Sunday, May 8, 2011

Capitalism: The right to extract wealth

When we buy stock we are not contributing capital: we are buying the right to extract wealth (Kelly 2001).


Capitalism doesn't require limited companies, but it is the institution that most clearly epitomizes capitalism. Take a small limited company. It has existed for ten years and its total revenue over ten years is in the range of 30 million dollars. The start up capital invested in stocks was 60,000 dollars. The shareholders have got small dividends over the year, just corresponding to a typical interest rate; they wanted to keep the profits in the company to allow for the rapid growth. Through accumulated profits, the company is now worth some 500,000 dollars, i.e. the value of the “investment” has increased eight times in ten years. This is nothing exceptional but all in all, it is a reflection of a moderately successful company. During the ten years of existence, some ten people have been working in the company. They have had a good salary; they even have been part of a profit sharing program. One now wonders why the ones who invested the original capital ten years earlier should be the owners of the whole company. Isn't it the fruits of the ten peoples' work that has made it to what it is today? The original capital, representing less than one man-year of work in value is now worth more than the 100 man-years of work dedicated to the company over the years. Funnily enough, we have come to accept this as the most natural thing. 
The stated purpose of limited companies is to supply their owners with profits. This is motivated with that the owners supply the capital that is needed to start and invest in the operations. That is also the reality when many companies start. The bulk of the trade in stocks is not about company start-ups, however, but it is stocks that are bought and sold in purely speculative purpose. In the period, 1900-1953 new stocks contributed less than five percent of the needed capital for US business. In the end of the 1990s only one percent of the value of the stock that was bought and sold reached the companies, the rest is only transfer between stockowners (Kelly2001)

As the system is now, it is the stockowners that have the power over companies and the exclusive rights to profits. Not the total right actually, the other power centre in society, the state, has ascertained its share of the profit through company taxes, in almost all societies. One can also see this as a payment for the services companies get from society such as an educated work force, health system, legal system and protection. The employees, the clients, the local community or the environment, none of them have any right to a share in profits. Between 1987 and 1997, the stocks in Dow Jones index went up 300 percent. In the same period, real wages in USA dropped 7 percent. That can hardly be fair, reasonable or even efficient? As Schumpeter noted when companies are not managed by entrepreneurs but by professional managers, and owned by investors, the whole idea of ownership andentrepreneurship is destroyed (Schumpeter 1942).

Privatize profits and socialize losses

In a limited company the owner has unlimited rights to the profits of the company, but only limited responsibility for the losses. This is the essence of limited companies; two hundred years ago this didn’t exist. It is an innovation and a privilege extracted by the rich in the same way as the nobles saw to that their rights were enshrined in law. There were shareholding companies earlier, but the owners were personally responsible. In England, it became more straightforward to incorporate a joint stock company following the Joint Stock Companies Act 1844, although investors in such companies carried unlimited liability until the Limited Liability Act 1855. The emergence of limited companies is the first, and one of the more clear examples of how the wealthy class try to privatize gains and socialize losses, something that became very apparent during the financial crisis 2008-2009 where a trillion of dollars or more were used by governments just to prime the financial markets because they were not willing to take any risks; the same markets that claims the legitimacy of their mere existence with that they are needed to provide businesses with risk capital!

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