I've been mulling over this one for some time.

I will lay out my understanding of the context first, then pose some questions relating to this context.

Before I begin, I freely admit that my understanding might be incomplete or imperfect. In fact, I'm assuming that it is because I do not see how modern capitalism has be allowed to come to be on the basis of my current understanding of its roots. What I seeking here is a better understanding of the underlying philosophical principles, or (if my understanding is already good enough) a debate on the rights & wrongs of these principles.

OK. Let's say I'm in business for myself. I start off as a sole trader, so it's all my own work. I own the whole lot. Let's then say that the business gets big enough that I want to convert it into a limited liability company, because I don't want to lose my house and the clothes on my back if it goes bust. (That is the main purpose of limited status, to limit the liability of stockholders to the amount they put in to begin with, right?)

Then, let's say that I take on a partner, Fred. Fred personally fronts the same amount of money as the business is currently worth, giving him a 50% stake in the new business. If I ever want to buy Fred out, I have to raise 50% of the value of the business at that time because I can't reasonably claim that I would have been able to grow the business to the same extent without him.

Now, me & Fred expand some more, and need some more capital to finance it, so we sell some more stock in our expanded venture to raise that capital. Let's say we now have 100 stockholders, and we have expanded our business so that it becomes ten times bigger. My and Fred's stake (originally 50% each) is now 5% each, because the business has grown by 10. All the other shareholders, who are not active in the business, own the same amount (to begin with), each worth 0.9% of the total business.

I can see how Fred & I are obligated to these 100 other guys, and to each other. It is only right and proper that we pay these guys some money back out of the profits we make, because we would not have been able to make it without their investment.

Between them, they vote for another guy - Dave - to sit in meetings with me & my partner and make sure that the business decisions we make don't hurt the interests of our stockholders, and every year, the three of us report back to them to tell them what we've been doing with their money.

Then one day, one of our 100 stockholders (let's call her Mary) sells her 0.9% stake in the business. She's entitled to do that, because it's her property. And it's in Mary's interests to do so, because Fred, Dave and me have worked really hard to grow the business so that her original 0.9% stake has grown in value from the $1 she originally paid us to $10,000.

So, Mary sells her $1 share for $10,000, making herself a fat $9,999 from the transaction, on top of the dividends we've paid her regularly out of company profits since she invested with us back when Fred & me were operating out of my garage.

Mary's stockholding is now owned by a guy called Bill. We've never met him. Theoretically, if we had to fold the business and sell off all of it's assets, he'd be entitled to 0.9% of it (more if he buys more stock), but the business is doing fine and there's no need for Fred, Dave or me to think we should fold up and go home. And

Bill can't do that off his own bat, because he'd have to persuade a majority of the other stockholders to fold up the business so he could realise his 0.9% stake. his only option is to hope we grow some more, so his stake will become worth more than the $10,000 he paid Mary for it.

Bill wasn't there at the beginning. He hasn't given the business any money - he gave that to Mary. He hasn't helped us to grow. Unless Dave, Fred & me go cap in hand to him to ask him for more money (a rights issue?), he's doing us no favours by buying stock in our company, even though he wants us to continue to make profits and pay him a dividend out of them.

He gets all the benefit. He's taking a risk that the stock price might go down, but that's essentially gambling. Expecting us to be obligated to him is as silly as expecting a losing racehorse to apologise to every punter that bets on him. We can't invest his money wisely, because he hasn't given us any money (excepting rights issues). What we had after he bought Mary's share we had before he did, and if the business grows, it will not be because he engaged in a transaction with Mary.

Sure, Dave, Fred & me are flattered by the confidence Bill has shown in us by buying Mary's share in our company. It makes us feel warm inside.

But Louise, our salaried employee that works in the office, does a lot more for us than Bill ever has done, or ever will. Yet Louise has a legally lesser claim on a share of the business's profits than Bill does.

