Home > Uncategorized > Short-termism: culture or power?

Short-termism: culture or power?

from Shimshon Bichler and Jonathan Nitzan and current issue of the RWER

At stake here is the connection between the two key quantities of the capitalist nomos – the price of capital and its underlying earnings – so the question is obviously important.  Yet, to the best of our knowledge, that question has never been asked, let alone answered. Indeed, as far as we know, the V­­‑shape pattern of the short-term price-EPS correlation shown in Figures 3 and 4 is a new finding.

It is common to argue that, since the 1980s, U.S. capitalism has been marked by a growing emphasis on ‘shareholder value’, heightened ‘short-termism’ and a nearly universal obsession with quarterly increases in profits. This popular view is certainly consistent with the post-1980s surge of the price-EPS correlation shown in Figure 4 – and this consistency should hardly surprise us. With capitalists paying more and more attention to the latest bottom line and analysts glued to the latest bit of news, it is no wonder that equity markets have become increasingly sensitive to the most recent variations in earnings.

But what is the cause of these changes? Why has the capitalist time horizon shrunk? Why have investors – who, for a whole century up until that point, cared less and less about current earnings and often seemed perfectly happy to buy and hold stocks for the long haul – suddenly started to insist on quarterly increases in profits? Is the V­‑shape reversal of the early 1990s merely the consequence of a changing ‘investment culture’? Is it simply a new fad imprinted by the theoretical winds of just-in-time neoliberalism and emboldened by the ideological flare of Margaret Thatcher, Ronald Reagan and Alan Greenspan – or are these developments themselves the result of a deeper change?  

The evidence presented below suggests the latter. Present-day capitalists and analysts, we argue, have come to demand quarterly increases in profits not because they started to ‘feel like it’, because they were taken over by a new financial ‘fashion’ or because they were somehow convinced that short-term increases are more ‘economically efficient’ than long-term growth. In our view, they do so because they are compelled to, and the force that compels them has nothing to do with any of the above. The reason, rather, is that their capitalized power is approaching its asymptotes, and the only way for them to counteract their deepening systemic fear is by pushing for higher current earnings.  read more

  1. October 13, 2018 at 1:00 pm

    Currently timespans ranging from a few months to a few years determine most formal planning and decision-making – by corporations, governments, non-governmental organizations and international bodies. Quarterly reporting by companies; electoral cycles of 18 months to seven years; planning horizons of one to five years: these are the usual temporal boundaries of our hot, crowded, and flattened little world. In the 1980s, this myopic vision found a name: short-termism. Short-termism has no defenders. Everyone seems to be against it, and yet proponents of alternatives are also in short supply. This is surprising. Everyone involved in any aspect of the humanities but particularly historians should have been opposed strongly to short-termism. The mission of the humanities is to transmit questions about value – and to question values – by testing traditions that build up over centuries and millennia. And within the humanities, it is the discipline of history that provides an antidote to short-termism, by giving pointers to the long future derived from knowledge of the deep past. Yet from the 1970s forward, most professional historians conducted most of their research on timescales of between five and 50 years. Large stories, told across long sweeps of time, became both unfashionable and unfeasible, at least for anyone claiming professional competence as a historian. Short-termism became accepted as usual and normal because the humanities, and particularly historians failed to do their job. Set loose short-termism in business and economics merely followed the path laid out for them by the failure of humanities and historians.

    • October 17, 2018 at 12:48 pm

      You state that “Short-termism became accepted as usual and normal because the humanities, and particularly historians failed to do their job.”

      The problem with this argument is that the conventional dogma of finance CONTINUES to uphold long-termism: indeed, according to the conventional financial dogma, stock prices should capitalize FUTURE earnings, all the way to eternity.

      In this context, what it the BENEFIT for capitalists for abandoning their own cherished dogma? What do they GAIN by suddenly shifting their gaze from the long-term future to the short-term present?

