Speculation is a form of arbitrage which moves the market price towards equilibrium, that is, the price which would satiate the needs of the highest degree of market actors, maximize the number of pairs "capable of exchange." Speculation in the stock market, commodity markets, currency markets, or whatever, is absolutely vital, and strengthens the price mechanism. Unfortunately, when the government manipulates the money supply, and distorts the price mechanism (method of information relay), expectations are altered, and saving leads to the destruction of your wealth (interest rates are far below the rate of inflation). This turns everyone into a speculator, and further distorts the price mechanism based on incorrect expectations. For example, many people bought a lot of AIG and CITI stock when they were below one dollar, which should have been a horrible play. But the government made this stupid investment extremely profitable.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
But you must expect at least some volume of sales. You have some fixed costs?
The purpose of speculation in "non productive" stuff is - calculation of the right price. If price of some good is expected to rise or fall in the future, price of that good must come near that expected price as soon as possible (expected future and today's price are linked). The profit is made by the people who guessed the rate price.
People will say that speculator that buys oil in expectation of big storm that can disturb oil transport is greedy. However, he is doing a favor to the economy. It's not always clear at the first moment what is good.
Manic:Well no. I work only when I have orders, so basically my sale is guarantied. No speculation here, sorry.But I don't talk about producers speculation or faith in sale. I talk about speculation of third party that makes profit only on speculation not on production.
Production doesn't deserve this elevated status. Productions, services, and arbitrage are all needed and serve a purpose, which is why they can be remunerative. This whole "doesn't produce anything" nonsense is a remnant of classical economics where production was thought to "create value."
Daniel Muffinburg: Austrian economics refers to a school of thought. Libertarianism refers to politics. I think Murphy is in both camps.
Austrian economics refers to a school of thought.
Libertarianism refers to politics.
I think Murphy is in both camps.
Is there any difference whatsoever in their conclusions? Is it simply the case that the Austrians work out what should be done in theory and the libertarians attempt to put it in to practice?
What Went Wrong with Economics
Esuric:Production doesn't deserve this elevated status.
On the contrary. Speculation doesn't deserve elevated status. Profit based purely on speculation is pure gambling, nothing else.
azazel:The purpose of speculation in "non productive" stuff is - calculation of the right price.
The "right price" is settled between me and my customer. If I set price to high in my offer he will not accept it and we will have to bargain again. I don't see any reason for speculation of some trader between me and my customer.
azazel:The profit is made by the people who guessed the rate price.
Well yes. And that is by definition gambling.
Manic: azazel:The purpose of speculation in "non productive" stuff is - calculation of the right price. The "right price" is settled between me and my customer. If I set price to high in my offer he will not accept it and we will have to bargain again. I don't see any reason for speculation of some trader between me and my customer. azazel:The profit is made by the people who guessed the rate price. Well yes. And that is by definition gambling.
In your mind, what is the difference between speculation and gambling?
Do you still disagree with the subjective theory of value?
When someone puts forth capital to become an entrepreneur they are undertaking risk. They believe that they can use that capital and some labor to obtain a profit. There is no guarantee for profit. When they do this, nevertheless, they do not rely on random chance. They understand the market and are guided by "the invisible hand".
mickanomics:I think a distinction needs to be made between the people who buy up the original shares when a company first sells them, and people who do secondary deals.
I think this may be an important distinction.
So by this logic, only underwriters+investment bank would be considered investors? Correct me if I am wrong, but does not the underwriter+investment purchase all of company A's stock, and resells them to other investors? The only money the company A sees is the original investment from the underwriter+investment bank. A raise in stock price does not mean the company itself gets more capital, just that the value of their stock is higher.
ViennaSausage: mickanomics:I think a distinction needs to be made between the people who buy up the original shares when a company first sells them, and people who do secondary deals. I think this may be an important distinction. So by this logic, only underwriters+investment bank would be considered investors? Correct me if I am wrong, but does not the underwriter+investment purchase all of company A's stock, and resells them to other investors? The only money the company A sees is the original investment from the underwriter+investment bank. A raise in stock price does not mean the company itself gets more capital, just that the value of their stock is higher.
It's an unimportant distinction. Some people buy and hold for years. The company will have a larger pool of money to draw from because the fact. That is also an investment.
There is no point in buying shares in IPO if you cannot sell it later. Buying shares is risky business. There are people with ideas that will not qualify for the bank credit. There are people with money willing to risk it for a good profit. The later provide money for the former. They get out and search for another opportunity (someone with great idea, but not enough money).
However, since money and credit were abundant recently, that thing died a bit. Instead, taxpayers will hold the risk and will earn no profit in return. That's capitalism in reverse.
You can also look at it as a gambling. The one who provides capital for risky ventures is betting the market he is right.
azazel:There is no point in buying shares in IPO if you cannot sell it later.
This is not true. You will get the benefit of dividends throughout the life of the company. The flexibility to sell the shares is a plus point, but the only reason you will be able to sell them is because other people know that they can then get the benefit of the dividends. Ultimately the only value of shares is the dividend payments. The day that people know that no more dividend payments will be made on a share is the day that the share becomes worth exactly zero.
EDIT: I may have to retract that last sentence - maybe if a company gets liquidated then there may be a chance of getting a share of the sale price of the company assets - I'm not sure.
mickanomics:You will get the benefit of dividends throughout the life of the company.
