Workers' Capitalism, Entrepreneurship, and Equity Supply: (Capital Flow Analysis)
Workers' Capitalism, Entrepreneurship, Equity Supply
Workers' Capitalism and Equity Supply
When aggregate corporate profits decline compared to other forms of investment income, the relative supply of fairly-valued equities diminishes.
The availability of reasonably-priced equities is germane to Capital Flow Analysis.
Most companies traded on Wall Street are controlled by institutions and hired managers.
When entrepreneurial spirit and equity supplies are waning, while burgeoning masses of non-entrepreneurial salaried workers eagerly struggle to 'own a share of America', stock prices rise and investment merit decreases.
In these times of dwindling equity supplies, the only capitalists that many Americans will ever meet are the owners of small businesses, doctors, lawyers, and other independent souls who are able to call themselves their 'own boss' without selling stock to the public.
Most stocks now traded on Wall Street represent companies controlled by institutional investors, run by hired managers, and beneficially-owned by millions of anonymous small holders of deferred tax saving plans.
Entrepreneurship and Equity Supply
The link between entrepreneurial activity and the supply of equities is obvious.
Small business formation is not only central to job creation, but it is also, eventually, the primary source of new securities that feed the equity market.
Small businesses are the seed source for equities that supply the capital market .
The decline in entrepreneurial income (proprietorship and corporate profits) relative to rentier income (net interest and rents), over the last three generations, raises questions about long-term prospects for the American stock market.
When we consider that the United States is still, by far, the leading capitalist nation, and as we listen to paeans of jingoistic assertions about the indomitable spirit of American capitalism from Wall Street brokers and their claques on stock-market television shows (almost all of whose participants are, in fact, not capitalists, but employees of large companies, often founded by, but no longer run by entrepreneurs), it is easy to be caught up in the chauvinistic fervor.
The Victory Of Capitalism?
To many Americans, it certainly seems premature to fret about whether entrepreneurial spirits in the United States are evaporating.
Did not the fall of Soviet Russia prove the ultimate victory of capitalism?
In fact, the role of the entrepreneur in America has been changing for a long time.
The over-valuation of equities in 2000 was material and easily verified.
The pain of popping the Great Bubble was, perhaps, real enough to create some awareness of underlying changes in capitalist society.
The over-valuation of equities at the turn of the century is material — easily verified by historical comparison and commonsense.
The Federal Reserve's numbers disclose a bizarre, but factual, decades-long buyback binge, as America's leading corporations, seemingly having run out of entrepreneurial ideas, spent well over a trillion dollars to take their stock off the market.
What Entrepreneurial Boom?
Many fail to see any erosion at the base of the pillars of capitalism.
On March 16, 2020, at the peak of the Great Bubble, the National Commission on Entrepreneurship released the testimony of their Executive Director, Patrick von Bargen, to the Subcommittee on Employer-Employee Relations of the House Committee on Education and the Workforce:
'As the Subcommittee certainly knows, we are now enjoying a true boom in entrepreneurship. Let me give you some recent data to support this point. In cooperation with the Kauffman Foundation, we recently released a study of start-up activity in the U.S. and nine other industrialized nations.
Americans were only about one-tenth as likely to be in business for themselves in 2000 as in 1880.
This study, the Global Entrepreneurship Monitor, found that America was far and away the most entrepreneurial country on earth. This finding was not a real surprise.
However, we were surprised by the pervasiveness of entrepreneurship around the United States. Each year, Americans start 600,000 to 800,000 new companies that hire employees. That adds up to roughly fourteen to sixteen start-ups for every one hundred existing businesses.
At the same time, an additional two million new businesses are started each year as self-employment ventures. Overall, about eight percent of the American adult populations (nearly sixteen million people) are in some stage of trying to start a new business.'
Of course, much of this 'boom in entrepreneurship', like the supposed New Paradigm that supported the Great Bubble, was an illusion dependent upon a selective reading of statistics and on ignoring historical context.
