Tag Archive for investment

Could Uber be Collectivised?

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A provocative piece in The Nation suggests turning the so-called “ride-sharing” company known as Uber into a worker-owned enterprise. In “Socialize Uber: it’s easier than you think, Mike Konczal and Bryce Covert argue that since Uber owns only the proprietary technology that coordinates the glorified taxi rides and processes payments, and drivers own their own cars, Uber is an excellent candidate for conversion to a worker cooperative.

Collectivisation of Uber is a tempting notion, but the authors’ conclusion that it’s the “obvious transition” for Uber is hard to fathom. First, they curiously fail to note that it would be virtually impossible (in a legal and technical sense) for the drivers to acquire Uber. The company is privately owned, with equity held between the founders, many employees, and a huge array of venture capitalists, individual investors, and other firms. These shareholders have complete legal prerogative to hold their equity until the company goes public or sells off (and beyond). The only way the workers could buy Uber is if they pooled their money and acquired the company, which would cost way more than its current $40 billion valuation. Indeed, due to the special circumstances of needing to acquire every last share and option from current holders, this would constitute, by a factor, the most expensive acquisition in the history of venture capitalism.

But let’s just play make-believe and look at Uber as if the workers could assume the reins overnight. I believe in worker cooperatives, not just as an organizational model for firms, but as a transformational force for our economy. That said, Uber is not merely a bunch of hard-working drivers coordinated by technocratic drones. If Uber establishes itself as a dominant, static force in the taxi economy, it might eventually become nine parts technocracy for every one part human ingenuity. But for now, it’s a new kind of craft in very uncertain conditions; autopilot is not an option.

The authors note, “It takes an entrepreneur to start up ride-sharing, but not to run it as a firm.” In truth, it takes a handful of entrepreneurs as well as venture capital to bring a startup of this kind to scale, and it takes a team with exceptional business sense to see it through the growth stage. Even as a staunch advocate of collectivism, I am willing to concede that successfully introducing a disruptive product into a market of this kind is beyond the reach of collectives or self-funded worker-run enterprises. At the very least, they would have to seek investment capital and empower managers with extraordinary vision to navigate this crucial phase. These are two very problematic necessities.

We all know what happens when workers empower managers to use their exceptional talent—those managers demand exceptional compensation. I’m not saying capable people don’t exist who would do this for humble wages, but they’d be exceedingly hard to find. Anyone with a proven track record has far more lucrative options. So whom would workers hire or promote to steer the company? This is where CEOs and other executives command what appear to be rentier compensation packages. It isn’t the actual scarcity of talent, but the scarcity of pedigree, that they’re leveraging. Even the ones with relatively poor records exercise the terrific advantage of having a resumé that shows they know anything at all about running a big company. While it’s surely far easier than they would have us believe, it’s not perfectly intuitive; not just anybody can pick it up overnight. Leadership isn’t an insurmountable obstacle, but it highlights a major problem and a significant gamble.

And then there’s the capital. Even if they don’t need $100B in up-front cash, Uber would need regular influxes of investment capital in order to grow while competing with other venture-backed companies in the ride-hailing app market (not to mention the main competition: taxis). We’re talking no less than tens of millions of dollars on a semi-regular basis. It’s difficult for worker cooperatives in conventional industries to get loans or other traditional forms of cash infusions; this is basically impossible for venture startups in unproven markets.

You might say, why not reinvest profits as capital for growth? Besides the fact that worker-owners would have to consistently forego dividends to grow the firm (a conventional co-op dilemma) the biggest reason is really that it puts tremendous pressure on creating big margins in the first place. Competitors will meanwhile enjoy the relative breathing room of not having to scrape every ounce of profit out of their model while growing strategically. Some of these companies pay no attention to profits at all as they spend investor money improving their position in the market.

This is why venture capital exists—to take seemingly insane risks seeking commensurate returns on the rare wins. For startups, they provide the ability to grow without cannibalizing revenues. I cannot imagine a VC firm wanting to invest in a labor-managed startup, and it wouldn’t be a cooperative if such a firm did decide to invest.

But why wouldn’t an investor want to back a democratically managed startup? We know a lot of these new Silicon Valley firms are relatively flat. Here we get to Konczal and Covert’s claim that at its core, Uber is just a technocracy:

And these workers [drivers] labor individually, doing the same tasks, so there’s no need for a management class to control their daily operations. The capital owners maintain the phone app, but app technology isn’t the major cost, and it’s getting cheaper and easier by the day.

