What Is the Stock Market For?

Elon Musk’s pending purchase of Twitter is an occasion for thinking, again, about what function stock markets perform in modern capitalism.

The original form of wealth in a capitalist society is control over some production process. If you become a wealthy capitalist, what this means at the outset is that you have authority over people engaged in some particular form of productive activity. Let’s say a group of people want to get together to make steel, or write some computer code, or serve a meal, or put on a play: The armed authority of the state says they cannot do it without your ok.

That property rights are fundamentally a legally enforceable veto over the activity of others is one of the first points you get from legal analysis of property. “The essence of private property is always the right to exclude.” What makes capitalist property distinct is that it is a right to exclude people specifically from carrying out some productive activity, and is linked in some way to the concrete means of production employed. 

As a capitalist, you are attached to the production process you have property rights over.¹ Now, you may be happy with this situation. You are a human person as well as a holder of property rights, and you may feel various kinds of personal affinity with this particular process. You may have some knowledge, or social ties, or other property claims that make this process a particularly suitable form for your wealth; or you may simply regard this as a more promising source of money income than the alternatives. 

Then again, you may not be happy; you may not want to be attached to this particular process. There are risks associated with both an enterprise as a social organism, and with the kind of activity it is engaged in. (The steel mill may burn down, or be taken over by the workers; steel may be replaced by alternative materials or cheaper imports.) Ensuring that the process remains oriented both to its own particular ends and to producing an income for you requires active engagement on your part; you may be unsuited to carry this out, or just get tired of it. And even if your ownership rights generate a steady flow of income for you, the rights themselves cannot be easily converted into claims on some other part of the social product or process. (You can’t eat steel.) So you may wish to convert your claim on this particular production process into a claim on social production in general.

In the US context, this is especially likely at the point where the owner dies or retires. For Schumpeter, the ultimate ambition of business owners was “the foundation of an industrial dynasty”, “the most glamorous of .. bourgeois aims”. But in the US, at least, the glamor seems to have faded.² Heirs may not be interested in running the business, or competent to do so. There may be several of them, or none. And a curiously persistent monarchical principle generally precludes looking outside the immediate family for a successor.

At some point, in any case, the holder of ownership rights over an enterprise will no longer be in a position to exercise them. At this point, the business might shut down. Before the modern corporation, this was the normal outcome:  In early-modern England, “The death of the master baker … ordinarily meant the end of the bakery.” This will often still happen in the case of small businesses, where the value of the enterprise is tightly linked to the activity of the owner themself. This is fine when the productive capacity of the economy is widely dispersed in the brains of the individuals carrying out, and in tools that can be owned by them. But once production involves large organizations with an extensive division of labor, and means of production that are too lumpy for personal ownership, some means has to be found for the organization to continue existing when the individual who has held ownership rights over it is no longer willing or able to.

The stock market exists in order to allow ownership rights over particular production process to be converted into rights to the social product in general. 

This is true historically. In the great wave of mergers in the 1890s that established the publicly-owned corporation as the dominant legal form for large industrial enterprises in the US, raising funds for investment was not a factor. As Naomi Lamoreaux notes, in a passage I’ve quoted before, “access to capital is not mentioned”  in contemporary accounts of the merger wave. And in the hearings by the U.S. Industrial Commission on the mergers,  “None of the manufacturers mentioned access to capital markets as a reason for consolidation.” The firms involved in the first mergers were normally ones where the founder had died or retired, leaving it to heirs “who often were interested only in receiving income.” The problem the creation of the publicly-traded corporation was meant to solve was not how to turn widely dispersed claims not he social product in general into claims on means of production to be used in this particular enterprise, but just the opposite: How to turn claims on these particular means of production into claims on the social product in general.

The same goes for today. We already have institutions that allow claims on the social product to be exercised by entrepreneurs on the basis of their plans for generating profits in the future. These include banks and, in favored sectors, venture capitalist funds, but not the stock market. The stock market isn’t there for the enterprise, but those with ownership claims on it.

