We get paid because someone thinks we’re creating value. You’re reading this column and might glance at the accompanying advertisements; therefore I get paid. And you? You’re obviously a person of such style and discernment, it’s difficult to believe you’re not paid just for being yourself. Nevertheless, chances are, you receive a salary for doing a job and it’s probably a job that’s been around for decades.
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But what if that were all to suddenly change?
Since the mid-1850’s, ever-larger department stores have been all the go. In fact, David Jones claims to be the oldest in the world still operating under the same trading name, first opening in 1838.
Just four months ago the e-commerce business Amazon opened in Australia.
Although there were some initial hiccups with the site, the website tracker Marketplace Pulse says today the business is Amazon’s fastest growing market (admittedly from a zero base). I’m in the US, where the company has just released a global quarterly profit total of more than US$1.6 billion from 2.6 billion e-‘visits’ (11.4 million of which were from Australia).
Since its listing in 1994, Amazon stock has risen more than 2250 per cent. That’s well over 1300 per cent more than the biggest American shopowner, Walmart.
At some point, of course, this phenomenal growth will slow. It’s also quite true that a company that’s been created out of nothing can just as easily disappear into a puff of smoke and nothingness. In the meantime, however, what these online companies are doing is changing our very way of existence.
Look at what happens to ‘value’ in this new economy.
The value I create for Fairfax (and thus the Canberra Times) is dependent on my ability to keep you reading this column and, hopefully, speaking to someone about the great insights you’ve received. Twenty years ago that was much easier than today. Today, thanks to the internet, everyone has access to the very best journalism anywhere in the world (if they’re prepared to pay for it). Perhaps more importantly (at least as far as the finances of the media are concerned) new retail sites specialising in selling cars (Drive), homes (Allhomes), or both nothing and everything (Amazon) are rapidly destroying the paid advertising model of news production. So where has all that ‘value’ gone? The answer requires thinking about wealth in its abstract sense.
The Banking Royal Commission has provided us with a particularly vivid picture of how successful financial advisers have been at creating wealth – for themselves. There’s been no problem there, and that’s the way the market is designed to work.
The issue is simply that the value they’ve created hasn’t matched their fees and that’s not really their fault; it’s the problem with a low inflation economy. Even if nobody’s money is growing the advisers will still need to be paid. It’s only natural that they’d seek to put a premium on their fees (first) and returns for their clients (second). That’s the way the market works and it’s the cost of the incentive schemes accompanying financial advice. Unfortunately, low percentage returns collapse into nothingness after the adviser’s taken their share of the income.
If it’s a ‘problem’, then it’s one inherent in the system – market capitalism.
The problem is over the past quarter-century two very different influences have combined to transform the nature of the system.
First came the witch-doctors; chanting incarnations about “maximising shareholder value” and “focusing on missions”, their alchemy successfully uprooted business practices and offered mantras to be chanted as necessary to justify any organisational monstrosity the managerial class sought to implement. The other process was the exponential development of computing power connected to the internet. Fused together, these processes are transforming society.
The old textbooks about modern industrial society are already out of date. A better guide to the future can be acquired from either using your imagination or the recent work of Mariano Mazzucato (a professor at University College London) or Thomas Piketty (Capital in the 21st Century). What’s important about the work of both of these economists is that they explode the one idea from which all else follows: that financial decisions are somehow arrived at ‘purely’ through a market mechanism. The issue is that bias is inherent in the very manner the markets are formed and operate.
It might, in fact, be better to think of economics more as a way to rationalise the way we live to ourselves, rather than a guide to how we should live.
So how does all this relate to Amazon? Well, consider how our value structure is changing. Our fiscal environment is built on exactly the same pillars that collapsed so quickly back in 2008. Central banks around the world (like our Reserve) have been looking around desperately, hoping for the return of (low) inflation or the decline of house prices. It’s not happening. Debt is being transferred to individuals, burdening the economy and exacerbating income inequality. Finance has rocketed out of control with value increasingly created by instruments with no relationship to the real world whatsoever.
The only answer is a reset.
These issues need to be addressed. A genuine conservative would begin the fightback with the coming Budget. Don’t hold your breath. Scott Morrison seems to place a far greater value on reelection than on resolving critical economic issues.
Nicholas Stuart is a Canberra-based writer.
