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8. The Joint-Stock Company
It is clear that, far from being the centrally important element, the producers’ loan market is of minor importance, and it is easy to postulate a going productive system with no such market at all. But, some may reply, this may be all very well for a primitive economy where every firm is owned by just one capitalist-investor, who invests his own savings. What happens in our modern complex economy, where savings and investment are separated, are processes engaged in by different groups of people—the former by scattered individuals, the latter by relatively few directors of firms? Let us, therefore, now consider a second possible situation. Up to this point we have not treated in detail the question whether each factor or business was owned by one person or jointly by many persons. Now let us consider an economy in which factors are jointly owned by many people, as largely happens in the modern world, and we shall see what difference this makes in our analyses.
Before studying the effect of such jointly owned companies on the producers’ loan market, we must digress to analyze the nature of these companies themselves. In a jointly owned firm, instead of each individual capitalist's making his own investments and making all his own investment and production decisions, various individuals pool their money capital in one organization, or business firm, and jointly make decisions on the investment of their joint savings. The firm then purchases the land, labor, and capital-goods factors, and later sells the product to consumers or to lower-order capitalists. Thus, the firm is the joint owner of the factor services and particularly of the product as it is produced and becomes ready for sale. The firm is the product-owner until the product is sold for money. The individuals who contributed their saved capital to the firm are the joint owners, successively, of: (a) the initial money capital—the pooled savings, (b) the services of the factors, (c) the product of the factors, and (d) the money obtained from the sale of the product. In the evenly rotating economy, their ownership of assets follows this same step-by-step pattern, period after period, without change. In a jointly owned firm, in actual practice, the variety of productive assets owned by the firm is large. Any one firm is usually engaged in various production processes, each one involving a different period of time, and is likely to be engaged in different stages of each process at any one particular time. A firm is likely to be producing so that its output is continuous and so that it makes sales of new units of the product every day.
It is obvious, then, that if the firm keeps continually in business, its operations at any one time will be a mixture of investment and sale of product. Its assets at any one time will be a mixture of cash about to be invested, factors just bought, hardly begun products, and money just received from the sale of products. The result is that, to the superficial, it looks as if the firm is an automatically continuing thing and as if the production is somehow timeless and instantaneous, ensuing immediately after the factor input.
Actually, of course, this idea is completely unfounded. There is no automatic continuity of investment and production. Production is continued because the owners are continually making decisions to proceed; if they did not think it profitable to do so, they could and do at any point alter, curtail, or totally cease operations and investments. And production takes time from initial investment to final product.
In the light of our discussion, we may classify the types of assets owned by any firm (whether jointly or individually owned) as follows:
On this entire package of assets, a monetary evaluation is placed by the market. How this is done will be examined in detail later.
At this point, let us revert to the simple case of a one-shot investment, an investment in factors on one date, and the sale of the resulting product a year later. This is the assumption involved in our original analysis of the production structure; and it will be seen below that the same analysis can be applied to the more complex case of a melange of assets at different stages of production and even to cases where one firm engages in several different production processes and produces different goods. Let us consider a group of individuals pooling their saved money capital to the extent of 100 ounces, purchasing factors with the 100 gold ounces, obtaining a product, and selling the product for 105 ounces a year later. The rate of interest in this society is 5 percent per annum, and the rate of interest return on this investment conforms with this condition. The question now arises: On what principle do the individual owners mutually apportion their shares of the assets? It will almost always be the case that every individual is vitally interested in knowing his share of the joint assets, and consequently firms are established in such a way that the principle of apportionment is known to all the owners.
At first one might be inclined to say that this is simply a case of bargaining, as in the case of the product jointly owned by all the owners of the factors. But the former situation does not apply here. For in the case discussed above, there was no principle whereby any man's share of ownership could be distinguished from that of anyone else. A whole group of people worked, contributed their land, etc., to the production process, and there was no way except simple bargaining by which the income from the sale of the product could be apportioned among them. Here, each individual is contributing a certain amount of money capital to begin with. Therefore, the proportions are naturally established from the outset. Let us say that the 100 ounces of capital are contributed by five men as follows:
A .......... 40 oz.
B .......... 20 oz.
C .......... 20 oz.
D .......... 15 oz.
E ............ 5 oz.
In other words, A contributes 40 percent of the capital, B 20 percent, C 20 percent, D 15 percent, E 5 percent. Each individual owner of the firm then owns the same percentage of all the assets that he contributed in the beginning. This holds true at each step of the way, and finally for the money obtained from the sale of the product. The 105 ounces earned from the sale will be either reinvested in or “disinvested” from the process. At any rate, the ownership of these 105 ounces will be distributed in the same percentages as the capital invested.