Developing successful technology isn’t just writing code, and most of the supposedly “flat” tech startups are neither nonhierarchical nor equalized in pay scales. Even if the code and the coders came with the acquisition (which they would), consider that all these years a relative handful of people at Uber have been figuring out what to make all that code do. There’s institutional knowledge and specialized skills behind that, some of which might be maintained beyond collectivisation, though that’s doubtful (why would a CTO or senior engineer or product manager stick around—why even would a junior developer who can start anywhere at $75,000 plus equity?). Could the right workers collectively do this under the right circumstances? I believe so. But not coders who weren’t hired for these propensities, and definitely not overnight.

Okay, so forget Uber (seriously, Uber is awful). What if all the Uber drivers wanted to set up their own competing co-operative? Maybe even do something innovative and offer regular customers shares in the company! Unfortunately, the above problems would persist.

There’s that pesky problem of the technology and infrastructure. The overhead costs for such a venture are not trivial, but replicating the model is conceivable. Uber’s trade secrets would be pretty hard to obtain, protected as they are by nondisclosure agreements that could keep even sympathetic insiders from aiding the dissident worker-owned venture. Still, I think most of the model is in plain view. So they’d have to get the right developers working for the right reasons. It’s theoretically possible, but I’d rank it as highly difficult.

It remains harder still to figure out where the capital would come from, and how the organization would work such that drivers, technologists, and business development workers would be on the same page at equitable wages and equal stakes of ownership and control. The irony, of course, is that this company would be competing with Uber and all its infrastructure and those piles of venture capital. My conclusion is precisely the opposite of Konczal and Covert’s: Uber is among the worst candidates for the cooperative model on a large scale.

Now, all this being said, if someone were to create open-source software for the ride-hailing industry, I bet small collectives of highly motivated driver-owners could perhaps eek out nice livings in the right markets. I would love to see that, and in fact I’d lend my expertise to such a project. But this sadly isn’t the place we’re going to kick capitalism’s ass.

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End-of-the-world Profiteering

the end of the world offers profit opportunities
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the end of the world offers profit opportunities

This reminds me of a couple of posts from last year, particularly my reviews of “doom-and-gloom” financiers Jeremy Grantham and Nouriel Roubini.

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The Promise of Capitalist Globalization, Predictably Unfulfilled

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I swear it’s just coincidence that right after coming down so hard on Nouriel Roubini, I’m going to praise a piece appearing in his EconoMonitor blog, this one by investment executive Walter Molano.

In “The Summer of Discontent“, Molano cuts straight to the nitty gritty, squarely placing blame for the past year’s various grassroots grumblings (China labor tension, Arab Spring, London riots) on the shoulders of market capitalism — namely, its failed promise. And he doesn’t try to sugar coat it or tack on a hackneyed stupefaction proclaiming capitalism will make it all right.

Molano basically illustrates how the global game of musical chairs that was played for the last twenty years as new markets opened up and capital flooded in has, in the end, left much of the world standing, disgruntled. It’s a short piece (with dreadful paragraphing), but let me share some highlights:

The growth spurt driven by globalization expanded the economic pie, as billions of new consumers were incorporated into the marketplace. Rising commodity prices and expanding trade flows delivered huge windfalls to the developed and developing world. However, as the rapid rise of global integration began to plateau, and the effects of the downturn in the U.S. and Europe took hold, the vast aspirations of disparate societies dimmed. Not only is the American dream looking like an empty promise and the European socialist model a distant memory, the hopes for a better way of life by billions of people across the developing world is also in doubt.

It’s hard to argue with this, adding to the account that everyday people in the “developed and developing world” did not accrue benefits equitably from the windfalls, which Molano fully understands. An investment analyst has captured the spirit of the street, and he’s going to tie it into useful, plain-English macroeconomic analysis. Observe…

The mad scramble for productive and physical assets throughout the former communist states, such as Russia, China and Vietnam, created a cadre of super-rich individuals. However, the re-allocation process is over and most of the boundless opportunities are gone. Now, these populations are stratifying into the traditional class segmentations associated with modern capitalist societies, fostering disappointment and frustration for some.

Molano then actually presents a Marxist framework within which to understand the impact these changes on class in countries his colleagues typically refer to as “emerging markets” (Molano spares us this dreadful term). I actually found this to be the weakest aspect of the piece, as Molano is trying to wedge modern concepts into an arcane (if historically useful) model. Nevertheless, it’s interesting.

But Molano’s commentary isn’t done getting better (i.e., franker). I’m going to make you read his piece for the details, though.

