Shareholding
Discussion
John C. Medaille:
“Capitalism and Corporations:
One cannot long find oneself in possession of a few excess dollars without soon getting advice to “invest” them in the stock market. But in a 2022 issue of New Polity Magazine, Jacob Imam and Marc Barnes took on this primary symbol of capitalism, this same stock market, posing the question of whether a Christian should even buy stocks at all. Now, as radical as this thesis may seem, its way was paved by none other than Adam Smith, the putative father of modern capitalism. Indeed, between the first edition of The Wealth of Nations in 1776, and the fifth in 1789, Smith seems to have come to doubt the benevolence of the genie that his defense of a “free market” had released from its bottle. He even comes to doubt the efficacy of a principle he originally thought was the very foundation of “the wealth of nations,” namely, the division of labor. In 1776, he was full of praise for “the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.” But in the 1789 edition he added
- "The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become."
But Smith’s most extensive revisions had to do with the “joint-stock” company—what we call the “corporation.” He was never very enthusiastic about them, but in subsequent editions his critique is vastly expanded. In a long section, inserted somewhat awkwardly into the chapter titled “Of the Expenses of the Sovereign or Commonwealth,” Smith lays out a critique that centers on the fact that share-holding is no longer a “copartnery,” a set of personal relationships. Rather, a corporation is abstract, anonymous, and its share-holders escape the personal responsibility that ownership normally entails. This leads to a host of problems: ownership is separated from responsibility (which encourages speculation over real investment); share-holders need have no real knowledge of the firm and generally don’t; the value of the share is no longer related to what the company produces but to the market price (which is a matter of mere expectation); the separation of ownership and management leads to mismanagement; and the interests of the “servants” (managers) come to predominate over those of the “owners,” the share-holders.
Imam and Barnes expand this critique, emphasizing the loss of responsibility implicit in shareholding and the shift from making a profit by providing goods to making capital gains by increasing the share price. “Making a profit” is something that happens in the present moment and is hence “real.” At its simplest level it is nothing more than one’s sales minus one’s expenses. But “capital gains” shifts our attention to the future, and hence to speculation. This represents a movement from reality to appearances, and from making money by providing goods to making money by increasing expectations. As the authors put it, within a shareholding economy “the primary purpose of a company becomes the production of this perceived value—that is, the purpose becomes what we might call marketing. For the public company, [actual] production is simply another form of this marketing.”
Sadly, firms can increase our expectations without adding any real value to anything at all. As an example of this (of profit without value), one need look no further than the Mortgage Backed Securities (MBS) that were responsible for the crash of 2008. The scheme was that the rich, working through banks and hedge funds, could borrow money at very low interest rates and use it to buy blocks of mortgages that paid a much higher interest rate. The difference between the two rates was the “profit” of the hedge fund. All this borrowing added not a dime to the mortgage market; it was simply an arbitrage of interest rates that contributed nothing to production. But it did encourage the banks, who collected high fees for brokering the MBS, to make ever riskier loans, until the whole market collapsed. We should not be too saddened by the fate of these hedge funds: the Federal Reserve Bank, in its infinite compassion and endless money-printing powers, bought up every single one of these failed securities, now labeled as “toxic waste,” to the tune of $4.2 trillion. This at a time when the FED had less than a trillion dollars on its accounts! The people who caused the problem didn’t lose a dime, but somewhere between four and six million homes went into foreclosure. The FED made the judgment that bailouts would be good for the rich but bad for the poor.
In this essay, I would like to expand the Imam/ Barnes critique to show that capitalism under the regime of shareholding can never be what it claims to be and never deliver what it purports to promise. Further, I think it necessary to propose a program of reform, one that is evolutionary rather than revolutionary. And we must start by examining the claims that capitalism makes on its own behalf, and by comparing them to the reality of the world it has made.”
(https://newpolity.com/blog/anonymous-societies)