Chapter 2: Lords of the Earth
The Principle of Privilege:
Stockholders claim wealth they do little to create, much as nobles claimed privilege they did not earn.
“If equality under the law is the hallmark of democracy, privilege sanctioned by law is the hallmark of aristocracy.” Just as feudal lords extracted wealth from serfs on their lands, today’s aristocracy does the same with corporations. Privilege – the right of the aristocracy – is “a right to income detached from productivity.” After the fall of the Roman empire, the feudal lords emerged as a source of order. They played a valuable role in bringing social stability, but over time this role and its associated responsibilities faded – and the benefits did not. The same has happened with stockholders today.
Look closely at the stock market and it betrays some fundamental assumptions about the creation of wealth in today’s markets. Only 1% of the total value of equity on Wall Street is actual investment in the sense of new money going into firms. The remaining 99% is speculation – people buying and selling existing stock in the aftermarket of equity. In the preface of the book, Kelly makes the good analogy of buying a car. When you buy a new car, the money goes to Ford. But when you buy a used car, it all goes to the previous car owner – Ford doesn’t get a cent. Stocks are the same – and the vast majority of money sloshing around is just trading hands and not actually being invested in firms.
What’s more, companies go to great pains to buy back stock, to take it off the market in order to shore up their stock price. When you take these stock buybacks into account, not only does all that 1% of new investment disappear, it actually goes negative. That’s right, “new equity sales were a negative source of funding in fifteen out of the twenty years from 1981 to 2000.” So in reality, investors aren’t really investing at all. They are extracting wealth and they’re speculating.
One role that investors do actually play is ensuring the liquidity of the stock. While Kelly acknowledged this, she seems to underplay the significance of this role somewhat throughout the book. Anyone who invests in a firm (whether it’s founders, stockholders or employees) will want to convert their equity into cash at some point, and liquidity is essential for that, so it actually is a pretty important job.
Shareholders at one time had some managerial responsibilities that they held with the firm. This was eventually shed, as eventually was their legal liability. The last responsibility to be shed was actually providing capital, as the above figures illustrate. So, much like aristocrats of old, shareholders today have shed all the responsibilities while retaining (and growing) all the benefits. This is the modern notion of privilege.
Meanwhile, over the last decade (since this book was written in 2001) employees have increased their productivity three times the rise in compensation that they received. Kelly makes the case that this is where we need to look to find the new peasant class now paying for the privilege of today’s aristocrats.
|Chapter 1: The Sacred Texts|
|Chapter 2: Lords of the Earth|
|Chapter 3: The Corporation as Feudal Estate|
|Chapter 4: Only the Propertied Class Votes|
|Chapter 5: Liberty for Me, Not for Thee|
|Chapter 6: Wealth Reigns|
|Chapter 7: Waking Up|
|Chapter 8: Emerging Property Rights|
|Chapter 9: Protecting the Common Good|
|Chapter 10: New Citizens in Corporate Governance|
|Chapter 11: Corporations Are Not Persons|
|Chapter 12: A Little Rebellion|