If we make a loss, does Bill put his hand in his pocket and make good that loss (or his share of it)? No. In fact, he still wants his dividend, or else he and other stockholders like him, threaten to sell their stock straight away, flooding the market and lowering the stock price. This doesn't mean the business can't raise money in loans, because like as not those will be secured against our assets (buildings, equipment, or even intangibles like brand equity), and not against the value of stock, which the business doesn't own anyway. Only Bill can take out a loan using Bill's stock as security.

Why does the law require Dave, Fred & me to behave as if our obligation to Bill is exactly the same as our obligation to Mary?

What IS the obligation to stockholders who aren't in on a business at the beginning of each phase of expansion?

What is the philosophical underpinning of the idea that stockholder like Bill should be treated just the same as stockholder like Mary?

What is the philosophical underpinning of the idea that Bill has a greater claim on the profits of the business than Louise, who works for us in the office?

In the widest context, what is the philosophical underpinning that ANY stockholders not 'in at the beginning' - in a well established business that might be most or all of them - is more important than other stakeholders?

NB, My understanding of Ford vs Dodge, the court case that established that stockholders have primacy over customers, staff, management and all other stakeholders in a given business, is that Henry Ford = me; the Dodge brothers = Mary (not Bill); and the court told me (Henry) I should be not deny Mary (the Dodges) her fair share of the profits.
As I've already stated, I can see why Mary should be treated well. What I'm struggling to understand is why Bill deserves the same level of treatment. He's more important than someone the entirely unconnected to the business, certainly, but why so important.

Why does the law require Dave, Fred & me to behave as if our obligation to Bill is exactly the same as our obligation to Mary?
From a purely accounting standpoint, we can look at each one of the participants.

From your standpoint (as the company), an outside transaction has taken place. The company can not legally or morally expect to benefit or be harmed by that transaction. Remember that the company's obligation is not to Mary or Bill, but to the owner of the stock, whomever it may be, which has not fundamentally changed.

From Mary's standpoint, she invested her money at the beginning, weathered the risks for however many years you grew the business, and then effectively withdrew her fairly-owned wealth.

From Bill's standpoint, although he is a latecomer, he has payed the $10000 to fairly receive his share of the ownership. The risks he did not take, and the contributions he did not make, are reflected in the fact that the price he paid is 10000 times higher than for the other stockholders. He has not made the profit they made, but he has effectively now paid his dues, and there is every reason to expect full and equal treatment.

To change the law to make newcomers, in any way, second-class stockholders, would not only be wrong from moral and accounting perspectives, but it would also have a negative effect on investment. If I'm going to be a second-class stockholder, I'm not going to buy the stock unless I pay a second-class price for it.

What IS the obligation to stockholders who aren't in on a business at the beginning of each phase of expansion?
The same as to the stockholders that were. Bill's perspective is apt. The newcomers never had to worry about risk or effort, but they haven't enjoyed the profits that the original stockholder's enjoyed. The newcomers do in fact pay for their equal ownership, in the form of the purchase price of their stock.

What is the philosophical underpinning of the idea that stockholder like Bill should be treated just the same as stockholder like Mary?
What is the philosophical underpinning of the idea that Bill has a greater claim on the profits of the business than Louise, who works for us in the office?
Simply this: all individuals entered into their agreements freely, without coercion, and with full knowledge of the compensation they should expect to receive. The company could have chosen not to issue stock. Mary could have invested elsewhere. Bill could now invest elsewhere. Louise could work elsewhere.

Mary was promised a share of the profits and ownership for her initial investment, and she has received that. Louise was promised a fixed salary for her secretarial duties, and she has received that.

Mary's contract included a provision to sell her stock without penalty to any purchaser she chose, which happened to be Bill. Bill was promised full and equal ownership for his investment, and has received it.

To claim that Louise should have any claim on the profits, while it might sound fair from a shallow perspective, has a problem. It is reneging on the promise made to the stockholders. THEY are the ones who have the claim on the profits, including Bill, having paid the fair market price for his stock. To give Louise any, without their collective consent, is stealing from them.

Now, the fact that a stockholder begins her investment with the right to sell that investment to a willing party, transferring all the rights and privileges that accompany that investment, means that Bill must therefore have those rights. To deny them to Bill, is to change the terms of the initial contract. If the contract were made with the understanding that a secondary investor would have limited rights, that would have been one thing, and that WOULD be reflected in the price Bill paid. In your example, however, that is not the case. Bill MUST have every right that Mary had.

Edited to add:

Well, as far as being required to invest more in the company, he does not. Nor does any other stockholder, so to imply that Bill is receiving a free lunch, is not fair.

As far as having to swallow the losses against his investment, he does have to make good that loss, just like every other stockholder. If you make a minor loss, then the dividend Bill receives will be less than expected, or even nothing. And if you fold up, then Bill suffers a $10000 loss...the price he paid for the stock. From the tone of several of your comments, it sounds like you would expect Bill to get nothing if the business went belly-up. At the very least, he would get a lesser portion. But think about it. Say your company collapses three hours after Bill signs the check to Mary. Bill immediately loses his $10000 investment. That sounds to me like reaching into his pocket to make good the loss.

First, huge disclaimer. I, too, am not an economist. I’m just answering these questions based on my opinion, judging by the best of my very limited ability.

Why does the law require Dave, Fred & me to behave as if our obligation to Bill is exactly the same as our obligation to Mary?

Because Bill owns part of the business, which he bought into under the assumption that it would continue to perform. If he owns .9 percent, he owns .9 percent, regardless of whether he was there at the start or not. Why would he be willing to shell out any money otherwise? He is buying into the business and taking a risk. He wouldn’t do so if he didn’t believe that it would eventually profit him.

When I buy a product (say, a collector’s item of some type), I haven’t spent any energy in the creation of that product. I simply bought it because I either liked it or hoped to cash in at some point. Does my lack of participation in the creation of the product influence its price in any way?

What IS the obligation to stockholders who aren't in on a business at the beginning of each phase of expansion?

Once a company decides to go public (it is not required by law to do so, this is the choice of the stakeholders), it is public. People purchase based on expectation of future value. If the company has little future value no one will invest in it.

What is the philosophical underpinning of the idea that stockholder like Bill should be treated just the same as stockholder like Mary?

Not much philosophical underpinning, in my estimation. I live in a house that I exerted no energy in producing. It is worth more today than the price it was built for, but the construction workers whom I (well, someone) paid to build it will not benefit.

What is the philosophical underpinning of the idea that Bill has a greater claim on the profits of the business than Louise, who works for us in the office?

Not much. I’d say that Louise should have a share in the (I'm assuming) publicly owned company, if she wants to. Most employees of such companies are allotted shares. In fact I don't know of any publicly owned companies which don't offer shares to their employees at discounted rates. It is usually part of their retirement. For that matter, the original stakeholders usually keep quite a bit for themselves, too. Has Bill Gates become disenfranchised since his company went public? If he had (theoretically) started the company with a partner named Frank, who decided to sell out to Bill before it went public, that is Frank's loss. He agreed to sell and someone else agreed to buy for the price he requested. How can someone sell their share and then later say, "Hey! I didn't expect it to do that well! I deserve some of that profit!" Is that any different from the Longaberger basket I bought three years ago? Can the original owner who sold it to me come back and expect a share if I am able to eventually sell it for a higher price? Or, from the reverse perspective, could I go back to the person I bought it from three years ago and say I want my money back because it is no longer worth as much as I paid for it?

The above have both been very good answers.

I would only seek to add to the last question, which you seem to draw the most indignation from:
What is the philosophical underpinning of the idea that Bill has a greater claim on the profits of the business than Louise, who works for us in the office?

As stated above, all parties have entered into contracts williningly, so Louise's only claim is to the salary she signed-up for. If the company does well, she can try to renegotiate her contract, to include a higher salary, or stock options, or she can add that success to her resume and seek better employment elsewhere.

The underpinning of Bill's claim is that he bought that claim from Mary. For $10,000, he has taken over her share of the company. Arguably, he has put even more at stake, since Mary only paid $1, while Bill paid $10,000, he has clearly put more at risk. Mary didn't put in $10,000, she enjoyed that growth by taking a small chance helping with the initial investment.

Stock is not just a betting card, like a horse race, it is a source of wealth for a company. When a company buys back its stock, it is not only bumping up the prce for shareholders, but is also effectively making a cash investment in itself, as well as reducing its dividend costs. Later, those shares can be sold to pay for additional growth. Bill's purchase of Mary's shares for $10,000 helps boost the stock price, meaning the company can get more for any new shares sold.

(For example, much has been made of oil companies buying back their shares instead of using their profits to invest in new production. But if oil companies believe that prices, and profits, will fall, then they may believe it is better to save money in the form of shares in the company, as well as reducing dividend expenses, so during the next low-price period they will have reduced costs and cash to balance the decrease in revenues.)

These questions are not involving capitalism, per se, but the mechanics of ownership.

The concept of capitalism is based upon willing participation in a supply-and-demand scenario where goods and services are exchanged for some combination of goods, services, or money (which is simply a representation of a certain amount of goods and services).

Ownership of a company is a particular scenario under this willing exchange. Ownership is a willing exchange of money (capital) in exchange for a share in the proceeds of the business. This ownership is fungible. That is, it can be bought or sold for any reasonable price agreed upon by the buyer and the seller. Whoever the current owner of this piece of the company is retains the same benefits of the original owner of that portion of the company.

When a company is started or expands, there is greater risk since it is unknown how the future of the company will turn out. Therefore, those that invest at that point can expect a higher return on their investment. At a later point in time, when the company's sales are known and predictable, there is much lower risk because there are fewer unknowns.

Now, we come to the employee. Julian, you have muddied the waters by confusing the exchange agreements between employees and the company with that of the owners and the company.

Employees willingly exchange their services (work) for money and benefits from the company. In some cases, these benefits may include some piece of ownership in the company (stock sharing program) or some return on the profits of the program (profit sharing program). Each employment situation remains, however, a willing agreement between the employee and the company. Each side must know, going in, what they can expect out of the agreement. In many cases, proceeds from the company's performance are not included in the employment agreement. If they are included, it is because the owners have delegated a certain portion of their compensation to the employee. Owners are under no obligation to agree to that arrangement.

Why does the law require Dave, Fred & me to behave as if our obligation to Bill is exactly the same as our obligation to Mary?

Ownership is fungible. It can be transferred to other people (or other corporations) at which time the full benefits transfer to the new owner. The original owner, by deciding to sell their interest, have collected what they consider a fair exchange for their investment. Likewise, the new owner has purchased the interest in the business with the understanding that they will receive the full benefits that the original owner would have received.

What IS the obligation to stockholders who aren't in on a business at the beginning of each phase of expansion?

Exactly the same, regardless of who the actual owner is.

What is the philosophical underpinning of the idea that stockholder like Bill should be treated just the same as stockholder like Mary?

Again, ownership is fungible. When Bill bought Mary's interest in the company, he bought the full benefits that come along with that ownership.

What is the philosophical underpinning of the idea that Bill has a greater claim on the profits of the business than Louise, who works for us in the office?

Bill is an owner. As such, he has certain obligations (monetary input) and he expects certain paybacks for it. Those paybacks are in the form of the company's profits. Bill does not draw a salary unless he also has a job with the company and exchanges his time (work) for that salary.

Louise is an employee. She has a different relationship with the company. She expects to exchange her time (work) for compensation. Her compensation is in the form of a salary. This salary is usually independent of the company's profits or losses.

These relationships are apples and oranges and that must be understood in order to answer the questions.

Because capitalism is like the lottery. "Deserve" has nothing to do with it.

It's better to be lucky than smart. If you get in early on a company, then you can win or lose. A well established company has less risk and less gain.

And Louise may have stock, but she no doubt gets a paycheck as well. If not, she's either very generous or a rube.

I think defining captalism was so much easier when you had so many command economies. But now pure capitalism is really hard to distinguish from other forms.

Tariffs, taxes, free trade agreements, yada yada, capitalism has kind of loss any distinction, IMHO.