Australia’s Economic Revolution
November 12, 2008

RADIO 2CBA FOCAL POINT COMMENTARY BROADCAST ON FRIDAY OCTOBER 8 1999 ON RADIO 2CBA FM.

The Telstra share offer closed yesterday. It was the largest share float in the world this year. Many Australians have now bought shares for the first time.

This is part of major economic and social revolution. More Australians own shares than ever before. At least 40 per cent of the adult population (5.5 million people) have some form of involvement with share ownership, including four million Australians who have direct share ownership.

Share ownership used to be seen as simply an elite activity. The rich invested in shares, while the poor gambled at lotto, trots, dogs and horses. Both could end up losing money, of course, but shares are a much safer way of making money.

Poorer Australians thought that share-ownership was socially not for them – and their union mates would oppose such an activity because of its perceived siding with the bosses. That psychological barrier has been broken and a social revolution is underway. Younger Australians are joining in share ownership with none of the reservations of their parents.

This is also an economic revolution because it means that more money is going directly into shares and other forms of investment. This helps to explain the current boom in the stock exchange. More employees are also becoming shareholders in their own companies: they now have a financial incentive not to go on strike.

This revolution has three consequences for companies. First, there is now increased share-holder activism. There is greater pressure from share-holders on companies to perform.

Second, the new share-holders have entered their activity at a time of rising share prices and dividends. They have expectations that this will continue.

Third, while in overall terms share investment is a good investment, we know that some shares are a bad investment and that all shares are vulnerable to periodic downturns (as indeed, capitalism has been marked by a series of business cycles for the last two centuries).

Therefore there is also a need to educate the new share-holders in the risks that come both from particular companies and the inevitable downturns of the business cycle.

This challenge in turn presents two risks. First, share-holders may be deterred from staying in the stock exchange because of the fear of losing money. Ironically, poorer Australians seem to have fewer reservations about losing money on horses and dogs. Perhaps they secretly expect to do so and in any case enjoy the gamble; they do not get the same sort of excitement from the stock exchange.

Second, they could panic en masse during the next downturn and so bring about an even larger downturn because so many people sell so quickly, thereby confirming their fears. Just as there is now a spiral of rising expectations, so there can also be a spiral of falling expectations and greater scepticism.

Therefore, the shareholder revolution has some long-term issues that need to be thought through.