Finance's commissars

March 12th, 2024

I used to read a lot of Tom Clancy. Hunt for Red October, Red Storm Rising. These Cold War fictions didn’t demonize the Soviets, but there was one consistent anatagonist: the communist commissars embedded in the Soviet military, more concerned with politics and advancement than sound tactics. I’m soundly a capitalist and a numbers guy. But since COVID, the cracks in capitalist dogma have certainly show themselves. I don’t mean any social ills: those are society and governmental issues. Related but not the same. Rather, in the governance of companies.

In the communist system, a commissar is embedded to ensure the alignment of organizations to the preeminent philosophy and dogma. Whether or not the organization succeeds is secondary. Basically, as long as the organization’s survival is not at stake, communist form trumps society function. A commissar’s authority is largely secondary to the organization’s head and cannot actually lead the organization, but when there is a crisis of confidence, the commissar can guide the removal and replacement of the leader.

Capitalism has its own commissars. You might think I’m referring to HR. But HR has no real power. It’s a vestigial appendage, like an appendix, born of the implicit and inevitable flaws in an organization in perfectly aligning and incentivizing its members.1 No, capitalism’s commissar is finance and specifically, financial thinking. It’s important here to distinguish between capitalism and financialism.

As Thiel posits, capitalism isn’t about competition. After all, it’s not called “competition-ism”. It’s about capital. Societal systems are about power and power is all about the allocation of resources. In communism, the people (or more often, the people’s proxy, the party) allocate resources based on “need”. In capitalism, resources are allocated by the owners of capital, pressumably because the very reason they have capital is because they are good at allocating it in activities that promote the accumulation of more capital.

Financialization is different productivity. A good example is childcare. As women have entered the workplace, many of the services they performed have become financialized. Preeminent was childcare (and increasingly, childbearing). This comes off as a GDP gain, but in fact, its simply that a service is not visible to the economy via prices. This is separate from efficiency gains, namely people who were previous forced into child-rearing who are better suited to other tasks can contribute more to society. It’d be more like if wives (or whoever the stay-at-home spouse is) just started charging for childcare. Yes, it increases the taxable income but it does not contribute to productivity.

Companies face the same ills. With failing companies, you hear things like “restructuring the balance sheet.” More often than not, it’s simply allowing some financial entity to put the company in debt so it can strip mine the last bit of profit. Boeing is the latest exemplar of this. The company was so busy with streamlining its finances it stopped building good planes.2

Tesla is an interesting counterpoint. Traditional car companies had long spun off parts manufacture and actual face-to-face sales. They were simply design, some basic assembly, and marketing. Tesla internalized almost all of these functions. You buy a Tesla which is mostly made by Tesla from a Tesla store. Other car companies were so busy optimizing their financials, they forget their core raison d’être: delivering cars. But we hate haggling with dealers over cars with “premium features” that we never wanted but just happen to be “on the lot.” We hate needing to find our own honest auto shops because the dealers are crooks. Sure, these are low margin services that the car companies don’t want, but they’re a core part of the car experience.

I myself was obsessed with financials. It was part of the fad of being data driven. Data can be tremendous, but they are only proxies. Bezos’s view is when data and anecdotes don’t match, the latter tend to be right. Getting to truth is the only thing of real value and in working, investing, or living, it’s better to chase value and trust the financials will eventually catch up.

  1. HR can easily go awry, but largely when the organization is too dominant. From all accounts, Google’s AI missteps are a good example of this. 

  2. Disclaimer: I have a small short position in Boeing.