I can’t help sharing his conclusion with you just in case you don’t take the hint and read the original:

The blurry images of the violence in London, Hama and Hangzhou are the precursors of similar events that will take place in other parts of the world, such as Istanbul, Jakarta and Bogota, when they realize that the dream of greater prosperity was dashed by the basic principles of market economics.

I’m not familiar with Molano’s prior work, so I don’t know what the rest of his take on capitalism is. His job title suggests he’s okay with taking advantage of it, but unlike many of his contemporaries examining the current hyper-crisis of capitalism, he seems to have some genuine understanding of if not sympathy for the people economics impacts most: workers (and the unemployed). His lens is still familiar to those of us who read economists and analysts speaking to an elite audience of investors, but he focuses it in a way Roubini and Jeremy Grantham don’t seem willing or able to. Not revolutionary, but kind of refreshing. Why can’t this become a trend?

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Will the New York Times Profit Off an Elitist Profile?

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It never ceases to amaze me how disconnected, or just plain unconcerned, the privileged can be when it comes to worrying about the future of the world. Believing they’re safe from the worst pains of anthropogenic climate change and contrived resource scarcity, their main concern tends to be how they are going to continue to grow their personal wealth when the shit hits the fan…

Long-term business analyst Jeremy Grantham has been noticed recently for what some see as economistic doomsday predictions, usually in the form of open “letters” to the investor class. In these communiques, Grantham says the same thing progressive economists and scientists have been saying for decades, citing roughly the same evidence (if far less of it!) and drawing essentially the same mid-term conclusions, with updated numbers. But Grantham has credibility because he’s not remotely radical, or really even progressive — he’s a late-to-the-game mainstream financial analyst… and more importantly, he’s got the interests of elites in mind, which means the New York Times will perk its ears up and give unconventional observations the kind of attention only a Magazine feature profile can provide.

Grantham and some fanboys drive the conversation of an August 11 NYTM piece titled “Can Jeremy Grantham Profit From Ecological Mayhem?” In a way only the extraordinarily privileged could swallow with a straight face, source after source lavishes Grantham with praise for looking out for the vulnerable, neglected investor class. Unless you’re made of money, it would be hard not to get outraged by the cavalier attitude of this whole story. But if you are a big investor, how “objective” and “unbiased” the feature must seem.

Let’s start with writer Carlo Rotella’s gushing treatment of Grantham:

Doomsayers are always plentiful, and the economic and environmental news has encouraged even more doomsaying than usual of late, but Grantham compels attention, in part because he’s not simply prophesying doom. […] And, crucially, the consequences will be unevenly distributed, creating angles for you to make money and look out for your interests, however you define them.

[emphasis added]

The New York Times is saying a man deserves attention not because he is pointing out how much trouble lies ahead (however inadequately); it’s because he inspires us to call our stockbrokers rather than run to the woods. In other words, it’s newsworthy because he can help people with capital exploit volatility, the rest of us be damned.

Bailout Nation author and prolific business blogger Barry Ritholtz, whose work I have followed for a couple of years now, appreciates Grantham as a fellow straight shooter. But with praise like the following in the NYTM story, it’s easy to see which side these guys are shooting for:

He’s not telling people to stockpile water and dehydrated food. He’s saying this asset class will underperform or not.

And what about those of us who can’t invest in assets of any class? (The ugly irony, of course, is that if a major collapse happens, it’s unlikely all the asset holdings in the world are going to keep these guys and their families fed and protected, but on the way to “doomsday” they can get filthier rich on paper!)

The whole piece is such a fawn fest, the Times even quotes sources with financial conflicts of interest. We’re treated to praise of Grantham from the head of the Environmental Defense Fund, a group backed by the Grantham Foundation for the Protection of the Environment. We also hear from the executive director of that same Foundation, whose job no doubt depends on Grantham’s good graces. On what planet is that legitimate journalism?

The article includes no critics of Grantham or his attitude. In fact, the only bit that could be conceivably construed as criticism is mixed praise of the quarterly letters, coming from another employee of Grantham, who notes some investors complain that Grantham’s advice isn’t immediately applicable enough for them to exploit!

No source points out how bizarre it is that someone notes potential suffering only to dismiss or distract from it, making no real mention of current suffering. No one offers alternative analysis. No one even challenges Grantham’s numbers from any perspective, Left, Right, or Martian.

Enough views about Grantham. What about Grantham’s views? Let’s start with a zinger. In Rotella’s words from the Times piece:

The world’s population could reach 10 billion within half a century — perhaps twice as many human beings as the planet’s overtaxed resources can sustainably support, perhaps six times too many.

