I ntroduction IN AN ERA when stock market wealth has seemed to grow on trees--and trillions have vanished as quickly as falling leaves--it''s an apt time to ask ourselves, Where does wealth come from? More precisely, where does the wealth of public corporations come from? Who creates it? To judge by the current arrangement in corporate America, one might suppose capital creates wealth--which is strange, because a pile of capital sitting there creates nothing. Yet capital providers--stockholders--lay claim to most wealth that public corporations generate. Corporations are believed to exist to maximize returns to shareholders. This is the law of the land, much as the divine right of kings was once the law of the land. In the dominant paradigm of business, it is not in the least controversial. Though it should be. What do shareholders contribute, to justify the extraordinary allegiance they receive? They take risk, we''re told. They put their money on the line, so corporations might grow and prosper.

Let''s test the truth of this with a little quiz: Stockholders fund major public corporations--true or false? False. Or, actually, a tiny bit true--but for the most part, massively false. In fact, most "investment" dollars don''t go to corporations but to other speculators. Equity investments reach a public corporation only when new common stock is sold--which for major corporations is a rare event. Among the Dow Jones industrials, only a handful have sold any new common stock in thirty years. Many have sold none in fifty years. The stock market works like a used car market, as former accounting professor Ralph Estes observes in Tyranny of the Bottom Line. When you buy a 1997 Ford Escort, the money goes not to Ford but to the previous owner of the car.

Ford gets the buyer''s money only when it sells a new car. Similarly, companies get stockholders'' money only when they sell new common stock. According to figures from the Federal Reserve, in recent years about one in one hundred dollars trading on public markets has been reaching corporations. In other words, ninety-nine out of one hundred "invested" dollars are speculative.1 That''s today. But the past wasn''t much different. One accounting study of the steel industry examined capital expenditures over the entire first half of the twentieth century and found that issues of common stock provided only 5 percent of capital.2 So what do stockholders contribute, to justify the extraordinary allegiance they receive? Very little.

Yet this tiny contribution allows them essentially to install a pipeline and dictate that the corporation''s sole purpose is to funnel wealth into it. The productive risk in building businesses is borne by entrepreneurs and their initial venture investors, who do contribute real investing dollars, to create real wealth. Those who buy stock at sixth or seventh hand, or one-thousandth hand, also take a risk--but it is a risk speculators take among themselves, trying to outwit one another, like gamblers. It has little to do with corporations, except this: public companies are required to provide new chips for the gaming table, into infinity. It''s odd. And it''s connected to a second oddity--that we believe stockholders are the corporation. When we say that a corporation did well, we mean that its shareholders did well. The company''s local community might be devastated by plant closings.

Employees might be shouldering a crushing workload. Still we will say, "The corporation did well." One does not see rising employee income as a measure of corporate success. Indeed, gains to employees are losses to the corporation. And this betrays an unconscious bias: that employees are not really part of the corporation. They have no claim on wealth they create, no say in governance, and no vote for the board of directors. They''re not citizens of corporate society, but subjects. We think of this as the natural law of the market.

It''s more accurately the result of the corporate governance structure, which violates market principles. In real markets, everyone scrambles to get what they can, and they keep what they earn. In the construct of the corporation, one group gets what another earns. The oddity of it all is veiled by the incantation of a single magical word: ownership. Because we say stockholders own corporations, they are permitted to contribute very little, and take quite a lot. What an extraordinary word. One is tempted to recall the comment that Lycophron, an ancient Greek philosopher, made during an early Athenian slave uprising against the aristocracy. "The splendour of noble birth is imaginary," he said, "and its prerogatives are based upon a mere word.

"3 A mere word. And yet the source of untold trouble. Why have the rich gotten richer while employee income has stagnated? Because that''s the way the corporation is designed. Why are companies demanding exemption from property taxes and cutting down three-hundred-year-old forests? Because that''s the way the corporation is designed. "A rising tide lifts all boats," the saying goes. But the corporation functions more like a lock-and-dam operation, raising the water level in one compartment by lowering it in another. The problem is not the free market, but the design of the corporation. It''s important to separate these two concepts we have been schooled to equate.

In truth, the market is a relatively innocent notion. It''s about buyers and sellers bargaining on equal footing to set prices. It might be said that a free market means an unregulated one, but in today''s scheme it really means a market with one primary form of regulation: that of property rights. We think of this as inherent in capitalism, but it may not be. It is true that throughout history capitalism has been a system that has largely served the interests of capital. But then, government until the early twentieth century largely served the interests of kings. It wasn''t necessary to throw out government in order to do away with monarchy--instead we changed the basis of sovereignty on which government rested. We might do the same with the corporation, asserting that employees and the community rightfully share economic sovereignty with capital owners.

What we have known until now is capitalism''s aristocratic form. But we can embrace a new democratic vision of capitalism, not as a system for capital, but a system of capital--a system in which all people are allowed to accumulate capital according to their productivity, and in which the natural capital of the environment and community is preserved. At the same time, we might also preserve much of the wisdom that is inherent in capitalism. If we go rummaging through its entire basket of economic ideas--supply and demand, competition, profit, self-interest, wealth creation, and so forth--we''ll find most concepts are sturdy and healthy, well worth keeping. But we''ll also find one concept that is inconsistent with the others. It is the lever that keeps the lock and dam functioning, and it is these four words: maximizing returns to shareholders. When we pluck this notion out of our basket and turn it over in our hands--really looking at it, as we so rarely do--we will see it is out of place. In a competitive free market, it decrees that the interests of one group will be systematically favored over others.

In a system devoted to unconscious regulation, it says corporations will consciously serve one group alone. In a system rewarding hard work, it says members of that group will be served regardless of their productivity. Shareholder primacy is a form of entitlement. And entitlement has no place in a market economy. It is a form of privilege. And privilege accruing to property ownership is a remnant of the aristocratic past. That more people own stock today has not changed the market''s essentially aristocratic bias. Of the total gain in marketable wealth from 1983 to 1998, more than half went to the richest 1 percent.

4 Others of us may have gotten a few crumbs from this feast, but in their pursuit we have too often been led to work against our own interests. Physicians applaud when their portfolios rise in value, yet wonder why insurance companies are ruthlessly holding down medical payments. Employees cheer when their 401(k) plans post gains, yet wonder why layoffs are decimating their firms. Their own portfolios hold the answer. Still, decrying the system''s ills is not the same as saying the stock market is devoid of value or that it should be eliminated. The stock market does have its worthwhile functions. Stock serves as a kind of currency with which companies can buy other companies. A high share price can also be the basis for a good credit rating, making it easier for firms to borrow at favorable rates.

Most vitally, public markets create liquidity, which is what makes genuine investment in companies attractive. Without an aftermarket for share trading, investors could cash out only when a company was sold or liquidated, which would make investing in a company like investing in a house. Money could be tied up for decades. In making the value of companies liquid, the stock market has the effect of increasing that value. It''s in part a function of auction. Because more bidders are available, a stock fetches a higher price, just as a first-edition Hemingway fetches a higher price on eBay than at a garage sale. But the auction function can get out of control when new wealth flows primarily to those already possessing substantial wealth. Because this wealth cannot fully be spent, it can only be reinvested, leaving more and more money to chase essentially the same body of stocks--causing th.