I will, however, continue to share some content here, on my award winning blog.
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Capital Strike!
By Robert E. Wright
person output in inflation-adjusted terms) at modern rates right after ratification of the US Constitution
because, as contemporaries explained, they believed that the document created a government that
protected their lives, liberty, and property from three principal and eternal threats:, foreigners, other
Americans, and domestic governments, including the national government itself.
Those early Americans were largely correct but of course they could not foresee the Civil War,
associated with COVID-19.
Matters grew so worrisome during the New Deal that many businesses engaged in what was termed
a “capital strike,” a concept that readers of Ayn Rand’s Atlas Shrugged will find familiar. Instead of
investing in new enterprises or improving existing ones, they hunkered down, waiting for less
repressive government policies, a reaction that of course exacerbated the prolonged economic
downturn now termed the Great Depression.
Another capital strike may loom if Elon Musk is openly articulating what entrepreneurs are thinking to
themselves;, that our systems of governance are so deeply flawed that taking big risks trying to
innovate is no longer worth the effort.
How long until innovators decide to stash their cash in real estate and drop out? If any “public health”
crisis can be used to shutter businesses indefinitely, spur massive bailouts that give the
AOC recasts climate change into a public health crisis and uses the state’s apparently unlimited police
powers to initiate a Green New Deal, or worse. Any legislator willing to say “[expletive that rhymes with
duck] Elon Musk” merely for moving his property to a, let’s face it palpably better, state is ready to seize
that property on whatever pretext she can concoct.
Yes, the stock market has recovered from the shock of lockdown policies but it is a poor indicator of
innovative gumption because public policies induce most Americans to save for retirement via the
stock market, artificially inflating demand for stocks. The stock market rebounded because retirement
savings are largely automatic and essentially have nowhere else to go, especially in a potentially
inflationary environment. I, for one, would love to turn my 403b into the outright purchase of real estate
but regulations and taxes render it extremely costly to do so. The CARES Act allows people directly
people cannot take any distribution, leaving them stuck with stocks.
Besides, a capital strike is much more fundamental than the stock market because it refers to slowing
or stopping new business investments, not merely the prices of claims on the fruits of past investments. I fear that entrepreneurship and innovation are no longer as attractive as rent- seeking activities, especially in blue states like New York and California where the sovereign expropriation risk has grown very high. Their recent lockdown policies, arguably unconstitutional actions, have simply made a brewing controversy more salient.
That controversy strikes at the heart of America’s two- plus century growth miracle, belief that
Americans’ lives, liberty, and property are safe. Before the present crisis, the controversy took its most
palpable form in the Corporate Social Responsibility (CSR) movement, which recently has begun
denying that investors own their own investments in corporations!
According to a recent article by David A. Ciepley, Americans today are under the misapprehension that
stockholders are owners or members of corporations because of some unusual happenings
associated with the formation of the British East India Company hundreds of years ago.
After reading Ciepley’s piece, I felt like Consuela, the maid on Family Guy who knows one word in
English because it is the same word in Spanish. “No.”
Ciepley, an Associate Fellow at UVA’s Institute for Advanced Studies in Culture, has missed almost the
entire literature on the history of corporate governance and finance so he fails to see, as
Amanda Porterfield clearly does in Corporate Spirit, that corporations pre-date the EIC by almost two
millennia and were always viewed in the West as groups of individuals voluntarily associated in one
“body” (corpus) for some common purpose, from worshipping Christ (literally the body of Christ),
to encouraging some laudable social end, to engaging in commerce.
By natural right, individuals can associate and create rules to govern themselves so long as those
rules do not contravene the laws of nature or of humans. Moreover, those associations can engage in
any activity as lawfully as any one of its members or owners could. That includes owning assets and
borrowing on the basis of them under contracts that may, or may not, limit the liability of each member.
Statutes called charters or acts of incorporation added the state’s sanction to that natural right of
association and clarified the relationship between the corporation and its owners or members.
You can read about the details of the (d)evolution of the governance of America’s corporations to your
Basically, bad laws made it possible for executives with little equity stake in businesses to entrench
themselves in management. Several times, shareholders fought back, only to lose back the ground
they made during the reign of corporate gadflies like Wilma Soss and the Gilbert Brothers and then the
temporary ascendance of leveraged buyout firms like KKR. Corporate governance history may be the
most important topic that hardly anyone studies.
And that is a crying rotten shame, not just for the sales of my books (including a forthcoming biography
of Wilma Soss with Bucknell’s Jan Traflet that will blow your socks off!) but for important national policy
discussions. Instead of helping shareholders to re-assert tried and true checks and balances against
managerial rent extraction (you know, sky high salaries, golden parachutes, unnecessary corporate jets
and such), a lot of “progressive” commentators waste their time and talents on counterproductive CSR
initiatives.
The worst of these, perhaps, are the constant calls to prevent corporations from buying their own
shares. All that practice does is to reduce the number of shares, thereby raising the price per share.
It is, then, simply a tax-efficient mechanism for returning capital to voluntary shareholders. Members of
the CSR movement dislike it, however, because stock buybacks could also signal a capital strike.
Executives can use buybacks to enrich themselves with stock options but that is a governance
problem, not a problem with buybacks per se, which are only one of a bazillion ways that unchecked
managers can expropriate resources from shareholders.
But the bigger problem with CSR advocacy is forgetting that corporations are, at root, voluntary
associations. When properly governed, they exist to serve the ends of their owners and members,
not the ends of government, or some activist law professors, or some twits on Twitter who couldn’t
tell the difference between a common and a preferred share.
That means that corporations can issue more shares if they want, or fewer, which can only be done by
buying them in the open market. Or they can organize as mutuals, or non-profits. It’s their own
business and they should be left to it.
Want to know what happens when donors, investors, or innovators fear that their money will be under
somebody else’s control? They stop donating, investing, and innovating. Want to know what happens
then? Poverty. Especially today, seemingly all of nature conspires to keep human beings poor. We don’t
need CSR “progressives” helping, we need to re-establish confidence in the Constitution’s protection
of life, liberty, and property. Otherwise, we will end up sharing our economic pie equally, but it will be a
very small one indeed.
We might have to eat catfish due to the policy response to COVID-19 (a threat thankfully less ominous
today than two weeks ago), but we will eat pie crumbs if governments and CSR progressives trigger
a capital strike.
