WEBVTT NOTE 6.08. The Joint-Stock Company 1 00:00:00.000 --> 00:00:04.880 8. The Joint Stock Company 2 00:00:04.880 --> 00:00:11.040 It is clear that far from being the centrally important element, the producer's loan market 3 00:00:11.040 --> 00:00:17.320 is of minor importance, and it is easy to postulate a going productive system with no 4 00:00:17.320 --> 00:00:25.160 such market at all. But, some may reply, this may all be very well for a primitive economy 5 00:00:25.160 --> 00:00:32.360 And where every firm is owned by just one capitalist investor who invests his own savings? 6 00:00:32.360 --> 00:00:39.460 What happens in our modern complex economy, where savings and investment are separated, 7 00:00:39.460 --> 00:00:46.560 are processes engaged in by different groups of people, the former by scattered individuals, 8 00:00:46.560 --> 00:00:50.640 the latter by relatively few directors of firms? 9 00:00:50.640 --> 00:00:55.600 Let us therefore now consider a second possible situation. 10 00:00:55.600 --> 00:01:02.040 Up to this point we have not treated in detail the question whether each factor or business 11 00:01:02.040 --> 00:01:07.120 was owned by one person or jointly by many persons. 12 00:01:07.120 --> 00:01:14.300 Now let us consider an economy in which factors are jointly owned by many people, as largely 13 00:01:14.300 --> 00:01:21.820 happens in the modern world, and we shall see what difference this makes in our analyses. 14 00:01:21.820 --> 00:01:27.620 Before studying the effect of such jointly owned companies on the producer's loan market, 15 00:01:27.620 --> 00:01:33.300 we must digress to analyze the nature of these companies themselves. 16 00:01:33.300 --> 00:01:40.520 In a jointly owned firm, instead of each individual capitalist making his own investments and 17 00:01:40.520 --> 00:01:46.880 and making all his own investment and production decisions, various individuals pool their 18 00:01:46.880 --> 00:01:55.040 money capital in one organization or business firm and jointly make decisions on the investment 19 00:01:55.040 --> 00:01:57.200 of their joint savings. 20 00:01:57.200 --> 00:02:03.860 The firm then purchases the land, labor and capital goods factors and later sells the 21 00:02:03.860 --> 00:02:08.760 product to consumers or to lower order capitalists. 22 00:02:08.760 --> 00:02:16.040 Thus the firm is the joint owner of the factor services and particularly of the product as 23 00:02:16.040 --> 00:02:19.660 it is produced and becomes ready for sale. 24 00:02:19.660 --> 00:02:24.880 The firm is the product owner until the product is sold for money. 25 00:02:24.880 --> 00:02:31.320 The individuals who contributed their saved capital to the firm are the joint owners successively 26 00:02:31.320 --> 00:02:40.520 of A. The initial money capital, the pooled savings, B. The services of the factors, C. 27 00:02:40.520 --> 00:02:48.080 The product of the factors, and D. The money obtained from the sale of the product. 28 00:02:48.080 --> 00:02:56.240 In the evenly rotating economy, their ownership of assets follows this same step-by-step pattern, 29 00:02:56.240 --> 00:02:59.280 period after period, without change. 30 00:02:59.280 --> 00:03:05.880 In a jointly owned firm in actual practice, the variety of productive assets owned by 31 00:03:05.880 --> 00:03:08.120 the firm is large. 32 00:03:08.120 --> 00:03:14.600 Any one firm is usually engaged in various production processes, each one involving a 33 00:03:14.600 --> 00:03:21.400 different period of time, and is likely to be engaged in different stages of each process 34 00:03:21.400 --> 00:03:24.120 at any one particular time. 35 00:03:24.120 --> 00:03:29.960 A firm is likely to be producing so that its output is continuous and so that it makes 36 00:03:29.960 --> 00:03:34.680 sales of new units of the product every day. 37 00:03:34.680 --> 00:03:40.420 It is obvious then that if the firm keeps continually in business, its operations at 38 00:03:40.420 --> 00:03:47.480 any one time will be a mixture of investment and sale of product, its assets at any one 39 00:03:47.480 --> 00:03:55.200 One time will be a mixture of cash about to be invested, factors just bought, hardly begun 40 00:03:55.200 --> 00:04:00.920 products and money just received from the sale of products. 