Scott Sumner: We all know that the capital-intensive businesses of yesteryear like GM and US steel are an increasingly small share of the US economy. But until I saw this post by Justin Fox I had no idea how dramatic the transformation had been since 1975:
Morgan is expressing my thoughts on the matter as well (better than I could). I see us as entering a world of free and virtual, where economics no longer applies-- at least not in the same way.
Just about everything I do is free and/or virtual. Every year I do more free or near free (and it gets better) and spend less on physical things.
Two examples: twenty years ago my company built a teleconference room in every region. The cost was about a third of a million plus a hundred grand or so annually in upkeep and maintenance. This was to eliminate the costs of air travel. Today I have a better teleconference system included as a free app on every smart device in my house. I have millions of dollars in teleconferencing utility and it shows up as near zero in economics measures. It subtracted from GDP!
Second, I used to buy an album or two a month at $8 or $9 each in the late seventies. Today for $15 a month I get a virtual library in CD quality which includes over twenty million albums. Better quality, portable and more convenient. This would have cost millions to buy and store twenty years ago. Today, better for less.
Economists are simply missing what is going on right under their feet. Stagnation my ass.
For example, analysts consider Fabrinet an "electronics contract manufacturer", a massive industry 1,000 times larger than Fabrinet. But in fact they're an optical component manufacturer with 50% market share, sole supplier on most everything they do, win deals w/ out bids, etc.
Another: Mocon is superficially an Industrial Instrumentation firm. In fact, their instruments do one thing: measure the rate at which substances permeate materials, which is useful in food packaging. They must have more than 50% share of this space, if not 90%.
Defining market segments accurately is extremely difficult for industry insiders to do; they've got little incentive to publicize their findings; and as Peter Thiel points out, those w/ near monopoly power tend to exaggerate the scope of their market to fend off regulatory attention.
Wonder whether HHI's ability to carve the economy at its joints has deteriorated.
Technology companies may not be the driver of this trend, but they seem like its paragon. The infamous Yo funding as well as the Whatsapp acquisition and the Snapchat offer all seem to be treating users, rather than technology, as the company's main asset.
1) Home Depot's Price/Book is 16. Their ROE is near 60%. They're more profitable, and more dependent on intangibles (in an accounting sense) than Apple and Google. By far. To explain the intangibles puzzle you gotta understand bizarre cases like Home Depot, I think.
2) Don't forget that stupidly deployed tangibles are worth less than their cost; many public companies trade below tangible book value.
In a multisegment firm that means bad segments can obscure the intangible value of good ones.
So a reduction in bad segments could cause measured intangibles/tangibles to rise, even though intangible value hasn't changed at all.
If CEO's make fewer bad investments, launch fewer doomed to fail ventures, focused more on entrenching their core, were more skeptical of the scope benefits of diversification/conglomeration -in short if they wasted less tangible investment - you'd see intangibles/tangibles rising. (Certainly strategy has nudged this way since folks realized conglomeration rarely works.)
3) Industries tend to have three profitability phases. A) Super profitable when they first emerge, because they admit few players w/ efficient scale and capabilities. B) Then brutally competitive as growth attracts delusional wannabes w/ out coherent strategies for achieving sufficient market share (and again, doomed firms, wasted tangible investment, reduces everyone's P/book). C) Finally, more profitable again (most profitable on an absolute basis, as the industry is now much larger than in phase A) as the losers shake out, and the winners cement their incumbency.
My gut is that this sort of thing played out in many IT industries between 1975 and 1995, which is the period when intangibles rose fastest in the bar chart above.
The selection hypothesis is very interesting. I read something recently about Nike not owning any factories, and really just having a tiny labor force, with all the actual production being subcontracted out to other firms overseas. So basically all the phone owns is the brand and some shoe design facilities, despite being incredibly valuable.
The New Deal wasn't explicitly Keynesian; it resulted in a permanent expansion in the size of government. That's not how Keynesian stimulus is supposed to work. The increase in government employment as a percentage if civilian employment in the U.S. from 1948 to 1975 was secular, not cyclical.
if You are interested in moats and innovation you may like www.thenatureofvalue.com it explains economics and innovation using evolutionary theory. I teach some of it at Columbia University's MBA program.
I suppose the sharpest contrast is between the New Deal's public-works projects and contemporary deep cuts in employment by governments.
[Added.] As to the date, Keynesian measures (implemented within a nation state) would be predicted to have become increasingly ineffectual with the post-1973 globalization process, which intrudes international free riders.
This is WHY I keep waiting for Robert Hanson to come out in support of Uber for Welfare until we get to VR as main form of reality: https://medium.com/@morganw...
Morgan is expressing my thoughts on the matter as well (better than I could). I see us as entering a world of free and virtual, where economics no longer applies-- at least not in the same way.