The purpose of a stock offering is to allow those who already hold claims against the enterprise (early investors, and perhaps also favored employees) to swap them out for general financial wealth. This is why IPO “pops” — immediate price rises from the offering price — are considered a good thing, even though, logically, they mean the company raised less money than it could have. The pop makes the stock more attractive to the investors who will be buying out the insiders’ stakes down the road. The IPO is for the owners, not for the company. Or as Matt Levine puts it, “the price of the IPO is less important than the insiders’ ability to sell stock at good prices in the future.” 

As I’ve argued before, converting the surplus generated within the firm into claims on the social product in general  is fundamental to the capitalist process as production itself. It’s also an integral part of capitalist common sense. As any guide for budding entrepreneurs will remind you, “It’s not enough to build a business worth a fortune. You also need a way to get your money back.” 

Now, in principle this goal could be achieved in other ways. Money itself is a claim on general social product — that is one definition of it. When Antonio’s ships are safely come to road, his venture is concluded and his whole estate is available to meet his obligations. This is sufficient for merchant capital in early-modern Venice – its self-liquidating character means that no additional mechanisms are needed to turn claims on concrete commodities back into money.

Ongoing enterprises cannot be liquidated so easily. And money is liable to delink from productive economy over longer periods – what one wants is something with the safety, liquidity and non-need for management of money, but which maintains a proportionate claim on the overall surplus. Government bonds are an obvious choice here. They offer a claim on productive activity in general, or at least that part of it which is subject to taxation.

This possibility is worth pausing over. Historically, this was one of the most important ways for holders of claims against particular production processes to turn them into claims against society in general. The “rent” in rentier refers originally to the interest on a government bond. Government bonds as alternative to stock ownership also calls attention to the fundamentally political character of this transaction. For the capitalist to be able to give up their direct control over a production process in return for a proportionate share of the overall social product, someone else needs to oversee the collection of the surplus. And that someone needs to be accountable to wealth owners in general. There is an important affinity between finance and the state here.

Alternatively, partnership structures allow for the human owners to turn over while ownership as such remains tied to the particular enterprise. ³ Universal owners are another route. If Morningstar or Blackstone owns all the corporations, it’s redundant for them to do so in the form of stock. They could just own them directly. Many startups today have their liquidity moment not by issuing stock but being bought by a larger competitor. One could imagine a world where a startup that is successful enough is bought up by a universal index-slash-private equity fund, without the intermediate step of issuing stock. 

Another possibility, of course, would be for the founder to give up their ownership rights and the company then just not to have owners. Wikipedia is a thing that exists; Twitter could, in principle, have a similar structure. I admit, I can’t think of many similar examples. When Keynes talked about corporations “socializing themselves”, this didn’t entail a change in legal structure; the shareholders continued to exist, but just were increasingly irrelevant. Plenty of rich people do leave some fraction of their wealth to self-governing charities of one sort or another, but this is their financial wealth, not the businesses themselves. The closest one gets, I suppose, is when someone leaves real estate to a conservation or community land trust.

Back in the real world, these other models of transition out of personal ownership are either nonexistent, or else confined to narrow niches. What we have is the stock market. Fundamentally, this is a way for owners of claims against production processes to pool them — to trade in their full ownership of a particular enterprise for a proportionate share of ownership in a broad group of enterprises. This was more transparent in the trust structures that preceded the development of publicly traded corporations, which were explicitly structured as a trade of direct ownership of a business for a share in a trust that would own all the participating businesses.⁴ But the logic of the public corporation is the same.

This is why shareholder protections are so critical. They’re often framed as protections for small retail investors. But the real problem they are addressing is mutual trust among owners. The pooling of claims works only if their holders can be reasonably confident that they’ll continue receiving their income even as they surrender control over production.

You’ll have noted that I keep using obtuse terms like “holders of property claims against the corporation” instead of the more straightforward “owners”. This is necessary when we are discussing shareholders. It is not the case, as more familiar language might imply, that shareholders “own” the corporation. One of my favorite discussions of this is an article by David Ciepley, which observes that many of the features of the corporation are impossible to create on the basis of private contracts. Limited liability, for example — there is no private contract a group of property owners can sign among themselves that will eliminate their liability to third parties for misuse of their property.

