Apparently, corporations constitute 19.9% of all American businesses, but account for 88.8% of all sales and 71.4% of all profits (p. 135).* Those are some pretty astounding numbers. Small businesses, considered such a lifeblood of the American way of life, bring in just over 10% of all sales, and less than 30% of all profits. A relatively small number of mega-corps bring in all the rest.
The book describes a crucial difference between the profit earning potential of corporations versus simpler forms of small businesses as the corporation’s seemingly unlimited capacity to raise capital (p. 131). A sole proprietorship is limited by the collateral of its owner as to what money financial institutions are likely to invest. Corporations, by contrast, get to sell ownership shares (ownership without any resulting liability, somehow) directly to whoever wants to purchase them. From there, the corporation gets to keep reinvesting the money virtually infinitely without paying any interest. Sure, there is the theoretical obligation to pay dividends to shareholders. But many companies eternally delay this step, convincing shareholders that the money is better re-invested in the company (or the CEO’s end-of-year bonus) than spent on dividends. And shareholders are usually untroubled with this explanation, because they have more potential to make money in the future by selling their shares of a highly valued corporation than they ever would have received in dividends anyway. (This of course presumes that the corporation continues to be highly valued by the market, and that there is somebody out there with enough capital to purchase the current owner’s shares.)
Does this seem to anyone else like a wink-wink, nudge-nudge house of cards system? If I invest in some shares of a company, all I have really purchased is the hope that down the line somebody else will want my little scrap of paper with hope written on it. That’s the only risk I’ve taken. My likelihood of making money seems to rely more on the winds of public sentiment than actual business performance, so perhaps it’s fitting that my action, my “ownership,” has very little impact on the performance of the corporation I “own,” anyway. And unless I’m purchasing initial public offerings, I’m not even contributing any actual money to the corporation.** So why is this considered the most capitalist of capitalist endeavors? Why is Warren Buffet, who as far as I know is not responsible for producing anything beyond books describing how to be like him, considered the Greatest Capitalist?
I know stock and bond markets are old, pre-dating Adam Smith, pre-dating capitalism itself. I’d like to know more about the history. If this house of cards truly is a flimsy but surviving relic of our aristocratic and mercantile past, why is it held up as the most modern and advanced element of post-industrial, globalized capitalism? Why do we continue to accept this system so susceptible to human frailties like panic, so exclusive in its beneficiaries, so myopically focused only on short term gain, and so obsessively good at creating massive, virtually stateless profit machines that are understood by no one and answerable to even fewer people?
* "It may seem a bit odd that Warren Buffett, one of the greatest capitalists the world has ever seen, resides firmly in the liberal camp when it comes to tax policy. (p. 181) Janjigian, Vahan. Even Buffett Isn't Perfect: What You Can--and Can't--Learn from the World's Greatest Investor.
** Interestingly enough, the discrepancy between 88.8% of all sales and 71.4% of all profits would seem to indicate that corporations are dollar for dollar less profitable than sole proprietorships or partnerships.
*** Admittedly, my purchase might indirectly benefit the company by indicating demand for its shares and faith in its profit-making potential, which could then increase its capacity to attract capital. But that’s just another layer of wink-wink nudge-nudge.
Downey, Matthew. Contemporary’s Economics.
0 comments:
Post a Comment