Cyclopedia Of Economics

APPENDIX: Introduction to the book "Facts and Fictions in the Securities Industry" (2009)

The securities industry worldwide is constructed upon the quicksand of self-delusion and socially-acceptable confabulations. These serve to hold together players and agents whose interests are both disparate and diametrically opposed. In the long run, the securities markets are zero-sum games and the only possible outcome is win-lose.

The first "dirty secret" is that a firm's market capitalization often stands in inverse proportion to its value and valuation (as measured by an objective, neutral, disinterested party). This is true especially when agents (management) are not also principals (owners).

Owing to its compensation structure, invariably tied to the firms' market capitalization, management strives to maximize the former by manipulating the latter. Very often, the only way to affect the firm's market capitalization in the short-term is to sacrifice the firm's interests and, therefore, its value in the medium to long-term (for instance, by doling out bonuses even as the firm is dying; by speculating on leverage; and by cooking the books).

The second open secret is that all modern financial markets are Ponzi (pyramid) schemes. The only viable exit strategy is by dumping one's holdings on future entrants. Fresh cash flows are crucial to sustaining ever increasing prices. Once these dry up, markets collapse in a heap.

Thus, the market prices of shares and, to a lesser extent debt instruments (especially corporate ones) are determined by three cash flows:

(i) The firm's future cash flows (incorporated into valuation models, such as the CAPM or FAR)

(ii) Future cash flows in securities markets (i.e., the ebb and flow of new entrants)

(iii) The present cash flows of current market participants

The confluence of these three cash streams translates into what we call "volatility" and reflects the risks inherent in the security itself (the firm's idiosyncratic risk) and the hazards of the market (known as alpha and beta coefficients).

In sum, stocks and share certificates do not represent ownership of the issuing enterprise at all. This is a myth, a convenient piece of fiction intended to pacify losers and lure "new blood" into the arena. Shareholders' claims on the firm's assets in cases of insolvency, bankruptcy, or liquidation are of inferior, or subordinate nature.

Stocks are shares are merely options (gambles) on the three cash flows enumerated above. Their prices wax and wane in accordance with expectations regarding the future net present values of these flows. Once the music stops, they are worth little.

E-books (Electronic Books)

One of the first acts of the French National Assembly in 1789 was to issue this declaration: "The free communication of thought and opinion is one of the most precious rights of man; every citizen may therefore speak, write and print freely." UNESCO still defines "book" as "non-periodical printed publication of at least 49 pages excluding covers".

Yet, have the innovations of the last five years transformed the concept of "book" irreversibly?

The now defunct BookTailor used to sell its book-customization software mainly to travel agents. Subscribers assembled their own, private edition tome from a library of electronic content. The emerging idiosyncratic anthology was either printed and bound on demand or packaged as an e-book.

Consider what this simple business model does to entrenched and age-old notions such as "original" and "copies", copyright, and book identifiers. Is the "original" the final, user-customized book - or its sources? Should such one-copy print runs be eligible to unique identifiers (for instance, unique ISBN's)? Does the user possess any rights in the final product, compiled by him? Do the copyrights of the original authors still apply?

Members of the BookCrossing.com community register their books in a central database, obtain a BCID (BookCrossing ID Number) and then give the book to someone, or simply leave it lying around to be found. The volume's successive owners provide BookCrossing with their coordinates. This innocuous model subverts the legal concept of ownership and transforms the book from a passive, inert object into a catalyst of human interactions. In other words, it returns the book to its origins: a dialog-provoking time capsule.

Their proponents protest that e-books are not merely an ephemeral rendition of their print predecessors - they are a new medium, an altogether different reading experience.

Consider these options: hyperlinks within the e-book to Web content and reference tools; embedded instant shopping and ordering; divergent, user-interactive, decision driven plotlines; interaction with other e-books using Bluetooth or some other wireless standard; collaborative authoring, gaming and community activities; automatically or periodically updated content; multimedia capabilities; databases of bookmarks, records of reading habits, shopping habits, interaction with other readers, and plot-related decisions; automatic and embedded audio conversion and translation capabilities; full wireless piconetworking and scatternetworking capabilities; and more.

In an essay titled "The Processed Book", Joseph Esposito expounds on five important capabilities of e-books: as portals or front ends to other sources of information, as self-referencing texts, as platforms being "fingered" by other resources, as input processed by machines, and e-books serving as nodes in networks.

