It was a big day for democracy on Friday. Oh! and hello after almost two months! I've been busy plotting the takeover of the world, and the education of third graders. But let's return to democracy, because it just got easier.
Technically, the term I'm looking for isn't democracy, which is a political process, but participatory capitalism, which is an economic one. But journalists are calling the SEC's move to let unaccredited investors invest in startups and early stage companies the "democratization of capital" and I approve of the sentiment behind the statement. In a world where the middle class is disappearing, it is tempting to return to Bernie Sanders-style socialism or some vague hope that "good jobs" will return from the nether [hint: they aren't in China and you don't want Chinese working conditions to come here]. However, socialism has proven to be remarkably unwieldy lately - witness the strangeness happening in Europe at present, or the growing social insurance of the advanced economies.
Part of the problem seems to be a lack of participation. As a teacher, I have observed that lessons that involved participation are more easily accepted by students. Student misbehavior decreases, excitement builds, and arguably learning increases. I think a similar force is at work in capital markets as well. Hitherto, capital markets have been restricted to accredited investors (individuals with net worths above $1 million, incomes above $200,000, or institutions such as banks or universities). Once a company has been capitalized, shares can be sold on secondary markets (the "stock markets"). All of that changed on Friday, when the SEC released new regulations that allowed any individual to contribute a limited sum to early stage companies.
The power, now, lies with the people. Entrepreneurs and capitalists want to move to a crowdfunding venue because of the enormous wealth that can be tapped - by some estates as much as $85.7 trillion. This number is the size of the US household wealth, which theoretically can be tapped to provide capital either through direct investment with cash, or through the sale or mortgaging of assets such as gold or houses. 300 million people can now invest, instead of the 3 or 4 million who could before.
And with investment comes power. Investing in a company is a sign of ownership and wealth. 90% of startups fail, but of the 10% that succeed you have runaway successes like Facebook and Google. 5-100 times the investment is the average return. A startup investor, with a little due diligence and common sense, can become quite wealthy indeed.
But the true power of investment is not in wealth. It is in power itself. The global influence of Google is an extreme example of a general rule. Corporations are perhaps the most powerful entities in the world (with the possible exclusion of nuclear-armed states). And the power behind a corporation is the stockholders. The CEO, for instance, may seem all-powerful, but many have been forced from their position by the board of directors, composed of the largest stakeholders.
And here lies the potential for the people of the United States (and the world). The labor movement in the US is moribund. The power of those who walk out, who strike, seems at an all time low. But this is because the central relationship between union members and management is still that of employed and employer. Management can always justify the decision to hire scabs, or close plants and move to some distant part of the world where the people are more scared and the taxes more corruptible, by appealing to the return expected by shareholders.
But what if the unions WERE shareholders? The power of the purse would be in the hands of the employed. Of course, companies have been employee-owned before, but this is not a common model and often leads to strange decentralization effects. Now, however, union members can pay small, nominal fees to enter the ultimate elite of their corporate employer.
It has always been possible to purchase small bits of companies via the unionized workforce on secondary markets, of course. The scale and size of the mature corporation, however, prevents this from being the first attempt at such a union ownership force. Walmart has 2.1 million employees, worldwide. There are 3.21 billion shares of Walmart stock outstanding (meaning in the market at present, not held by insiders or funds). To buy every share outstanding would require each employee purchasing about 1500 shares, costing nearly $107,000. In reality, it would cost a lot more, since such a massive buying spree would cause a surge in equity prices. This would still keep the unionized workers at a mere 2/3 ownership, dispersed among 2 million unorganized people. And union hierarchies are not, currently savory characters to deal with.
But an early stage company could be successfully bought up by the conscientious outsiders, the workers and the people of goodwill. They could form a sort of oversight organization, dedicated not only to financial oversight but also social and environmental oversight. The board of directors of a corporation is supposed to do this, but when it is primarily composed of relatives, school friends and professional associates of the CEO, or at least his fellow upper class stakeholders, the groupthink becomes ant-like. With a young company, this pattern of control and responsibility can be set up right away, as the company grows.
One final cautionary note: people used to be able to invest in startups anyway. Until the Great Depression, anyone could help capitalize a new company. The only problem was that most people were barely above subsistence level and did not have sufficient capital for a spare set of boots, let alone a share of a company. When the US population became richer, in the 1920s especially, it flocked to the capital markets for a quick gain, much as the Chinese middle class has been doing recently. This all crashed down during the Depression, and the government squashed non-accredited investors investing in the highly risky startup market. The power that has just been handed to the people can lead to a lot of vanity and stupidity. Use it well, humanity.
