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The long and the short-term of it: Apple's future
Jam today tastes oh so good
Comment We all know that markets are terribly short term things, don't we? Well, we're told often enough at least: the City and the stock market are only interested in what can be had now, immediately, and are not ready to invest for the long term. Venture capitalists want quick returns, not to build a solid business. The whole Anglo Saxon-style capitalist adventure is driven purely by greed and impatience with no thought of the future at all.
At one level of seriousness this is the sort of thing pumped out by Will Hutton, who seems to think that banks making loans rather than shareholders making equity investments will bring about the needed concentration on the far horizon. At the other end of barking moonbattery we've any number of teenage Trots and the Guardian's editorial conclave insisting that only government has the necessary long term view, and thus much more of how much is invested in what should be determined by whoever kisses enough babies to get the most votes.
Now it is of course entirely possible that all of this is true. Perhaps that's the way the world really does work? But in order to test this idea we actually need to, er, test it against the real world. A useful (if far too infrequently done in economics) part of the scientific ideal is: does our theory actually accord with reality? Which brings us to the recent news about Apple. You might recall this story from a couple of weeks ago.
This was the first time Apple had been worth more than Microsoft since 1989.
If we were to think of markets as being purely short term in outlook we'd be rather puzzled by this. While the companies' revenues are not dissimilar, profits most certainly are. Micro(whatevertoday'sinsultingnameis) makes somewhere between two and three times the profits of Apple. It has more cash in the bank, more short term investments and is a near monopolist in a way that Apple simply is not. Yet Apple is worth more on the stock market? Why?
It's certainly possible in theory that the critics could be right: investors in markets might be driven by nothing but short term greed while politicians have longer timescales to work to and thus are able to take a more holistic view of what should be done. And in both theory and practice we know that there are things which markets do not take account of, and which are not included in market prices. These are known as “externalities” (things external to markets) and pollution is the simplest example. If I can profit from poisoning you with no comeback then I probably will do so. Even if I don't my competitor will - I'll go bust and you'll still get poisoned. Regulation to make sure that my pollution becomes a cost of my business might need to be imposed by government, and this is what all the shouting over carbon taxes and cap and trade systems is about.
However, what might be true in theory isn't necessarily true in practice, at least in the field of economics. That concentration on the long term, when communism would finally arrive, didn't seem to help either the people or the environment of the Soviet Union all that much after all. Nor did the absence of short termism and the exploitation of the workers improve things all that much in Mao's China. So there's clearly something else at work as well. Perhaps it's that while politicians could look to the long term they don't necessarily do so?
Examples of this aren't too hard to find: Peter Mandelson was handing out the grants and guaranteed loans with abandon in the run-up to the last election, so much so that civil servants were demanding written instructions that he really did want to override their advice and go ahead. And, of course, we now see St Cable of Vince pondering whether to rescind all these clearly purely electioneering handouts to favoured groups.