E-books, counter their opponents, have changed little beyond format and medium. Audio books are more revolutionary than e-books because they no longer use visual symbols. Consider the scrolling protocols - lateral and vertical. The papyrus, the broadsheet newspaper, and the computer screen are three examples of the vertical kind. The e-book, the microfilm, the vellum, and the print book are instances of the lateral scroll. Nothing new here.

E-books are a throwback to the days of the papyrus. The text is placed on one side of a series of connected "leaves". Parchment, by comparison, was multi-paged, easily browseable, and printed on both sides of the leaf. It led to a revolution in publishing and, ultimately, to the print book. All these advances are now being reversed by the e-book, bemoan the antagonists.

The truth, as always, is somewhere in mid-ground between derision and fawning.

The e-book retains one innovation of the parchment - the hypertext. Early Jewish and Christian texts as well as Roman legal scholarship were inscribed or, later, printed, with numerous inter-textual links. The Talmud, for instance, comprises a main text (the Mishna) surrounded by references to scholarly interpretations (exegesis).

Whether on papyrus, vellum, paper, or PDA - all books are portable. The book is like a perpetuum mobile. It disseminates its content virally, by being circulated, and is not diminished or altered in the process. Though physically eroded, it can be copied faithfully. It is permanent and, subject to faithful replication, immutable.

Admittedly, e-texts are device-dependent (e-book readers or computer drives). They are format-specific. Changes in technology - both in hardware and in software - render many e-books unreadable. And portability is hampered by battery life, lighting conditions, or the availability of appropriate infrastructure (e.g., of electricity).

The printing press technology shattered the content monopoly. In 50 years (1450-1500), the number of books in Europe swelled from a few thousand to more than 9 million. And, as McLuhan noted, it shifted the emphasis from the oral mode of content distribution (i.e., "communication") to the visual mode.

E-books are only the latest application of age-old principles to new "content-containers". Every such transmutation yields a surge in content creation and dissemination. The incunabula - the first printed books - made knowledge accessible (sometimes in the vernacular) to scholars and laymen alike and liberated books from the tyranny of monastic scriptoria and "libraries".

E-books are promising to do the same.

In the foreseeable future, "Book ATMs" placed in remote corners of the Earth would be able to print on demand (POD) any book selected from publishing backlists and front lists comprising millions of titles. Vanity publishers and self-publishing allow authors to overcome editorial barriers to entry and to bring out their work affordably.

The Internet is the ideal e-book distribution channel. It threatens the monopoly of the big publishing houses. Ironically, early publishers rebelled against the knowledge monopoly of the Church. The industry flourished in non-theocratic societies such as the Netherlands and England - and languished where religion reigned (the Islamic world, and Medieval Europe).

With e-books, content is once more a collaborative effort, as it has been well into the Middle Ages. Knowledge, information, and narratives were once generated through the interactions of authors and audience (remember Socrates). Interactive e-books, multimedia, discussion lists, and collective authorship efforts restore this great tradition.

Authors are again the publishers and marketers of their work as they have been well into the 19th century when many books debuted as serialized pamphlets in daily papers or magazines or were sold by subscription. Serialized e-books hark back to these intervallic traditions. E-books may also help restore the balance between best-sellers and midlist authors and between fiction and non-fiction. E-books are best suited to cater to neglected niche markets.

E-books, cheaper than even paperbacks, are the quintessential "literature for the millions". Both erstwhile reprint libraries and current e-book publishers specialize in inexpensive books in the public domain (i.e., whose copyright expired). John Bell (competing with Dr. Johnson) put out "The Poets of Great Britain" in 1777-83. Each of the 109 volumes cost six shillings (compared to the usual guinea or more). The Railway Library of novels (1,300 volumes) costs 1 shilling apiece only eight decades later. The price proceeded to dive throughout the next century and a half. E-books and POD resume this trend.

The plunge in book prices, the lowering of barriers to entry aided by new technologies and plentiful credit, the proliferation of publishers, and the cutthroat competition among booksellers was such that price regulation (cartel) had to be introduced. Net publisher prices, trade discounts, and list prices are all anti-competitive practices of 19th century Europe. Still, this lamentable period also gave rise to trade associations, publishers organizations, literary agents, author contracts, royalties agreements, mass marketing, and standardized copyrights.

