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Hampton Think - September 25, 2020

Soon you have an economy full of companies that make just enough to cover their debt service — so-called “zombie” firms

Tech stocks deepened their recent skid this week, and the fear among market watchers right now is the bubble may have already burst. Investments that could do no wrong just last month now look somewhat suspicious.

What these observers don’t know is that things are actually much worse than they think. There is a deep and important connection between these high-flying tech investments and the crappy economy their shareholders hope to escape.

Drawing this out requires a big picture outlook, and connecting some dots in ways that Wall Street can’t.


Let’s start as big as we can: all human societies have to constantly reproduce themselves to survive. Our society reproduces itself through a system of market exchanges. Each completed purchase validates the good or service exchanged as necessary for the reproduction of our society.

Investors use their capital to command some portion of society’s existing resources to produce something new they think society also demands. If they’re right, then the product will sell and they’ll get a return on their investment. If the new product isn’t socially necessary — i.e. valuable — it won’t sell, and they lose their investment.


These investors don’t gain any additional value from the inputs they buy for their products. Buying these inputs just validates their necessity. To create new value the investors need to combine the inputs together to create new, value-added products, and this requires human input — labor.

Labor power is an exceptional input because the workers selling it can’t realize its value without the machinery, facilities, and other inputs owned by private businesses. This means those businesses get to buy labor power at a discount, and investors pocket the difference.

This has an important implication: each enterprise is some combination of produced inputs and labor power. If the enterprise sinks a larger share of its investment dollars into inputs rather than labor, then over time they should return less investment. This is why labor-intensive “emerging markets” can have such extraordinary rates of growth as compared to capital-intensive advanced economies. ...
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