What Mr. Bargen did not highlight was that for every ten businesses started, nine were closed and that many who were in some stage of trying to start a new business never got far.
In the last 25 years, Americans took more out of small business than they put in.
Furthermore, the apparent 'boom' was only a speculative blip associated with the Great Bubble.
In the longer view, relative to the population, Americans were only about one-tenth as likely to be in business for themselves in 2000 as in 1880.
During the last quarter of the twentieth century, not only were corporations buying back equity, but individuals were also taking more out of proprietorships and unincorporated firms than they were putting in.
The flow of funds data shows that households withdrew, on balance, $331.7 billion from non-corporate enterprises between 1975 and 2002.
'Post-Brontasaurus Capitalism'
Professor Jeffry Timmons of Babson University has introduced the term 'Post-Brontasaurus Capitalism' and many speak excitedly of an 'entrepreneurial revolution'.
Undoubtedly there are changes underway, but in which direction and to what extent?
Whether equity supply keeps up with demand depends on how government treats small business.
For purposes of Capital Flow Analysis, we need to know whether the supply of equities will keep up with demand.
This depends to a large degree upon how government treats those who would be entrepreneurs.
For many years, economists have recognized the importance of small business and entrepreneurial spirit.
The Small Business Administration (SBA), an independent agency of the U.S. government, was founded in 1953 with a charter to 'aid, counsel, assist, and protect, as far as possible, the interests of small business concerns.'
The SBA continued government efforts to aid small business that started in the Great Depression and World War II with the Reconstruction Finance Corporation (founded by Herbert Hoover in 1932), the Smaller War Plants Corporation (1942), the Small Defense Plants Administration, and the Office of Small Business in the Department of Commerce.
The focus of the SBA has been on making and guaranteeing loans, helping small businesses get government contracts, and providing management and business training.
Confusing Debt with Capital
The SBA does little to provide equity to small businesses; and the use of debt as capital is inherently risky.
The mortality rate of small business is extremely high — close to ninety percent.
The presumption has been that most small businesses do not survive due to lack of know-how on the part of would-be entrepreneurs.
Government SBA bureaucrats teach people how to succeed in business.
Therefore, government bureaucrats, from the security of guaranteed civil service status, have been deemed suitable to provide the elusive skills needed to succeed in business.
In 1958, the Small Business Investment Company Act allowed banks to invest, through subsidiaries, in entrepreneurial companies.
In 1959, the SBA launched an effort to encourage universities to conduct research on entrepreneurship.
In 1972, the SBA inaugurated a Small Business Institute program at Texas Tech University, designed to have students provide consulting services to small businesses.
In 1980, Congress recognized that over-regulation was strangling small businesses and promulgated the Regulatory Flexibility Act (RFA) which placed some bureaucratic roadblocks to excessive regulation, but was largely ignored and had little practical effect.
Excessive regulation and burdensome taxes on small business have not been eliminated.
The cumulative rules of a thousand agencies were already beyond control. In 1995, the White House held a Conference on Small Business, urging Congress to 'put some teeth' into the RFA.
In response, the Small Business Regulatory Enforcement Fairness Act was promulgated in 1996.
This set up a Small Business Advocacy Review Panel Process – essentially just another cog in the bureaucracy of little practical merit.
There has been no significant rolling back of the already excessive restrictions on business activity or any easing of the tax code.
Touchy-Feely, PC Capitalism
Like all government agencies, the SBA tends to puff up and distort its value to society.
We should view government progress reports with skepticism.
SBA administrators are happy to proclaim that in forty years the agency has provided $27 billion in long-term loans and equity to sixty thousand small businesses.
Less than one-tenth of one percent of small business receive any help at all from the SBA
Putting this in perspective, less than one-half of one percent of small businesses formed during the last four decades received any financial assistance at all from the SBA.
