Most people probably don’t remember the old Tom Hanks movie Volunteers, about 3 Peace Corps volunteers in Thailand. John Candy really kind of stole that show, but Hanks has some great lines. His character, Lawrence Bourne, faces off with CIA operative John Reynolds, wonderfully played by Tim Thomerson. Bourne is unarmed. Reynolds tell him, “There’s no one else, Bourne. It’s just you, me, and Mike.” If you’re wondering who Mike is, well that’s the name of his knife. Naturally. Reynolds explains, “I’m gonna kill you. I’m gonna skin you. I’m gonna use your shin bone for a pencil box.” Bourne is unfazed. “Well that’s fair,” he replies. Then he says, “You know, there never was a time when brains didn’t triumph over brawn.”
Many people refer to our society today as the “information society.” But in a way, this is misleading. Societies have ALWAYS been “information societies,” in the sense that information is the real source of wealth and power. Those who have information, and the tools to use it, have always had the advantage.
On February 29th, 1504, Christopher Columbus was stranded on the island of Jamaica. He and his crew were out of provisions, and the locals had soured on them. But he knew something they didn’t. A lunar eclipse would shortly be visible on Jamaica. So he went to the local chiefs and told them that the Christian God was all-powerful. He was very displeased with them, and would soon show his displeasure by darkening the moon and staining it with red.
Because a lunar eclipse is visible over half the earth, such events are not that rare for a given spot. But they often occur late at night on the side of the earth where they are visible, when many people in preindustrial societies slept. And imagine how you would respond, not knowing how they were caused, when the moon indeed darkened and turned reddish, at the very time that Columbus foretold. It hardly needs to be said that the chiefs begged for forgiveness and provided everything Columbus wanted.
This is an extreme example of something that is much more pervasive. The ability to make accurate predictions is more valuable than gold. How many movies have featured people going back in time armed with the results of major sporting events or stock price information? If you could make accurate predictions of these things, you could make a fortune in short order.
In fact, that is exactly what reliable stock brokers and fund managers do – they use mountains of information to make predictions about the equities and commodities markets, thus making large sums for investors. Of course, their services are not free. They are literally selling their expertise and their predictive power. It ain’t cheap.
This is exactly why “insider trading” is illegal – inside knowledge of a company’s operation gives an investor a tremendous advantage over those who don’t have such knowledge. (Although in fact, contrary to popular belief, “insiders” – company executives, for example – routinely buy and sell their own companies’ stocks, which is perfectly legal as long as they report it.) But the information advantage is routinely used to exploit and manipulate people in our society.
One common expression of this is the “fine print” in many consumer agreements. The language is intentionally difficult, often full of legal and financial jargon, in order to exploit consumer ignorance. Insurance agreements are particularly notorious in this regard, and this is nothing new. One of the most hilarious sketches from the classic Monty Python’s Flying Circus series is the “insurance sketch.” A vicar tries to pursue a claim when his car is hit by a truck while parked. His insurance company sends him a little, shall we say, discouragement. “It says something here about filling my mouth with cement,” he tells the insurance man. “Oh, that’s insurance jargon,” the man explains. “In your policy,” he continues, ”it states quite clearly that no claim you make will be paid.” In the fine print, no doubt.
Then there is finance. Suppose you wanted to invest in the stock market. Naturally you will want to know how various companies are performing. Specifically, you will need to look at the following: P/E ratio, EPS, EBITDA, Beta, return on assets – are your eyes glazing over yet? Even if I told you what the abbreviations mean, you might not be much better off. The fact is, you can make a lot of money in stocks, with a lot of knowledge. That, of course, is what people pay stock brokers for.
But think about all of the other ways people pay for knowledge and expertise. Tax preparers. Lawyers. Doctors. Bankers. An enormous chunk of our economy consists of people who simply know stuff that most of us don’t. And much of what they do can in fact be performed by sophisticated computer programs. That’s why, increasingly, IT IS. Banking, for example. At this moment, much of what banks do is performed by computers. I myself rarely interact with a human teller. Stock trading too. I own stock and have never interacted with a human stock broker. Many traders use “bots,” computer programs that analyze stock prices. And they make a lot of money in the process.
The holders of stock in our society are literally the owners of the country’s largest companies. At present, the New York Stock Exchange, only one of many global exchanges, contains about 15 trillion dollars in stocks. Without that capital, our economy would collapse. It is, in essence, a 15 trillion dollar loan to the business world, with an expectation of a return. In order for businesses to make money, much larger sums of money must be “out there,” constantly, feeding the wheels of production. This is something that most working people don’t fathom. Large sums of money can only be made if even larger sums of money are already “in the system,” already invested.