This natural structure of a firm is essentially the structure of a joint-stock company. In the joint-stock company, each investor-owner receives a share—a certification of ownership in proportion to the amount he has invested in the total capital of the company. Thus, if A, B, ... E above form a company, they may issue 100 shares, each share representing a value, or an asset, of one ounce. A will receive 40 shares; B, 20 shares; C, 20 shares, etc. After the sale of the product, each share will be worth 5 percent more than its original, or par, value.
Suppose that after the sale, or indeed at any time before the sale, another person, F, wishes to invest in this company. Suppose that he wishes to invest 30 ounces of gold. In that case, the investment of money savings in the company increases from 100 (if before the sale) or 105 (if after the sale) by 30 ounces. Thirty new shares will be issued and turned over to F, and the capital value of the firm increases by 30 ounces. In the vast majority of cases where reinvestment of monetary revenue is going on continuously, at any point in time the capital value of a firm's assets will be the appraised value of all the productive assets, including cash, land, capital goods, and finished products. The capital value of the firm is increased at any given time by new investment and is maintained by the reinvestments of the owners after the finished product is sold.
The shares of capital are generally known as stock; the total par value of capital stock is the amount originally paid in on the formation of the company. From that point on, the total capital value of assets changes as income is earned, or, in the world of uncertainty, as losses are suffered, and as capital is reinvested or withdrawn from the company. The total value of capital stock changes accordingly, and the value of each share will differ from the original value accordingly.
How will the group of owners decide on the affairs of the company? Those decisions that must be made jointly will be made by some sort of voting arrangement. The natural voting arrangement, which one would expect to be used, is to have one vote per share of voting stock, with a majority of the votes deciding. This is precisely the arrangement used in the joint-stock company and its modern form, the corporation.
Of course, some joint-stock company arrangements differ from this, according to the desires of the owners. Partnerships can be worked out between two or more people on various principles. Usually, however, if one partner receives more than his proportionate share of invested capital, it is because he is contributing more of his labor or his land to the enterprise and gets paid accordingly. As we shall see, the rate paid to the labor of the “working partner” will be approximately equal to what he could earn in labor elsewhere, and the same is true for payment to the land or any other originally owned factor contributed by a partner. Since partnerships are almost always limited to a few, the relationships are more or less informal and need not have the formal patterns of the joint-stock company. However, partnerships will tend to work quite similarly. They provide more room for idiosyncratic arrangements. Thus, one partner may receive more than his share of capital because he is loved and revered by the others; this is really in the nature of a gift to him from the rest of the partners. Joint-stock companies hew more closely to a formal principle.
The great advantage of the joint-stock company is that it provides a more ready channel for new investments of saved capital. We have seen how easy it is for new capital to be attracted through the issuance of new shares. It is also easier for any owner to withdraw his capital from the firm. This greater ease of withdrawal vastly increases the temptation to invest in the company. Later on we shall explore the pricing of stock shares in the real world of uncertainty. In this real world, there is room for great differences of opinion concerning the appraised value of a firm's assets, and therefore concerning the monetary appraised value of each share of the firm's stock. In the evenly rotating economy, however, all appraisals of monetary value will agree—the principles of such appraisal will be examined below—and therefore the appraised value of the shares of stock will be agreed upon by all and will remain constant.
While the share market of joint-stock companies provides a ready channel for accumulating savings, the share market is strictly dependent on the price spreads. The savings or dissavings of capitalists are determined by time preferences, and the latter establish the price spread in the economy. The value of capital invested in the enterprise, i.e., its productive assets, will be the sum of future earnings from the capital discounted by the rate of interest. If the price spreads are 5 percent, the rate of interest return yielded on the share market (the ratio of earnings per share to the market price of the share) will tend to equal the rate of interest as determined elsewhere on the time market—in this case, 5 percent.
We still have a situation in which capitalists supply their own saved capital, which is used to purchase factors in expectation of a net monetary return. The only complications that develop from joint-stock companies or corporations are that many capitalists contribute and own the firm's assets jointly and that the price of a certain quantum of ownership will be regulated by the market so that the rate of interest yield will be the same for each individual share of stock as it is for the enterprise as a whole. If the whole firm buys factors for a total price of 100 and sells the product a year later for 105, for a 5-percent return, then, say, 1/5 of the shares of ownership of this firm will sell for an aggregate price of 20 and earn an annual net return of one ounce. Thus, the rates of interest for the partial shares of capital will all tend to be equal to the rate of interest earned on the entire capital.29
Majority rule in the joint-stock companies, with respect to total shares owned, does not mean that the minority rights of owners are overridden. In the first place, the entire pooling of resources and the basis on which it is worked out are voluntary for all parties concerned. Secondly, all the stockholders, or owners, have one single interest in common—an increase in their monetary return and assets, although they may, of course, differ concerning the means to achieve this goal. Thirdly, the members of the minority may sell their stock and withdraw from the company if they so desire.