41 00:04:00.920 --> 00:04:07.520 The result is that, to the superficial, it looks as if the firm is an automatically continuing 42 00:04:07.520 --> 00:04:14.680 thing and as if the production is somehow timeless and instantaneous, ensuing immediately 43 00:04:14.680 --> 00:04:21.880 Actually, of course, this idea is completely unfounded. 44 00:04:21.880 --> 00:04:27.440 There is no automatic continuity of investment and production. 45 00:04:27.440 --> 00:04:33.860 Production is continued because the owners are continually making decisions to proceed. 46 00:04:33.860 --> 00:04:40.360 If they did not think it profitable to do so, they could, and do at any point, alter, 47 00:04:40.360 --> 00:04:58.240 In the light of our discussion, we may classify the types of assets owned by any firm, whether 48 00:04:58.240 --> 00:05:02.760 jointly or individually owned, as follows. 49 00:05:02.760 --> 00:05:09.600 A. Money B. Productive assets, a mélange of factors, 50 00:05:09.600 --> 00:05:17.000 such as land and capital goods, embodying future services, various stages of product, 51 00:05:17.000 --> 00:05:19.640 and the completed product. 52 00:05:19.640 --> 00:05:26.440 On this entire package of assets, a monetary evaluation is placed by the market. 53 00:05:26.440 --> 00:05:30.980 How this is done will be examined in detail later. 54 00:05:30.980 --> 00:05:36.720 At this point, let us revert to the simple case of a one-shot investment, an investment 55 00:05:36.720 --> 00:05:43.440 in Factors on One Date and the Sale of the Resulting Product a Year Later. 56 00:05:43.440 --> 00:05:48.880 This is the assumption involved in our original analysis of the production structure, and 57 00:05:48.880 --> 00:05:55.240 it will be seen that the same analysis can be applied to the more complex case of a mélange 58 00:05:55.240 --> 00:06:02.840 of assets at different stages of production and even to cases where one firm engages in 59 00:06:02.840 --> 00:06:08.700 in several different production processes and produces different goods. 60 00:06:08.700 --> 00:06:15.100 Let us consider a group of individuals pooling their saved money capital to the extent of 61 00:06:15.100 --> 00:06:22.700 100 ounces, purchasing factors with the 100 gold ounces, obtaining a product and selling 62 00:06:22.700 --> 00:06:27.160 the product for 105 ounces a year later. 63 00:06:27.160 --> 00:06:33.660 The rate of interest in this society is 5% per annum, and the rate of interest return 64 00:06:33.660 --> 00:06:37.800 on this investment conforms with this condition. 65 00:06:37.800 --> 00:06:44.300 The question now arises on what principle do the individual owners mutually apportion 66 00:06:44.300 --> 00:06:47.000 their shares of the assets? 67 00:06:47.000 --> 00:06:52.880 It will almost always be the case that every individual is vitally interested in knowing 68 00:06:52.880 --> 00:06:54.880 The Theory of Money and Credit 69 00:07:22.880 --> 00:07:29.880 The principle whereby any man's share of ownership could be distinguished from that of anyone else. 70 00:07:29.880 --> 00:07:36.880 A whole group of people worked, contributed their land, etc. to the production process, 71 00:07:36.880 --> 00:07:45.880 and there was no way except simple bargaining by which the income from the sale of the product could be apportioned among them. 72 00:07:45.880 --> 00:07:53.800 Here, each individual is contributing a certain amount of money capital to begin with, therefore 73 00:07:53.800 --> 00:07:58.240 the proportions are naturally established from the outset. 74 00:07:58.240 --> 00:08:04.760 Let us say that the 100 ounces of capital are contributed by 5 men as follows. 75 00:08:04.760 --> 00:08:09.040 A. 40 ounces B. 20 ounces 76 00:08:09.040 --> 00:08:13.800 C. 20 ounces D. 15 ounces 77 00:08:13.800 --> 00:08:29.240 E. 5 oz. In other words, A contributes 40% of the capital, B 20%, C 20%, D 15%, E 5%. 