Notes from the Observatory: ETF Price History Predicts Performance

In this article, I report on some recent findings from my little nonrigorous garden of stock market metrics. Due to the small number of observations (36 index ETFs and 55 individual stocks), we must consider these findings as hypotheses, rather than fully reliable assessments. I’ll be interested to know if you have confirming or contrary information.

The ten-year history of price growth for index ETFs correlates (R^2=.34) positively with future prices. A higher rate of historical growth predicts increasing price.

This contrasts with our observation in January.

We found no significant similar relationship for individual stocks.

The annualized dividend growth over the previous five years for index ETFs correlates (R^2=.24) positively with future price changes. Index ETFs with higher rates of dividend growth tend to increase in price.

We saw similar results previously in January and last July.

We found no significant similar relationship for individual stocks.

We found price to book ratio mildly correlated positively with future stock price among individual stocks with price to book ratio less than 20.

We found no significant price predictors among these metrics:
1. Price to book ratio for ETFs.
2. Market capitalization.
3. Revenue growth for individual stocks.


Daniel Brockman owns index ETFs VOO, SLYG, XBI, SLYV, EWJ, MDYG, EWU, FEZ, VNQI, VNQ and VHT.


The Fairy Tale of Capitalism: Land and Ricardo

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Often, the Staff of the Aristocrats, and sometimes the Aristocrats themselves, would mention the motifs of FTC the Fairy Tale of Capitalism. 

Phillips, Portrait of Ricardo (1821)

Once upon a time, the Old One David Ricardo (1772-1823) composed some of the earliest Tales. Modern economics emerged from Ricardo’s insights. These include the Labor Theory of Value, a correction to the Theory of Rents advanced by Adam Smith, another Old One, and another theory called the Principle of Comparative Advantage. The Professors continued singing of these Tales long after the great wars. In this story, we get acquainted with Ricardo, dash through Rents on Land, then dash through the Comparative Advantage, and wind up contemplating some omissions.

Ricardo was a trader. He looked for differences in values of financial contracts that had the same price, and differences in prices for contracts that had the same value. Taking advantage of these differences, he became quite wealthy trading on the Exchange

Since he was an Old One, we think of Ricardo as wise, though charmingly antique in his Tales. Charm would suggest that we understand the Tales clearly, but we don’t. If we were Professors, our incomes would depend on our understanding the Old Ones, so we wouldn’t likely admit we didn’t. The Professors studied and debated Ricardo’s Tales without conclusion, because of and without admitting their lacunae of understanding.

Ricardo left unexplained holes in his Tales, as though a carpenter had overlooked erecting a wall of a house, or a portrait painter forgot the eyeballs. Unintelligibility and missing parts obstruct our understanding.

Like all Old Ones, Ricardo was an Economist. Like all Economists, he was fundamentally unintelligible. His Tales often twisted into lists of cases, for example, plots of Land put under cultivation as Farms No. 1, No. 2 and No. 3 of equal area, producing respectively 180 quarters of corn, 150 quarters and 120 quarters, requiring contributions of Labor of 10 Workers each, with equal Capital contributions, and with corn selling for 6 shillings per quarter. 

Our heads fill to capacity with the tangle of numbers. Even so, at this point in his Tale, he would change something in that list. Then he would roll through the entire list again tracing out the numbers that changed and the numbers that didn’t change. We get kaleidoscopic feelings. We wonder if we’ve witnessed a magician’s sleight-of-hand illusion. So when reading the following summaries of some of Ricardo’s Tales, if the paragraph gets too dense, just skip to the next picture or table.

After the great wars, hardly anyone in the Society measured quantities of corn in quarters. Most people didn’t know what a quarter was, except maybe USD 0.25, which made no sense in understanding Ricardo. Some Professors rumored that Ricardo’s corn wasn’t like popcorn, or grits or the corn in taco chips, but rather something like wheat. Most people living in the modern Society knew a shilling was an archaic unit of currency, but nobody used them any more, because it was too difficult to explain how to count shillings.

Despite these concerns, we can understand Ricardo relatively easily for an Old One. He ran for office successfully and became a member of the British Parliament in 1818. According to a rumor among some Professors, the Parliament paid him a consulting fee to instruct them on the Principles of Political Economy, which would be the title of his greatest book.