The Internet is often perceived to be nothing more than a glorified - though digitized - mail order catalogue. But e-books are different. Legislators and courts have yet to establish if e-books are books at all. Existing contracts between authors and publishers may not cover the electronic rendition of texts. E-books also offer serious price competition to more traditional forms of publishing and are, thus, likely to provoke a realignment of the entire industry.

Rights may have to be re-assigned, revenues re-distributed, contractual relationships reconsidered. Hitherto, e-books amounted to little more that re-formatted renditions of the print editions. But authors are increasingly publishing their books primarily or exclusively as e-books thus undermining both hardcovers and paperbacks.

Luddite printers and publishers resisted - often violently - every phase in the evolution of the trade: stereotyping, the iron press, the application of steam power, mechanical typecasting and typesetting, new methods of reproducing illustrations, cloth bindings, machine-made paper, ready-bound books, paperbacks, book clubs, and book tokens.

Without exception, they eventually relented and embraced the new technologies to considerable commercial advantage. Similarly, publishers were initially hesitant and reluctant to adopt the Internet, POD, and e-publishing. It is not surprising that they came around.

Printed books in the 17th and 18th centuries were derided by their contemporaries as inferior to their laboriously hand-made antecedents and to the incunabula. These complaints are reminiscent of current criticisms of the new media (Internet, e-books): shoddy workmanship, shabby appearance, and rampant piracy.

The first decades following the invention of the printing press, were, as the Encyclopedia Britannica puts it "a restless, highly competitive free for all ... (with) enormous vitality and variety (often leading to) careless work". There were egregious acts of piracy - for instance, the illicit copying of the Aldine Latin "pocket books", or the all-pervasive book-bootlegging in England in the 17th century, a direct outcome of over-regulation and coercive copyright monopolies.

Shakespeare's work was repeatedly replicated by infringers of emerging intellectual property rights. Later, the American colonies became the world's centre of industrialized and systematic book piracy. Confronted with abundant and cheap pirated foreign books, local authors resorted to freelancing in magazines and lecture tours in a vain effort to make ends meet.

Pirates and unlicensed - and, therefore, subversive - publishers were prosecuted under a variety of monopoly and libel laws and, later, under national security and obscenity laws. Both royal and "democratic" governments acted ruthlessly to preserve their control of publishing.

John Milton wrote his passionate plea against censorship, Areopagitica, in response to the 1643 licensing ordinance passed by the British Parliament. The revolutionary Copyright Act of 1709 in England decreed that authors and publishers are entitled to exclusively reap the commercial benefits of their endeavors, though only for a prescribed period of time.

The never-abating battle between industrial-commercial publishers with their ever more potent technological and legal arsenal and the free-spirited arts and craftsmanship crowd now rages as fiercely as ever in numerous discussion lists, fora, tomes, and conferences.

William Morris started the "private press" movement in England in the 19th century to counter what he regarded as the callous commercialization of book publishing. When the printing press was invented, it was put to commercial use by private entrepreneurs (traders) of the day. Established "publishers" (monasteries), with a few exceptions (e.g., in Augsburg, Germany and in Subiaco, Italy) shunned it as a major threat to culture and civilization. Their attacks on printing read like the litanies against self-publishing or corporate-controlled publishing today.

But, as readership expanded - women and the poor became increasingly literate - the number of publishers multiplied. At the beginning of the 19th century, innovative lithographic and offset processes allowed publishers in the West to add illustrations (at first, black and white and then in color), tables, detailed maps and anatomical charts, and other graphics to their books.

Publishers and librarians scuffled over formats (book sizes) and fonts (Gothic versus Roman) but consumer preferences prevailed. The multimedia book was born. E-books will, probably, undergo a similar transition from static digital renditions of a print edition - to lively, colorful, interactive and commercially enabled objects.

The commercial lending library and, later, the free library were two additional reactions to increasing demand. As early as the 18th century, publishers and booksellers expressed the - groundless - fear that libraries will cannibalize their trade. Yet, libraries have actually enhanced book sales and have become a major market in their own right. They are likely to do the same for e-books.

Publishing has always been a social pursuit, heavily dependent on social developments, such as the spread of literacy and the liberation of minorities (especially, of women). As every new format matures, it is subjected to regulation from within and from without. E-books and other digital content are no exception. Hence the recurrent and current attempts at restrictive regulation and the legal skirmishes that follow them.

