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Greater Shareholding Leads to Increased Government Activism and Regulation

For about ten years a number of writers sympathetic to the free market have rejoiced that more and more Americans have become shareholders in corporations through retirement accounts and direct investing. These commentators predicted that widespread stock ownership would effect a radical change in Americans’ attitudes about economic policy. No longer would they be sympathetic to big government, high taxes, and pervasive regulation of business. Why? Because as owners of stock, they would recognize that their material self-interest depended on the vibrancy and freedom of private enterprise unencumbered by the state.

This view has been widely held among pro-market advocates. It has even become part of the case for privatization of Social Security through individual retirement accounts.

This sounded like a reasonable expectation. But it had some telltale flaws. For one thing, it sounded too much like Marx’s view that property relations determine ideology. There was no real reason to believe that just because people owned stock and had a material interest in rising stock values, they would not want the government to interfere with business. After all, they might want government to do something to boost stock values. It would take economic education to realize that this cannot be done on a sound basis.

The theoretical argument over whether the “investor politics” hypothesis is correct has now gotten some empirical assistance. In the Washington Post last fall, Robert Samuelson stood the sanguine prediction up against the facts and drew some interesting conclusions. He began bluntly: The “investor politics” hypothesis is “the exact opposite of the truth. Greater shareholding leads to more—not less—government activism and regulation. It increases—not decreases—the political impulse to tinker with business and the stock market. The investor class behaves like other aggrieved groups, from farmers to steelworkers. When they have problems, they look to government for sympathy and help. If there are only a few shareholders, it doesn’t matter. When there are roughly 80 million—as now—it matters a lot.”

That is a sobering thought.

Samuelson noted that an “exhaustive” analysis of opinion surveys done at the American Enterprise Institute demonstrated that there was no increase in favorable attitudes toward business in the 1990s. For example, in 2000 the percentage of people agreeing that business should make “maximum profits” (36 percent) had not changed much since 1981 (33 percent). If the “investor politics” theory were correct, we should have seen a dramatic improvement in such numbers.

Samuelson made an important point when he wrote, “One reason that more shareholding didn’t change the national consciousness is that stocks were not promoted as an exercise in risk-taking, which is the nature of capitalism. Instead, stocks were sold as a free-enterprise entitlement. If you invested and stayed in the market, you had to get rich. Risk was almost nonexistent, because stocks outperformed rival investments.” (Emphasis added.)

Keep in mind that the explosion in investing came when it looked as though the market could go in only one direction—up. In truth, it was entirely reasonable to expect that when the market went down, the new investors, given their low level of economic and moral-political education, would cry out for government help.

In other words, if people got into the market without understanding the nature of free markets, risk, and individual rights, why would anyone think they’d react in a pro-capitalist way when their fortunes soured? Why, indeed? We have long known that businessmen can be the most anti-free-market people around. When times get tough, they are the first to seek tariffs, subsidies, and antitrust assaults on their competitors. Why should we be surprised when amateur stockholders react that way?

Politicians Took Credit

This is even less surprising when we consider that all during the boom, politicians took credit for the prosperity. Without knowledge of how markets work, people were willing to believe this. And if politicians could create a boom, then surely they could reverse a bust and restore good times. People believed that too. And the politicians were just as eager to encourage that belief. What better way to get re-elected? Add to this a few business and accounting scandals and 401(k) depletions, and any affection for free markets in the new investor class, given its economic illiteracy, was bound to evaporate.

We all know the results: a flurry of new laws out of Congress, supported by a “pro-business” Republican President, promising to “restore confidence” in the stock market, laws that we well know will do no such thing, much less restore the upward trajectory of “the economy.”

Not everything that the investor class favors is bad. Ending the double taxation of dividends, of course, is a good idea. Similarly, surveys show that new investors favor ending or cutting the capital gains tax. But a commitment to having one’s own taxes cut does not a free-market advocate make. I shudder to think what those investors think about antitrust law, the Securities and Exchange Commission, and Martha Stewart (that is, “insider” trading).

Samuelson concludes:

The new investor politics is not what conservatives imagined. Instead, it combines investors’ bruised sense of entitlement and politicians’ infinite capacity for empathy. The ostensible aim is to improve the integrity of the market. The unstated aim is to restore higher stock prices, which is what investors want. The distinction between social entitlement and private investment is blurring.

The blurring is a tricky and possibly treacherous development. . . .[T]rying to make the market “safe” for the middle class may entail so many rules that they perversely suffocate the genuine risk-taking necessary for a vibrant economy. The market is too complex for the government to control, and the goal—even implicit—of making it rise is hazardous. In the end, capital gains cannot be an entitlement. [Emphasis added.]

What’s the lesson here? There is no shortcut to a free society. Objectively having a stake in economic freedom is not the same thing as understanding one has a stake in it. That requires economic knowledge and a grasp of the broader freedom philosophy: individualism, natural rights, private property, and the rule of law.

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