ECONOMICS - McVALUE
McBankers justify their
$200m. bonuses as rewards for “adding value”. That phrase has gone
feral among private equity merchants.
But what kind of value?
To answer “the share price” makes a $90bn takeover sound cheap, at
least, aesthetically. Yet it seems that some public affairs consultant
has succeeded in re-branding “price” as “value”, and vice
is replete with paradox. Three instances can be tracked across economic
theory to accountancy and then stock-broking.
From the 1870s,
jettisoning “value” as metaphysical was the launching point for the
Neo-Classical economists, the progenitors of today’s orthodoxy. What
mattered to them was not some intrinsic value in a commodity, but its
price as determined by supply and demand. To reach this position, they
turned their backs on Adam Smith.
Then, in 1926, Piero
Sraffa showed that the Neo-Classicals had been calculating capital and
profit in terms of each other. For the next fifty years, the brightest
and the best of them tried to rescue their premises. Failure led them to
pretend that the circularity in their algebra was merely
(The above will
surprise most economics graduates since the history of their discipline
is eschewed as subversive in many Australian universities.)
had no “technical” bolt hole. Their scholarly literature was blotted
with worries about which number to inscribe against capital goods.
Should they be entered at their historic cost? Or at the cost of
replacement? The oldest swindle for adding value was to switch between
these two criteria for pricing stock and plant.
Because McBankers claim
to “add” value, their accountants need some measure to quantify the
performance bonuses. In the old days, one basis would have been an
increase in the price of a share in some toll road; the alternative
might have been the growth in the capitalised value of that business.
But the value-adders at
McBank are no longer bound to either the past or the present. Values at
McBank are neither “historic” nor “replacement”, but
“futurist”. Executives who can not put a number on their current
debt know with certainty what the earnings from that leverage will be
several years hence.
In promising bonuses
for all, the McBankers have learnt from the mistakes of the dot.com
boomers whose share prices went stratospheric without ever turning a
cent of profit. Today’s value-adders operate a new law of value:
dividends first, profits later.
20 July 2007