Wealth

There are only two ways to become wealthy: one can create wealth, or one can acquire the means to create wealth. To create wealth, four things are needed:

  1. resources, or materials for which no one had previously found a use;
  2. inspiration, or the idea to use these materials in a new way;
  3. hard work, or the motivation and ability to translate those materials and that idea into a finished commodity, and
  4. risk, or the gamble of trying to find people to buy your commidity.

To recap: take materials with little or no apparent value, invent something useful to do with them, do the work to make the useful thing, and then hopefully convince people that they have need of the thing. This is absolutely the only way to create wealth; there is no alchemy here, just the capacity to see things in an unorthodox manner.

So how does a big, ponderous, overmanaged corporation create wealth?

For the most part, it doesn't. The pointy-headed bureaucrats who run corporations are largely systems people, applying narrow cost-benefit analyses and feasibility studies to the wealth-creation game. Pouring too much money into basic research is a risky gamble, and large corporations are generally content to let others look after this. Pouring money into marketing and advertising are much less risky, as the rules for getting people to buy a product are simpler than the rules of inventing a product. The result is usually conventional products with superficial twists which are marketed as novelties.

Of course, the heads of large corporations realize how important it is to develop in new directions; they are intelligent, prudent businessmen. They just don't want to risk doing this themselves. Hence, the second way to become wealthy: acquiring the means to create wealth. For a large corporation with deep pockets, the best route to wealth is to find a small start-up company which has great ideas but is starved for capital and financing, and acquire it. The owners of these small, dynamic enterprises are given offers they can't refuse: to be the new division's highest paid employee, with no personal risk and a generous compensation plan full of stock options.

There are two threads running through this, both related: there are incentives for large corporations to buy small ones, and disincentives for large corporations to pursue ideas themselves; at the same time, there are incentives for small corporations to let themselves be bought up, and disincentives to stay independent (in many cases, for example after going public, the small corporation has no choice in the matter). One party wants to alleviate the risk of investing in research, and the other wants to take advantage of established logistical systems (and executive compensation).

Unfortunately, there are unpleasant consequences of this mode of development. The purchase of start-up companies must be financed, putting the acquisitor into debt. All kinds of paper is created as a result, often by banks, who create money as debt issue. Wages and salaries, which are admittedly expensive, come under close scrutiny as ways are sought to free more capital. Moving production offshore is one way. Dissolving pension funds through legal manoeuvres and using those funds towards acquisitions is another. Raising prices is yet another. The sum of acquisitions and takeovers just increases the total indebtedness of the private sector which, if left unchecked, will lead to an eventual correction.

Also, there is a danger of inefficiencies creeping into the picture once a small company becomes part of a big one. If the acquisition is vertical, it means that the firm can guarantee cheap access to supplies and favourable treatment by distributors, both of which encourage abuse and laziness. If the acquisition is horizontal, increased market share means the firm has less competition and hence less market discipline, economies of scale notwithstanding. If the acquisition is conglomerate, then debt is created for no defensible structural advantage.

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Copyright © 2000, 2002 by Ryan McGreal