Is stock ownership (i.e., equity shares) compatible with free market libertarianism?
For background, see "Entrepreneurs, the Firm, and the Knowledge Problem". I'm working on some broader ideas of organization, economy, etc., and I'm interested in arguments in support of, and objecting to the thesis that stock ownership is compatible with libertarianism.
Discuss.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
I'll bite.
I believe that stock ownership in the form of equity shares is compatible with free-market Libertarianism for the following reasons:
- Equity shares are just another form of private property, and the protection and respect of private property is one of the cornerstones of free-market advocates.
- Limiting or prohibiting the right of an individual or group of individuals to invest into a private company by purchasing equity shares in return for speculated future profit is opposed to the concept of non-coercion within Libertarian thought.
Thanks, Eric! Let's get the ball rolling! (I may play some devil's advocate, here.)
I'm on the fence, and before I write any more on the topics, I'd certainly like to cement my opinions (one way or the other).
On one hand, I agree with the "private property" aspect. I also agree that nobody should be externally prohibited (or otherwise limited) in their right to do whatever they want, voluntarily.
On the other hand, stock equity represents a perpetual obligation, resulting from a one-time capital infusion. Now, this is the part I'm not sure of. I can't say that there's anything wrong per se, with this sort of arrangement, but it doesn't strike me as necessarily kosher, either, especially as a speculative vehicle that is essentially divorced from any fundamental and tangible stake in the company.
Furthermore, I'm not convinced that in a freed market, equity stakes (as we are now familiar with the concept) would be competitive, the question here is something like, "Why would any organization of people agree to perpetual indenture, when they could competitively obtain a loan of fixed term and repayment?"
Good points David!
Just to clarify, I think you're suggesting that taking ownership in stock equity in return for investing cash or other capital toward a company or venture will put a perpetual obligation on the company or venture, until that capital is paid back, or for an indeterminate amount of time.
If I understand you correctly, I would respond with the point that free markets are just that--free. They allow people to freely make private non-coerced contracts with each other, and these contracts should be binding. The contents of these contracts can be whatever the parties decide. If the organization or person selling the stock and receiving the investment is not in agreement to the terms of the payback or equity ownership, then they have the ability to shop around for investors, finding more amicable terms.
I think your last paragraph somewhat pre-answers my previous paragraph. But perhaps a group of people would opt for a perpetual indenture because the terms and/or the amount of investment is so good, that it may be the only way they would be able to achieve their ambitious goals.
In short, risk should be accurately balanced with reward, and on the other side of the coin, with penalty, if things don't work out. But it must be tied directly to the parties themselves. That goes for both the stock seller as well as the investor. The means by which to most accurately balance the risk/reward is to remove external intervention between the two (or more) groups involved in the contract. They'll be more acutely aware of the triune risk/reward/penalty outcome than any external party would be--thus they would make the best decisions that result in the best outcome possible with the least risk necessary.
david_z: Furthermore, I'm not convinced that in a freed market, equity stakes (as we are now familiar with the concept) would be competitive, the question here is something like, "Why would any organization of people agree to perpetual indenture, when they could competitively obtain a loan of fixed term and repayment?"
Because they want to share risk.
The fallacies of intellectual communism, a compilation - On the nature of power
one quirk with equity right now, is that new shares are often issued. This dilutes the value of existing ownership stakes, or, it forces the existing owners to contribute more capital in order to maintain the same share of ownership. This strikes me as peculiar, to say the least.
I don't want to come off as "anti", I'm just trying to think everything through.
Are you talking about economic risk (e.g., bankruptcy/default), or more along the lines of liability risks (e.g., accidents/negligence/etc.)? Could you expound on this?
Why would we agree to give you 2% of net, per year, forever when we could quite possibly obtain a loan at 3-4% fixed in term and amount?
Let me clarify where I see the disconnect: a dividend obligation/expectation is a claim against future profits, no matter how much they are. You might buy equity for $1,000 to start up, and if I net $1MM, I owe you 2% or $20,000. On the other hand, if you loan me $1,000 I only owe you $1,030 at year's end.
david_z:Why would we agree to give you 2% of net, per year, forever when we could quite possibly obtain a loan at 3-4% fixed in term and amount?
Because you don't know if you will earn 10% or 0% net cash this year.
There is a reason it's called leverage. It's weight.
this is a good angle.
I have to admit that I'm still kind of put off by the "forever" aspect of it, although stock is occationally repurchased by the issuer.
I was speaking more toward economic risk. Stranger pretty much summed it up in that there is no guarantee of returns from the investment when purchasing stock, thus the need for a greater reward in the form of perpetual dividends.
If a typical loan was given out instead of selling shares in order to raise capital, then a few things would likely need to be in place:
- Company requesting the loan will need to have a strong case showing they're capable and trustworthy in paying it back in a fixed timeframe.
- Company may require to put up collateral in return for increased trust.
- Company may need to disclose a significant amount of internal financial and operating information to the loaning organization.
Many times one or more of these points are deal-breakers for companies seeking capital. For them, I suppose they find the idea of selling off speculative yet ongoing future dividend payments in return for dealing with less issues listed above, as a better move than the increased difficulty in trying to obtain a conventional fixed-rate and term loan.
Then it gets into the perceived risk/reward/consequence beliefs of both the investor and the company seeking capital. Apparently some choose this method because all parties in the contract find it the best possible reward with the least consequences, given the alternatives.
If I want to buy a certain company, can I be prevented from doing so? Of course not. If I want to buy a certain company, but only have the money to buy a little bit part of it, why should I be prevented from doing so and buying a tiny part of it? You do not own stock. You own a bit part of the company. The stock is just a little receipt that you use as proof of your ownership. There is nothing mystical about it as far as I can see.Infact it is through stock that we could reach conditions of free exchange from the present condition the fastest and with the least fuss. Just de-nationalise all the state owned property by handing the citizens stock (favoring older workers and retirees).