Ricardo’s Theory of rents was perhaps his most powerful Tale. Ricardo described rents as income from Land. And Land was one of the three factors of production: Labor, Land and Capital. Adam Smith said rents are money a person can get while hardly doing a lick of work. Ricardo said that’s because the rent getter has something the nearest competitor can’t offer. Ricardo said that when the farmer establishes Farm No. 1, there aren’t any other farms around. The landlord lets the farmer cultivate the Land for a modest fraction of the crop, just a ceremonial payment to seal the contract. The Land of the prospective farm, like all the other Land around, hasn't any previous use. The farmer can just as well plow the adjacent plot of Land not under the landlord’s control, so the Land of No. 1 is worth nothing until farmed.

We will summarize the explanation of rents, but if the tangle of numbers becomes a blur, just skip to the song in italics.

The farmer chooses this Land for Farm No. 1, because it has the best soil and drainage and other helpful attributes. The farmer’s Labor, the employees, work the Land for all it can produce, which is 180 quarters of corn in that year, worth 900 shillings at 5 shillings per quarter. With the 900 shillings, the farmer pays the wages, the return on Labor, of the employees and the costs of fencing, plows, a wagon to take the quarters of corn to market, and return on Capital which is a truly few shillings for his own pocket.

After a few years of corn production, the well-fed population grows more numerous and demands more corn. A farmer cultivates Farm No. 2 to meet the demand. Now No. 1 is on the best land, and No. 2 is less well endowed. No. 2 produces only 150 quarters with the same amount of Labor. 150 quarters at 5 shillings is 750 shillings from Farm No. 2. Plus, No. 1 still produces 180 quarters, also at 5 shillings for 900 shillings. The landlord of Farm No. 1 now demands the difference, 150 shillings ( = 900 - 750 ) as rent on No. 1, the prime Land. No. 2 produces no rent, because any rent would wipe out the return on Capital. 

The population expands further, demanding more corn. A farmer tells a merchant that with the cost of Labor and Capital such as they are, the farmer can’t plow Farm No. 3 profitably at 5 shillings per quarter, because the price wouldn’t pay the Workers and the return on Capital. The merchant, who expects to sell corn to the population, offers 6 shillings per quarter. The farmer agrees, hires some Workers and cultivates No. 3. At harvest, No. 1 produces 1080 shillings ( = 6 shillings times 180 quarters ), No. 2 produces 900 shillings ( = 6 times 150 ), and No. 3 produces 720 shillings ( = 6 times 120 ). The landlords demand from the farmers a rent of  540 shillings, which is 360 shillings ( = 1080 - 720 ) for No. 1, 180 shillings ( = 900 - 720 ) for No. 2 and nothing for No. 3. 

When the Professors rendered Ricardo’s Tale of rents as a drinking song, they roared out this chorus:

Higher rent causes higher price,
Said Adam Smith,
But his was an err-oh.
Higher price causes higher rent,
Correctly saw Ricard-oh. 

Elena House (2013) sings "Libiamo ne’ lieti calici" from "La Traviata" (1853) by Verdi

Ricardo's most penetrating insight comes down to us, gleaming like a brilliant star. In Chapter 7: On Foreign Trade, “Principles”, in a Tale tricky to relate and slippery in the understanding, Ricardo identified a country’s Comparative Advantage, that which it does best, as its best choice for export. As in all his Tales, Ricardo confounds the understanding by weaving in an additional plot line, this one concerning the mechanics of trade finance. And as in all his Tales, the source of value is the Labor required to produce it. With apologies to the Old One, and to economize your time, we shall put Ricardo’s Labor Theory of Value aside, for that’s another story. 

Again, we summarize a tangle of numbers. If it gets incomprehensible, then skip to the next picture.

In the Tale of Comparative Advantage, there are two countries, England and Portugal. England can produce 1,000 bolts of cloth with the Labor of 100 Workers in one year. Or England can produce 1,000 bottles of wine with the Labor of 150 Workers in one year. England can more easily produce a bolt of cloth than a bottle of wine. For every bottle of wine, England gives up 1.50 ( =150/100 ) bolts of cloth. So we say England has a Comparative Advantage in producing cloth.