78 00:08:29.240 --> 00:08:35.420 Each individual owner of the firm then owns the same percentage of all the assets that 79 00:08:35.420 --> 00:08:41.560 he contributed in the beginning. This holds true at each step of the way, and finally 80 00:08:41.560 --> 00:08:47.560 Only for the money obtained from the sale of the product, the 105 ounces earned from 81 00:08:47.560 --> 00:08:54.440 the sale will be either reinvested in or disinvested from the process. 82 00:08:54.440 --> 00:09:01.700 At any rate, the ownership of these 105 ounces will be distributed in the same percentages 83 00:09:01.700 --> 00:09:04.720 as the capital invested. 84 00:09:04.720 --> 00:09:11.540 This natural structure of a firm is essentially the structure of a joint stock company. 85 00:09:11.540 --> 00:09:18.740 In the joint stock company, each investor-owner receives a share, a certification of ownership 86 00:09:18.740 --> 00:09:24.420 in proportion to the amount he has invested in the total capital of the company. 87 00:09:24.420 --> 00:09:35.740 Thus, if A, B, C, D and E form a company, they may issue 100 shares, each share representing 88 00:09:35.740 --> 00:09:39.740 a value or an asset of 1 ounce. 89 00:09:39.740 --> 00:09:49.420 A will receive 40 shares, B 20 shares, C 20 shares, etc. After the sale of the product, 90 00:09:49.420 --> 00:09:57.460 each share will be worth 5% more than its original, or par, value. 91 00:09:57.460 --> 00:10:04.340 Suppose that after the sale, or indeed at any time before the sale, another person, 92 00:10:04.340 --> 00:10:11.720 F wishes to invest in this company. Suppose that he wishes to invest 30 ounces of gold. 93 00:10:11.720 --> 00:10:18.460 In that case, the investment of money savings in the company increases from 100, if before 94 00:10:18.460 --> 00:10:27.620 the sale, or 105, if after the sale, by 30 ounces. 30 new shares will be issued and turned 95 00:10:27.620 --> 00:10:33.880 over to F, and the capital value of the firm increases by 30 ounces. 96 00:10:33.880 --> 00:10:40.960 In the vast majority of cases where reinvestment of monetary revenue is going on continuously, 97 00:10:40.960 --> 00:10:47.320 at any point in time the capital value of a firm's assets will be the appraised value 98 00:10:47.320 --> 00:10:55.860 of all the productive assets including cash, land, capital goods and finished products. 99 00:10:55.860 --> 00:11:02.320 The capital value of the firm is increased at any given time by new investment and is 100 00:11:02.320 --> 00:11:09.120 is maintained by the reinvestments of the owners after the finished product is sold. 101 00:11:09.120 --> 00:11:13.160 The shares of capital are generally known as stock. 102 00:11:13.160 --> 00:11:19.860 The total par value of capital stock is the amount originally paid in on the formation 103 00:11:19.860 --> 00:11:21.500 of the company. 104 00:11:21.500 --> 00:11:28.320 From that point on, the total capital value of assets changes as income is earned, or 105 00:11:28.320 --> 00:11:35.960 or in the world of uncertainty as losses are suffered and as capital is reinvested or withdrawn 106 00:11:35.960 --> 00:11:42.480 from the company, the total value of capital stock changes accordingly and the value of 107 00:11:42.480 --> 00:11:47.880 each share will differ from the original value accordingly. 108 00:11:47.880 --> 00:11:52.920 How will the group of owners decide on the affairs of the company? 109 00:11:52.920 --> 00:11:58.900 These decisions that must be made jointly will be made by some sort of voting arrangement. 110 00:11:58.900 --> 00:12:04.660 The natural voting arrangement, which one would expect to be used, is to have one vote 111 00:12:04.660 --> 00:12:10.260 per share of voting stock, with a majority of the votes deciding. 112 00:12:10.260 --> 00:12:16.900 This is precisely the arrangement used in the joint stock company and its modern form, 113 00:12:16.900 --> 00:12:18.780 the corporation. 114 00:12:18.780 --> 00:12:24.540 Of course, some joint stock company arrangements differ from this, according to the desires 115 00:12:24.540 --> 00:12:26.540 of the owners. 116 00:12:26.540 --> 00:12:31.500 Partnerships can be worked out between two or more people on various principles. 