austin-murphy-the-triumph-of-evil

162 THE TRIUMPH OF EVIL
as money managers are generally selected based on sales ability and
personal contacts (O'Barr and Conley, 1992). Such a situation implies
even less rational and less efficient investment in West Germany.
In addition, in Western capital markets, the costs of trading and analyzing
the value of a security often result in investors requiring a premium
return over that normally required (Halle and Stoll, 1989). This
liquidity premium is larger fo r smaller firms because of the inability to
spread fixed costs of trading and analysis over a large trading volume
(Dubosfsky and Groth, 1986). The existence of liquidity premiums in
Western capital markets implies a higher cost of capital, especially for
smaller firms (Stoll and Whaley, 1983 ).1 In an effort to reduce these
liquidity premiums, an extensive financial infrastructure can be built
up, but the fees and commissions from the banking, brokerage, and
insurance components of that infrastructure alone exceed 5% of GOP
in some countries (Stopa, 1999), and these deadweight costs don't even
include other major costs of liquidity trading (like differences between
buying and selling prices), nor do they include all the costs of shopping
around for the best deal and analyzing investments (Murphy, 2000).
Moreover, because of the existence of central planning in East Germany,
greater stability in consumption there might have been expected
than in West Germany. As a result, a lower return premium could be
required for systematic risk as measured by a consumption beta (Ahn,
I 989), thereby magnifying the discrepancies between the costs of capital
in the two countries.
It should also be mentioned that required risk premiums on securities
fluctuate wildly in Western capital markets (Chan, Chen, and Hsieh,
1985). The result is uncertainty as to the cost and availability of funds,
socially unproductive speculation on the future course of the risk premium,
and more mispricing and wasted analytical resources (Murphy,
2000). In addition, a further risk premium may be. required in Westem
capital markets for the variation in the risk premium (Chan, Chen, and
Hsieh, 1985). The resulting higher cost of capital results in less investment
projects being acceptable and therefore lower economic growth
in capitalist countries (although the higher returns required mean faster
income growth for the rich).
There is also some evidence that rich capitalists and corporate bureau·
crats are more difficult to persuade to fund innovative and productive
CHAPTER 4 163
long-term investments than governments (Der Sp iegel, 1998), as previously
discussed in Chapter I. In particular, the desire to protect jobs,
salary, and the status quo contributes to the fact that capitalist corporations
"don't tend to be great foundations of independent thinking" in the
USA (O'Barr and Conley, 1992) or in Germany (Rhoads, 1999). Moreover,
"innovative" capitalist heroes (such as Bill Gates) glorified by the
Western press often create nothing on their own but instead copy the
innovations of others and then monopolize the market through special
deals arranged through rich relatives (and social contacts), buyouts, and
predatory pricing made possible only because of their riches (Wilson,
1998a). Even true innovators and entrepreneurs are not really made
�appy by enormous amounts of accumulated personal wealth but are
m�t�d motivated more by the lure of"creating something," "having a
MISSion," and "connecting with other people .. .in a team" (Wall Street
Journal, 2000a). Further evidence on this issue is provided by the fact
tha� despite technology embargoes and despite having less capital,
the communist countries were fairly successful in staying fairly close
� the technological level of the richest capitalist countries (Smith,
000), often strictly through local development because ofthe technol-
0&>: embargoes (Parrott, 1985). An example of East German techno­
logtcal . advances can even be found in their much maligned auto indus­
try, Whtch developed a world class car (the Trabant) in the late 1950s
(Schroeder, 1995), and which also designed a new car model that was
Years ahead of West German development in the 1970s although East
?enna ny did not have the resources to justify further development for
�ts small market (Bauer, 1999). Adler ( 1980) has cited evidence indicat-
IDg that communist countries were able to motivate more innovation
( and parr · ICtpahon) ·
.
among workers, and he logically drew the concluston
that "th
tec�st m�e of production is being engendered in the scientific and
l
e type of production technology associated with the com-
m .
0 ogtcal revolution."
Managing Investments
be Once an investment decision is made and financed, the project must
le :anag