03 January, 2015

Stocks: The Myth of Ownership



In response to my article on the nature of capitalism, I received some responses objecting to my statement that part of the definition of capitalism is that laws facilitate the separation of ownership from work. Well, not only do the laws of capitalism facilitate the separation of ownership from work, but they even seem to separate ownership from the rights of ownership.

The "American dream" used to be marketed as owning a piece of land with your house on it. In truth, the "American dream" is this nebulous thing that has changed over time, but it seems to consistently involve owning something. There is nothing particularly "American" about the desire for ownership, but it's a handy way to market things to Americans. It's also effective.

When we think of owning something, we have a general understanding of what ownership means. More specifically, we understand that ownership involves rights over that which is owned. If you own a car, you get to control aspects of its use. If you own a home, you get to decide if there will be wood flooring or carpeting in the living room. If you own a company, you get to make decisions about the running of that company.

When the news companies analyze the health of the economy, they are typically discussing the stock market. They will occasionally venture into the realm of the local economy to see how small businesses are doing, or discuss how the average family is holding up, but "the economy" seems to really mean "the market" and the share prices of stocks.

Stocks are a means of ownership in a company, and owning a share of common stock grants the holder ownership rights in the company. It is true that stocks are only one form of security in the market, but when the market analysts on the news discuss if the market is "up" or "down," they are discussing stocks. The fluctuation of the values of common stocks in the market alter the dividends those shares provide to their owners. Most of our retirement plans are investments in the market, which means that most of us have shares of ownership in some publicly traded company or other.

Now, it is true that there are some people who invest the time necessary to analyze specific companies and direct their investments based on that information. Many of these people are relying on reports expressing the opinions of market experts who have spent years studying both companies and the laws governing the markets and whose full time job is analyzing both commercial and legal trends. For the average person whose retirement is invested in the market, their daily lives do not really allow for the time needed to directly manage their investments. The result is that retirement plans are left in the hands of "experts," and roughly half of retirement investments are placed into mutual funds managed by those experts.

Now, there are many varieties of mutual funds, but many of them include common stocks which, for the purposes of this article, raises the question of who actually owns the stock. Who gets to exercise the rights that ownership entails? Because your money in a mutual fund is pooled with that of others, if your money is used to purchase common stock, you do not get to exercise the rights of ownership. Do the companies who employ the experts who manage your investments get those rights, or has this become a means by which a company selling shares of itself on the market get to obtain your investment without having to deal with the pesky issue of giving you a vote on how the company is run (something that ownership in common stock grants)?

Our economic laws not only facilitate separating ownership of productive capital from work on that capital, but even from exercising the rights of ownership of that capital. Not only has money gone from being based on some form of economic value to being based on the existence of debt, but, through mutual funds, ownership of productive capital has gone from being based on acquiring the rights of ownership to not even granting the rights of ownership. Is our entire economy nothing more than a fiction?

2 comments:

  1. Hello, David. Could you please explain what you mean by this statement?:

    "Not only has money gone from being based on some form of economic value to being based on the existence of debt."

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  2. Certainly, Jamie. Whether or not something has economic value is determined on the value society is willing to associate to it. In times past, it was common to issue money in the form of coins of metals deemed valuable by a society. The value of paper money was based on the promised trade for a given amount of precious metal - thus, the paper money was known to be of no particular value on its own, but because you used to have a guarantee that you could exchange it for a given amount of something considered valuable, the paper money was considered to have the same value as the thing for which it had a guaranteed exchange.

    Please note that I am not necessarily endorsing this as my preferred system of valuing money. There are other ways that I think would work, and maybe even work better, but I must admit that I don't really have sufficient expertise on the matter of what should form the basis of the value of money other than I do believe it should be based on something of deemed of value - whether that is a precious commodity or the amount of goods and services generated in the society, or whatever.

    The reality is that we live under a "fractional reserve" system in which money is created by issuing debt. The loans you get from a bank are not the money other customers deposited in the bank. When you deposit money in a bank, that bank deposits it in the Federal Reserve Bank where it will sit. The money your bank can loan is based on the rules of the fractional reserve system which allow the bank to loan out nine times the money it has on reserve. This is money which did not previously exist. It is brought into existence when someone takes out a loan. It is created by the act of establishing a debt with the bank.

    Let's say that I am the bank. Your neighbor comes to me and deposits $10,000. I deposit it into the Federal Reserve Bank and I am allowed to loan out $90,000. Note that I don't actually have $90,000 - I only have $10,000.

    Now you come to me for a loan of $5,000. No part of that money comes from the original $10,000 I have deposited in the Federal Reserve Bank. I still have $10,000 on deposit, so where did I get the $5,000 to loan you? Under the rules of fractional reserve banking, I was allowed to create it just because you were willing to go into debt. Where did it come from? Nowhere. It was literally created by the act of establishing debt, which is why the money itself is based on the existence of debt.

    Now, it's true that you get paid for your work, but you don't get to write checks for nine times what you are paid. The banks that create our money are.

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