Not if the company does not issues dividends.
mickanomics:but the only reason you will be able to sell them is because other people know that they can then get the benefit of the dividends.
Not necessarily true. Voting stock brings control of the capitalization of the company, and there are all sorts of reasons to pursue that.
mickanomics:EDIT: I may have to retract that last sentence - maybe if a company gets liquidated then there may be a chance of getting a share of the sale price of the company assets - I'm not sure.
Bingo.
liberty student:Not if the company does not issues dividends.
Explain to me the value of a company share when they don't issue dividends.
liberty student:Not necessarily true. Voting stock brings control of the capitalization of the company, and there are all sorts of reasons to pursue that.
Could you give an example?
liberty student:Bingo.
Bingo? You say that excitedly, like you've discovered some major component of the value of shares. But liquidating the company only happens after everything has gone disastrously wrong. Usually when a company goes belly up the creditors get next to nothing.
I rather like this (rather long) lecture by Prof. Robert Shiller on the value of shares. In it he states that the value of shares is essentially tied to expected future dividend payments and pretty much nothing else: http://oyc.yale.edu/economics/financial-markets/content/sessions/session-11-stocks
mickanomics:Explain to me the value of a company share when they don't issue dividends.
I own 100% (100 shares out of a 100 total) of a hot-dog stand company (HDSC) comprised of $10k cash (in an HDSC bank account) and a hot-dog stand. I don't intend to make any hot-dogs, so no future sales, profits, and dividends are pending. I'm selling my 100 shares of HDSC. How much are you willing to offer for those shares?
You keep using "company" and "shareholders" as two separate entities. The company IS the shareholders (investors), and nothing BUT a "company" of them.
Z.
mickanomics: Explain to me the value of a company share when they don't issue dividends. liberty student:Not necessarily true. Voting stock brings control of the capitalization of the company, and there are all sorts of reasons to pursue that.
I just did. You quoted it.
mickanomics:Could you give an example?
Purchasing shares to takeover a firm. To force a merger. To encourage the firm to pursue certain markets or models. The possibilities are endless. It's like asking people why they would buy anything. Every individual sees different manners and magnitudes of utility in their purchases.
mickanomics:Bingo? You say that excitedly, like you've discovered some major component of the value of shares.
No, I said Bingo!, like I am pleased beyond imagination that you figured out something sensible. Bingo! You win!
mickanomics:But liquidating the company only happens after everything has gone disastrously wrong.
Not at all. Liquidation can happen because the sum of the company's parts are worth more than the sum of its whole. That doesn't mean something is disasterously wrong, that just means that the situation has changed and the capital allocation needs to adjust.
If you support the notion of markets (and it is almost impossible not to) then you have to understand that capital reallocation, recessions, falling prices are all mechanisms of market re-balancing. Without them, markets would be static until we have a real disaster.
J. Grayson Lilburne: If investors "win", that means they have directed capital in a propitious way, and consumers win too. If they "lose", that means they have directed capital in a non-propitious way, and consumers lose too.
If investors "win", that means they have directed capital in a propitious way, and consumers win too. If they "lose", that means they have directed capital in a non-propitious way, and consumers lose too.
Don't consumers win either way? The loss of the speculator simply reveals that his predictions about where consumers' preferences are directed were wrong, correct?
mickanomics: Giant_Joe:Very concise and important distinction. I'm sick of people calling investors and traders "paper pushers that create no value". I think a distinction needs to be made between the people who buy up the original shares when a company first sells them, and people who do secondary deals. When people buy the original shares, their money can be considered an investment in the company. The money goes to the company and can go towards buying new equipment. But people who buy "second hand" shares are not contributing anything at all towards the company (are they?). I don't see how they can be classed as "investors" - because the "investment" has already taken place.
Giant_Joe:Very concise and important distinction. I'm sick of people calling investors and traders "paper pushers that create no value".
I think a distinction needs to be made between the people who buy up the original shares when a company first sells them, and people who do secondary deals. When people buy the original shares, their money can be considered an investment in the company. The money goes to the company and can go towards buying new equipment. But people who buy "second hand" shares are not contributing anything at all towards the company (are they?). I don't see how they can be classed as "investors" - because the "investment" has already taken place.
I think I addressed this in another thread, but the bidding up of the stock price allows for further access to capital, with any further stock floats (assuming some is still privately owned) gaining more for the company for any given level of stock, and the increased value of the company making it appear as a safer bet for banks and/or those looking to buy bonds from the company.
mickanomics: DD5:Those wages are coming only from those who willingly sold their shares. They are not coming from you, They are eventually. If there are any people, in society who get goods and services given to them in return for useless pseudo-work, then, regardless of who gives them those goods and services in the first instance, we eventually all pay. Label the useless people X, label the people who pay them A. Then the goods produced by A will now be more expensive for the rest of us because we are competing for them with X.
DD5:Those wages are coming only from those who willingly sold their shares. They are not coming from you,
They are eventually. If there are any people, in society who get goods and services given to them in return for useless pseudo-work, then, regardless of who gives them those goods and services in the first instance, we eventually all pay. Label the useless people X, label the people who pay them A. Then the goods produced by A will now be more expensive for the rest of us because we are competing for them with X.
And we aren't competing for the goods with A. Look at it in terms of money or resources, ultimately the only people paying are those who buy and sell shares to the traders.