      Notice that, according to Figure 5 on page 48 in our paper (http://bnarchives.yorku.ca/555/2/20180900_bn_with_their_back_to_the_future_rwer.pdf), short-termism is not a novel phenomenon: during the 1880s-1930s, investors were MORE short-termist than during the 1980s and 1990s, and it was only since the 2000s that past levels have been surpassed.

      According to Figure 5, the ups and downs of capitalists’ short termism seems to follow less the annals of historians and humanists and more the differential power of capitalists relative to the underlying population: the greater this differential power —> the more difficult it is to augment —> the bigger the fear of capitalists it will decline —> the greater their reliance on short-term profit as evidence of whether id does or does not.

      • October 18, 2018 at 6:14 am

        Jonathan let’s back up. To discuss long-term vs. short-term we first must examine the culture in which such concepts are created. You conclude that finance subculture asserts that the short-term goes on forever. In other words, there is no difference between short-term and long-term. In this view of long- and short-term there is no benefit from viewing one vs. the other. This might even turn out to be what happens in some cases. In others, certainly the two will not turn out the same. From this vantage, it’s important to consider both to be aware of some of the ways the two might vary and consider mitigating the effects of such differences on one’s portfolio (to adopt finance language). It might be argued that the short-term is knowable with greater certainty than the long-term. In terms of statistics this is correct. But the actors and events in the short-term and long-term aren’t aware of statistical “laws,” so feel no obligation to comply with them. Both are uncertain. The question is how to assess that uncertainty and what to do with the assessments once completed. Whatever the results, living in a short-term culture creates problems for businesses big and small. Peter Drucker put it this way in a 1985 Wall Street Journal editorial, “Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes.” Short-term and long-term are culturally specified understandings of time. To adjust our search for knowledge as social scientists it’s important we examine the answers given about time for the areas of our concern.

    • October 18, 2018 at 1:07 pm

      You write: “You [BN] conclude that finance subculture asserts that the short-term goes on forever. In other words, there is no difference between short-term and long-term. In this view of long- and short-term there is no benefit from viewing one vs. the other.”

      So let me reiterate.

      (1) We draw no such conclusion. On the contrary, we argue that the two views are radically different. In finance, long-termism projects future earnings to eternity, whereas short-termism is based on current earnings. The first is a monotonously rising quantum, the second a jerky-cyclical one. How is there “no difference” between them?

      (2) Our entire argument in the article is that financial short-termism is driven not by culture but by power. If anything, it is the dialectical rise of capitalized power and capitalist fear that breeds a cultural short-termism.

      (3) And there is an easy way to test this proposition. If financial short-termism is indeed a slowly changing “cultural” phenomenon, then that will preclude a drop in the earnings price correlation, which Figure 5 predicts will happen if the power of capitalists declines.

      But that can take time, so I guess we’ll have to wait and see.

      • October 19, 2018 at 6:35 am

        Jonathan, I believe my question is a simple one. In the Figure 5 graph what can we learn about the relationship in 2000-2010 from the relationship in 1900-1910? Secondly, what can we learn about the entire period depicted in the graph from either of these two selections, or any other 5-10-year period you choose? If the picture is correct, it seems these short-term periods will show the same general relationship as the entire period. Here, there is no difference in terms of what we see when viewing short-term and long-term. Second, it seems clear that the actual shape of the curves (i.e., slope) changes over time such that some segments of the graph show a pattern different from the period as whole. Third, culture is what creates power — political, religious, legal, etc. So, it cannot be an either/or question. Has culture been created that favors considering the short-term over the long-term? That should be easy to see in the way economies, in fact entire societies are structured. For example, in constructing stock, commodity, financial, etc. markets are the focus on building based on short-term events or long-term events. The perceptions behind such a choice in this instance may be as you suggest. I don’t know the details of these segments of society as well as you.

    • October 19, 2018 at 2:03 pm

      Ken, I think you might be misreading the series in Figure 5 and consequently misinterpreting what they mean.

      You seem to conflate (1) the temporal relationship between the systemic fear and power indices on the one hand with (2) the definition of “short-termism” and “long-termism” on the other.

