McBankers justify their multi-million dollar bonuses as rewards for “adding value”. That phrase went feral among private equity merchants just as their world began to implode in mid-2007.
But what kind of value? To answer “the share price” makes a $90bn takeover sound cheap, at least, aesthetically. Yet public affairs consultants had succeeded in re-branding “price” as “value”, and vice versa.
That prestidigitation is replete with paradox. Three instances can be tracked across three domains, first, economic theory, secondly, into accountancy, and finally through stock-broking.
From the 1870s, the jettisoning of “value” as a metaphysical concept 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. Out went Marx’s definition of value as congealed labour time, and in came the marginal utility ability to determine the price of a cup of tea. To reach this position, the neo-Classical turned their backs on Adam Smith.
Then, in 1926, the neo-Ricardian 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 redeem their premises. Failure led them to pretend that the circularity in their algebra was merely “technical”.
The above will surprise most economics graduates since the history of their discipline is eschewed in many Australian universities as subversive. Eternal truths have neither origins nor development: they simply are, like the market.
Meanwhile, accountants had no “technical” bolt hole. Their scholarly literature was blotted with worries about which number to inscribe into the capital goods column. Should they be entered at their historic cost? Or at the cost of replacement? The oldest swindle for “adding value” was to switch back and forth between these two criteria for pricing stock and plant.
Because McBankers claim to “add” value, their accountants do need some measure with which to quantify the performance bonuses. In the old days, one basis could have been an increase in the price of a share in some toll road; an 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 could not put a number on their current debt, knew with certainty what the earnings from that leverage would 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. The McValue-adders operate a new law of value: dividends first, profits later.
[The points presented here become easier to follow after spending a few hours with Marx's Value, Price and Profit. The advantages from so doing, instead of subjecting oneself to more of the pap known as the "news", is that we gain some intellectual ballast to carry forward into every twist of the expansion of capital.]
Next: The market in futures