Amy and Becky want to start a restaurant. Amy will be the chef, Becky will be the business manager. To get started, they ask their friends Caitlin and Dierdre to lend them some money. At first, the restaurant has no value. But after a year or two, it is doing well. Whatever we call the overall value of the restaurant, each of the four women owns a percentage of that and is "worth" that amount of money.
Let's not even talk about the part where the state wants to raise taxes on the business in some way. Let's pretend the tax rate is zero. But Amy is frustrated with something about the deal. She doesn't like working with Becky, or she thinks she can make more somewhere else. Something. She wants to take her percentage of the value - which she does own - and cash out. If she does, there is a strong possibility that the other three cannot rescue things efficiently with another chef quickly enough and the restaurant goes under. The remaining "worth" of all of them is pennies on the dollar.
Or Dierdre has a crisis in her life and needs to take her investment money out. The other three attempt a lot of juggling, restructuring, and negotiating, but it's not enough and the business goes bankrupt. Again, now instead of having 25% of something valuable, everyone has 25% of scattered restaurant equipment. Any of the four might try again with another restaurant or business and succeed. Each might still have market value, but now they have little "worth" unless they become part of building something else.
If you try to smuggle in some idea of a different kind of worth, like the worth of the labor they put in, or whether they are worth something just because they are human, or their infinite worth in God's eyes you are changing the subject and being deceitful.
I just explained billionaires to you.
7 comments:
Oh no you didn't.
Tell me more. I wrote this in frustration. Improve my thinking.
Well, I don't see what it has to do with billionaires or for that matter what it is about billionaires that needs explaining.
At least related, and I think fundamental, is the difficulty of accepting the idea nothing has an intrinsic value. If you are talking monetary value, what something is worth is what someone else will voluntary pay for it, and that is true in both directions.
Something like that. I think you have a good point that I didn't tie that in tightly enough.
There is a lot of claiming that billionaires, and recently Musk in particular, could just give 100 billion or pay it in taxes and everyone could be Queen of the May forever. They don't understand that he - like the ladies ABCD above - doesn't have it in a jar or a vault of coins and jewels in his basement like Scrooge McDuck. It's not liquid like that.
The point of the bankruptcy reorganization law I used to practice was that businesses had a "going concern" value that couldn't be captured in a liquidation. That wasn't always true, but the law is arranged to give the body of creditors a lot of say in whether the business should continue and, if so, under whose leadership, while everyone tested the assumption that something over liquidation value was still available. Theoretically shareholders had a say, too, but in practice, once things got bad enough for a chapter 11 filing, the shareholders rarely had much of a stake left, their equity having basically been taken over by creditors who weren't likely to be paid in full even if management was given time and grace. All the bankruptcies I worked on were dominated by a battle over valuation of the gestalt of the company under various assumptions about what needed to be done to arrest whatever catastrophe had befallen a once profitable business, to what extent existing management should be allowed to drive that bus, and then how to split up the goodies if the plan to repair the controversy worked. Often the preferred course was to sell the going concern ASAP, but not as rashly as a fire sale, and deliver the value of whatever was salvageable to the creditors.
What does this have to do with billionaires? Not that much, I guess, except that people accumulate control over large piles of resources for a reason. The reason seems adequate when stakeholders are first investing in a controlling manager, but the rationale sometimes loses its appeal if control is not exercised successfully. Nevertheless, replacing management is never easy, and it certainly has no track record of success if the new management is some random guy with a limited and/or passive investment in the going concern. The path to riches for the limited passive investor is to sell his share before the company loses its value, and invest the proceeds in some other manager he thinks will do a better job, typically by pooling his limited investment with that of a lot of other people's.
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