despite evidence to the contrary, there is no rational belief that supports the idea that you can repackage a business and make it worth more. There is a theorem in finance that says a given business is worth what it is worth, independent of how it is financed. Modigliani-Miller. Repackaging usually should not matter. Except to the money getter type.
To get money, all you need is an edge. A well developed network of naifs, a lawmaker friend, an official who applies regulations arbitrarily, a clever story, all can add great value by changing the way the playing field is organized or used. Properly done it is not materially harder than picking up money you find on the street.
To earn money on the other hand, you need to be able to offer something where the value to the user is great enough for you to be profitable. That requires ingenuity, persistance and work on your part. It requires having and maintaining a competitive advantage over others who are doing it too. Insight, foresight and work. What could go wrong?
Perhaps we have come to expect things to be easy. Getting money instead of making money does not last forever, because too many people get caught up init and the source of the resources consumed eventually dries up. People don’t stay stupid forever.
Perhaps it is time for us to teach the value of hard work and skill as opposed to the tricks that get money. One is durable, the other is not. Or I am one of the naifs?
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
email@example.com | Twitter @DonShaughnessy | Follow by email at moneyFYI
Let’s figure out a way to convert our MP’s, MLA’s, and local officials from money-getters to value producers. For it is they who pervert our efforts at educating our children to follow the better way. It is they who extort tax money from the value producers, under threat of fine or imprisonment, and give it to the money-getters. This has the unintended consequence of forcing the value producers to waste inordinate amounts of their time in activities related to avoidance–and even evasion. This erosion of the connection between the ruling class and the value producers counteracts any demonstrable benefit to the mantra of the value producer.