Economics for One

The 2000 film Boiler Room depicts the seedy world of the “pump-and-dump” scam.  In it, a broker purchases a large block of public stock in a shell (i.e. empty) company.  The firm then calls potential clients to pitch them the same stock.  This drives up (“pumps”) the price, making it appear to be a runaway stock, thus attracting more buyers and driving the price higher.

When the price is high enough, the broker “dumps” their own shares at a huge profit and walks away.  The result is that the buyers are left holding stock in a worthless, basically non-existent company, which promptly falls back to zero, wiping out the investors.

Which brings us to Silicon Valley.  Over the past decade or so, Silicon Valley has morphed from a region that was the builder of great companies (Apple, HP, Intuit, Cisco, Oracle, etc), into perhaps the greatest generator of “pump and dump” stocks.

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Here’s a great Op Ed in the Wall Street Journal.

http://online.wsj.com/article/SB123544318435655825.html

They give a great argument for focusing the Stimulus on Entrepreneurs, rather than traditional, moribund behemoths.

A healthy, competitive economy is like an ecosystem.  Unsuccessful businesses die young.  Successful businesses are able to grow, accumulate resources, and age.  But eventually they too give way to younger, more competitive companies.

By propping up the older firms, we are basically preventing the new, more competitive and more effective firms from taking their place.  This stifles innovation and weakens the overall system.  On the other hand, by encouraging the creation of new businesses, we find those more effective replacements sooner, and create a stronger, healthier economy.

I recently met a man who tried to impress me with his entrepreneurial credentials.

“I’ve always been an entrepreneur!” he proclaimed.  ”When I graduated from school I immediately joined a little startup, named Yahoo!”  He looked quite pleased with himself.

He was in his early 30′s.  I thought about it a moment.  ”So, how may employees were there?”

“Just 350 back then.”  He answered smugly.

Pause.  ”And when did they go public?  Wasn’t it around then?”

“Well, yes.  Just before I joined.”  Now he looked uncomfortable.  Or annoyed.  Either way, he seemed to realize I was calling his bluff; I quickly changed the subject. Read more…