The following article is about a thought experiment that I engaged with recently. For this purpose, I stepped into the role of a supporter of the theory of “capitalcracy” to extol the advantages of that hypothetical system. I wanted to delay critical reflection of the idea after exploring its potential disadvantages (which there are probably quite a lot). Feel free to point out the weaknesses of the theory, or add other potential benefits…

There is a general sentiment that democracy seems to best further the goals of capitalism. This sentiment is mistaken. Historically, capitalism and democracy seem to have co-evolved. But that doesn’t mean that there is a more natural form of government that is more harmonically integrated with the requirements of capitalism: Capitalcracy – the rule of capital.

Instead of democratic elections, which are problematic, because people are dumb and they can be manipulated anyway, decision making power is directly bought with capital. The governing bodies of states are turned into public corporations that issue shares. Each share gives its owner one vote in the corporation. Laws, executive policies, and legal judgments are then each decided by a vote of the shareholders. If one cares about division of power, then this can be achieved by making the legislative, executive, and judicial branch each a different public corporation. There may be rules to prevent shareholders from purchasing shares in a different branch, but such rules could still be easily circumvented by large cliques of capitalists, so maybe it’s not worth bothering with that in order to keep things transparent and simple.

This arrangement could have interesting advantages. States wouldn’t need to fund their expenses with taxes, but could instead just issue more shares as main source of funding. That way, the elites would found running the state, which would actually be the fairest way to handle things, since they can easily carry that financial burden. The lower classes would be freed from tax burdens, which would provide a welcome boost to the economy.

Such a practice would of course lead to an inflation of shares in the long run, if shareholders stick to these shares indefinitely. There are of course mechanisms to deal with a dilution of voting power of shares. For example, after a certain threshold, 10 old shares could be converted into 1 new share. Those who do not hold enough old shares to be converted to a new share could be compensated with the current value of the share.

But what if some entity gets a hold of a majority of shares? Would that turn the state into a dictatorship? Wouldn’t that destroy the incentive for other players to purchase any shares, if the majority holder can simply outcompete them? Well, yes, but the majority holder would then have the problem of having to pay for the state business out of his own pocket, or by raising taxes. In theory the state could finance is business by selling goods and services, but then the majority holders could finance the state with their other businesses. In the end, the difference isn’t really big.

However, if the majority holders of the state decide to raise taxes, then it would certainly lose some of its best subjects, and that would threaten the value of state shares. Depending on how sensitive subjects are to the introduction or raise of shares, such a move could be ruinous. So, a majority position of some entity can be reached, but even such an effective dicatorship would shy back from taxing its subjects.

Would shareholders have sufficiently strong incentives to care about the satisfaction of their subjects? Well, yes. Unhappy subjects may switch to a different state that cares more about their satisfaction. As seen before, a loss of subjects would hurt the valuation of state shares. Of course, the state could decide to prevent emigration by imprisoning its subjects, or preventing them from leaving. Such a decision would however signal to other states that the shareholders are desperate and the state has troubles that others shouldn’t know about. This would cause a sudden drop in the value of state shares. And that would make it easy for other parties to acquire a new majority position in that state when it decides to issue new shares.

So, what if a state decides not to issue new shares in order to prevent such a takeover? Then the majority holder of the state would be left to sit on a worthless piece of land with subjects that would try to use every possibility of escape. Also, the image of the majority holders would suffer tremendously, since they would be known for making stupid business decisions. Any shareholder considering such practices would risk burning a large part of his capital, which would make it easy for other players to take over, since capital buys power.

Instead, keeping subject satisfaction high would be an important issue for state, since high subject satisfaction usually translates into high productivity. And high productivity means a higher valuation of state shares. This mechanism would help to keep injustice in check, because perceived injustice would hurt subject satisfaction. Of course, there is the possibility to just hide injustice, so that it’s not perceived, but in a highly connected and well informed world, such measures can be very costly and would therefore only be economic under rare circumstances.

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