We aren’t told that this is only true if we assume the planetary elite — that tiny percentage of the global population that consumes a massive share of resources that could otherwise be used to feed, clothe, heal, shelter, and educate the 60 percent or so that live on less than $2 a day — is permitted to maintain its sickening dominance of global wealth and resources. This status quo is a given for the Times and people who look at Grantham as a prophet of profit angles.

Rotella quotes Grantham’s open letter from July:

We humans have the brains and the means to reach real planetary sustainability. The problem is with us and our focus on short-term growth and profits, which is likely to cause suffering on a vast scale. With foresight and thoughtful planning, this suffering is completely avoidable.

The above statement is just plain wrong. First, it ignores the “suffering on a vast scale” that is already underway! On Day Zero, we’ve got suffering on a vast scale. Who can look around and consider that the horrors already caused by “scarcity” that is in turn caused by market capitalism’s wicked misallocation of goods and resources is anything other than “vast” — I’d rate it as “epic”, even.

Worse, it’s absurd to suggest by implication that the suffering of the world’s poorest can be averted. Some of it can be curbed — perhaps much, even — but the trajectory we are on offers no option for sparing a great many, no matter what radical changes are made. (See, for instance, the recent work of fellow market optimist Paul Gilding, who at least has the integrity to admit widespread suffering caused by climate change and scarcity will be hellish and is inevitable and underway.) And make no mistake, Grantham is not advocating radical changes anyway, least of all those with the most vulnerable in mind.

It isn’t actually clear what “suffering” Grantham is referring to. But even if he’s talking about the “suffering” of wealthy investor class that risks losing its $300 shirts if they don’t play their dollars right, that hardship can be but delayed as Grantham and his friends trample to the aft rim of the Titanic.

Grantham does give some indication of who he’s looking out for, noting that a drastic change in economic priorities will likely come “too late in the sense of failing to protect much of what we enjoy and value today.” By we, he probably doesn’t mean the world’s poorest.

Grantham wisely wants to tie the issue of climate change to that of resource depletion, which he thinks will have a greater impact on the American conscience than that abstract bogey man of global warming. “Global warming is bad news,” Grantham tells the Times. “Finite resources is investment advice.” Again we’re back to those real interests. You’re not going to ride out Grantham’s storm on your 401k.

Cynics like me will have to agree with Grantham to an extent: it’s true that Americans are more interested in their short-term concerns than looking down the road. But Grantham goes a step further; he considers this unfortunate attribute a strength, saying Americans “respond to a market signal better than almost anyone.” How great that we don’t care about those who will be first and most severely affected by climate change — by gosh, we’ll respond when it puts the economic pinch on us… after all, we’re Americans. Meanwhile, the Global South is collectively begging us to respond for their sake (and our own), but the virtuous Americans are awaiting the proper signal.

The Times feature ends unsurprisingly on a note of praise for Grantham.

But I’m not done with him yet.

Grantham’s most-recent letter — the one that has garnered him cult-like attention (that I contributed to because his numbers are very interesting) — is a moral disgrace.

Grantham is extremely smart and insightful. He has a keen eye for some of the limitations of the system he lives by.

Capitalism does not address these very long-term issues easily or well.  It seems to me that capitalism’s effectiveness moves along the spectrum of time horizons, brilliant at the short end but lost, irrelevant, and even plain dangerous at the very long end.

Again, how capitalism can be considered brilliant in the short term when billions of humans are food-insecure or at risk of dying from curable diseases is kind of hard for us non-elites to understand. But it’s important for business analysts to comprehend, as Grantham does, that capitalism isn’t even good at keeping their interests steadily shaping up, because markets have extremely limited predictive capabilities.

Grantham tentatively advocates reducing the human population of Earth in such a way that “might leave us with a world population of anywhere from 1.5 billion to 5 billion.” Well, we certainly could go a long way toward solving our resource problem by eliminating the wealthiest billion humans, but something tells me that isn’t who Grantham is thinking about. (I don’t advocate it either, for the record.)

We could more palatably solve many of our resource concerns by knocking out excess consumption by the wealthiest 15 percent of the global population, even while raising the standard of living for the lowest 60 percent or so. But of course that’s not a serious option for the Paper of Record or anyone they’d herald in a praise piece.

Grantham’s letter is devoid of the following words: hunger, poverty, refugee, famine, disease. These are hazards that even the most cynical of elite analysts doesn’t take seriously. Malnutrition and starvation are both mentioned, but one is a historical reference. One use of the terms is in a bullet point glancing over the fact that there will be “increases” in Africa and Asia, and nothing will be done about it. Another mention is used to crassly bolster Grantham’s case against US ethanol subsidies.

