6 April 2019 — Novara Media
Ride-hailing app Lyft’s initial public offering (IPO) last week saw the company valued at $24.3bn in its first day of trading shares – before crashing back below its $72-a-share initial purchase price, where it has knocked around for the rest of the week. Short-sellers (those betting on further price falls) have reportedly gone into “overdrive”, whilst the post-offer price slump has been flagged as a significant warning for tech investors in general.
Unless you personally have money on it, it’s best not to pay too much attention to the wobbles on the stock market. Financial markets are fundamentally herdlike and irrational, and the hype that has developed around IPOs is a particularly good example of it. Back in the olden days, so the textbooks tell us, an initial public offering was the chance for a company to raise funds: by offering public shares, it could attract far more investment than if it remained in private hands as buyers hand over their money for fresh equity.
Alas, this virtuous mechanism for the expansion of productive capital was crudely abused by the chancers and ne’er-do-wells that are – this will shock you – attracted to finance, it quickly becoming clear that an IPO made under the market’s expected valuation for the company would produce rapid, entirely speculative returns. Or, alternatively, talking a company up to the skies ahead of its IPO would get you to the same place – big cash, as fast as possible. IPOs have, as a result, turned into pots of sticky honey for every bullshit merchant going, and the bigger the story that can be spun, the better. A story about how (say) ride-hailing apps were going transform the urban environment, end private car use, and pave the way for the self-driving robocar services of our fully-automated future is a pretty big one to spin, and never mind the fact that Lyft has never turned a profit or, seemingly, had any real intention of doing so.
Nonetheless, the flunk of a major tech IPO within a few days ought to alert us to something important. To see this, we need to grasp two things. First, the weird economics of networks. Second, the even weirder economics of the last ten years.
The economics of networks are simple, and brutal: each additional member of the network adds value to the network. A single phone is useless, but two people with two phones are worth something. Three people are worth more, four worth more still – and so on until everyone is connected. And they will usually all end up connected on the same network, since it is far more valuable to any new member to join the network that everyone else is already on. This is the brutal part: one network will dominate the rest. So if you want to make real money, you really need to get in there first – and have sharp elbows.
It’s this prospect that drives the mania for networked goods and services. It means that, despite never having turned a profit, both Lyft and Uber can attract extraordinary sums. Lyft, like Uber, and like most of the internet-enabled new tech companies, delivers a network of drivers that you can tap into. Both hold out the prospect of vast riches down the line since, although the software they offer is simple, there are powerful network effects at play. There’s far more value in using the hailing app with a dense network of drivers on call than there is in just having a few. The technology involved is simple and easy to reproduce. But the network itself is not.
The economics of this drive a particular feature of networked technology under capitalism – that their installation and spread, if left largely to the private market, tends to follow a pattern. First comes the spectacular growth, as money rushes in to chase the seemingly never-ending returns from powerful network effects. Then the bubble bursts, companies go bust, investors face ruin, many sage newspaper articles of the I-told-you-so variety are written. But what is left behind, when the dust settles, is a new network. From canal mania in the 1790s, through railway mania, through to the dot.com bubble of the early noughties – each time, the expansion is ludicrous, the bust spectacular. But what we end up with is a new network – and one generally dominated by a few large companies, just as Google, Amazon and a few other dot.com prospects came to dominate the modern internet.
The hope, somewhere down the line, is that Uber or Lyft (or whoever else) will come to dominate the new network of self-driving car services in the same way. But, so far, the prospects are not great: automated cars remain some distance from viability, and may yet require the radical overhaul of existing road infrastructure. Uber has become notorious for its aggressive attempts to dominate markets where it operates and for the large slice it takes from drivers’ incomes. Both Uber and Lyft have faced legal disputes over their treatment of drivers. This is some distance from the self-driving Shangri-la.
The second is that we are reaching the end of the road for the strange, post-2008 period in which the world’s financial authorities, led by the central banks, have attempted to persuade, cajole and tease the world’s financial markets into a less socially-destructive setting.
The central banks’ top mechanism for this management has been the extraordinary flood of money issued by successive rounds of quantitative easing (QE). Whatever the original intentions – and central bank excuses varied, as did the theoretical justifications – the $12tr issued through QE globally since 2008 have helped inflate asset bubbles across the world, with strikingly little impact on the rest of the economy. Indeed, QE has coincided with the extraordinary upsurge not even of property investment – but of the hoarding of cash by corporations in particular. In the UK, companies are now sitting on nearly £700bn in their bank accounts, up 40% in real terms since 2010. (Table 3.1.1, series NNZF, ‘Total currency and deposits held by UK private non-financial corporations’.) But the UK economy only grew 12% over the same period. Real wages, meanwhile, have fallen.
There are two deeper issues here. First, the metrics of success or failure under capitalism are breaking down: GDP, long taken (despite warnings) as an indicator of human welfare, is becoming detached from the most obvious measure of individual welfare under capitalism – the pay in your pocket. Where once GDP going up meant, broadly, wages and salaries would rise in turn, the last ten years have seen GDP rise (a bit), but wages stagnate or even fall, most notably in the UK. The promise of GDP no longer holds, and it is little wonder the declarations of economists about it attract such disdain.
Second, this breakdown in how we measure the economy reflects real changes within it. As detailed by the recent Bean Review of Economic Statistics, the metrics that we use to capture progress in the economy are designed for economies that, broadly, produce goods and services for immediate sale. GDP (and productivity) primarily register transactions involving money: they have never properly accounted for economic activity where money plays no part (such as housework) and have always had measurement issues for when activity is not paid for directly (such as government-provided services, like the NHS). But for as long as the core dynamic of capitalism was centred on the sale of goods and services, the measures held. The problems really start to emerge when major parts of capitalism earn their revenues through other means; instead of one transfer of money being one transfer of a product, these companies will plug themselves into revenue flows based on their ability to exploit network effects and enforce property rights. Uber, it should be noted, is moving towards offering a subscription service.
We have ended up with a world in which the disappearance of money from transactions – the retreat away from cash in daily life, the shift away from sales directly for money – has been matched by its extraordinary resurgence in the form of hoards: hoards of offshore wealth, hoards held by corporations, hoards held in government reserves.
Central banks, those institutions charged with overseeing the national money systems of the world, contribute to this on a huge scale through QE. All the major institutions of capitalism are gearing more and more towards the production of something whose primary purpose – payment for a transaction – is eroding. This isn’t a healthy system in any useful, human sense: the hoarding represents the spectacular and useless concentration of wealth and power in fewer and fewer hands. Set against the return to outright speculation and some of the most questionable forms of financial manipulation, this is a system that isn’t even healthy in its own terms. And why hoard money? Because the future is unknown, and full of terrors. We live in a system that, if it could register an emotion, would register one only: fear.