Actually, the partners may arrange their voting rights and ownership rights in any way they please, and there have been many variations of such arrangements. One such form of group ownership, in which each owner has one vote regardless of the number of shares he owns, has absurdly but effectively arrogated to itself the name of “co-operative.” It is obvious that partnerships, joint-stock companies, and corporations are all eminently co-operative institutions.30
Many people believe that economic analysis, while applicable to individually owned firms, does not hold true for the modern economy of joint-stock companies. Nothing could be further from the truth. The introduction of corporations has not fundamentally changed our analysis of the interest rate or the savings-investment process. What of the separation of “management” from ownership in a corporation? It is certainly true that, in a joint-stock firm, the owners hire managerial labor to supervise their workers, whereas individual owners generally perform their own managerial labor. A manager is just as much a hired laborer as any other worker. The president of a company, just like the ditch digger, is hired by the owners; and, like the ditch digger, he expends labor in the production process. The price of managerial labor is determined in the same way as that of other labor, as will be seen below. On the market, the income to an independent owner will also include the going wage for that type of managerial labor, which joint-stock owners, of course, will not receive. Thus, we see that, far from rendering economic analysis obsolete, the modern world of the corporation aids analysis by separating and simplifying functions in production—specifically, the managerial function.
In addition to the capital-supplying function, the corporate capitalists also assume the entrepreneurial function: the crucial directing element in guiding the processes of production toward meeting the desires of the consumers. In the real world of uncertainty, it takes sound judgment to decide how the market is operating, so that present investment will lead to future profits, and not future losses. We shall deal further with the nature of profit and loss, but suffice it to say here that the active entrepreneurial element in the real world is due to the presence of uncertainty. We have been discussing the determination of the pure rate of interest, the rate of interest as it always tends to be and as it will be in the certain world of the ERE. In the ERE, where all techniques, market demands and supplies, etc., for the future are known, the investment function becomes purely passive and waiting. There might still be a supervisory or managerial labor function, but this can be analyzed under prices of labor factors. But there will no longer be an entrepreneurial function because future events are known.
Some have maintained, finally, that joint-stock companies make for a separation of savings and investment. Stockholders save, and the managers do the investing. This is completely fallacious. The managers are hired agents of the stockholders and subject to the latters’ dictation. Any individual stockholder not satisfied with the decisions of the majority of owners can dispose of his ownership share. As a result, it is effectively the stockholders who save and the stockholders who invest the funds.31
Some people maintain that since most stockholders are not “interested” in the affairs of their company, they do not effectively control the firm, but permit control to pass into the hands of the hired managers. Yet surely a stockholder's interest is a matter of his own preference and is under his own control. Preferring his lack of interest, he permits the managers to continue their present course; the fundamental control, however, is still his, and he has absolute control over his agents.21 A typical view asserts:
The maximizing of dividend income for stockholders as a group is not an objective that is necessarily unique or paramount. Instead, management officials will seek to improve the long-run earnings and competitive position of the firm and their own prestige as managers.33
But to “improve the long-run earnings” is identical with maximizing stockholders’ income, and what else can develop the “prestige” of managers? Other theorists lapse into the sheer mysticism of considering the “corporation”—a conceptual name which we give to an institution owned by real individuals—as “really” existing and acting by itself.34
- 29. The shares of stock, or the units of property rights,
have the characteristic of fungibility; one unit is exactly the same as another. ... We have a mathematical division of the one set of rights. This fungible quality makes possible organized commodity and security markets or exchanges. ... With these fungible units of ... property rights we have a possible acceleration of changes of ownership and in membership of the groups. ... If a course of market dealings arises, the unit of property has a swift cash conversion value. Its owner may readily resume the cash power to command the uses of wealth. (Hastings Lyon, Corporations and their Financing [Boston: D.C. Heath, 1938], p. 11)Thus, shares of property as well as total property have become readily marketable.
- 30. The literature on the so-called “co-operative movement” is of remarkably poor quality. The best source is Co-operatives in the Petroleum Industry, K.E. Ettinger, ed. (New York: Petroleum Industry Research Foundation, 1947), especially pt. I, Ludwig von Mises, “Observations on the Co-operative Movement.”
- 31. See Mises, Human Action, pp. 301–05, 703–05.
- 21. The proxy fights of recent years simply give dramatic evidence of this control.
- 33. Edgar M. Hoover, “Some Institutional Factors in Business Decisions,” American Economic Review, Papers and Proceedings, May, 1954, p. 203.
- 34. For example, see Gerhard Colm, “The Corporation and the Corporation Income Tax in the American Economy,” American Economic Review, Papers and Proceedings, May, 1954, p. 488.