Less than two-tenths of one percent of small businesses in 1999 participated in the SBA loan guarantee program.
There are no statistics to show how many SBA assisted ventures failed and whether this rate was better or worse than unassisted ventures.
The SBA has a patronizing attitude and assumes that training and loan guarantees are critical to small business success. However, this influences few entrepreneurs.
Although some successful ventures may have benefited from contact with the SBA (Intel, Apple Computers, Staples, Federal Express, Sun Microsystems, Sybase, Inc., Callaway Golf, and Outback Steakhouse are supposed examples), taken in a broad economic context, this government bureau has not had a significant economic impact on entrepreneurial activity in the U.S. – certainly not enough to have favorably nudged the overall supply of equities.
No Modern Homestead Act
The SBA's impact on capitalist activity has certainly not been of a magnitude comparable to that of the Homestead Act of 1862, which, for the asking, provided free capital to millions in the form of land, with a minimum of red tape.
Like most government endeavors, the SBA has been diverted by political expediency from seriously advancing entrepreneurship.
The SBA is diverted by political expediency.
Instead, its efforts are designed to help elected officials get the votes needed to stay in office.
The SBA disburses financial assistance after natural disasters, makes loans to important organized, low-income voting blocks such as African-Americans, Hispanics, women, and the handicapped, and helps give government contracts to these same favored individuals.
In June 2000, the SBA signed a partnership agreement with the National Association of Gay and Lesbian Community Centers in an effort to increase the participation of lesbian- and gay-owned small businesses in SBA's capital-access, contract procurement and technical assistance programs.
There Is No 'Department of Capital'
The relative position of entrepreneurs in American society can be seen in the structure of government.
Since most voting Americans are employees, the government pays attention to their interests.
There is a Department of Labor for wage-earners, but no Department of Capital for entrepreneurs.
The Department of Commerce is a directionless, grab-bag of bureaucracy, concerned with many more or less useful things, the least of which is the plight of entrepreneurs.
The Department of Commerce does not provide start up capital to new enterprises.
The Department of Commerce deals with the census, compiles statistics, makes economic analysis, disburses money to economically distressed communities, oversees international trade, tries to help develop minority business, tracks oceanic and atmospheric conditions, administers telecommunications and information systems, issues patents and trademarks, gathers information on technology, and sets standards for measurement.
The Department of Commerce does nothing to help entrepreneurs raise start-up capital or to reduce the rules and taxes that diminish the chances for a new business to succeed.
The head of the Small Business Administration, separate from the Department of Commerce, is far removed from a cabinet level position.
Its Office of Advocacy of Small Business purports to restrain the impact of new regulations, but has no real power and does little to eliminate burdensome old rules and destructive taxes.
All Power To The Workers!
On the other hand, employees are protected by:
- a minimum wage,
- unemployment insurance,
- safeguards against discrimination or harassment on the basis of sex, race, age, national origin, or sexual preference,
- accident compensation insurance,
- guaranteed pensions,
- portable pension and health plans,
- favorable rules on employee stock options and stock purchase plans,
- the right to join labor unions that are bigger than the companies for which they work,
- the right to collective bargaining for further benefits,
- thousands of regulations that limit the freedom of employers to organize the workforce in a way that might be most appropriate, and
- a 1971 Supreme Court decision precluding intelligence tests on hiring.
Government favors employees because workers have the most votes.
Preparation for a career as an employee is financed by free public schooling, government scholarships, and government guaranteed tuition loans.
For the average employee, tax regulations are simple: the employer does the calculation and deducts the amount due from each salary check.
If an annual declaration is needed, it is on an EZ-form that often results in a refund.
Before proceeding, check your progress:
Self-Test
Over the last three generations, entrepreneurial income has:
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Compared to 1880, in 2000 relatively more Americans were likely to be:
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The United States has a Department of Labor but no Department of Capital because:
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Workers' Capitalism : continued >