Rick: I stated... "whether you are talking about value between just 2 people or equal value among a larger group of people" ? I stated this because there are scenarios in which you can exchange something of equal value with another party only because a 3rd party values it more, thus in return creating a scenario where you benefit from the EVEN transaction. Case in Point: PERSON A exchanges a green apple for a red one with Person B. Person B is impartial on what color his or her apple is. Person A is also impartial with what color his or her apple is but knows that Person C prefers RED apples and thus might be more likely (but not gauranteed) to trade their banana for a red apple.
I stated... "whether you are talking about value between just 2 people or equal value among a larger group of people" ? I stated this because there are scenarios in which you can exchange something of equal value with another party only because a 3rd party values it more, thus in return creating a scenario where you benefit from the EVEN transaction.
Case in Point: PERSON A exchanges a green apple for a red one with Person B. Person B is impartial on what color his or her apple is. Person A is also impartial with what color his or her apple is but knows that Person C prefers RED apples and thus might be more likely (but not gauranteed) to trade their banana for a red apple.
Only person A isn't impartial, as he values a red apple over a green one due to his expectations that he will be able to trade with person C if he has the red apple.
mickanomics: Daniel Muffinburg: Austrian economics refers to a school of thought. Libertarianism refers to politics. I think Murphy is in both camps. Is there any difference whatsoever in their conclusions? Is it simply the case that the Austrians work out what should be done in theory and the libertarians attempt to put it in to practice?
As far as I'm aware, as an Austrian economist one can only speak of what will happen i.e. price controls will result in shortages or surpluses. After this stage it is up for individuals to use their own values to establish what should be done, which may seem obvious, but whereas most Austrians would say price controls should be abolished as they result in disutility to people and they believe this should be avoided, one could just as easily be an Austrian and a Nazi, advocating heavy price controls in, say, Israel.
Bradipo: J. Grayson Lilburne: If investors "win", that means they have directed capital in a propitious way, and consumers win too. If they "lose", that means they have directed capital in a non-propitious way, and consumers lose too. Don't consumers win either way? The loss of the speculator simply reveals that his predictions about where consumers' preferences are directed were wrong, correct?
No, because his incorrect predictions resulted in capital being directed in a way which didn't satisfy their preferences, essentially wasting capital which could have benefited them.
It is nothing like gambling.
Actually the stock market is a very efficient market.
There have been studies done using historical data that show that usually the stock value 10 years ago is roughly the book value of the company today.There are of-course a lot of distortions (some years it may not be true because of bubbles and some companies are more difficult to value then others) but it holds up surprisingly well.
The important point is that there is any correlation between future real assets and current stock prices and there most certainly is. That means that the market works and it is better at estimating the future value of a company then a dice. Thus if you are good at business guessing you can make a lot of money in the stock market and you can effectively reduce risk by obtaining more information. In a lottery the amount of information you have about now is of no use to your chances of winning in the stock market information about current conditions along with an understanding of how business work is key.
If you trade in a very short-term or with other instruments like forex it is different information that matters but it is still not really gambling.
There is one aspect of the stock market that perhaps can be considered gambling, that would be bubbles. They are sort of a ponzi lottery where you can gamble on when it will end. But then you are not using your own assessment of the actual potential of the company, but rather you use your assessment of other second-hand investor's assessments ... which is retarded.
Escaping Leviathan - regardless of public opinion
"Democracy is the road to socialism." - Karl Marx
Håkan Kindström Arnoldson: It is nothing like gambling. Actually the stock market is a very efficient market. There have been studies done using historical data that show that usually the stock value 10 years ago is roughly the book value of the company today.There are of-course a lot of distortions (some years it may not be true because of bubbles and some companies are more difficult to value then others) but it holds up surprisingly well. The important point is that there is any correlation between future real assets and current stock prices and there most certainly is. That means that the market works and it is better at estimating the future value of a company then a dice. Thus if you are good at business guessing you can make a lot of money in the stock market and you can effectively reduce risk by obtaining more information. In a lottery the amount of information you have about now is of no use to your chances of winning in the stock market information about current conditions along with an understanding of how business work is key. If you trade in a very short-term or with other instruments like forex it is different information that matters but it is still not really gambling. There is one aspect of the stock market that perhaps can be considered gambling, that would be bubbles. They are sort of a ponzi lottery where you can gamble on when it will end. But then you are not using your own assessment of the actual potential of the company, but rather you use your assessment of other second-hand investor's assessments ... which is retarded.
"Actually the stock market is a very efficient market."
All markets are always 100% efficient- at least from an Austrian perspective [I believe].
"It is nothing like gambling."
So you would advise someone to put all of their accumulated savings into the stock market for the long term ,I take it, as there is no element of uncertainty to be considered, or am I misunderstanding?
For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"].
z1235:I own 100% (100 shares out of a 100 total) of a hot-dog stand company (HDSC) comprised of $10k cash (in an HDSC bank account) and a hot-dog stand. I don't intend to make any hot-dogs, so no future sales, profits, and dividends are pending. I'm selling my 100 shares of HDSC. How much are you willing to offer for those shares?
Ok, in theory the value of shares can be significant without dividends... but in practice I would suggest that 99% of shares that are traded on a stock exchange are traded in the expectation of future dividends.
Adam Frost:I think I addressed this in another thread, but the bidding up of the stock price allows for further access to capital, with any further stock floats (assuming some is still privately owned) gaining more for the company for any given level of stock, and the increased value of the company making it appear as a safer bet for banks and/or those looking to buy bonds from the company.