      (1)

      You are correct to observe that the correlation between the systemic fear and power indices has remained stable since the late 19th century — “there is no difference in terms of what we see when viewing short-term and long-term”, as you put it. But this stable correlation, although very important to our argument, is entirely unrelated to our definition of “short-termism” and “long-termism”.

      (2)

      “Short-termism” and “long-termism” in this chart are defined independently of the relationship between the systemic fear and power indices and therefore have nothing to do with the time interval the observer (you or I) chose on the X-axis (i.e., it has nothing to do with whether we look at a 50-year interval, say 1960-2010, or a 5-year interval, say 2005-2010).

      Instead, “short-termism“ and “long-termism” have to do with the ABSOLUTE LEVEL of the systemic fear index. As explained in Figure 4 of our paper, this index measures the 12-month trailing correlation between price and current EPS (smoothed as a 10-year trailing average). The higher/lower the correlation, the more/less “short-termist” investors are deemed to be. According to this understanding, investors were most short-termist in the 2010s (~0.6 correlation) and most long-termist in the 1980s (~-0.2 correlation). The length of the chosen time interval – whether you look at the entire twentieth century, say, or at a 10-year stretch – can tell you nothing about the degree of “short-termism” prevailing in those intervals.

      • October 21, 2018 at 6:48 am

        Jonathan, I clearly have misunderstood your purposes in the paper. Based on my experiences the focus depends on the situation. In the energy sector investors in hardware tend to focus on long-term earnings, both historical and projected. Investors in commodities (natural gas, oil) tend to focus on the prior and next year. In the financial sector richer investors tend to focus on the longer-term, while we poor run-of-the-mill folks focus on our lifetimes. One of the reasons it’s so easy to cheat us in this sector. I admire your maths, just don’t believe they’re informative on this question.

        According to John Feffer (Director, Foreign Policy in Focus and Editor, LobeLog; Author of ‘Splinterlands’) short-termism a “disease,” in both economics and politics. USA politicians and those in most other democracies have not transcended the short-term demands of politics to offer transformative policies that go beyond quick fixes.

        It’s not only politics. Capitalist economics is also geared to short-term gain. In a hostile takeover, a corporate raider will take charge of a moderately profitable firm and fire many employees to increase the profit margin. Often the hijacked firm collapses—but not before a few people make a lot of quick money on the deal. Similarly, the brokers who devised the new financial instruments—such as sub-prime mortgages—that served as the basis for the financial crisis in 2008 were unconcerned about the long-term effects of their innovation. They saw only the prospect of high-risk, short-term profit. There are, of course exceptions. For instance, long-term investments in pension funds or the money held in Social Security. But increasingly, investors want to tap into these sources of capital and “marketize” (privatize) them: that is, make them more subject to short-term profit (or loss).

        According to economic and political theory, quantity somehow produces quality. Thanks to the magic of the marketplace and the multiple levels of democratic governance, voters and investors act in their own short-term self-interest and thereby produce aggregate policies or trends that add up to economic and political stability and, ultimately, progress in the long term. It sounds nice in theory. But in practice, our political and economic institutions have proven singularly incapable of dealing with such long-term problems as climate change, income inequality, and the proliferation of dangerous weapons. Politicians are subject to the short-term interests of lobbying interests (coal companies, for instance). And market actors have helped to exacerbate these problems through unsustainable economic growth, increased salaries for CEOs, and ramped up markets for profitable arms transfers.

        It is tempting to look at how a country like China has been able to address climate change. Over the last 30 years, the government has invested large sums of money in Green technologies like solar panels and wind turbines. China is now a leading manufacturer of both. Through economic planning and autocratic decision-making, it managed to redirect resources into a long-term solution to the country’s energy needs. But China, with its lack of democracy, is not immune to the disease of short-termism. To take only one example, the country is rapidly using up its water resources and relying on a quick fix—e.g., a huge transfer of water from south to north—to deal with the problem. It’s spending more than $65 billion to postpone addressing the harder challenge of reducing consumption and making water management more efficient. So, if China is no model, what can be done to cure the disease of short-termism in market democracies?

