The New Capitalists Were Not Real Capitalists

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The proletariat began buying stocks in the ’80s. The ‘shareholder nation’ was a dream of Maggie Thatcher and Ronald Reagan: Everyman a Capitalist.

Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds…or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers – who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn’t mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich…and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the ’80s, realized how it worked, he was outraged; ‘they make money in their sleep,’ he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. “Buy stocks,” thundered Wall Street.

And so…the little guys piled in….and stocks soared.

“Buy and Hold,” the pros told them. “Stocks for the Long Run,” wrote professors of finance.

Of course, some people wanted to make money faster. So ‘day trading’ became popular in the late ’90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the ’80s and ’90s, too, people began to believe that you could motivate workers by giving them “a piece of the upside.” And the workers, too, believed they might get rich if they had a stake in their employer’s company. Especially in the financial sector, ‘results-based compensation’ caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened…well, that would be the owners problem, wouldn’t it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners – including the new capitalists – wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits – so they could exercise their stock options and pay themselves big bonuses. They were all ‘capitalists’ – but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high…he’d want to move to a lower-cost production center. And if the managers asked for too much – he’d fire them and get new ones.

But neither the working stiffs nor the suits shared the owners’ interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries…GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn’t allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century – suppressing earnings in the short term in order to make the company stronger later on – its bonus- seeking, option-driven managers wouldn’t permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you’re wondering what that means in today’s world, you’re not alone. We’re wondering too.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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