^ venture capitalist Nick Hanauer : venture capitalism IS capitalism. The current stock market is NOT.

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Today in America we have two economies : an entrepreneurial, capitalist, start-up economy and a large-corporation, publicly traded arbitrage situation.

While the entrepreneurial, start-up economy epitomizes capitalism as I define it — the application of privately owned funds to the creation of productive value — the structure today of the larger, stock market economy isn’t capitalist at all. It is an arbitrage market — by which I mean that it seeks to reap the profit potential of valuation inefficiencies.

Arbitrage creates no value, invents no products or services, hires few employees. It actually destroys value, by applying money that could otherwise be invested in a capitalist way. The bulwarks of arbitrage must be rolled back.

These include : ( 1 ) rapid electronic trading of stocks by hedge funds and other seekers of market fluctuation profits ( 2 ) a corporate governance system that places stock ownership of companies — and stock voting rights — at the mercy of speculators, whose objectives negate the entire purpose of the enterprise they are able to own ( 3 )  availability of borrowed funds to pay for arbitrage trades ( 4 ) tax benefits given to arbitrage profits.

Stock markets were created for a capitalist purpose : to enable enterprises to raise funds from many investors besides the few who started them up; to provide a buyer for sellers of stock if and when they choose to sell; and to establish a market opinion of an enterprise’s prospects. None of these purposes is an exact matter. Appraisal never is. The inexactitudes in market appraisal provide opportunity for shrewd investors, but, as we see, unchecked they also enable those whose goal is not to acquire ownership in an enterprise but to exploit its appraisers. This must be curbed.

I propose to restore capitalist uses of money to the primary position that a thriving economy requires. To that end I offer the following suggerstions for market reform :

( 1 ) place a substantial tax penalty on stock buybacks, which diminish an enterprise rather than expanding it, the corporation spending money not on boosting its business but on arbitaging its stock value.

( 2 ) Require publicly traded companies to authorize two classes of stock : voting and non-voting, and make only non-voting stock available for trading on a stock market. (Many companies already do this.) Such reform would make it much more difficult for speculators and raiders to take over a corporation’s board of directors and reshape the business for liquidation or break up rather than productive creation.

( 3 ) Eliminate all tax breaks now given to arbitrage profits, especially the “carried interest” benefit. Either we are serious about discouraging arbitrage or we aren’t.

( 4 ) as a condition of being listed on a stock exchange or in an authorized market, require that employees of a firm be represented on its board of directors. Germany does this, which is one reason why its big firms are vehicles for capital investment as I define it. Employee board members are not going to vote in favor of an arbitrage take over or corporate break up raider whose first move is usually to fire workers.

( 5 ) establish a $ 15/hour minimum wage, and an even higher minimum for certain high cost metropolitan areas. An enterprise purposed to the creation of productive value needs to see its employees as assets, not a burden, and to pay them accordingly. Plus, is it not obvious that employees who are paid sufficiently to be able to buy things are a boon to an economy ? One of our economy’s most grievous difficulties right now is that far too many people do not earn enough to buy anything discretionary. (There are many other benefits to a substantially higher wage base, but these go beyond the topic at hand.) Keep in mind that the more customers an enterprise has, the more workers it needs to hire. This policy reform is a win win situation.

( 6 ) give tax benefits to firms that offer employee stock ownership plans and dividend reinvestment for employee stock plans. The more proprietary interest an enterprise can attach to an employee, the better for both.

( 7 ) require 100 percent margin for all hedge funds trading and for all “short” sales. The Federal Reserve has the power to set margin rules (the amount of a purchase that can be paid for with borrowed money), and 100 percent margin means that no borrowed money can be used for these types of transactions or purposes, none of which support capitalism.

The start-up, venture capital economy works exactly as I want it to. Its principles should govern the mature economy as well. If our entire economy were deployed in a capitalist manner rather than an arbitrage one, and if the vast majority of workers have enough funds to actually buy stuff, maybe that $ 7 trillion of funds now parked in money market accounts or spinning wheels in traders’ cubicles, would get off the schneid and risk itself for the sake of productive value creation. It;s at least worth a try. Because the current situation is about as useless a finance as it gets.

—- Mike Freedberg / Here and Sphere