Grantham’s letter focuses heavily on agricultural issues, lending some very good analysis of soil and water problems that are worth reading. But it conspicuously ignores the root causes of the soil and water problems he notes: factory farming, livestock dependence, and monocropping. He’s either just learning about the cornucopia of deep-seeded oh-shit crises already facing humanity, or he’s burying most of them for whatever reason. Either way, his agricultural analysis is embarrassingly amateurish.

Perhaps worst of all, Grantham naively exhibits symptoms of a very typical chronic optimism disorder that is virtually religious in nature. This is not uncommon among elites trying earnestly to look down the road. After lamenting (while the Fukushima crisis is still at a high simmer in Japan) that humanity probably won’t make a revolutionary switch to nuclear fission energy, Grantham brightens up:

I believe that in 50 or so years – after many and severe economic and, possibly, social problems – we will emerge with sufficient, reasonably priced energy for everyone to live a decent life (if we assume other non-energy problems away for a moment) even if we don’t radically improve our behavior and make true sustainability our number one goal. In other words, current capitalist responses to higher prices should get the job done.

I’ll stick to the worst of this quotation’s many offenses: the belief, based on nothing but faith, that markets and humanity will somehow, magically, make everything peachy again mid-century. No need to switch economic systems or do anything too radical; after some undisclosed “social problems” that we can assume away, we don’t even need to “radically improve our behavior” in the meantime — everything will fix itself.

Substantiation of such a bizarre claim is unnecessary, because Grantham is telling the financial elite what they want to hear. Worst case scenario: everything will sort itself out after some problems. No worrying about that whole screwing-over-future-generations conundrum. Even the chief doomsayer says they’ll be fine.

That must be comforting for the kind of people the Times finds relevant.

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The Truer Threat of a ‘Carbon Bubble’

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You aren’t an idiot, so you’ve long known many of the impacts of climate change are inevitable at this point. Some are already occurring. You get that. The trajectory is in place, and unless we change it sharply, we’re going to see worse and worse conditions.

But what if financial markets have embedded the trajectory to a great extent by all but guaranteeing dependence on fossil fuels? A new report (PDF) raising fear of a bubble in the fossil fuels market inadvertently suggests this trajectory is precisely what’s underway, although its authors don’t seem particularly concerned about the threat to our habitat. The deck has been stacked; there’s a carbon commitment in place, if you will.

I found the report through a blog entry by Lydia Prieg over at NEF. She summarizes some key points for those of us more interested in humanity and the planet than investors:

This research offered a fresh perspective on investment and tackling climate change, by noting that more fossil fuel reserves are currently listed on stock exchanges than can be burnt if we are to avoid breaching the 2 °C global temperature rise (above pre-industrial levels), beyond which it is believed that climate change will be irreversible. For example, the CTI notes that:

  • “global markets are currently treating as assets [carbon] reserves equivalent to nearly 5 times the carbon budget for the next 40 years.”
  • “the CO2 potential of the reserves listed in London alone account for 18.7% of the remaining global carbon budget.”
  • “If the 2 °C target is rigorously applied, then up to 80% of declared reserves owned by the world’s largest listed coal, oil and gas companies and their investors would be subject to impairment”

Note that the +2°C point is way too high. We want to aim for +1° beyond pre-industrial levels by Century’s end, fully conceding we’ll spend most of the next hundred years cooking well above +1°. (And the prospects for even +2° are more than a little grim.)

Like Prieg’s, my take on this is different from that of the report’s authors. They seem concerned for fossil fuel investors, which is probably their mission. But I’m more worried about the rest of us. If the world’s governments get serious about curbing carbon emissions, it’s unlikely they’ll leave speculators holding the bag. Whoever is holding a hot potato (oil field) if and when steep regulations kick in could get bailed out.

Even if the influence of those invested in dirty energy were to fail in some way, they’d almost certainly succeed in protecting their existing investments in the trade-off. Which in turn means burning that fuel or transferring the burden onto the consumer/citizen, who is of course relatively unprotected by government.

Anyway, as Prieg notes, the industry isn’t particularly worried about the prospect of harsh emissions limits being imposed on fossil fuel reserves already on the market, wagering either that curbs are not impending or that the price spike they’d cause would benefit contract holders.

But Prieg’s personal insights are most important:

Both these arguments, however, demonstrate the lack of interest investment managers have about the role that they themselves may be playing in bringing about irreversible climate change. Apparently, when one is focused on optimizing an investment portfolio’s performance, concerns regarding the state of the planet just don’t feature on the agenda.

Indeed.

Image credit: Carbon Tracker Initiative

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