Working people are accustomed to doing a job in exchange for a paycheck. Most working people don’t have a clue about investment. Billionaires don’t have billions of dollars sitting in checking accounts. They have billions of dollars of INVESTMENTS. It takes a lot of money to make more money.
Here’s an example. UnitedHealth Group is one of the largest health services companies in the country. It has a market capitalization of about 188 billion dollars. But its annual earnings are only about 15 billion. In other words, it takes an investment of about 12 times the company’s earnings to produce those 15 billion dollars of wealth. Facebook is a more familiar example. It has a market capitalization of about 500 billion dollars. It annual earnings are only about 18 billion dollars. It takes an investment of about 28 TIMES the company’s earnings to produce that wealth.
Both of these companies are doing quite well. But it takes A LOT of money to make money. Of course working people don’t have a lot of money. That’s why they don’t collect a lot of money. Profits go to owners, otherwise known as investors, not workers. That’s the whole point. Workers are a COST, not a reward, for owners.
Working people entertain illusions, encouraged by the media, like “my hard work is what keeps our economy going.” On the contrary, your “hard work,” or more specifically, your human need to be paid, is a cost of doing business. Machines do the overwhelming bulk of the physical work of production. But human workers, with annoying needs like vacation time, overtime pay, health insurance, and retirement, are a huge cost of doing business – for many companies, it’s the single biggest cost. Machines, on the other hand, don’t need to be paid, they don’t need sleep, they don’t get tired or sick, and when they get old they can be discarded and replaced without protest.
Most working people do not have brokerage accounts, at least not directly. Over the last 20 years, the Dow Jones Industrial Average has increased about 170% in value. In other words, if you had merely picked stocks more or less at random, you would have more than tripled your money since 1997. You would have gotten an average rate of return of about 5% per year. Anyone with a modest understanding of stocks would do much better, likely achieving 10% per year. In fact, I have traded stocks on a simulator for 2 years, with an average annual return of about 10% – and I am no financial wizard. At such a rate your money would be multiplied well over 6 times over the course of 20 years. And a sharp investor could probably achieve an average of 15% per year. At this rate, your money would be multiplied 16 TIMES over 20 years.
That’s what information and analysis are worth. Enormous sums of money are collected by people who simply take other people’s money and invest it wisely, or set it aside as a hedge against future disaster. Bankers, stock brokers, fund managers – and insurers. And much of what these companies do is now performed by computer programs.
Predators are everywhere. Manipulators. Fear-mongers. Exploiters. People who make money by taking advantage of the unsophisticated. From television “programs” that use classic public relations techniques to sell us worthless crap, to junk mail sent to us in official-looking envelopes, we are bombarded by hucksterism. There is an enormous amount of information that is intentionally concealed from consumers – or at least made expensive to access. A great deal of what we learn about our finances as adults is learned only from painful experience, not because that knowledge is readily available.
But there is the other side of the coin too. Shrewd entrepreneurs realized that they could get rich by providing services to defeat the exploiters. Not very long ago, if you wanted to book a flight, or a cruise, you had to go to a human travel agent. That person received a commission for hooking you up with an airline or a cruise line. Today we have on-line travel services like Travelocity and Expedia. They provide mountains of information about airlines, hotels, and such. They have made travel much less expensive for consumers – and human travel agents are far fewer.
Not very long ago, you walked into a retail store and purchased a product, based on little more than gut feelings or word-of-mouth. Often you faced a person who had every incentive to sell you something, whether the products were any good or not. It is always easier to exploit people when they have only local and limited access to products and information. Now you can shop on line and get access to numerous comparisons and product reviews. Increasingly, we see on-line banks, stock brokerages, and insurance outlets. The internet gives consumers access to incredible amounts of knowledge and analysis. Which equals money and power. What has changed? Why is the internet giving consumers something they never had before?
The reason is global connectivity. One of the older Simpson’s episodes features Phil Hartmann as a monorail salesman. He comes to town with a catchy song and manages to get everyone on board – despite the fact that Springfield is a small city with no real need for a mass transit system, let alone a monorail. But a little out-of-town research shows Marge that the town is being scammed. And therein lies the key. When consumers have access to a whole world of information, there’s no place for the exploiters and scammers to conceal their scamming. We are seeing the gradual destruction of the business of exploitation – because the business of defeating the exploiters is just as lucrative, if not more so.
