January 4, 2021

Short Term Thinking - Part 1 - The Netflix example

One of the major problems with capitalism in it's current format, is short term thinking.  As is so often the case in capitalism, short term gain is chased at the expense of longer term well being or perhaps even greater profit.  This is likely tied to the dividend cycle and executive bonus structure, all designed to maximize profit as quickly as possible.

In the past this often manifested itself in harmful ways such as companies polluting without concern, treating employees as assets without concern for their safety (leading to onerous government oversight and difficult restrictions) or reasonable rates of pay (leading to the rise of unions, who did the same short term thinking in response and often stifled company long term viability), or not doing due diligence in safety testing (think Ford Pinto).

As these problems metastasized into bigger problems and led to reactions that dealt, often ineffectively, with the issues, business of course responded in kind to the reactions.  More pay and more regulation led to offshoring of jobs (the long term outcome potentially being the destruction of the consumer market as jobs vanished).  Of course consumer protection safety was more difficult to deal with and sometimes business had to put up with not being harmful to the general populace. Grudgingly.  The reaction to this in the West was of course BREXIT and MAGA.  National self-interest to bring jobs back was key driver on both those cases.  

But there are of course caveats to this.  Firstly not all businesses in capitalist countries are motivated by short term profit. Small mom and pop shops are by necessity, driven by the need to be viable long term.  People are personally invested in the success.  Corporate investors are driven by the quick-hit rate of return.  If your company is returning 8% on the stock purchaser investment and the business across the street, which doesn't even have to be a direct competitor is returning 25%, where do you think investors are going to flock?

There are ways to deal with this.  Capitalism itself is not the problem just as socialism is not the solution (as I will show later in this series). The application and management of a capitalist system is what needs to be addressed.

Despite all the corporate wokeness that is going on now, companies stumbling over themselves to show how great they are as global citizens, the short term thinking problem is not going away.  Netflix is a great example:

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