117 00:12:31.500 --> 00:12:37.300 Usually, however, if one partner receives more than his proportionate share of invested 118 00:12:37.300 --> 00:12:44.940 capital, it is because he is contributing more of his labor, or his land, to the enterprise, 119 00:12:44.940 --> 00:12:47.160 and gets paid accordingly. 120 00:12:47.160 --> 00:12:52.700 As we shall see, the rate paid to the labor of the working partner will be approximately 121 00:12:52.700 --> 00:12:59.360 equal to what he could earn in labor elsewhere, and the same is true for payment to the land 122 00:12:59.360 --> 00:13:05.200 or any other originally owned factor contributed by a partner. 123 00:13:05.200 --> 00:13:10.940 Since partnerships are almost always limited to a few, the relationships are more or less 124 00:13:10.940 --> 00:13:16.720 informal and need not have the formal patterns of the joint stock company. 125 00:13:16.720 --> 00:13:21.160 However, partnerships will tend to work quite similarly. 126 00:13:21.160 --> 00:13:24.880 They provide more room for idiosyncratic arrangements. 127 00:13:24.880 --> 00:13:31.240 Thus, one partner may receive more than his share of capital because he is loved and revered 128 00:13:31.240 --> 00:13:32.600 by the others. 129 00:13:32.600 --> 00:13:37.620 This is really in the nature of a gift to him from the rest of the partners. 130 00:13:37.620 --> 00:13:42.260 Joint stock companies hew more closely to a formal principle. 131 00:13:42.260 --> 00:13:47.580 The great advantage of the joint stock company is that it provides a more ready channel for 132 00:13:47.580 --> 00:13:50.820 new investments of saved capital. 133 00:13:50.820 --> 00:13:56.100 We have seen how easy it is for new capital to be attracted through the issuance of new 134 00:13:56.100 --> 00:13:57.340 shares. 135 00:13:57.340 --> 00:14:03.220 It is also easier for any owner to withdraw his capital from the firm. 136 00:14:03.220 --> 00:14:09.820 This greater ease of withdrawal vastly increases the temptation to invest in the company. 137 00:14:09.820 --> 00:14:16.340 Later on, we shall explore the pricing of stock shares in the real world of uncertainty. 138 00:14:16.340 --> 00:14:21.860 In this real world, there is room for great differences of opinion concerning the appraised 139 00:14:21.860 --> 00:14:28.220 value of a firm's assets, and therefore concerning the monetary appraised value of 140 00:14:28.220 --> 00:14:30.960 each share of the firm's stock. 141 00:14:30.960 --> 00:14:38.300 In the evenly rotating economy, however, all appraisals of monetary value will agree, and 142 00:14:38.300 --> 00:14:46.300 Therefore the appraised value of the shares of stock will be agreed upon by all and will remain constant. 143 00:14:46.300 --> 00:14:53.300 While the share market of joint stock companies provides a ready channel for accumulating savings, 144 00:14:53.300 --> 00:14:57.300 the share market is strictly dependent on the price spreads. 145 00:14:57.300 --> 00:15:03.300 The savings or dis-savings of capitalists are determined by time preferences, 146 00:15:03.300 --> 00:15:07.300 and the latter establish the price spread in the economy. 147 00:15:07.300 --> 00:15:19.300 The value of capital invested in the enterprise, that is, its productive assets, will be the sum of future earnings from the capital discounted by the rate of interest. 148 00:15:19.300 --> 00:15:36.300 If the price spreads are 5%, 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. 149 00:15:36.300 --> 00:15:40.200 Market, in this case 5%. 150 00:15:40.200 --> 00:15:47.180 We still have a situation in which capitalists supply their own saved capital, which is used 151 00:15:47.180 --> 00:15:52.620 to purchase factors in expectation of a net monetary return. 152 00:15:52.620 --> 00:15:58.900 The only complications that develop from joint stock companies or corporations are that many 153 00:15:58.900 --> 00:16:05.700 capitalists contribute and own the firm's assets jointly, and that the price of a certain 154 00:16:05.700 --> 00:16:11.860 quantum of ownership will be regulated by the market, so that the rate of interest yield 155 00:16:11.860 --> 00:16:18.100 will be the same for each individual share of stock as it is for the enterprise as a 156 00:16:18.100 --> 00:16:19.100 whole. 