Passive Capitalists

Socialists especially resent passive capitalists who provide financing. They allegedly contribute nothing to a productive process, being nothing but parasites on wage earners.

George Reisman in Capitalism (Chapter  11, Part C) argues to the contrary. Similar to paying wages, it is businessmen who pay dividends and interest to passive capitalists, not wage-earners. The dividends and interest are a deduction from the businessman’s revenues or gross income, not a deduction from wages. The payment of dividends and interest is not from exploitation, because the passive capitalist is a source of gain to the businessman. The former provides the latter with a source of assets that can be put to a productive purpose.

Moreover, the recipients of passive income need not be passive at all. While their efforts don’t contribute directly to the businessman’s products – they are passive in that way – they may expend considerable intellectual labor evaluating and deciding where and with whom to deploy their capital. “Anyone who has attempted to manage a portfolio of stocks and bonds or investments in real estate should know there is no limit to the amount of time and effort that such management can absorb, in the form of searching out and evaluating investment possibilities[.]”

The author of After Capitalism writes, “Let us ask the ethical question. Why should I receive interest on my savings? I put money in a bank. There is no question of risk here. My savings account is fully insured by the federal government. There is no question of entrepreneurial activity on my part. I have not the slightest idea what the bank does with my money” (p. 42).

First, I believe he should send all interest he receives, minus any income tax thereon, to the federal government, where he believes it belongs in his vision of Economic Democracy.  More seriously, let’s address his myopia. A savings or checking deposit is a liability of the bank. Deposits appear on the liability side of a bank’s balance sheet, along with accounts payable and other debts due to the bank borrowing.  In effect a depositor loans money to the bank. What does the bank do with it? It can pay wages or other expenses or make loans to businesses, consumers, or other parties. Generally it makes loans at an interest rate higher (with more risk) than what it pays on deposits (often zero for checking). The difference is commonly called the "spread" or "net interest spread," the main source of profits and paying other expenses.  A depositor is much more passive than the bank or other investment manager that Mr. Reisman refers to, but still makes a small addition to the amount of capital in the economy.

Bank of America and Wells Fargo are two of the largest banks in the USA. The following numbers as a percent of assets are from their most recent balance sheets at financials.morningstar.com.

Bank of America:  Deposits = 56%,  Loans = 42%

Wells Fargo:  Deposits = 68%,  Loans = 53%

Nowadays passive capitalists are the major owners of large businesses. For example, insiders – the CEO and other executives and members of the board of directors – own much less than 1% of the outstanding shares of Exxon-Mobil stock.  Mutual funds and other institutional investors own a large part of the shares. They are typically not as passive as an individual who owns shares of Exxon-Mobil in a taxable account or an IRA. Exxon-Mobil’s current dividend yield is about 3.5% of the share price, much better than a bank savings account.

Less than 1% of Apple, Inc. shares are likewise owned by insiders. The dividend yield is about 1.9%.

For both companies the CEO and other top executives, owning a tiny percent of all shares, make a poor fit to Reisman’s ‘businessmen who own the final product’. The final product is legally owned mostly by a huge number of passive capitalists.  The CEO and other top executives run the business but are more as wage-earners. By Marxist criteria, does that mean the passive capitalists exploit the CEO and other top executives? J

The CEO and other top executives steer the business. This does not undercut Reisman’s analysis of the businessman that I presented on April 12. His implicit assumption is that the businessman is sole owner and steers the business (has control).