ARTS & FARCES internet

John Robb, president of UserLand Software—the company that makes the software on which ARTS & FARCES internet runs—has published two interesting and insightful essays about the new economy enabled by the Internet: “The New Economy” and “The New Economy II.” His basic premise is that improved information flow—mostly due to the Internet—has reversed the power relationship between individuals and corporations. While that may be happening, it is premature to claim it has happened.

Robb is generally on the mark with these essays when he states that the new economy isn’t the new economy that corporate America expected. It’s surely dawned on just about everyone with enough eye-hand coordination to wield a mouse that the Internet isn’t a new market, nor strictly a new medium in the most traditional sense.

While agreeing with most of Robb’s comments, I take issue with two of his points: that “wages are up and increasing” and that the market is “merely an abstraction of the wealth creation process.”

More than one in four working Americans earn poverty-level wages

My research indicates that Robb is technically correct when he writes “wages are up and increasing,” but wrong when the bigger picture is examined. The fact is that in the last 15 years, the proportion of employees that earn poverty-level wages has increased significantly. By the mid-1990s, fully 30% of all employees were being paid at or below the poverty level. According to the State of Working America 2000-01, the average hourly wage from 1995 - 1998 rose by 2.6% per year (adjusted for inflation). While that’s much better than the 0.6% annual growth seen from 1989 - 1995, worker benefits have been dropping drastically enough to reduce the overall compensation growth from 1995 - 1998 to under 2% annually. And most of the gains realized in the 1995 - 1998 period have been lost since 2000.

Four years of significant annual wage growth is not enough to offset decades of falling wages.

The sad fact remains that even with the 1995 - 1998 gains, 26.8% of all American workers earn poverty-level wages today. A poverty-level wage is defined as “the wage required to lift out of poverty a family of four headed by a full-time, full-year worker (about US$8.19 per hour in 1999).”

More importantly, the inequity of income distribution in America continues to grow. While wage earners at the lowest end of the income spectrum are making gains on the middle, the upper income brackets continue to pull away from everyone else. CEO salaries, for example, rose by 62.7% during the same 1995 - 1998 period.

Although Robb doesn’t cite wealth distribution, it’s an important part of the whole picture. The stock market advances of the 1990s benefited fewer than half of all American households (less than half of all households own stock in any form, including mutual funds and pension plans) and 64% of those households that do own stock have holdings of US$5,000 or less. In America, the wealthiest 1% own about 38% of all national wealth while the bottom 80% of the populace own 17% of the wealth pie. The middle of the wealth distribution is even more telling: the value of stock holdings of the typical American household grew by US$5,500 from 1989 - 1998 while the value of non-stock assets rose by US$8,500 and “typical household debt increased US$11,800.”

The market is a mechanism for wealth extraction, not wealth creation

Robb is a man after my heart when he writes:

“Corporations aren’t people despite what the law says. They are a means to an end. If they end up barely producing a profit, but employee salaries rise and consumers get low prices, does that hurt us? No. Sure, the stock market will be a dog, but who cares? The market is merely an abstraction of the wealth creation process and a playground of the wealthy that is often perverted to fleece gullible individual investors.”

He’s right about the market being a playground of the wealthy. As New York University economics professor Edward N. Wolff points out in “Recent Trends in Wealth Ownership, 1983 - 1998,” the wealthiest 10% of American households own 90% of all stock held by households. And that wealth inequality is continuing to rise.

Unfortunately, Robb is wrong about corporate personhood, corporate profits, and the market as an abstraction of the wealth creation process.

Corporations were granted fictional personhood in 1886 when the Supreme Court, in Santa Clara County v. Southern Pacific Railroad, found that corporations were subject to the due process and equal protection provisions of the Fourteenth Amendment. With that decision, corporations were solidly identified with private property instead of the public grants and interests that had been their overarching governance previously. That single decision also significantly weakened the public claims on corporate charters, and is seen by most corporate governance experts as an endorsement of the corporation being a “natural entity” with natural rights, rather than a created fiction chartered by the state for a specific purpose in the public interest, subject to state control. Corporate personhood is clearly something that needs to be revisited by the Court, but wishing it away won’t make it so.

Robb’s comment on corporate profits and the market (and by extension stockholder primacy) is a much more problematic issue. The sole purpose of a modern corporation—since corporations were granted the rights (but not the responsibilities) of personhood—is to maximize returns to shareholders. This precedent was firmly established by the 1919 decision of the Michigan Supreme Court in the case of Dodge v. Ford Motor Co. which found that “a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”

As Ralph Estes eloquently pointed out in Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things, stockholders do not fund large corporations. What we commonly call “investments” are much more accurately termed “speculations” because the only time a corporation gets money “invested” in stock is when the corporation issues new stock. And that happens very rarely indeed. Federal Reserve data compiled in the 2000 census indicates that only about one percent of money “invested” in the stock market actually reaches corporations. The stock market is analogous to the used car market. When you buy stock, the money goes to the prior owner of the stock, not the corporation in which you are said to be “investing.”

The stock market is not an abstraction, it’s a fiction. The idea that shareholders create wealth is a myth, plain and simple. Shareholders do not create, they extract. When stock is purchased the common myth says that capital is being added to the economy. What’s really happening is that shareholders are buying the privileged entitlement to extract wealth. No one points this out more articulately than Marjorie Kelly in The Divine Right of Capital: Dethroning the Corporate Aristocracy, where she draws comparisons between shareholders and feudal aristocrats: “The most fundamental right of an aristocracy,” she writes, “is a right to income detached from productivity—in other words, to be free from labor.”

In real markets, participants work to keep what they earn; in the stock market, a solitary privileged group called shareholders keeps—through an entitlement—what others earn. One of the questions we need to be asking is simple and straightforward: what place does entitlement have in a real market economy?