John Bogle, the accidental socialist
The iconoclastic Wall Street legend John Bogle died Wednesday at 89. He'll go down in history for pioneering the humble index fund, making it an accessible and affordable form of investment for ordinary people. "A lot of Wall Street is devoted to charging a lot for nothing," legendary investor Warren Buffet told CNBC. "[Bogle] charged nothing to accomplish a huge amount."
But Bogle contributions don't end there: History may also remember him for helping to socialize the American economy.
How's that, you ask?
Allow me to quickly sketch the issue.
The basis of capitalism is competition: It drives innovation, creates new wealth, reduces costs, and raises standards of living. The paradox is those are benefits for society as a whole, not for specific companies. For the individual business, properly-functioning capitalism is a miserable, endless deathmatch with competitors over ephemeral profits.
You'd think capitalists would all join forces, agree to avoid competition, and grow fat and happy extracting profits from the rest of us. And the United States has all sorts of laws — against monopoly, against price-fixing, and more — to prevent exactly that dystopian outcome. (How good a job we do enforcing those laws is another matter.)
What do Bogle's index funds have to do with all this?
Well, an index fund is just a way to organize shareholders. It's a species of mutual fund or institutional investment — where one firm manages many portfolios for many different investors across many companies. Bogle's triumph made that model much more ubiquitous. It also expanded mutual fund portfolios to include all companies in the market, or something close to it.
But now consider shareholders' specific role in capitalism: They elect the board and the CEO and vote on major company governance decisions; in other words, they run the business. And because shareholders want maximum profits, they'll drive their individual company to participate as ferociously in the deathmatch as possible. For capitalism to work as advertised, shareholders must be caught within capitalism's competitive paradox as much as their companies.
Here's the thing: For that to happen, companies can't have shareholders in common.
If competitors are both owned by the same group of stockholders, driving them to compete with each other risks reducing one company's profits to zero, and the shareholders get nothing. Better for shareholders to reduce competition to keep the profits coming. This wouldn't even necessarily require active or intentional collusion: If applying the pressure to compete becomes antithetical to profits, shareholders can just sit back and do nothing.
At that point, the group of common shareholders becomes that most dreaded of socialist apparitions: the inefficient central planner.
And common shareholders across many different companies is precisely the situation that the wild success of Bogle's index funds helped create. Back in 1990, the odds were only 20 percent that any two random firms from the S&P 500 had at least 5 percent of their shareholders in common. By 2014, the odds had risen to 90 percent.
In other words, for basically every American company today, at least 5 percent of their shareholders overlap. That's a big change from just a few decades ago. And researchers are already pointing fingers at this phenomenon to explain everything from rising prices to bad customer service in the airline industry.
In fact, law professor Eric Posner and economist E. Glen Wyl consider this such a threat that in 2015 they recommended heavily regulating mutual funds or banning them outright: "The government regulates the types of funds that employers may offer to their employees. The government should direct employers to offer only mutual funds that do not own a significant number of shares of more than one firm in a specific industry."
Obviously, that's a pretty clunky solution. Investors could always still diversify on their own. The backlash against any attempt to regulate investment like this would also be huge. These worries about mutual and index funds as incipient socialism also remain speculative. Even if virtually all American companies have at least 5 percent of their shareholders in common, that's not exactly a huge portion.
At the same time, the portion could also be far higher for some companies, and the trends are going in the wrong direction. More broadly, the fear certainly fits with everything else we're seeing in the U.S. economy: slowing productivity, less investment, more monopoly power, rising inequality, stagnant wages.
The implications quickly get radical. If the critique of common shareholders is correct, it doesn't just mean American capitalism is quietly being taken over by incipient central planners. It means those central planners only answer to one group of Americans — namely, the top 10 percent, who own 70 percent of all U.S. wealth. Which is basically the worst of all possible worlds. "If we are already trusting corporate managers to be faithful agents of the rentier class as a whole," wrote economist J.W. Mason in Jacobin, "why not take the next step and make them agents of society in general?" I.e. If this is our reality already, why not just socialize finance outright?
Conversely, if you want to preserve capitalist competition, but avoid central-planning-by-mutual-fund, a cleaner solution might just be to get rid of shareholders entirely.
As it happens, Bogle's own company, Vanguard, has no shareholders; it's a form of co-operative, where the company is instead owned by its customers or its workers. (In Vanguard's case, it's owned by its investor-customers.) Bogle decided that managing customers' portfolios through a corporate structure that answered to a separate group of profit-driven shareholders caused an inherent conflict of interest.
Co-operatives aren't that common, but maybe they should be. Reinvigorating unions or mandating worker representation on corporate boards are other ways to marginalize the influence shareholders have over corporate governance.
Ironically, such efforts often get derided as socialism. But if you follow the logic, they may actually be the most pro-capitalism thing in the world.