Not true.
Even if there was a law stating that shares, once sold, could not be resold (I'm not advocating this), then there is no reason a new share issues could not be sold at a higher price then the original ones. If, during the period between the initial shares issue and the second one, the company invented some great product and future dividends were now expected to be higher than first thought, then the second share issue will sell at a higher price.
mickanomics: azazel:There is no point in buying shares in IPO if you cannot sell it later. This is not true. You will get the benefit of dividends throughout the life of the company. The flexibility to sell the shares is a plus point, but the only reason you will be able to sell them is because other people know that they can then get the benefit of the dividends. Ultimately the only value of shares is the dividend payments. The day that people know that no more dividend payments will be made on a share is the day that the share becomes worth exactly zero. EDIT: I may have to retract that last sentence - maybe if a company gets liquidated then there may be a chance of getting a share of the sale price of the company assets - I'm not sure.
Inability to sell your investment is also kind of a risk. Sometimes you need money fast. Waiting till infinity comes to collect dividends is not an option.
George Reisman: The Specific Productive Role of the Stock Market A widespread misconception is that the stock market is somehow divorced from genuine productive activity except insofar as it is the source of funds going directly to corporations in exchange for newly issued stock. On this view, the overwhelming bulk of stock market activ- ity, which consists of the trading of already outstanding shares, makes little or no contribution to the productive process. It should be realized that the ability of stockholders to sell their shares provides a major inducement to the purchase of those shares in the first place. If it were not for the existence of the stock market and its continuous trading in already issued stock, any purchaser of newly issued stock would be faced with the prospect of not being able to sell his stock, or of being able to do so only with great difficulty. Such a prospect would greatly discourage the initial purchase of stock from the issuing corporations and would thus greatly reduce the availabil- ity of capital to those corporations. The existence of the stock market and its continuous trading in outstanding shares makes it possible for the individual investor to liquidate his investment at virtually any time, even though the funds initially supplied to the corporation itself may be invested in assets that have a productive life of several decades or more and cannot be recovered from business operations in any less time than that, and, indeed, will most likely be permanently retained by the business enterprise in which they have been invested. Furthermore, it should be realized that the sale of already issued stock can be, and very often is, the source of funds for investment in the actual physical assets of a business by the individual shareholders who sell their holdings. For example, the owner of a drug store or restaurant who owns stock in IBM or General Motors, say, may very well decide to sell his shares, or use them as collateral on a loan, in order to raise money to expand his own business activities. In this way, the stock market provides a source of funds for investment in physical assets of business through the trading in already out- standing shares. The determination of the price of stock in the market for already outstanding shares plays a major role in deciding whether or not it is worthwhile for the present stockholders to have their corporation issue additional shares. Other things being equal, the higher is the price of a share of its stock, the smaller is the percentage of the corporation that must be given up in order to raise any given sum of money, and thus the more likely is it that it will be worthwhile for the present stockholders to have the corporation sell additional stock. By the same token, the lower is the price of its stock, the less likely is it to be worthwhile for the present stockholders to have their corporation sell additional shares. For example, if a corporation has 1 million shares of stock outstanding, and the price of its stock is $10 per share, then in order to raise a million dollars through the sale of new stock, it must sell an interest to outsiders that will amount to one-eleventh of itself—i.e., 100,000 shares out of a new total outstanding of 1.1 million shares. If the price of the corporation’s stock were $100 per share, however, then it could raise an additional million dollars by selling to outsiders less than 1 percent of itself—i.e., only 10,000 shares out of a new total of 1 million shares plus 10,000 shares. By the same token, if its stock had a market value of only $1 per share, it would have to sell 50 percent of itself in order to raise a million dollars. On this basis, it should be obvious that the stock market plays a decisive role in determining whether or not a corporation will find it worthwhile to issue new stock. In connection with this point, it must be said that the stock market makes it possible for firms that demonstrate their success to obtain capital at a much faster rate than they could if they had to rely exclusively on the reinvest- ment of their profits. A firm’s demonstration of the ability to earn a high rate of profit on its existing capital operates to raise the price of its outstanding shares and thus to make it possible and worthwhile for the firm to obtain substantial additional capital from the sale of additional stock. In this way, the firm can obtain control over larger sums of capital more rapidly than would otherwise be the case. Indeed, if it increases its equity in this way, the firm correspondingly increases its capacity to borrow and can thereby raise still more capital if it wishes. By these means, successful small businesses are enabled to grow into large businesses and play a more important role in the economic system more rapidly than they otherwise could. At the same time, as an important consequence, they are enabled to challenge the existing large firms all the more rapidly. Finally, it must be pointed out that the existence of the stock market serves to penalize poor management and to offer a protection against the abuse of stockholders by corporate managements. The effect of poor management, or of the abuse of stockholders, is a low price of the firm’s stock relative to the value of the firm’s assets. This situation invites an outside takeover of the firm, the firing of its present management, and, very often, the sale of some or all of its assets to other firms which are capable of putting them to better use. Apart from anything else, the mere fact of changing circumstances, and the inabil- ity of many corporate managements to keep pace with the changes, repeatedly necessitates the breakup of ex- isting corporations, as the land sites their facilities oc- cupy and often the facilities themselves and much of their equipment become more useful in other employments than in their present employments. Regrettably, in the present-day United States, this important function of the stock market, of serving to bring about the redeployment of the physical assets of business firms in different hands and often for different purposes, is threatened by government intervention de- signed to protect incompetent managements from the threat of outside takeovers. With the narrow-minded perspective that is typical of opponents of the free mar- ket, the enemies of corporate takeovers can see only that some existing “jobs” are eliminated. They do not see the new employment opportunities that are created in other firms, accompanying the availability of the capital assets that have been sold to them. They are unaware that the very fact that the assets of a firm are worth more in being sold off than in being retained is virtual proof that their employment elsewhere will be more productive and thus will contribute to a more rapid rate of capital accumula- tion and a higher productivity of labor. They do not even see that corporate takeovers, followed by the selling off of assets, are a powerful remedy for previous ill-conceived mergers, whose existence, along with all other mergers, the enemies of capitalism never tire of denouncing.