Portugal, owing to different circumstances, can produce 1,000 bottles of wine with the Labor of only 80 Workers in one year, and 90 Workers can produce 1,000 bolts of cloth in a year. Portugal can more easily produce wine than cloth. Portugal can export wine in exchange for cloth, even though they could produce the cloth locally with less Labor than England could produce cloth. For every bottle of wine, Portugal gives up 0.89 = ( 80 / 90 ) bolts of cloth. Portugal has a comparative advantage in producing wine.

If Portugal shifts 16 Workers out of cloth production and into wine, then Portugal can produce and export 200 bottles to England. Those 200 bottles get 300 bolts of cloth in England to take back to Portugal. Net of exports and imports, that is, local production plus imports minus exports, Portugal now has 1,000 bottles of wine, 1200 bottles produced by 96 Workers, less 200 bottles exported to England, and 1,122 bolts of cloth, 822 produced locally by 74 Workers ( = 1,000 * (90 - 16) / 90 ), plus 300 from England.

And England shifts 30 Workers out of wine production to put 130 Workers to producing 1,300 bolts of cloth. England sends 300 bolts of cloth to Portugal and gets 200 bottles of wine. Net of exports and imports, England now has 1,000 bolts of cloth produced by 130 Workers, and 1,050 bottles of wine, 750 produced locally by 90 Workers ( = 1,000 * (120 - 30) / 120 ), plus 300 from Portugal.

Making Cloth. Photo by Louis Hine circa 1937.

Both England and Portugal have more by concentrating on their comparative advantage than they would have had by producing everything locally. Ricardo reveals the surprising and profound insight of the Principle of Comparative Advantage: Portugal benefits from trading with England even though Portugal makes both wine and cloth better than England makes either wine or cloth.   

In theory, capitalists and consumers will prefer for Labor to migrate to Portugal, there to make both wine and cloth. The returns to Capital are higher and the cost of product lower. In practice, both Capital and Labor encounter constraints in migrating among countries. 

But Ricardo left some things out. In “Principles”, an hour of Labor has the same value, whether spent making wine or cloth. In Chapter 5, “On Wages”, Ricardo clearly states the natural price of Labor, the wage, will never long remain much more nor less than subsistence, just enough to stay alive. If the wage rises unusually high, as sometimes it will, then Workers will prosper and their numbers increase. When the number of Workers increases beyond the demand for Labor, then the wage falls. When it falls even below subsistence, as sometimes it will, then privation will reduce the number of Workers, until demand exceeds the supply of Labor. So the ability of Workers to buy produce of the land changes little. We see that England has more wine when England trades with Portugal, and Portugal has more cloth. The Workers receive approximately the same wage, enough to survive, and not enough to buy more wine and cloth. Though the country has more wine or cloth, an individual Worker has no more than she had before. Ricardo’s Tale doesn’t say who gets the additional wine and cloth.

Another omission from Ricardo’s Tale concerns the fates of Portuguese cloth Workers who can’t find a vineyard to hire them because they haven’t sufficient experience at winemaking. The cloth mill has curtailed operations and demands less Labor. The Workers’ total wages from making cloth no longer suffice to maintain their families and they face privation. Ricardo doesn't tell us in any detail what becomes of the Workers. He says the privation reduces the supply of Labor. 

Ricardo, the wise Old One left out these parts. We can’t fault him for all he didn’t do, for which of us has not left something undone? Euclid didn’t discover calculus, and Newton didn’t envision Einstein’s Theory of Relativity. Euclid and Newton described great and enduring theories, and so did Ricardo.

Ricardo lived in an ancient age when Land and Labor had great importance in production and distribution of goods and services in the Society. Dr. Leigh Shaw-Taylor and his colleagues at the Cambridge Group for the History of Population and Social Structure estimated the occupational distribution of England and Wales in 1817 from baptismal records of the occupations of fathers, militia records and other sources. About 35% of the working population worked in agriculture, cultivating the Land. Another 40% were in “secondary” occupations, manufacturing goods from agricultural and mining products, including large numbers employed in textiles, construction, footwear, clothing and food. The remainder were “tertiary” roles, merchants, dealers, government and transportation. Incidentally, the statistical tables show 1.31% of occupations were “Distinguished, titled, gentleman”, and 0.03% were “Owners, possessors of capital”. Almost everyone had some understanding of agricultural Land, Labor and Capital. 

In the modern Society, after the great wars, agriculture had diminished in importance.  The United States Bureau of the Census reported that for 2012, agriculture employed 161k people, less than 0.2% of all employed persons. Most people had forgotten about farming and Land rents. In the modern Society, Capital had risen in importance, and sophisticated machines began to displace Workers.