Technically, the term I'm looking for isn't democracy, which is a political process, but participatory capitalism, which is an economic one. But journalists are calling the SEC's move to let unaccredited investors invest in startups and early stage companies the "democratization of capital" and I approve of the sentiment behind the statement. In a world where the middle class is disappearing, it is tempting to return to Bernie Sanders-style socialism or some vague hope that "good jobs" will return from the nether [hint: they aren't in China and you don't want Chinese working conditions to come here]. However, socialism has proven to be remarkably unwieldy lately - witness the strangeness happening in Europe at present, or the growing social insurance of the advanced economies.
Part of the problem seems to be a lack of participation. As a teacher, I have observed that lessons that involved participation are more easily accepted by students. Student misbehavior decreases, excitement builds, and arguably learning increases. I think a similar force is at work in capital markets as well. Hitherto, capital markets have been restricted to accredited investors (individuals with net worths above $1 million, incomes above $200,000, or institutions such as banks or universities). Once a company has been capitalized, shares can be sold on secondary markets (the "stock markets"). All of that changed on Friday, when the SEC released new regulations that allowed any individual to contribute a limited sum to early stage companies.
The power, now, lies with the people. Entrepreneurs and capitalists want to move to a crowdfunding venue because of the enormous wealth that can be tapped - by some estates as much as $85.7 trillion. This number is the size of the US household wealth, which theoretically can be tapped to provide capital either through direct investment with cash, or through the sale or mortgaging of assets such as gold or houses. 300 million people can now invest, instead of the 3 or 4 million who could before.
And with investment comes power. Investing in a company is a sign of ownership and wealth. 90% of startups fail, but of the 10% that succeed you have runaway successes like Facebook and Google. 5-100 times the investment is the average return. A startup investor, with a little due diligence and common sense, can become quite wealthy indeed.
But the true power of investment is not in wealth. It is in power itself. The global influence of Google is an extreme example of a general rule. Corporations are perhaps the most powerful entities in the world (with the possible exclusion of nuclear-armed states). And the power behind a corporation is the stockholders. The CEO, for instance, may seem all-powerful, but many have been forced from their position by the board of directors, composed of the largest stakeholders.
And here lies the potential for the people of the United States (and the world). The labor movement in the US is moribund. The power of those who walk out, who strike, seems at an all time low. But this is because the central relationship between union members and management is still that of employed and employer. Management can always justify the decision to hire scabs, or close plants and move to some distant part of the world where the people are more scared and the taxes more corruptible, by appealing to the return expected by shareholders.
But what if the unions WERE shareholders? The power of the purse would be in the hands of the employed. Of course, companies have been employee-owned before, but this is not a common model and often leads to strange decentralization effects. Now, however, union members can pay small, nominal fees to enter the ultimate elite of their corporate employer.
It has always been possible to purchase small bits of companies via the unionized workforce on secondary markets, of course. The scale and size of the mature corporation, however, prevents this from being the first attempt at such a union ownership force. Walmart has 2.1 million employees, worldwide. There are 3.21 billion shares of Walmart stock outstanding (meaning in the market at present, not held by insiders or funds). To buy every share outstanding would require each employee purchasing about 1500 shares, costing nearly $107,000. In reality, it would cost a lot more, since such a massive buying spree would cause a surge in equity prices. This would still keep the unionized workers at a mere 2/3 ownership, dispersed among 2 million unorganized people. And union hierarchies are not, currently savory characters to deal with.
But an early stage company could be successfully bought up by the conscientious outsiders, the workers and the people of goodwill. They could form a sort of oversight organization, dedicated not only to financial oversight but also social and environmental oversight. The board of directors of a corporation is supposed to do this, but when it is primarily composed of relatives, school friends and professional associates of the CEO, or at least his fellow upper class stakeholders, the groupthink becomes ant-like. With a young company, this pattern of control and responsibility can be set up right away, as the company grows.
One final cautionary note: people used to be able to invest in startups anyway. Until the Great Depression, anyone could help capitalize a new company. The only problem was that most people were barely above subsistence level and did not have sufficient capital for a spare set of boots, let alone a share of a company. When the US population became richer, in the 1920s especially, it flocked to the capital markets for a quick gain, much as the Chinese middle class has been doing recently. This all crashed down during the Depression, and the government squashed non-accredited investors investing in the highly risky startup market. The power that has just been handed to the people can lead to a lot of vanity and stupidity. Use it well, humanity.
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