157 00:16:19.100 --> 00:16:25.760 If the whole firm buys factors for a total price of $100 and sells the product a year 158 00:16:25.760 --> 00:16:35.300 later for $105 for a 5% return, then say one-fifth of the shares of ownership of this firm will 159 00:16:35.300 --> 00:17:02.300 The shares of stock, or the units of property rights, in the words of Hastings Lyon, have the characteristic of fungibility. 160 00:17:02.300 --> 00:17:10.140 One unit is exactly the same as another. We have a mathematical division of the one set of rights. 161 00:17:10.140 --> 00:17:17.260 This fungible quality makes possible organized commodity and security markets or exchanges. 162 00:17:17.260 --> 00:17:24.620 With these fungible units of property rights, we have a possible acceleration of changes of ownership 163 00:17:24.620 --> 00:17:31.660 and in membership of the groups. If a course of market dealings arises, the unit of property has 164 00:17:31.660 --> 00:18:01.660 In the first place, the entire pooling of 165 00:18:01.660 --> 00:18:08.780 of Resources and the basis on which it is worked out are voluntary for all parties concerned. 166 00:18:08.780 --> 00:18:16.180 Secondly, all the stockholders or owners have one single interest in common, an increase 167 00:18:16.180 --> 00:18:22.900 in their monetary return and assets, although they may of course differ concerning the means 168 00:18:22.900 --> 00:18:24.860 to achieve this goal. 169 00:18:24.860 --> 00:18:30.520 Thirdly, the members of the minority may sell their stock and withdraw from the company 170 00:18:30.520 --> 00:18:32.520 if they so desire. 171 00:18:32.520 --> 00:18:38.320 Actually, the partners may arrange their voting rights and ownership rights in any way they 172 00:18:38.320 --> 00:18:43.320 please, and there have been many variations of such arrangements. 173 00:18:43.320 --> 00:18:49.080 One such form of group ownership, in which each owner has one vote regardless of the 174 00:18:49.080 --> 00:18:56.080 number of shares he owns, has absurdly but effectively arrogated to itself the name of 175 00:18:56.080 --> 00:18:57.920 cooperative. 176 00:18:57.920 --> 00:19:04.880 It is obvious that partnerships, joint stock companies and corporations are all eminently 177 00:19:04.880 --> 00:19:08.020 cooperative institutions. 178 00:19:08.020 --> 00:19:14.560 Many people believe that economic analysis, while applicable to individually owned firms, 179 00:19:14.560 --> 00:19:20.000 does not hold true for the modern economy of joint stock companies. 180 00:19:20.000 --> 00:19:22.320 Nothing could be further from the truth. 181 00:19:22.320 --> 00:19:28.420 The introduction of corporations has not fundamentally changed our analysis of the interest rate 182 00:19:28.420 --> 00:19:34.880 or the savings reinvestment process, what of the separation of management from ownership 183 00:19:34.880 --> 00:19:36.480 in a corporation. 184 00:19:36.480 --> 00:19:43.140 It is certainly true that in a joint stock firm the owners hire managerial labor to supervise 185 00:19:43.140 --> 00:19:50.180 their workers, whereas individual owners generally perform their own managerial labor. 186 00:19:50.180 --> 00:19:54.940 A manager is just as much a hired laborer as any other worker. 187 00:19:54.940 --> 00:20:00.180 The president of a company, just like the ditch digger, is hired by the owners. 188 00:20:00.180 --> 00:20:04.740 And like the ditch digger, he expends labor in the production process. 189 00:20:04.740 --> 00:20:10.540 The price of managerial labor is determined in the same way as that of other labor, as 190 00:20:10.540 --> 00:20:12.120 will be seen. 191 00:20:12.120 --> 00:20:18.580 On the market, the income to an independent owner will also include the going wage for 192 00:20:18.580 --> 00:20:25.140 for that type of managerial labor, which joint stock owners, of course, will not receive. 193 00:20:25.140 --> 00:20:31.940 Thus we see that far from rendering economic analysis obsolete, the modern world of the 194 00:20:31.940 --> 00:20:39.980 corporation aids analysis by separating and simplifying functions in production, specifically 195 00:20:39.980 --> 00:20:42.800 the managerial function. 