If we take a step back, it is obvious that the relationship of shareholders to the corporation is something other than ownership. Just think about the familiar phrase, separation of ownership from control — it is an oxymoron. What, after all, is ownership? The old books will tell you that it is a set of control rights — jus utendi, jus disponendi, and so on. Ownership without control is ownership without ownership. 

The vacuity of shareholder “ownership” can be glossed over most of the time, but becomes salient in takeovers and governance questions in general.⁵   Dividends and other payments can be subdivided arbitrarily, but decisions are discrete and control over them is unitary. Either Elon Musk buys Twitter, or he does not. Yes, there are votes, but someone still sets the terms of the vote, and 51% is as good as 100%.⁶ This is the contradiction that shareholder protections are meant to paper over. The publicly owned corporation allows business owners to pool their claims on the income of their respective companies. But it is not possible to share control over the businesses themselves. So the board – which actually does controls them — is instructed to act “as if” the shareholders did. 

All of this is visible by contrast in Elon Musk’s purchase of Twitter, which reverses the usual logic of shareholding. He is trading in a claim on the general social product (or on Tesla, but it has to be cashed in first) into a claim on the specific activity organized via Twitter. He wants Twitter itself, not the stream of income it generates. He wants to turn his share of Twitter’s (so far nonexistent) profits into control over the substantive production process it is engaged in. Twitter for him is a source of use-value, not exchange-value. In this specific transaction, he is acting not as a capitalist but as a feudal lord. (Italics for a reason. One of the many mistakes we can make on these tricky questions is to treat terms like “capitalist” as if they described the essential nature of a person or organization, something that one either is or isn’t. Whereas they are ways of organizing human activity, which one can participate in in one context but not in another.)

The tension between the social production processes over which property claims are exercised, and the specific people who exercise them and the means by which they do so, is easy to lose sight of. It’s natural to abstract from these questions when you’re focused on other questions, like the conflict between capital — whoever exactly that may be — and the human beings who more directly embody labor. In Volume 1 of Capital, the capitalist is simply the personification of capital, and there are good exposition reasons for this.⁷

It’s in Volume 3 — truly the essential reading on this topic — that Marx directly takes on the conflation of social relations with concrete things. In a blistering passage in chapter 48 he attacks the identification of the real conditions of production with the incomes that are received from them, as if for example land — the natural world — existed only insofar as it is a source of rent for the landlord. This is “the complete mystification of the capitalist mode of production, the conversion of social relations into things, … It is an enchanted, perverted, topsy-turvy world, in which Monsieur le Capital and Madame la Terre do their ghost-walking as social characters and at the same time directly as mere things.” This mystification is alive and well in modern discussions of economics, where ownership of claims against a thing are constantly confused with being the thing. The ubiquitous language of payments to capital (or factor payments) is an obvious example, in which a payoffs to whatever private rights-holder you need permission from to use a machine, are imagined as payments to the machine itself. 

This is not just a matter of verbal ambiguity. It leads to completely wrong conclusions when transactions involving ownership claims on something are confused with transactions involving the use of the thing. For example, you sometimes hear housing activists say that investor purchases will drive up the cost of housing. This sounds reasonable – but only because the word “housing” is being used in two different senses. Ownership of a house, and living in a house, are not competing uses, they exist on entirely separate levels. We may object for various reasons to ownership of homes by large investors rather than owner-occupiers or small landlords (or we may not). But this shift in ownership claims has no effect on the amount of space available for people to live in.

Coming back to the stock market, the confusion comes from mixing up transactions and institutions intended to shift ownership rights over the enterprise with solutions to the financing needs of the enterprise itself. The terms of the twitter deal seem to be: The bankers will get $2 billion per year, half from Musk, half from Twitter. Current Twitter shareholders get a one-time payment of $54 per share, which they may or may not be happy with.⁸ Twitter as an enterprise — and its employees and users — get nothing from the transaction at all. The company ends up owing $13 billion in additional debt, which finances nothing.