Before the internet came along, there were sources of information out there for consumers. Consumer Reports, for example. But generally, you had to subscribe to them, and they were vastly outgunned by those whose job it was to conceal, distort, and promote – advertisers, retail sales people, even door-to-door sales people. The very reason we have the internet is that sharp people realized they could make money, not by concealing information from large numbers of people, but by providing it. The same reason that most everybody in America now has a smartphone. What was wrong with the old system, in which you had to pay, and pay handsomely, to call someone in Lafayette, Louisiana, if you were right down the road in Opelousas? It made money, yes. But sharp people understood that a lot more money could be made by eliminating obstacles to communication, once the technology was in place.
Something like Facebook would have been inconceivable for most of the 20th century. Facebook requires NO SUBSCRIPTION – yet Facebook is one of the fastest-growing companies on earth. Facebook’s stock has multiplied more than 8 TIMES in value over the last 5 years. Facebook could just as easily have made itself a subscription service. But it wouldn’t have been nearly as profitable.
Many internet services do offer “premium” options, if you want to pay, or pay more, for more features. But in the 20th century, most everything was a “premium” option – if you wanted information, you had to pay for it. Today, the amount of information available on line is staggering. In 5 minutes of web browsing, I can find out more about what’s happening in the world, and more about how to navigate the minefield of exploiters, than I can in 5 hours of watching television or browsing a magazine rack.
In a way, it’s the 21st century equivalent of the very origins of the middle class. In the robber baron era of the late 19th century, a few people made fortunes by exploiting workers, by keeping them in poverty. But enterprising entrepreneurs realized that even more wealth could be generated by having a vibrant middle class. For all his faults, Henry Ford understood that you had to pay the people building your cars a decent wage, because otherwise who was going to BUY the cars they were building?
Inclusion always leads to greater wealth generation. In the early days of major league baseball, audiences were largely male. It took decades for the owners to realize that they could make far more money by inviting women and children to games. When they did, baseball parks quickly grew to become the big stadiums we know today. Similarly, in the early years of Las Vegas, the city largely provided gambling and prostitution for men. It took decades for its business community to realize that it could make far more money by making the city family-friendly. This is what led to the extravaganza that we think of today when we think of Vegas. More and more inclusion and enfranchisement leads to greater wealth. The zero-sum game of exclusion and exploitation is revealed to be the road of stagnation.
But the internet, and global connectivity, has added a new dimension. For years, cable television filled people’s homes with hundreds of channels of commercials and crap, most of which they never watched, at exorbitant prices. Then along came internet services like Netflix and Amazon Prime. Consumers suddenly had access to thousands of commercial-free television shows and movies for a fraction of the price – programming that gave THEM control. For every exploiter, every manipulator, every scammer, there is someone else who can make a fortune defeating them – because exploiters and scammers always take resources away from working people, leaving an opening for those who encourage more inclusion and increase their disposable income.
Most of the exploitation of human labor has been focused on the human being as a PHYSICAL MACHINE. But the time has long since passed when human muscle could come close to matching machine muscle. And now, the human eyes, ears, and brains are being replaced as well. At some point it will become painfully obvious to all that human physical work is a minor component of production. At that point our society will be revolutionized. Imagine a society in which bankers, stock brokers, and insurance adjusters are no different than teachers and scientists, with the same agenda – to lift people up rather than exploit them. If this seems incredible, ask yourself why our society ever managed to create compulsory education and the 40-hour work week, from abject poverty, ignorance, and exploitation.
As I have written before, America is a young country, with a recent frontier. This has everything to do with our attitudes about commerce. There’s a pervasive nostalgia for the days of unbridled get-rich-quick schemes. In the classic movie Little Big Man, Allardyce Merriweather tells young Jack Crabb, “Whales speak French at the bottom of the sea. The horses of Arabia have silver wings. Pygmies mate with elephants in darkest Africa. I have sold all of those propositions.” Americans feel a lot of sympathy for the Merriweathers of the world – those who use the ignorance and gullibility of others to their advantage.
There is also an element of conservative ideology that strongly believes in the necessity for a few talented men to be able to exploit without hindrance – that this is the real basis for American wealth. If it were true, the creation of a vibrant middle class would have killed American economic growth long ago. If the exploitation of the masses is so wonderfully productive, slavery should have turned the South into an industrial powerhouse before the Civil War. The opposite is true, and the South’s long delay in building a vibrant middle class is arguably a continuing legacy – southern states continue to lag in education and economic development, particularly in the “new economy.”
And then there’s the other side of the coin – Americans recoil at those who inflict suffering on the helpless. No one celebrates when someone simply robs a frail old woman, or someone in a wheelchair. In any case, the days of unbridled capitalism are long gone. The frontier is gone. In a civilized society, the strong and smart do not victimize the weak and unsophisticated. We aren’t there yet. We still give a tremendous amount of wiggle room to exploiters and scammers. But big changes are on the horizon.