In the modern Society, IP Intellectual Property and market domination produced rents similar to rents on Land described by David Ricardo. Some economists said that CEOs, a kind of Manager, sought rents as Supercompensation, but that is another story.  

Some Workers in the modern Society worried that trade with foreigners would shift them from their source of wages. They became suspicious of the songs of the Professors. They became suspicious of theories. Good children who listened to their parents learned some version of the quote attributed to Jan L. A. van de Snepscheut

In theory, there is no difference between theory and practice, 
but in practice, there is.  

I wish to thank Dr. Leigh Shaw-Taylor for his advice on source materials. I also wish to thank several good friends who read prepublication drafts and offered corrections and advice.

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Image: [Permission requested] Elena House, soprano, “Libiamo ne’ lieti calici” (performed 2013) from “La Traviata” (1853) by Giuseppe Verdi, https://youtu.be/V3ochPOtbyM?t=1m12s Image: [Public domain] Making cloth, Louis Hine (1874-1940), “Paterson, New Jersey - Textiles. [Man working at machines.]” (1936-1937, National Research Project, NARA), https://commons.wikimedia.org/wiki/File:Paterson,_New_Jersey_-_Textiles._(Man_working_at_machines.)_-_NARA_-_518626.jpg Image: [Public domain] Thomas Phillips, Portrait of David Ricardo (1821, National Portrait Gallery), downloaded from https://en.wikipedia.org/wiki/David_Ricardo#/media/File:Portrait_of_David_Ricardo_by_Thomas_Phillips.jpg Apr 2017. While the National Portrait Gallery has claimed ownership of photographs of the portrait, itself a work of art in the public domain, the Intellectual Property Office cited in Nov 2015 the opinion of the European Court of Justice that rights may attach to original works, and not to photographs of original works, and US law (Bridgeman v. Corel, 1999) is consistent with the European Court. Image: [Public domain] Shilling.


Daniel Brockman, “The Fairy Tale of Capitalism: CEOs, Growth and Prosperity of Society” (Mar 2017), https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and The Exchange” (Apr 2017), https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html

Daniel Brockman, “The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent” (Mar 2017), 

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 2017), https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html

Anthony Caruso, “Statistics of U.S. Businesses Employment and Payroll Summary: 2012; Summary Statistics by NAICS Sector and Enterprise Employment Size: 2012; Appendix Table 1” (Feb 2015, U.S. Census Bureau), https://www.census.gov/content/dam/Census/library/publications/2015/econ/g12-susb.pdf

Debasish, “Adam Smith Theory of Development in Economics (Main Features)” (downloaded Apr 2017), http://www.economicsdiscussion.net/economics-2/adam-smith-theory-of-development-in-economics-main-features/4514

Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality” (Oct 2015), https://obamawhitehouse.archives.gov/sites/default/files/page/files/20151016_firm_level_perspective_on_role_of_rents_in_inequality.pdf

P. M. Kitson, L. Shaw-Taylor, E. A. Wrigley, R. S. Davies, G. Newton, and M. Satchell, “The creation of a ‘census’ of adult male employment for England and Wales for 1817” (May 2010, Cambridge Group for the History of Population and Social Structure, Department of Geography, University of Cambridge), http://www.geog.cam.ac.uk/research/projects/occupations/britain19c/papers/paper2.pdf

David Ricardo, “On the Principles of Political Economy and Taxation” (1823) http://amzn.to/2ogjuFs

Wikiquote, “Jan L. A. van de Snepscheut” (retrieved Apr 2017), https://en.wikiquote.org/wiki/Jan_L._A._van_de_Snepscheut

Daniel Brockman, "Venus over Diamond Head" (Apr 2017)


The Fairy Tale of Capitalism: Supercompensation, Income and The Exchange

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A mythology, such as FTC the Fairy Tale of Capitalism, provides explanations and justifications for the norms of society, inspiration and justification for our actions, a narrative of transformation, and no small portion of entertainment.

Sculpture: Brenda Putnam, "Solon" (1950)
Once upon a time, a small, small number of people in the Society received a large, large amount of pay for their work. So large an amount did this small number of people receive that it accounted for a significant part of the National Income.