It should be realized that the ability of stockholders to sell their shares provides a major inducement to the purchase of those shares in the first place. If it were not for the existence of the stock market and its continuous trading in already issued stock, any purchaser of newly issued stock would be faced with the prospect of not being able to sell his stock, or of being able to do so only with great difficulty. Such a prospect would greatly discourage the initial purchase of stock from the issuing corporations and would thus greatly reduce the availabil- ity of capital to those corporations. The existence of the stock market and its continuous trading in outstanding shares makes it possible for the individual investor to liquidate his investment at virtually any time, even though the funds initially supplied to the corporation itself may be invested in assets that have a productive life of several decades or more and cannot be recovered from business operations in any less time than that, and, indeed, will most likely be permanently retained by the business enterprise in which they have been invested.
Furthermore, it should be realized that the sale of already issued stock can be, and very often is, the source of funds for investment in the actual physical assets of a business by the individual shareholders who sell their holdings. For example, the owner of a drug store or restaurant who owns stock in IBM or General Motors, say, may very well decide to sell his shares, or use them as collateral on a loan, in order to raise money to expand his own business activities. In this way, the stock market provides a source of funds for investment in physical assets of business through the trading in already out- standing shares.
The determination of the price of stock in the market for already outstanding shares plays a major role in deciding whether or not it is worthwhile for the present stockholders to have their corporation issue additional shares. Other things being equal, the higher is the price of a share of its stock, the smaller is the percentage of the corporation that must be given up in order to raise any given sum of money, and thus the more likely is it that it will be worthwhile for the present stockholders to have the corporation sell additional stock. By the same token, the lower is the price of its stock, the less likely is it to be worthwhile for the present stockholders to have their corporation sell additional shares. For example, if a corporation has 1 million shares of stock outstanding, and the price of its stock is $10 per share, then in order to raise a million dollars through the sale of new stock, it must sell an interest to outsiders that will amount to one-eleventh of itself—i.e., 100,000 shares out of a new total outstanding of 1.1 million shares. If the price of the corporation’s stock were $100 per share, however, then it could raise an additional million dollars by selling to outsiders less than 1 percent of itself—i.e., only 10,000 shares out of a new total of 1 million shares plus 10,000 shares. By the same token, if its stock had a market value of only $1 per share, it would have to sell 50 percent of itself in order to raise a million dollars. On this basis, it should be obvious that the stock market plays a decisive role in determining whether or not a corporation will find it worthwhile to issue new stock.
In connection with this point, it must be said that the stock market makes it possible for firms that demonstrate their success to obtain capital at a much faster rate than they could if they had to rely exclusively on the reinvest- ment of their profits. A firm’s demonstration of the ability to earn a high rate of profit on its existing capital operates to raise the price of its outstanding shares and thus to make it possible and worthwhile for the firm to obtain substantial additional capital from the sale of additional stock. In this way, the firm can obtain control over larger sums of capital more rapidly than would otherwise be the case. Indeed, if it increases its equity in this way, the firm correspondingly increases its capacity to borrow and can thereby raise still more capital if it wishes. By these means, successful small businesses are enabled to grow into large businesses and play a more important role in the economic system more rapidly than they otherwise could. At the same time, as an important consequence, they are enabled to challenge the existing large firms all the more rapidly. Finally, it must be pointed out that the existence of the stock market serves to penalize poor management and to offer a protection against the abuse of stockholders by corporate managements. The effect of poor management, or of the abuse of stockholders, is a low price of the firm’s stock relative to the value of the firm’s assets. This situation invites an outside takeover of the firm, the firing of its present management, and, very often, the sale of some or all of its assets to other firms which are capable of putting them to better use. Apart from anything else, the mere fact of changing circumstances, and the inabil- ity of many corporate managements to keep pace with the changes, repeatedly necessitates the breakup of ex- isting corporations, as the land sites their facilities oc- cupy and often the facilities themselves and much of their equipment become more useful in other employments than in their present employments. Regrettably, in the present-day United States, this important function of the stock market, of serving to bring about the redeployment of the physical assets of business firms in different hands and often for different purposes, is threatened by government intervention de- signed to protect incompetent managements from the threat of outside takeovers. With the narrow-minded perspective that is typical of opponents of the free mar- ket, the enemies of corporate takeovers can see only that some existing “jobs” are eliminated. They do not see the new employment opportunities that are created in other firms, accompanying the availability of the capital assets that have been sold to them. They are unaware that the very fact that the assets of a firm are worth more in being sold off than in being retained is virtual proof that their employment elsewhere will be more productive and thus will contribute to a more rapid rate of capital accumula- tion and a higher productivity of labor. They do not even see that corporate takeovers, followed by the selling off of assets, are a powerful remedy for previous ill-conceived mergers, whose existence, along with all other mergers, the enemies of capitalism never tire of denouncing.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
mickanomics: Adam Frost:I think I addressed this in another thread, but the bidding up of the stock price allows for further access to capital, with any further stock floats (assuming some is still privately owned) gaining more for the company for any given level of stock, and the increased value of the company making it appear as a safer bet for banks and/or those looking to buy bonds from the company. Not true. Even if there was a law stating that shares, once sold, could not be resold (I'm not advocating this), then there is no reason a new share issues could not be sold at a higher price then the original ones. If, during the period between the initial shares issue and the second one, the company invented some great product and future dividends were now expected to be higher than first thought, then the second share issue will sell at a higher price.
