Is profiting from stock ownership moral?

Question

When you buy shares of a company, you become its co-owner and are entitled to dividends proportional to your investment. From what I understand, co-ownership is offered simply because it has to be to attract potential investors. But how is co-ownership (i.e. permanent entitlement to profit sharing) morally justified in the sense that it is considered proportional to the act of investing?

If I invest directly in the company by buying its shares when they are issued, it seems just that I should profit proportionally to my investment in the form of dividends as my investment was needed to enable the company to conduct business. However, why should I retain the right to profit even after my investment was spent, decades into the future? Similarly, if I purchase shares previously owned by someone else - which is what happens most of the time when trading - I'm granted the right to profit (or loss) sharing.

Beyond the point of initial investment, am I not taking a profit/loss generated by other people (employees, etc.)? Is such a redistribution moral? The contract (purchase of shares) grants me co-ownership, but is it moral of me (a buyer) to accept such a contract?

_{Note than when I'm talking about "profit", I also mean loss, so you can think of "profit" here as either positive or negative.}

Answer 1

As noted above, it certainly depends on the moral framework. For Aristotle's virtue ethics, the accumulation of wealth by means of trade may fall under pleonexia, an ignoble trait. But, of course, the philosophers of his day lived largely and unproblematically off "shareholdings" in land and slave labor.

For Aquinas and the medieval moralists, usury was immoral, and your dividends represent a sort of compounding interest on a loan to the company. But, of course, tithes and the sale of indulgences formed a morally dubious financialization of the Church that eventually ended in the "credit" or "credibility" crisis of the Reformation.

Morality plays no role in a Marxist analysis of classic Liberalism, but that is the framework most relevant to our modern situation. To put the case very, very crudely, the classical economists, from Smith to Marx, held a labor theory of value, which I argue remains valid and intuitive, beneath the veil of marginal utility "pricing" and the vast, intentional complexities of finance.

Two classes dominate this modern production system, according to Marx, the Capitalist and the Workers, with innumerable subclasses. If you must in any way "work" for a living, you are a worker. The workers collectively produce all material value by selling the only thing they own, their labor power, which is materialized as commodities. The capitalists own the "means of production," land, machinery, financial capital, patents, copyrights, licenses, etc., as well as the final commodities.

Of course, there are myriad complications. The "capitalist" may chose to work or at least yell on the phone and "look busy," even if they are in fact losing value (a certain president comes to mind). A CEO may be "rich," yet still have to sell her labor, and so forth. The idealized point is that a tiny minority will collect a surplus value simply from what they own, "money makes money," while the vast majority "own" only the labor they sell for wages, which are collectively worth less than the commodified value they produce.

The scenario you describe is very pertinent. Today the role of "capitalist" is widely fragmented and distributed and, yes, the retired worker with a 401K is a tiny "owner" of the means of production, collecting money without labor, the value of which can only come from someone's labor somewhere. This was not common in Marx's time, and interestingly Marx did thinks the widely distributed stock market was a potentially democratizing trend.

Here, the potential point is not of morality, but of justice. Despite the naturalized illusion of "investment," money does not create money, or at least money does not magically create value. The "shareholder" is collecting the difference between the value labor produces, collectively and globally, and the value labor is paid, including value-producing intellectual or managerial labor.

There are no pure cases of this model. But the detachment of capital shares from labor value can be seen in present crises, where the stock values can rise on bad economic news or unemployment. Collectively, corporations and their "shares" seek only their own accumulation or pleonexia, quite apart from the external impacts on workers, the environment, national laws, customs, cultures. So the "returns" on shares may reflect sociopathic forces, and thus might be called not only amoral but "immoral."

Answer 2

Depends on who you ask, since moral is quite subjective.

"Socialists":

It's immoral, if the stock owner does not participate in production, since then the stock owner merely "parasites" on the fruits of labor of others and gains profit "by not doing anything".

"Marketists":

It's moral, since the investor takes a risk when he/she invests. With his/her investment the company (with its employees etc.) gains advantage. It's therefore moral to compensate the investor for the risk and both parties benefit.

Note also that public stocks can go either way in value. Therefore the investor is not guaranteed to make profit. And then you might realize that stocks really do carry risk and it's maybe "not as free money", more like a bit of gambling.

Answer 3

Your first paragraph seems to reflect some confusion about what share ownership means. A share just is part ownership of a company. If you are a part owner of a business then you participate in its future fortunes, both positive and negative. If the company can afford to pay a dividend then all of its owners will receive it, but it is not an entitlement. A company can raise capital in other ways, e.g. by issuing bonds or borrowing from a bank or selling royalties, but those investors are only entitled to the corresponding specific benefits: usually interest payments. They do not participate in the fortunes of the company and will not have assets that grow and fall in value as the company fares better or worse.

Perhaps it would help to give a simple example. Suppose Alice is a good car mechanic and she decides to start her own repair business. She needs some capital to make this happen. She has some savings, but not enough. She asks her brother Bob and her cousin Carol for a loan and they agree to lend some money. She also asks her friend Dave and her Aunt Erica and they both agree to invest a much larger sum but they don't want to just lend money, they prefer to take part ownership of the business because they believe Alice is going to make a big success of it. Alice negotiates with them and agrees to sell 10% of the company to Dave and 15% to Aunt Erica.

Bob and Carol are in a completely different situation from Dave and Erica. Bob and Carol are entitled to interest on their loan, and to have the loan repaid at some future date. Dave and Erica on the other hand are shareholders of the company. They have ponied up the capital to make the business happen and will gain or lose depending on its success. Dave and Erica are not able to get their money back from Alice. The capital that Dave and Erica have invested is not 'spent': it is a permanent part of the assets of the company. If the company fails and its liabilities are greater than its assets, the shareholders will lose everything.

Maybe at some point Dave decides he no longer wants all his shares. He's planning to buy a house, or start his own business and he needs some cash. He sells half of his 10% stake to Fred. Fred now owns 5% of the company. He wasn't one of the original shareholders, but it is still his money that provides part of the capital the company runs on. If the company has done well, Dave may make a profit on the sale, but his money was at risk and he could have lost.

Now suppose Alice's business does well. She might decide to expand and open a second shop in the neighbouring town. This will require more capital. Companies typically have a constant need for capital as they expand: it is not a once and for all matter. She might be able to borrow, or to ask the existing shareholders for more, but she may need to bring in new shareholders by creating new shares and selling them. Eventually, it may become difficult to keep finding investors. Also, it may be difficult for the existing investors to sell some of their shares when they need to. Alice could decide to take the company public, so that its shares can be bought and sold on an exchange. This makes it easier to raise fresh capital, and easier for all the investors to buy and sell when they need to.

Once you grasp a simple example like this, it becomes easier to answer your questions. Why would it be immoral for someone to invest in a business? Businesses create value, employ people and pay taxes. Investors are needed to make this happen. If you have some savings it is better to invest them in a business than hide them under a mattress. Why should it matter whether a particular owner was one of the original owners? It is their decision to buy, and the previous owner's decision to sell: the transaction benefits both. Either way, the capital is needed for the company to operate, and the shareholder is not entitled to withdraw it.

As to whether it is moral for a company to pay dividends, there are different accounts of how this might be justified. An investor is tying up money that they could be spending on their own consumption and deserve to be compensated for doing so. Having a market for investments helps to ensure that money flows towards those who are best able to allocate capital.