Just about everything I do is free and/or virtual. Every year I do more free or near free (and it gets better) and spend less on physical things.
Two examples: twenty years ago my company built a teleconference room in every region. The cost was about a third of a million plus a hundred grand or so annually in upkeep and maintenance. This was to eliminate the costs of air travel. Today I have a better teleconference system included as a free app on every smart device in my house. I have millions of dollars in teleconferencing utility and it shows up as near zero in economics measures. It subtracted from GDP!
Second, I used to buy an album or two a month at $8 or $9 each in the late seventies. Today for $15 a month I get a virtual library in CD quality which includes over twenty million albums. Better quality, portable and more convenient. This would have cost millions to buy and store twenty years ago. Today, better for less.
Economists are simply missing what is going on right under their feet. Stagnation my ass.
How fine-tuned are HHI indices?
For example, analysts consider Fabrinet an "electronics contract manufacturer", a massive industry 1,000 times larger than Fabrinet. But in fact they're an optical component manufacturer with 50% market share, sole supplier on most everything they do, win deals w/ out bids, etc.
Another: Mocon is superficially an Industrial Instrumentation firm. In fact, their instruments do one thing: measure the rate at which substances permeate materials, which is useful in food packaging. They must have more than 50% share of this space, if not 90%.
Defining market segments accurately is extremely difficult for industry insiders to do; they've got little incentive to publicize their findings; and as Peter Thiel points out, those w/ near monopoly power tend to exaggerate the scope of their market to fend off regulatory attention.
Wonder whether HHI's ability to carve the economy at its joints has deteriorated.
Maybe stocks of companies were undervalued on average 40 years ago compared to today. Maybe today's stocks are overvalued.
yep.
You mean the best answer was the bit about naked women and fighting dragons?
Technology companies may not be the driver of this trend, but they seem like its paragon. The infamous Yo funding as well as the Whatsapp acquisition and the Snapchat offer all seem to be treating users, rather than technology, as the company's main asset.
I just made the observation that the simple explanations you listed are actually quite good explanations.
1) Home Depot's Price/Book is 16. Their ROE is near 60%. They're more profitable, and more dependent on intangibles (in an accounting sense) than Apple and Google. By far. To explain the intangibles puzzle you gotta understand bizarre cases like Home Depot, I think.
2) Don't forget that stupidly deployed tangibles are worth less than their cost; many public companies trade below tangible book value.
In a multisegment firm that means bad segments can obscure the intangible value of good ones.
So a reduction in bad segments could cause measured intangibles/tangibles to rise, even though intangible value hasn't changed at all.
If CEO's make fewer bad investments, launch fewer doomed to fail ventures, focused more on entrenching their core, were more skeptical of the scope benefits of diversification/conglomeration -in short if they wasted less tangible investment - you'd see intangibles/tangibles rising. (Certainly strategy has nudged this way since folks realized conglomeration rarely works.)
3) Industries tend to have three profitability phases. A) Super profitable when they first emerge, because they admit few players w/ efficient scale and capabilities. B) Then brutally competitive as growth attracts delusional wannabes w/ out coherent strategies for achieving sufficient market share (and again, doomed firms, wasted tangible investment, reduces everyone's P/book). C) Finally, more profitable again (most profitable on an absolute basis, as the industry is now much larger than in phase A) as the losers shake out, and the winners cement their incumbency.
My gut is that this sort of thing played out in many IT industries between 1975 and 1995, which is the period when intangibles rose fastest in the bar chart above.
Nioe my answer covers your point, please read better. Confront best answers.
The selection hypothesis is very interesting. I read something recently about Nike not owning any factories, and really just having a tiny labor force, with all the actual production being subcontracted out to other firms overseas. So basically all the phone owns is the brand and some shoe design facilities, despite being incredibly valuable.
The New Deal wasn't explicitly Keynesian; it resulted in a permanent expansion in the size of government. That's not how Keynesian stimulus is supposed to work. The increase in government employment as a percentage if civilian employment in the U.S. from 1948 to 1975 was secular, not cyclical.
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if You are interested in moats and innovation you may like www.thenatureofvalue.com it explains economics and innovation using evolutionary theory. I teach some of it at Columbia University's MBA program.
I suppose the sharpest contrast is between the New Deal's public-works projects and contemporary deep cuts in employment by governments.
[Added.] As to the date, Keynesian measures (implemented within a nation state) would be predicted to have become increasingly ineffectual with the post-1973 globalization process, which intrudes international free riders.
And what evidence do you have that that was ever implemented before Nixon and ever "abandoned" after him?
Keynesianism dictates that governments (central and local) should resist the impulse to impose austerity during downturns.
This is WHY I keep waiting for Robert Hanson to come out in support of Uber for Welfare until we get to VR as main form of reality: https://medium.com/@morganw...