On one level, this is just what the stock market, and finance more generally, do: They change asset and liability positions around, without necessarily implying any changes in the substantive activities that those positions give rights over and which generate the incomes that go with them. As Perry Mehrling likes to point out, the biggest single transaction for most families is the purchase of a home, which doesn’t even show up in the national income and product accounts. But on another level, again, in the specific trade here — away from liquidity and general financial claims toward a more direct relationship with a particular production process — is the opposite of what the stock market usually facilities. Musks’s purchase of Twitter is, precisely, a form of de-financialization.  

On some level I suppose all this is obvious. Everyone understands that this a transaction between various groups of holders of financial claims against Twitter — Musk, the board on behalf of the existing shareholders, the banks— to which Twitter-the-enterprise is not a party at all. But coverage tends to treat this as a problem only insofar as Twitter is special, the “digital town square”. In weighing the deal, the Times sniffs, the board “might as well have been talking about a tool-and-die manufacturer.” Any conflict between relations of production and relations of ownership is, evidently, only a problem when what is being produced are 280-character messages.

At this point, I suppose, I should denounce Elon Musk’s purchase of Twitter. But honestly, I’m not convinced it will make much difference one way or another. 

For me personally, Twitter has been a good outlet.  It connects me with journalists, political people, potential students, and other folks I want to communicate with more effectively than any other platform. It’s a gratifyingly horizontal — anyone who has something to say is on the same level. I’d be sorry if it no longer existed in its current form. But I’m not sure any of its good qualities come from who exactly exercises a claim on whatever profits it may generate.

Do you think that any of Twitter’s positive qualities emanate from the particular individuals who’ve owned it, or “owned” it? Jack Dorsey seems like kind of a nut; if the platform works, it’s in spite of him, not because of him. The current gaggle of suits on the board don’t see to have much hands-on involvement one way or another. The people who do the actual work of maintaining the platform obviously take their jobs seriously. I have no idea who exactly they are, but I have a lot of respect for them. I expect they’ll continue doing their job, whoever is appropriating the surplus.  

To say that having Elon Musk own a company is a central, transformative fact about it – for good or for ill — is to buy into the narcissistic worldview of the masters of the universe. I would rather not do that. Indeed, the idea that who owns a business and how it operates are inseparable, is more or less exactly the position I’m arguing against in this post.

The question of who owns a company is a distinct question from what it does or how it is run. Not entirely unrelated, to be sure — but to think about how they are connected, we first have to recognize that they are not the same.

1. This fact is obscured when we think in terms of Capital Volume 1, where the capitalist shows up with money at the beginning of the circuit, and departs with money at the end. To be sure, this is a reasonable shorthand for the historically important case of the putting-out system, where the capitalist began as a middleman. But the case where control over production process comes first, and is only later converted to money, is probably more typical.
2. Elsewhere in the world industrial dynasties are still a thing. The CEO of the world’s sixth-largest automobile manufacturer is the great-great-grandson of Giovanni Agnelli, the founder of Fiat.
3. The prevalence of partnership structures in large parts of the economy – high-end services like law, architecture, advertising, to some diminishing extent medicine — seems like an underappreciated fact about real-world economies.
4. The trusts themselves were a short-lived transitional form, existing for only a few years in the 1880s before giving way to the publicly-owned corporation. They left a linguistic legacy in terms like anti-trust and trust-busting.
5. Probably the best discussion of these issues – and certainly the one that’s done the most to shaping my thinking on it — is chapter 6 of Doug Henwood’s Wall Street.
6. This fact was exploited in the 1920s by shrewd operators like Samuel Insull and Howard Hopson, who used pyramids of holding companies to turn a small direct stake into control over much larger utilities.
7. Musk himself has somehow acquired an opinion on this.
8. Yes, it’s higher than the most recent market price. But on the other hand, the market price is the price paid by the marginal holder, not the typical holder. No one who owns the stock should value it less than the market price, but some may value it quite a bit more. But then on the other other hand, many holders are actually index funds and similar, who did not make an affirmative decision to hold it at all. They may be happy to that Musk is allowing them to exit their position, I have no idea.