        There are two parallel efforts in the United States to build long-range planning into a system fatally addicted to short-termism. In the political sphere, many communities are experimenting with “deliberative democracy,” in which citizens come together to have longer and more informed discussions about policy issues that then feed into the larger debate on political choices. One of my alma maters is a leader in this work, The University of Texas.

        In the economic sphere, the Obama administration attempted to increase the role of government interaction in the economy—through stimulus spending, universal health care, regulation of the banking industry, and so on. This more conventional approach relies on government to impose a long-term perspective on an economy geared strongly toward short-term profit. However, the magnitude of the problems facing us today is massive. We must ask ourselves whether our system can be altered sufficiently at this late stage to prevent the world from suffering irreparable ecological, societal, and economic damage. As the temperatures rise and the waters swallow up our islands and coastlines, as democracies fall one after the other, as the wages of workers stagnate or fall precipitously, many might be tempted by the promises of Green dictators who impose long-term solutions on desperate populations. The question is simple. Will we give up our health, welfare, and democracy for the safety mirage of short-term solutions?

  2. Craig
    October 13, 2018 at 8:44 pm

    Short-termism only is the antithesis of Wisdom. When you integrate the truths/insights/advantages/strategies to be derived from both the short term and the long term…you’ve plopped your mind down in the deeper insight of Wisdom and the cosmic code:

    [ (short term x long term) –> Wisdom ]

    • October 14, 2018 at 7:08 am

      That was not my intent, Craig. The long-term and short-term make human history. History is the sight of the creation of human cultures. These cultures are crippled without both parts of human history. Which, I guess translates to human history, complete being the source of the grace you mention.

      • Craig
        October 14, 2018 at 7:40 am

        Ken, Pardon, my response was not intended to be contrary to what you said actually, only to re-affirm the integrative nature of wisdom and its process.

        To me grace is really synonymous with consciousness full or otherwise. IMO the original paradigm change was the human species awakening to consciousness. And the final one will be their realization that on an elemental and yet imminently experiential level the basic nature of the cosmos is that very same “thing”.

      • October 14, 2018 at 10:06 am

        Craig, I think it’s the way you use language to express these beliefs that throws me off. My perspective tends not to use such grandiose words as grace and cosmos. The non-specificity of such terms leads me to look at them as ways to impede clear understanding.

      • Craig
        October 14, 2018 at 9:02 pm

        Yes I understand that words/concepts like grace and cosmos are traditionally religious and/or holistic. But that’s why I keep capitalizing the adjectives NATURAL and PHILOSOPHICAL before the word grace. Minds run entirely too much in single and exclusionary modes. Concepts like grace and cosmos are polar opposites to the mindset of science which is unfortunately solely empirical, mentally fragmenting and objectifying and last but not least entirely too culturally habituated. What?….am I against science? NO! I’m 100% for science itself….just not science as an orthodoxy, as an incomplete and hamstrung mental discipline….especially when Wisdom includes the scientific method.

        The sages of the world’s major wisdom traditions were the scientists of their age, and their lore and mental techniques are proof of how disciplined and honest they were…and with a much trickier subject matter than the physical universe.

        Viz economics (and I’m not trying to be exclusionary here and recognize that others here have criticized mere mathematical and axiomatic techniques) who is actually advocating a more empirical approach to investigating our economic problems those who are off in some mathematical/abstract quasi-fugue ….or me who wants economists and pundits to look at and analyze the exquisitely empirical tool of double entry bookkeeping so as to decipher its digital nature and what I refer to as its “Triple Power Point” of retail sale in order to see that a digital monetary policy at that point effects every signature of a paradigm change???

        Integrate opposite perspectives/tools/mindsets/truths and you’ll be able to see and accomplish an actual thirdness greater oneness that transcends dualistic orthodoxies.

      • October 15, 2018 at 5:37 am

        Craig, my focus as a social scientist and historian is on what humans create and how they create and destroy their creations. I see grace, cosmos, etc. as human creations. In that sense I would want to understand them. Overall, my focus is and has been on how people create durable cultures and societies and how these fail and collapse.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.