The creeping divorce of interest and capital

There always seems to be big events in August. The level of gold has hit its record levels and sits smugly in vaults around the world. The high prices that have been paid for gold are a signal that there are no better investment homes for the money. The volatility we’ve seen teases out and amplifies the fundamental (and often balancing) characteristics of our nature. This has been a big display of capitalism in action.

Capitalism suggests that capital and other factors of production, combined with the wisdom of crowds will find the most efficient utilization. It is the question of how the wisdom of crowds allocates the capital that we will now consider. Let’s think about what the typical private investment looks like: Overwhelmingly this is likely to be an investment, either advised or self-advised, into the stock market. Would it be fair to argue that these investors are bound only by their capital with these companies? If this is true then the ‘investment’ is simply a purchase of securities based on some belief that the value of the company will appreciate. This could actually already be defined as speculation rather than investment – perhaps this is actually the blurry distinction between the two? If the only contribution is capital, then surely this should be recognized as speculation rather than investment. An increasingly capitalist system would see a transition from passive investments to an arrangement where more is demanded from the investor in terms of value added factors. Rarely is the question asked  “what comes with your money”?

New start-ups begin with partnerships that very often demand a higher level of participation than simply capital contribution. Examples of this are ‘angel investments’ and a large part of venture capital. Beyond these stages of company formation, all further capital infused usually comes without representation or other benefits (ignoring voting rights since they arguably represent a governance control rather than a form of value added contribution). Many start-ups do seek value added money infusions and the popular BBC television programme called the ‘Dragons Den’ does show aspects of competition between the investors beyond monetary investment. However, the extreme world in which all investors are forced to participate in their investments could be case of overkill. Like most solutions, the answer lies somewhere in the balanced middle.

Since the major transport (canal and rail), industrial (steel and mass production) and technological (micro-chip followed by dotcom) revolutions , we have moved towards a model of a divorce between people and their capital. The owners of the capital have decreased their participation in the investment and now see their function as that of laying their wager only. Is it fair to say that this is an abdication of responsibility? I fear the ease at which money may be perceived to be made will reduce the overall effectiveness and net output of our current economic paradigm. Large swings in wealth occur on the stock market but does this change in the wealth of the investor represent a change in the value that either the winner or loser is personally bringing to people? Perhaps my goal here is to  encourage an understanding of what an ‘investment’ reasonably ought to entitle and to call for a reality based appreciation of the value of  contributions made by investing.

I do believe that ultimately the Technium leads us on its inevitable arc over the long term but here and now in the shorter term, there’s plenty of time for deviance. Capitalism is not the end but a step towards a closer alignment between dedication and capital.