Ignoring the event of banning reselling shares, new shares could not be sold for any more than the current market price.
mickanomics: z1235:I own 100% (100 shares out of a 100 total) of a hot-dog stand company (HDSC) comprised of $10k cash (in an HDSC bank account) and a hot-dog stand. I don't intend to make any hot-dogs, so no future sales, profits, and dividends are pending. I'm selling my 100 shares of HDSC. How much are you willing to offer for those shares? Ok, in theory the value of shares can be significant without dividends... but in practice I would suggest that 99% of shares that are traded on a stock exchange are traded in the expectation of future dividends.
Purposefully or not, you keep missing the point. Why would you concern yourself with why agent A (not you) buys/sell something from/to agent B (not you)? How does the fact that a transaction has or hasn't occurred (or the buyers/sellers motivation behind it, or the frequency with which it is occurring) affect YOU in any way? To the extent that it DOES affect you, how is a world with no (or less) transactions better for YOU than a world with MANY transactions? Personally, I would prefer to live in a world where everything is traded as much as possible, as such a world would give me much better price transparency and liquidity so I can more efficiently (and less costly) allocate my assets to reflect my view of the changing world around me. So I support speculators and traders of all sorts for purely SELFISH reasons, and so should you.
nirgrahamUK: George Reisman: The Specific Productive Role of the Stock Market A widespread misconception is that the stock market is somehow divorced from genuine productive activity ..........
George Reisman: The Specific Productive Role of the Stock Market A widespread misconception is that the stock market is somehow divorced from genuine productive activity ..........
This is a good article. Do you have a link to the actual source?
its page 467 from his epic book 'Capitalism'. www.capitalism.net
onebornfreedotblogspotdotcom: "Actually the stock market is a very efficient market." All markets are always 100% efficient- at least from an Austrian perspective [I believe].
Ehm, there are many ways a market can be inefficient. The simplest example being poor communications making buyers and seller meet so seldom that it gets distorted and don't generate as many trades as is possible. Further problems can come from poor information making people achieve there expected outcome of a trade less frequently then if it was possible for them to have better information.
onebornfreedotblogspotdotcom: "It is nothing like gambling." So you would advise someone to put all of their accumulated savings into the stock market for the long term ,I take it, as there is no element of uncertainty to be considered, or am I misunderstanding?
No, I wouldn't advice that. I don't understand your point.
There is uncertainty in everything, any property you have could drop in price including capital binding assets like your home or even whatever commodity you happen to use for cash. Your savings and loans bank could also go bust. These are financial risks of the same type you take in the stock market they just vary in degree from asset to asset.
There are other types of risks, like physical ones. Those are normally reduced with insurance, but then you get insurance risks instead. There is always a chance your insurance won't pay.
Lotteries does not fall in any of these categories, in fact I don't think any concept of risk apply to lotteries. Lotteries are about chance and entertainment...
mickanomics: Ok, in theory the value of shares can be significant without dividends... but in practice I would suggest that 99% of shares that are traded on a stock exchange are traded in the expectation of future dividends.
So if you can buy a company now for a stock value of $1m and you believe that there business idea is so revolutionary that in ten years there book value will be $300m you won't buy it cause they promise not to pay dividends?
Does it really matter if the money stay in the company or get paid in dividends if you don't plan to do anything else with it anyway?No, not really ... actually if you think that the stock is the best investment right now then not paying dividends will just spare you the trouble from having to re-invest the funds yourself.
Dividends may be preferable to some because it gives them more freedom what to do with the returns, but for some it is not ideal at all cause it just cost them money to have to re-invest them rather then keeping them in the company from the start.
On the whole it doesn't matter one bit if you get paid a dividend of $10 per share or if the book value of the company increase with $10 per share. It is the same thing, it is just a matter of which payment method you happen to prefer.
Well in practice in the long run it matters a great deal ofcourse. A company that re-invest all profits even if they have any worthwhile projects or not will get a lot of low interest bearing savings that will destroy there returns/assets. But if it still it the best investment for the investor that was our initial condition this is of no concern. It just can't keep being that forever in practice...
