"When we buy stock we are not contributing capital: we are buying the right to extract wealth."
(Marjorie Kelly,The Divine Right of Capital, 2001)
The first is a system that in a rational way, through peoples’ self-interest, efficiently organizes production and consumption, with little or no government control. This system creates increasing wealth. Although this system has created enormous wealth and a tremendous increase in useful as well as useless ‘things’, the wealth is very unevenly distributed, resulting in enormous gaps in society. It has also not made people more satisfied. Meanwhile, it has created havoc in nature, from pollution of a local water source to disruption in life-supporting cycles such as the carbon and nitrogen cycles. ‘As efficient as markets may be, they do not ensure that individuals have enough food, clothes to wear, or shelter,’ says Stiglitz (2002: 222). There is a need for constant government intervention to correct all so-called market failures. It is wise to exempt large parts of society as well as nature from the logic of the market. Most people who are essentially positive towards capitalism and market economy realize that.
The second argument is a moral defense both for the accumulation of capital and for making profit. Even if it can appear a bit unfair, these mechanisms are needed to stimulate innovation and development. In the long view, everyone will benefit. The sometimes absurd profits are explained—and defended—by Schumpeter (1942) as follows: Spectacular profits, much bigger than needed to motivate the action, are gained by a very small group of winners. The possibility, the dream, of these enormous gains stimulates normal business more efficiently than if everybody got only a very modest profit. They overestimate the possibility for the big win in the same way as a poker player or a lottery-ticket buyer. In Schumpeter’s view, one should agree to these giant profits, and the thereby associated differences in income and wealth, because it is the best way to stimulate development. This is the essence also of others’ defense for capitalism, even if modern proponents mostly express themselves a bit more politically correctly than Schumpeter did. Let us study this argument a bit more in depth and how well it passes the test of reality.
Capitalism doesn’t require limited companies, but it is the institution that most clearly epitomizes capitalism. Take the example of a small limited company. It has existed for 10 years and its total revenue over 10 years is in the range of US$ 30 million. The start-up capital invested in stocks was US$ 60,000. 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 rapid growth. Through accumulated profits, the company is now worth some US$ 500,000; that is, the value of the ‘investment’ has increased eightfold in 10 years. This is nothing exceptional but all in all it is a reflection of a moderately successful company.
During the 10 years of existence, some 10 people have been working in the company. They have had a good salary; they even have been part of a profit-sharing programme. One now wonders why the ones who invested the original capital 10 years earlier should be the owners of the whole company. Isn’t it the fruits of the 10 people who work that has made it what it is today? The original capital, representing less than 1 person-year of work in value is now worth more than the 100 person-years of work dedicated to the company over the years. Strangely, this is accepted as the most natural thing.
The stated purpose of limited companies is to supply their owners with profits. This is motivated by the owners supplying the capital that is needed to start and invest in the operations. This is also the reality when many companies start. The bulk of the trade in stocks is not about company start-ups, however, but about stocks that are bought and sold purely speculatively. In the period 1900–1953, new stocks contributed less than 5% of the needed capital for business in the United States. At the end of the 1990s, only 1% of the value of the stock that was bought and sold reached the companies, the rest was only transfer between stockowners (Kelly 2001).
As the system is now, the stockowners 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 have no right to a share in profits. Between 1987 and 1997, the stocks in the Dow Jones index went up 300%. In the same period, real wages in the United States dropped 7%. That can hardly be fair, reasonable or even efficient. As Schumpeter (1942) noted, when companies are not managed by entrepreneurs but by professional managers, and owned by investors, the whole idea of ownership and entrepreneurship is destroyed.
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; 200 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 it that their rights were enshrined in law. There were shareholding companies earlier, but the owners were personally responsible. The emergence of limited companies is the first example, and one of the clearer examples, of how the wealthy class tries to privatize gains and socialize losses, something that became very apparent during the financial crisis of 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!
It is an undisputed fact that capitalism is very good in making business out of innovation, but that doesn’t mean that most groundbreaking innovations in society have been made by private companies. On the contrary, most big innovations have taken place in very different arenas. Automobiles, television, radio, nuclear power, antibiotics, wind power, sailing, electrification and the Internet are all examples of groundbreaking technologies that were driven primarily by governments or by curiosity and the ‘wish to know’ rather than by capitalist innovation (Hourihan and Atkinson 2011). When a big leap in technology has already been made, entrepreneurs find commercial uses for the new technology. The Internet is a very good example of this. Entrepreneurs are also very good at moving those technologies out to the people.
Technological development was rather slow before capitalism, and one of the reasons was that there were few incentives for people to improve efficiency. The rich could extract value added by serfs, tenants or slaves and didn’t need mechanization and the poor had neither resources nor real possibilities to turn any innovation into business. Having said that, there is certainly no reason to believe that innovation will cease without the profit motive. To make the job easier or more entertaining is a driver for innovation as well. Human nature is curious and innovative and that will be the case also without profit motives. To do something new, something good, not only for oneself but for the whole community can be a forceful driver, and it is also something that could be highlighted and emphasized more in a way that it renders more status.
(Extract from Garden Earth: from hunter and gatherers to global capitalism and thereafter
Available from Create Space, Amazon.com , Amazon.de, Amazon.es, Amazon.fr, Amazon.it, Amazon.co.uk and most book retailers)