196 00:20:42.800 --> 00:20:48.860 In addition to the capital supplying function, the corporate capitalists also assume the 197 00:20:48.860 --> 00:20:56.100 entrepreneurial function, the crucial directing element in guiding the processes of production 198 00:20:56.100 --> 00:20:59.580 toward meeting the desires of the consumers. 199 00:20:59.580 --> 00:21:05.140 In the real world of uncertainty, it takes sound judgment to decide how the market is 200 00:21:05.140 --> 00:21:12.500 operating so that present investment will lead to future profits and not future losses. 201 00:21:12.500 --> 00:21:18.140 We shall deal further with the nature of profit and loss, but suffice it to say here that 202 00:21:18.140 --> 00:21:25.240 the active entrepreneurial element in the real world is due to the presence of uncertainty. 203 00:21:25.240 --> 00:21:30.140 We have been discussing the determination of the pure rate of interest, the rate of 204 00:21:30.140 --> 00:21:37.420 interest as it always tends to be and as it will be in the certain world of the E.R.E. 205 00:21:37.420 --> 00:21:45.620 In the ERE, where all techniques, market demands and supplies, etc. for the future are known, 206 00:21:45.620 --> 00:21:50.260 the investment function becomes purely passive and waiting. 207 00:21:50.260 --> 00:21:56.800 There might still be a supervisory or managerial labor function, but this can be analyzed under 208 00:21:56.800 --> 00:21:59.300 prices of labor factors. 209 00:21:59.300 --> 00:22:07.060 But there will no longer be an entrepreneurial function because future events are known. 210 00:22:07.060 --> 00:22:12.720 Some have maintained, finally, that joint stock companies make for a separation of savings 211 00:22:12.720 --> 00:22:15.140 and investment. 212 00:22:15.140 --> 00:22:18.660 Stockholders save and the managers do the investing. 213 00:22:18.660 --> 00:22:20.940 This is completely fallacious. 214 00:22:20.940 --> 00:22:28.180 The managers are hired agents of the stockholders and subject to the latter's dictation. 215 00:22:28.180 --> 00:22:34.420 Any individual stockholder not satisfied with the decisions of the majority of owners can 216 00:22:34.420 --> 00:22:37.040 dispose of his ownership share. 217 00:22:37.040 --> 00:22:43.960 As a result, it is effectively the stockholders who save, and the stockholders who invest 218 00:22:43.960 --> 00:22:45.660 the funds. 219 00:22:45.660 --> 00:22:51.200 Some people maintain that since most stockholders are not interested in the affairs of their 220 00:22:51.200 --> 00:22:57.860 company, they do not effectively control the firm, but permit control to pass into the 221 00:22:57.860 --> 00:23:00.560 hands of the hired managers. 222 00:23:00.560 --> 00:23:05.740 Yet surely a stockholder's interest is a matter of his own preference, and is under 223 00:23:05.740 --> 00:23:11.660 under his own control. Preferring his lack of interest, he permits the managers to continue 224 00:23:11.660 --> 00:23:18.980 their present course. The fundamental control, however, is still his, and he has absolute 225 00:23:18.980 --> 00:23:27.540 control over his agents. A typical view asserts, the maximizing of dividend income for stockholders 226 00:23:27.540 --> 00:23:35.140 as a group is not an objective that is necessarily unique or paramount. Instead, management officials 227 00:23:35.140 --> 00:23:41.140 Experts will seek to improve the long-run earnings and competitive position of the firm 228 00:23:41.140 --> 00:23:44.780 and their own prestige as managers. 229 00:23:44.780 --> 00:23:51.860 But to improve the long-run earnings is identical with maximizing stockholders' income, and 230 00:23:51.860 --> 00:23:55.860 what else can develop the prestige of managers? 231 00:23:55.860 --> 00:24:02.220 Other theorists lapse into the sheer mysticism of considering the corporation, a conceptual 232 00:24:02.220 --> 00:24:09.700 is an integral name which we give to an institution owned by real individuals as really existing 233 00:24:09.700 --> 00:24:11.420 and acting by itself.