At its inception, every new variant of content packaging was deemed "dangerous". The Church, formerly the largest publisher of bibles and other religious and "earthly" texts and the upholder and protector of reading in the Dark Ages, castigated and censored the printing of "heretical" books, especially the vernacular bibles of the Reformation.

It even restored the Inquisition for the specific purpose of controlling book publishing. In 1559, it issued the Index Librorum Prohibitorum ("Index of Prohibited Books"). A few, mainly Dutch, publishers ended up on the stake. European rulers issued proclamations against "naughty printed books" of heresy and sedition.

The printing of books was subject to licensing by the Privy Council in England. The very concept of copyright arose out of the forced recording of titles in the register of the English Stationer's Company, a royal instrument of influence and intrigue. Such obligatory registration granted the publisher the right to exclusively copy the registered book - or, more frequently, a class of books - for a number of years, but politically constrained printable content, often by force.

Freedom of the press and free speech are still distant dreams in most parts of the earth. Even in the USA, the Digital Millennium Copyright Act (DMCA), the V-chip and other privacy-invading, dissemination-inhibiting, and censorship-imposing measures perpetuate a veteran though not so venerable tradition.

The more it changes, the more it stays the same. If the history of the book teaches us anything it is that there are no limits to the ingenuity with which publishers, authors, and booksellers, re-invent old practices. Technological and marketing innovations are invariably perceived as threats - only to be upheld later as articles of faith. Publishing faces the same issues and challenges it faced five hundred years ago and responds to them in much the same way.

Dan Poynter and Danny Snow - the acknowledged gurus of the e-book revolution - did it again. The fourth edition of their U-Publish.com tome is a "living book". The public release is slated for December 2006-January 2007. But no two volumes will be alike. An appendix in the POD paperback edition will be updated monthly with breaking news from the couple's widely-circulated newsletters and, thus, differ in size and content. The standard trade edition will reference Web locations for monthly updates.

This is only the latest in a series of experiments that, put together, constitute a novel re-definition through experimentation of the classical format of the book.

Consider the now defunct BookTailor. It used to sell its book customization software mainly to travel agents - but this technology is likely to conquer other niches (such as the legal and medical professions). It allows users to select bits and pieces from a library of e-books, combine them into a totally new tome and print and bind the latter on demand. The client can also choose to buy the end-product as an e-book.

Consider what this simple business model does to entrenched and age old notions such as "original"  and "copies", copyright, and book identifiers. What is the "original" in this case? Is it the final, user-customized book - or its sources? And if no customized book is identical to any other - what happens to the intuitive notion of "copies"? Should BookTailor-generated books considered to be unique exemplars of one-copy print runs? If so, should each one receive a unique identifier (for instance, a unique ISBN)? Does the user possess any rights in the final product, composed and selected by him? What about the copyrights of the original authors?

Or take BookCrossing.com. On the face of it, it presents no profound challenge to established publishing practices and to the modern concept of intellectual property. Members register their books, obtain a BCID (BookCrossing ID Number) and then give the book to someone, or simply leave it lying around for a total stranger to find. Henceforth, fate determines the chain of events. Eventual successive owners of the volume are supposed to report to BookCrossing (by e-mail) about the book's and their whereabouts, thereby generating moving plots and mapping the territory of literacy and bibliomania.

This innocuous model subversively undermines the concept - legal and moral - of ownership. It also expropriates the book from the realm of passive, inert objects and transforms it into a catalyst of human interactions across time and space. In other words, it returns the book to its origins: a time capsule, a time machine and the embodiment of a historical narrative.

E-books, hitherto, have largely been nothing but an ephemeral rendition of their print predecessors. But e-books are another medium altogether. They can and will provide a different reading experience.  Consider "hyperlinks within the e-book and without it - to web content, reference works, etc., embedded instant shopping and ordering links, divergent, user-interactive, decision driven plotlines, interaction with other e-books (using Bluetooth or another wireless standard), collaborative authoring, gaming and community activities, automatically or periodically updated content, ,multimedia capabilities, database, Favourites and History Maintenance (records of reading habits, shopping habits, interaction with other readers, plot related decisions and much more), automatic and embedded audio conversion and translation capabilities, full wireless piconetworking and scatternetworking capabilities and more".