In those days, there was a young man who received a good education and became an employee receiving $55,000/yr of pay. His colleagues liked him and regarded him highly. He reliably exceeded short-term goals while remaining consistent with the long-term plan. He worked with versatility and insight. He was diligent, clever, persistent, adaptable, creative and quite productive. He worked with devotion to customers, colleagues, Society and the Shareholders. He never wasted the Firm’s resources, though he didn’t shirk from taking a calculated business risk. His work advanced long-term strategic growth and drove strong results. He embraced change, improved product quality, focused on the customer and led his colleagues in grasping new challenges. His Managers observed his consistently superior performance. Each year, he received an increase of 10% in his rate of pay, a reward for good work and an implied incentive to perform well in the future. After 30 years of superior performance, no longer young, with promotions to new responsibilities and the 10% increase each year, he received nearly $1m/yr of pay.

The CEO Chief Executive Officer of the same Firm received Supercompensation of about $8m/yr of pay.

We'll return to the excellent worker and the CEO in a minute, but first, what is this thing called National Income? And for that matter, what is Income?

The Economists calculated National Income as GDP Gross Domestic Product minus depreciation of capital plus or minus some relatively minor adjustments, mostly for transactions with foreign parties.

United States 2016
$ trillions
GDP Gross Domestic Product
Less: Depreciation
Equals: National Income

The Aristocracy got about 20%, or $3t, of National Income. Of that, about 2/3 was Capital Income, and the remaining 1/3, or about $1t, was Labor Income for the Aristocracy. The Aristocracy were One Percent of the households in the Society. Those of them who got Labor Income were the small, small number who received a large, large amount of pay.

Customarily, in those days, nearly everyone received money, called “pay” in exchange for the Labor of some members of their household. The people could exchange the money for the necessities of life and a degree of personal indulgence. Some of the people saved a part of their pay for future use.

A different arrangement called “slavery” prevailed in earlier times, but most of the people had forgotten it. Slavery enabled some people to force Labor from Workers. If these Workers got pay, they rarely got much of it, but that is a different story.

Another arrangement sometimes called “debt slavery” wasn’t uncommon in earlier times, but most of the people had forgotten it. Even though Solon of Athens had prohibited some forms of debt slavery, the arrangement persisted elsewhere even 2,500 years later, the time of the great wars. In one form, an employer paid Workers cash insufficient for bare subsistence, and lent money to the Workers for house rent in housing the employer owned and for food from a store the employer owned. With loan payments deducted from their pay, Workers borrowed even more, and so remained under perpetual obligation to the employer. But that too is a different story.
However, the Workers, in this (longish) story of Supercompensation, Income and The Exchange, didn’t live in the time of slavery. For the most part, and like nearly all of the 99 Percent, the Workers were employees of Firms. Around 9/10ths of their Income came from exchanging their Labor for money. If you didn't have Capital Income, then you had to give up Labor to get Income.

The Society (with some exceptions in this immense population, of course) believed that without the principle of Labor for Income, civilization would be lost. Maybe it didn't have to be that way, but that's how it was.

The Income of the median household was about $55,000/yr. Many Workers got pay of about that much, which was nearly all of their income. A Worker with 5 times that pay was quite well paid and characteristic of the upper reaches of the 99 Percent and the less wealthy Aristocrats. Aristocratic Income came mostly from ownership of Firms and the lending of money, which the Economists called Capital Income, and about ⅓ from Labor Income, as we mentioned earlier. Supercompensation, a form of Labor Income, became a more important component of Aristocratic Income following the great wars then tapered off.

As we said earlier, in those days, there was a man whose excellent work brought him, after 30 years of superior performance, nearly $1m/yr of pay. And you remember the CEO of the same Firm who received Supercompensation of about $8m/yr of pay.

comic: Scott Adams http://amzn.to/2nC642w  © 1993 United Features Syndicate

The Firm’s shares were traded at the Exchange, a big granite building where representatives of people who wanted to own part of the Firm would buy shares from representatives of Shareholders of the Firm who wanted to sell some of their shares. The Exchange was also an association of members, like a club, that met every day at the big granite building. They never ran on the floor of the Exchange. The members were the representatives who bought and sold shares of various Firms. They would buy or sell shares for you, if you paid them their fee. Their revenues came from their fees, and from buying shares for a few pennies less than the price for which they immediately sold them. They bore the costs of trading paperwork and of the Exchange membership, which they had bought from someone else. Like all other businesses, the Incomes of the members were their revenues less their costs.

The Exchange’s members had rules limiting the character of the shares they traded. They had created many of these rules at the insistence of Government, which usually allowed the members to pretend the rules were voluntary. The historical reason for this custom of pretending the voluntary was lost even to the Old Ones, most of whom had been dead a long time. The Society kept the custom for the same reason they placed the forks on the left sides of their plates.

One set of Exchange rules required Firms, with shares traded on the Exchange, to make public the amounts paid to the most highly paid employees every year with explanation for why they paid $8m/yr.

Chart: Daniel Brockman
To explain why they paid $8m/yr, the Board of the Firm appointed a Committee of Compensation of three of their members, who were 2 CEOs and 1 Executive from other Firms. First, they hired a consultancy, a kind of organization that provides Staff on demand. The Staff so hired researched the matter carefully. After several months, they provided two or three dozen pages of intensely boring prose for inclusion, with approval of the Committee of Compensation, in the Notice to Shareholders of Annual Meeting and Proxy Statement.

With this text, the Proxy Statement explained how the CEO upheld the Firm’s devotion to customers, employees, Society and the Shareholders. It explained how the CEO exceeded short-term goals while remaining consistent with the long-term plan (except for a pesky little legal problem), advanced long-term strategic growth drivers, drove strong results in all parts of the Firm, and got general concurrence from the Shareholders on pay in the previous year. The Proxy Statement also gives great detail on the competition with other Firms to pay up for CEO talent, the extensive industry experience of the CEO, levels of pay (without giving specific numbers) at other Firms of similar size and complexity, various Staff-concocted methods of pay and executive benefits, and an abundance of other detail.

The Shareholders who paid any attention ignored most of the detail, looked quickly at the total in the Summary Compensation Table part of the Proxy Statement, then voted yes. And that’s why the CEO got $8m/yr.

The Economist Thomas Piketty (2014, p.510) said the CEOs exercised “bargaining power” to extract the higher rates of pay. The Economists Piketty, Emmanuel Saez and Stefanie Stantcheva (2014, p.231) attributed an aggressive bargaining response to reduced top marginal income taxation as a possible cause of Supercompensation. They said on the other hand that the CEOs might have been paid for luck. On yet another hand, they said that CEOs might indeed merit their Supercompensation.

The Economist Dean Baker said that the CEOs collected rents (2016, p.18), unless the value the Firm received was about equal to the money paid to the CEO. CEOs receiving Supercompensation, he wrote, got money that could only have been taken from funds that the Firm otherwise would have paid to other employees or to Shareholders or as reductions in prices for customers.

“Rents” was a word Economists liked to use to describe money a person could get simply because she or he was in a circumstance to demand it. They picked it up from the writings of David Ricardo, one of the Old Ones. Ricardo described how the value of older agricultural land increased when farmers cultivated new lands nearby. But that is another story.

Two verses of the Professors’ song “Market Value” described how the CEOs’ Supercompensation fully reflected the CEOs’ value, because it was tempered by the competition of many buyers and sellers. Customarily, when a CEO recognized the wisdom of the Professors, as often happened, the CEO would endow a chair in Economics at a University.    

Some Workers wondered why the excellent employee of 30 years topped out at $1m/yr when the CEO got $8m/yr. But most Workers knew the song “Market Value” had the right idea, more or less. They taught their children that good children, with hard work, would deserve Supercompensation when they grew up.

I’m grateful to my friends who reviewed a prepublication draft and offered helpful corrections and advice.

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Alphabet, “Notice of 2016 Annual Meeting of Stockholders and Proxy Statement” (Apr 2016) https://abc.xyz/investor/pdf/2016_alphabet_proxy_statement.pdf

Dean Baker, “Rigged” (Center for Economic and Policy Research, 2016) http://deanbaker.net/images/stories/documents/Rigged.pdf

Daniel Brockman, “Critique of GOP Tax Plan” (Mar 2, 2017) https://daniel-brockman.blogspot.com/2017/03/critique-of-gop-tax-plan.html

Daniel Brockman, “The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent” (Mar 11, 2017) https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-buyer-of.html

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 17, 2017) https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html

Bureau of Economic Analysis, “Selected NIPA Tables: Table 1.7.5. Relation of Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income” (Mar 30, 2017) https://www.bea.gov/national/pdf/SNTables.pdf

Johnson & Johnson, “Notice of Annual Meeting and Proxy Statement” (Mar 2017) http://www.investor.jnj.com/secfiling.cfm?filingID=200406-17-15&CIK=200406

Thomas Piketty, “Capital in the Twenty-First Century” (2014, English translation) http://amzn.to/2fJg7Oi

Thomas Piketty, Emmanuel Saez, Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities” (2014) https://eml.berkeley.edu/~saez/piketty-saez-stantchevaAEJ14.pdf

Thomas Piketty, Emmanuel Saez, Gabriel Zucman “Distributional National Accounts: Methods and Estimates for the United States” (Dec 2016, NBER Working Paper No. 22945) https://eml.berkeley.edu/~saez/PSZ2016Slides.pdf https://eml.berkeley.edu/~saez/Piketty-Saez-ZucmanNBER16.pdf

United States Census Bureau, “Median Household Income in the United States: 2015” (Sep 2016) https://www.census.gov/library/visualizations/2016/comm/cb16-158_median_hh_income_map.html


The Fairy Tale of Capitalism: CEOs, Growth and Prosperity of Society

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The Fairy Tale of Capitalism, or FTC, is a mythology, as is the Wild West, portrayed in thousands of movies, radio and television programs.

Once upon a time, Growth measured Prosperity in the Society. “Growth of GDP”, the kind of Growth they had in mind, was perhaps the Professors’ favorite hymn. In “Growth of GDP”, sung often, Growth led and Prosperity followed. Some listeners envisioned enlarging the Aristocrats' wealth and letting the Downward Trickle distribute the Prosperity to the 99 Percent. But that is another story.

Ali Amir Beg (ca. 1558),  image: Wikimedia.org
Society, of course, was all the people, the Aristocrats, the Nine Percent, the 90 Percent, everyone. The Society organized itself into groups called Firms to find, gather, produce and distribute stuff.

A CEO Chief Executive Officer, sometimes called the President, was the Manager who outranked all other Managers in a Firm. The CEO could tell any of the Workers or other Managers what to do. By hiring appropriate Staff, the CEO worked to improve the Shareholders’ part of GDP10, and incidentally the CEO’s part.  

There were many kinds of CEOs. Some founded the Firm, the usual case with the smaller Firms. Many were Managers who had pleased the previous CEO, often by their performance at other Firms. For older or larger Firms, especially those in which the previous CEO was Aristocratic, the CEO was an Aristocrat from birth. Sometimes a Board selected for CEO a Worker who had become a Manager and who had shown talent.

The Staffs did not include the CEOs. But not uncommonly a member of the Staff was chosen for CEO. Some of the Staffs became CEOs when an Aristocrat wanted a person of demonstrated talent, instead of a son or niece or paramour of presumed talent, to manage a Firm, reminiscent of the Ottomans.

GDP50 grew slowly then shrank.

People understood the Economist Piketty only slightly better than other Economists, because he presented many pictures. The pictures showed the Prosperity wasn’t evenly shared among the Society. GDP01 was not much smaller than GDP90. Piketty’s pictures showed GDP50 grew ever more slowly as the years had passed and then shrank. GDP90 slowed to nearly nothing. GDP10 grew nicely, though ever more slowly. In later years, overall GDP growth sometimes outpaced GDP10. GDP01 grew rapidly over the years, though with variability. 

Responding to the unsettling conflict between Piketty’s pictures and their favorite song, some Professors added a few verses to “Growth of GDP” describing how even though redistribution allocated much Growth to the Ten Percent, that was necessary if the Ninety Percent were to get any. But most continued to sing the classic form, which members of Government understood well, owing to their frequent discussions with the Staffs, who the Professors educated. 

The Economists held Economist Saez in high regard for the arcane mathematical runes with which he always punctuated his expressions. Saez, a frequent collaborator with Piketty, had unusual talent for pictures among Economists. Saez described how the Supercompensation that the Boards paid the CEOs in the period following the great wars grew to about 40% of the aggregate incomes of the Aristocracy. But that’s another story.

I’m grateful to my friends who reviewed a prepublication draft and offered helpful comments.

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Ali Amir Beg, “Janissary Recruitment in the Balkans” (1558, Wikimedia) https://commons.wikimedia.org/w/index.php?curid=22361418

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 17, 2017) https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html

“Koprulu Mehmed Pasha” (Wikipedia) https://en.wikipedia.org/wiki/K%C3%B6pr%C3%BCl%C3%BC_Mehmed_Pasha

Thomas Piketty, “Capital in the Twenty-First Century” (2014, English translation) http://amzn.to/2fJg7Oi

Saez, Piketty and Zucman, "Distributional National Accounts: Methods and Estimates for the United States" (NBER Working Paper NO. 22945, Dec 2016) https://eml.berkeley.edu/~saez/PSZ2016Slides.pdf

Emmanuel Saez, https://eml.berkeley.edu/~saez/


The Fairy Tale of Capitalism: Workers, GDP and Economists

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The Fairy Tale of Capitalism, or FTC, is a mythology, a collection of villains, heroes, morals, all of which participate from time to time.

Once upon a time, the Composers of Tales were known as Economists, but most people thought the Economists were unintelligible. Sometimes the Professors created tales, and sometimes other members of Society created tales, but Economists originated most of the Tales. The ancient economists, to whom all turned for their original and enduring wisdom, were called the Old Ones, but that’s another story.

Workers were the people who got most of their income from their personal Labor. Sometimes the Economists simply called them Labor. The 90 Percent included almost all Workers. Of the Workers, none were Aristocrats, or if there was an Aristocrat among them, it was most often a scion sent to work in a factory for a summer, or an Aristocrat in disguise, like a monarch or a president of a Federal Reserve Bank who wanted to learn about the life of a Worker. 

The Economists often told of GDP Gross Domestic Product as the fundamental measure of social well being. GDP in the United States was mainly National Income plus depreciation of Capital. Depreciation of Capital was a relatively small and predictable amount compared with National Income. A few relatively minor adjustments wrapped up the calculation. So GDP was pretty much the same as National Income. Changes in the GDP level would reflect significant change in National Income.

Almost nobody understood the Economists. The Professors studied the Economists carefully, and sang songs of the Tales. Many people could understand the songs. They repeated some of the catchier songs to their friends. That was how most of the people learned of the Tales. “Growth of GDP” was perhaps the Professors’ favorite hymn. They sang it again and again. 

For a few years following the great wars of the 20th century, many Economists believed that Aristocrats, Nine Percent and Ninety Percent shared, more or less evenly, the growth of GDP. But in the 21st century, Piketty and a few other Economists told of GDP01, the Aristocrats’ share of GDP, of GDP09, the share collected by the Nine Percent, and GDP90, everyone else’s share. According to their Tale, from 1977 to 2007, growth of GDP10 (=GDP01+GDP09) was three-fourths of the growth of GDP. Even when GDP grew nicely, GDP90 grew very little from year to year. At the same time, GDP09 grew fast, and GDP01 grew very fast indeed. GDP growth wasn’t distributed evenly at all. The Ten Percent got most of GDP growth.

The Workers knew their incomes weren’t growing much. They didn’t understand GDP numbers. They knew GDP growth was a good thing, because they heard the songs. The Workers had faith that disciplined work and a little bit of luck would make them rich as Aristocrats. They didn’t know. 

They would have known had they remembered the songs sung by some of their grandfathers a hundred years earlier. One of the Old Ones had written some Tales that inspired Workers, and there were songs. But that’s another story.

I’m grateful to my friends who reviewed a prepublication draft and offered helpful comments.

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Daniel Brockman, “The Fairy Tale of Capitalism: The 90 Percent” (Nov 30, 2016) https://daniel-brockman.blogspot.com/2016/11/the-fairy-tale-of-capitalism-90-percent.html 

Daniel Brockman, “The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent” (Mar 11, 2017) https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-buyer-of.html 

John Royston Coleman, “Blue Collar Journal” (Jan 1974) http://amzn.to/2mQus2k

Kevin J. Lansing and Agnieszka Markiewicz, “Consequences of Rising Income Inequality”, FRBSF Economic Letter (Oct 17, 2016, Federal Reserve Bank of San Francisco) http://www.frbsf.org/economic-research/publications/economic-letter/2016/october/welfare-consequences-of-income-inequality/ 

Robert K. Massie, “Peter the Great” (1980) http://amzn.to/2nu5GTU