Is investing in the stock market gambling? NO.... From the phrasing of the question and the comments elicited, it appears that the underlying concepts of investing and reasons to invest (much less within the stock market) are lacking. Let's examine 2 topics: investing, and, the stock market & gambling (I sense some cynicism here that needs to be addressed-- but then again, this is simply a bloggers inquiry). First, perhaps we can agree that investing is a calculated risk (the 'possibility' of permanent loss of capital), whereby the investor temporarily relinquishes some degree of personal control of his capital for the prospect of an acceptable rate of positive return with an item that has some degree of intrinsic value. Whether it be the stock market, trading marshmallows, or any other form of bartering, the concept is very basic. Again, the concept holds true within ANY form of economy or political governance (socialist, democratic, anarchist, egalitarian, or theocratic... LOL). It is simply a temporary or permanent exchange within a mutually agreeable context. Free-market thinkers, realizing that economics is rooted in a social context that stems from personal choice, deem investing as necessary in order to advance creativity, wealth, and social progress. Investing, in the U.S., has evolved into a highly organized and supposedly more efficient level of bartering or borrowing. Let's not digress, investing is necessary. Next, what the topic calls into question within the second half of the statement is, I believe, whether the markets (NYSE, AMEX, FOREX, etc...) are/should remain the CORRECT context into which to make an investment. Perhaps the question of 'venue' (stock market), coupled with the negative use of gambling (the 'probability' of a permanent loss of capital-- note difference from 'risk' above) stems from the author's personal tribulation in the markets (or even an unjustified notion- if you have never invested), a lack of optimism in humanity, politics, social ethics, morality or another gadfly that has made it into the author's crawl. Let's simply agree that there is a questioning as to whether the stock market, as it exists and has evolved in the U.S., is now a place of gambling. Perhaps we can also agree that investing, at its root, ascribes some innate value in the item being invested in. Therefore, though subjective, each investment does possess some intrinsic value or worth which the investor perceives will have a higher value at some time in the future. Gambling, however, does NOT ascribe any value or intrinsic worth to any identifiable item. Gambling, by nature, is a process... hence, its existence infers that there is no material or goods upon which to ascribe value. Gambling is descriptive of a process that possesses no value whatsoever, but seeks to achieve gain through non-rational or unjustifiable means. One must not use semantics to argue 'value' when used in the context of gambling. This idea can be easily exemplified when gambling on dice. There is no intrinsic value in the number seven or snake-eyes, it is only a preference on whether one is willing to go against the odds of numerical outcome. Should one wish to argue the point that there is no value in the stock market, then one simply has no personal philosophy of the value of capital, and, therefore, should "unsubscribe" from the Mises network and declare Austrian Economics a ruse! Investing in the stock market cannot be gambling. On the other hand, one must decide whether the stock market is, in its current form, 'worth' investing in, which, of course, is a personal decision. O.K., let's make some final summaries and close this epistle for the time being. Summary & a modest solution: A free-market economist must necessarily support the notion of investing, and investing in the stock market since it stems from the creative energies of members of that society (Remember, society infers the existence of at least 2 individuals with the same inalienable rights and freedoms). Could there be a way to invest that is better than within our U.S. stock markets, of course. However, Austrians do not mind working within the framework of the stock market as it exists. What we DO mind is the fact that the free-market economy has been manipulated by mal-individuals for the express purpose of selfish gain OVER that gain of another. Interventionist policy of the government has made the dilemma even worse because it shows favor to one faction over another as well (One may differ as to which came first, intervention or personal abuse: the chicken or the egg). Poor ethical practices by individuals (who create what we call corporate mentality) and intervention of governmental regulation within our system are rampant. It is not that the system of the stock market is bad in-itself, rather, it is flawed because people/government forget or discard the notion that their freedom and rights extend only so far until they infringe on the freedom and rights of another (others). It is the ability to make choices that is both the most genius and most depraved part of our nature. If you want to be Austrian, you have got to want it BAD... you must accept the social context first, endow each person with the same rights and privileges, and have a workable definition of capital and the value thereof. ... a modest solution? Give thought as to how best to incorporate your theories into practice and action when it comes to investing. As near as I can discern, my personal philosophy has led me to invest in my home and the land I desire. Secondly, I seek to invest in those items that possess some intrinsic value, may have a degree of permanence, are valuable to others, and are fairly priced or offered to me at what I perceive to be a discount, so that I may benefit from the exchange in the future. Pragmatically, here is what I believe an Austrian perspective means in the real world.... focus portions of your capital in the areas of natural resources, anything that can be made with paper, plastic (petroleum), glass, or metal. As well, employ a Graham-Dodd-Buffett style of investing that seeks viable, simple to understand enterprises that do not trade at a premium to their intrinsic value. Further, focus upon industries that create something universal and of value.... intellectual property is very difficult to value, service-based industry is less difficult, but does depend upon societal utility and perceived need. In the area of loans... (for income needs), I believe the Austrian is acutely aware that the future is uncertain, therefore, I believe relatively mid- to short obligations within the fixed income arena may offer the least risk and maximize short-term potential within a dynamic economy.
Is investing in the stock market gambling? NO.... From the phrasing of the question and the comments elicited, it appears that the underlying concepts of investing and reasons to invest (much less within the stock market) are lacking. Let's examine 2 topics: investing, and, the stock market & gambling (I sense some cynicism here that needs to be addressed-- but then again, this is simply a bloggers inquiry).
First, perhaps we can agree that investing is a calculated risk (the 'possibility' of permanent loss of capital), whereby the investor temporarily relinquishes some degree of personal control of his capital for the prospect of an acceptable rate of positive return with an item that has some degree of intrinsic value. Whether it be the stock market, trading marshmallows, or any other form of bartering, the concept is very basic. Again, the concept holds true within ANY form of economy or political governance (socialist, democratic, anarchist, egalitarian, or theocratic... LOL). It is simply a temporary or permanent exchange within a mutually agreeable context. Free-market thinkers, realizing that economics is rooted in a social context that stems from personal choice, deem investing as necessary in order to advance creativity, wealth, and social progress. Investing, in the U.S., has evolved into a highly organized and supposedly more efficient level of bartering or borrowing. Let's not digress, investing is necessary.