EBRD (European Bank for Reconstruction and Development)

In typical bureaucratese, the pensive EBRD analyst ventures with the appearance of compunction: "A number of projects have fallen short of acceptable standards (notice the passive, exculpating voice - SV) and have put the reputation of the bank at risk". If so, very little was risked. The outlandish lavishness of its City headquarters, the apotheosis of the inevitable narcissism of its first French Chairman (sliding marble slabs, motion sensitive lighting and designer furniture) - is, at this stage, its only tangible achievement. In the territories of its constituencies and shareholders it is known equally for its logy pomposity, the irrelevance of its projects, its lack of perspicacity and its Kafkaesque procedures. And where the IMF sometimes indulges in oblique malice and corrupt opaqueness, the EBRD wallows merely in avuncular inefficacy. Both are havens of insouciant third rate economists and bankers beyond rating.

Established in 1991, "it exists to foster the transition towards open market oriented economies and to promote private and entrepreneurial initiative in the countries of central and eastern Europe and the Commonwealth of Independent States (CIS) committed to and applying the principles of multiparty democracy, pluralism and market economics. The EBRD seeks to help its 26 countries of operations to implement structural and sectoral economic reforms, promoting competition, privatization and entrepreneurship, taking into account the particular needs of countries at different stages of transition. Through its investments it promotes private sector activity, the strengthening of financial institutions and legal systems, and the development of the infrastructure needed to support the private sector. The Bank applies sound banking and investment principles in all of its operations. In fulfilling its role as a catalyst of change, the Bank encourages co-financing and foreign direct investment from the private and public sectors, helps to mobilize domestic capital, and provides technical co-operation in relevant areas. It works in close co-operation with international financial institutions and other international and national organizations. In all of its activities, the Bank promotes environmentally sound and sustainable development."

Grandiloquence aside, the EBRD was supposed to foster the formation of the private sector in the revenant wreckage of Central and Eastern Europe, the Balkan, Russia and the New Independent States. This it was mandated to do by providing finance where there was none ("bridging the gaps in the post communist financial system" to quote "The Economist"). Put more intelligibly, it was NOT supposed to transform itself into a long-term investment portfolio with equity holdings in most blue-chips in the region. Yet, this is precisely what it ended up becoming. It avoided project financing like the plague and met the burgeoning capital needs of small and medium size enterprises (SMEs) grudgingly. And it refuses to divest itself of stakes in the best run and most efficiently managed firms from Russia to the Czech Republic. In a way, it competes head on with other investors and commercial banks - often crowding them out with its subsidized financing.

One of its main mistakes, in a depressingly impressive salmagundi, is that it channelled precious resources to this budding sector (SMEs), the dynamo of every economy, through the domestic, decrepit, venal and politically manhandled banking system. The inevitable result was a colossal waste of resources. The money was allocated to sycophantic cronies and sinecured relatives (often one and the same) and to gigantic, state-owned or state-favoured loss makers. Most of it lay idle and yielded to its hosts a hefty income in arbitrage and speculation. As banks went bankrupt, they wiped whole portfolios of EBRD SME funds, theoretically guaranteed by even more bankrupt states.

Thus, the only segments of the private sector to benefit handsomely from the EBRD were lawyers and accountants involved in the umpteen lawsuits the EBRD is mired in. It is a growth industry in "countries" such as Russia. This is the melancholy outcome of indiscriminate, politically-motivated lending and of a lackadaisical performance as both lenders and shareholders. In the spirit of its first chairman, the suave and titivated Attali, the bank is in a constant road show, mortified by the possibility of its dissolution by reason of irrelevance. It aims to impress the West with its grandiose projects, mega investments, fast returns and acquiescence. In thus behaving, it is engaged in a perditionable perfidy of its fiduciary obligations. It lends to criminal managers, winking at their off-shore shenanigans and turning a blind eye to the scapegrace slaughter of minority shareholders. It throws good money after bad, cosies up to oligarchs near and far and engages in creative accounting. Instead of Westernizing the Easterners - it has been Easternized by them. Its sedentary though peregrinating employees are more adept at wining and at dining the high and mighty and at haughtily maundering in the odd, tangential, seminar - than at managing a banking institution or looking after the interests of their nominal shareholders with the tutelary solicitude expected of a bank.

Consider two examples: