Thursday, January 5, 2017

A Liberal Asks: What is the Justification for the Stock Market?

I spent time with a liberal friend over New Years, and he asked me what justified the stock market. Because the day-to-day stock market doesn't raise capital. It just shuffles it around.

I have to admit that I didn't have the answer right on the tip of my tongue. Another case of l'esprit d'escalier, alas.

Eventually, as I was "descending the stairs" I did start coming out with good reasons: a whole cascade of them.

First of all, the stock market provides an exit to the investor. Suppose I worked for a company for years and got stock options that I converted into stock. Now I want to retire, and I want to change my stock in a growth company into a dividend stock. If I want to do that, I need a stock market full of buyers and sellers so I can get a good deal on the stock I want to sell and a good deal on the stock I want to buy.

Secondly, the stock market lets me, the little guy, get in on the next big thing. Not on the ground floor, of course. Startups get ground-floor money from venture capitalists that get their money from rich guys. But when a company goes public and the founders make billions, then the little guy has a chance to make millions. Suppose I bought $10,000 of Microsoft in December 1989, before its second split, at what would now be $0.6 per today's share. Suppose I then sold it some time between 2002 and 2012 when Microsoft was pretty well flat at $24 per share. I'd have walked away with $400,000, which ain't too shabby on a $10,000 investment.

But all that is just nickels and dimes. Let's do an Ike and make the problem bigger.

The main thing the stock market does is put a price on a corporation. It says: here is what we, the whole marketplace of buyers and sellers, think the present value of all future revenue is from this company. That is why, in J.P. Morgan's famous phrase, the stock market fluctuates. Nobody knows the future, and opinions about the future fluctuate from day to day. This is a very big deal, both for the company and for the rest of the world. It tells the company whether it is doing the right thing or not. It tells the rest of the world whether to buy the company's bonds, whether it is growing its business, or whether, like New York Times, it is failing and needs to be bought by a foreign crony capitalist if it is to survive at all.

But that is not the basic point about the stock market.

The main thing about the stock market is that prices are the only way that we can make decisions on what to buy and sell. Administrative ukase doesn't do it; administrative froo-frar didn't help Obamacare, because Obamacare thought it could fool the market with clever manipulations and regulations thought up by Jonathan Gruber. Government regulation doesn't do it. Did financial regulation prevent the Crash of 2008? Did financial regulation by the Securities and Exchange Commission stop the fraudster Bernie Madoff?

So the very idea from a faithful liberal that raises the question, should we allow the stock market, is false on its face. The question is not: should we allow the stock market? The question is: should be allow any political intervention into the stock market at all? Should we do anything except punish the fraudster after his exposure? Should we allow any politician to mouth off about any economic issue at all without applying a sharp blow to his solar plexus?

And here is a bigger question. Should we allow liberals that think they are better, wiser than spontaneous economic and social phenomena that birthed and grew and contributed to human welfare and decency without a single liberal (or indeed anyone else) having a clue what it did and why.

Are not liberals outrageous economic deniers that -- in the face of overwhelming evidence over the last 200 years that government has no clue when it comes to the economy, and economic theory that says that socialism/government programs can't work because they can't compute prices, and regulatory theory that says that the government regulators always get "captured" by the regulated -- persist in their pre-Cambrian superstition that politics should be in control of the economy?

Politics in control of the economy? Did not Mao ZeDong write that "politics is war without bloodshed while war is politics with bloodshed." So liberals think that they have a holy right to wage a bloodless war on the capitalists, that have raised per-capita income from $3 to $100 in the last 200 years with government trying to hobble them every step of the way.

You ask: what is the justification for the stock market?

I say:  what is the justification for liberals?

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