The Divine Right of Capital

JUST Books topic for March/April was capitalism and greed. Although we decided not to specify a single book to read, most readers picked Naomi Klein's The Shock Doctrine. It sounds like an important book that I should read some time.

We had an interesting discussion when we met at a club member's home, last week. In addition to the chosen topic and the books we had read, we discussed local and national politics, the economy, and even the pope. Our host had made some posters, recounting some important people and events that have shaped our economic theories and institutions. He included consideration of Adam Smith, Karl Marx, John Maynard Keynes, Milton Friedman, and Joseph Schumpeter. He led a discussion about booms and busts and the maldistribution of wealth. We debated whether people leave the land because they are attracted to the higher wages offered in the city or if they are driven from it. We talked about the practice of creating gated communities for the wealthy and building walls around the poor.

The book that I selected to read for March/April was The Divine Right of Capital, by Marjorie Kelly. It fit with the chosen topic and it was a book that I already had on my shelf. I had read it several years ago, but it was worth rereading and still very relevant.

Kelly's premise is that our corporation-centered capitalism is a remnant of the age of aristocracy. She constructed a reasonable and understandable comparison between the political enlightenment of the 18th Century and the economic enlightenment that we should be working toward in the 21st.

The major obstacle to achieving economic democracy is the mandate to maximize returns to shareholders. She says she doesn't have a problem with capitalism's supply and demand, competition, profit, self-interest, or wealth creation. Those are motivators that can work toward society's benefit. But shareholder primacy is a privilege that is an artifact of the aristocratic age, akin to the divine right of kings.

The stock market's function is to provide liquidity to corporations. Its dysfunctions are:
1] many bidders for a fixed amount of stock causes inflation, and
2] it causes decapitalization, that is, converting natural capital and labor capital to financial capital.

Stockholders should switch places with employees in the economic equation. If corporations maximized employee income, basing it on productivity, they would be more successful. Employees would take ownership in the well-being of the corporation and be motivated to produce more. Stockholders could negotiate for a return on their investment.

Kelly reveals the fact that stockholders seldom actually invest in a corporation when they buy stock. That only happens when the corporation makes an offering of new stock. New stock offerings represent only one percent of all stock exchange transactions. However, if you consider stock buy backs, the stock market operates at less than zero efficiency.

She suggests basing corporate finance on the following equation:
Employee income + retained corporate earnings = Revenue - (capital income + cost of materials)
Rather than treating employee income as a cost to be minimized, capital income (returns to shareholders) is a cost to be minimized.

The Divine Right of Capital is a very exciting book, presenting historical perspective, intelligent insight and a plan for changing a corrupt and dysfunctional system. It is a very dense read, loaded with thought provoking ideas and information. For me, it is a book to be read slowly and then reread.