Next, what the topic calls into question within the second half of the statement is, I believe, whether the markets (NYSE, AMEX, FOREX, etc...) are/should remain the CORRECT context into which to make an investment. Perhaps the question of 'venue' (stock market), coupled with the negative use of gambling (the 'probability' of a permanent loss of capital-- note difference from 'risk' above) stems from the author's personal tribulation in the markets (or even an unjustified notion- if you have never invested), a lack of optimism in humanity, politics, social ethics, morality or another gadfly that has made it into the author's crawl. Let's simply agree that there is a questioning as to whether the stock market, as it exists and has evolved in the U.S., is now a place of gambling.
Perhaps we can also agree that investing, at its root, ascribes some innate value in the item being invested in. Therefore, though subjective, each investment does possess some intrinsic value or worth which the investor perceives will have a higher value at some time in the future. Gambling, however, does NOT ascribe any value or intrinsic worth to any identifiable item. Gambling, by nature, is a process... hence, its existence infers that there is no material or goods upon which to ascribe value. Gambling is descriptive of a process that possesses no value whatsoever, but seeks to achieve gain through non-rational or unjustifiable means. One must not use semantics to argue 'value' when used in the context of gambling. This idea can be easily exemplified when gambling on dice. There is no intrinsic value in the number seven or snake-eyes, it is only a preference on whether one is willing to go against the odds of numerical outcome. Should one wish to argue the point that there is no value in the stock market, then one simply has no personal philosophy of the value of capital, and, therefore, should "unsubscribe" from the Mises network and declare Austrian Economics a ruse! Investing in the stock market cannot be gambling. On the other hand, one must decide whether the stock market is, in its current form, 'worth' investing in, which, of course, is a personal decision.
O.K., let's make some final summaries and close this epistle for the time being.
Summary & a modest solution: A free-market economist must necessarily support the notion of investing, and investing in the stock market since it stems from the creative energies of members of that society (Remember, society infers the existence of at least 2 individuals with the same inalienable rights and freedoms). Could there be a way to invest that is better than within our U.S. stock markets, of course. However, Austrians do not mind working within the framework of the stock market as it exists. What we DO mind is the fact that the free-market economy has been manipulated by mal-individuals for the express purpose of selfish gain OVER that gain of another. Interventionist policy of the government has made the dilemma even worse because it shows favor to one faction over another as well (One may differ as to which came first, intervention or personal abuse: the chicken or the egg). Poor ethical practices by individuals (who create what we call corporate mentality) and intervention of governmental regulation within our system are rampant. It is not that the system of the stock market is bad in-itself, rather, it is flawed because people/government forget or discard the notion that their freedom and rights extend only so far until they infringe on the freedom and rights of another (others). It is the ability to make choices that is both the most genius and most depraved part of our nature. If you want to be Austrian, you have got to want it BAD... you must accept the social context first, endow each person with the same rights and privileges, and have a workable definition of capital and the value thereof.
... a modest solution? Give thought as to how best to incorporate your theories into practice and action when it comes to investing. As near as I can discern, my personal philosophy has led me to invest in my home and the land I desire. Secondly, I seek to invest in those items that possess some intrinsic value, may have a degree of permanence, are valuable to others, and are fairly priced or offered to me at what I perceive to be a discount, so that I may benefit from the exchange in the future. Pragmatically, here is what I believe an Austrian perspective means in the real world.... focus portions of your capital in the areas of natural resources, anything that can be made with paper, plastic (petroleum), glass, or metal. As well, employ a Graham-Dodd-Buffett style of investing that seeks viable, simple to understand enterprises that do not trade at a premium to their intrinsic value. Further, focus upon industries that create something universal and of value.... intellectual property is very difficult to value, service-based industry is less difficult, but does depend upon societal utility and perceived need. In the area of loans... (for income needs), I believe the Austrian is acutely aware that the future is uncertain, therefore, I believe relatively mid- to short obligations within the fixed income arena may offer the least risk and maximize short-term potential within a dynamic economy.
Håkan Kindström Arnoldson:So if you can buy a company now for a stock value of $1m and you believe that there business idea is so revolutionary that in ten years there book value will be $300m you won't buy it cause they promise not to pay dividends?
Correct. Because I will have no way of getting money from my shares. I won't be able to sell them because any potential customers will say "how do I get any money from these shares?"
Adam Frost:Ignoring the event of banning reselling shares, new shares could not be sold for any more than the current market price.
Not true. Imagine there are just four rare Rolls Royce cars left in the world. They only come up for sale at auction everey few years. Are you suggesting that the price in the latest sale can not be higher than the price in the previous sale?
Manic:On the contrary. Speculation doesn't deserve elevated status. Profit based purely on speculation is pure gambling, nothing else.
Wow, I never thought of it that way! Is this the response you were looking for?
Manic: Esuric:Production doesn't deserve this elevated status. On the contrary. Speculation doesn't deserve elevated status. Profit based purely on speculation is pure gambling, nothing else.
Profit, in the strict sense, is, by definition, ALWAYS based on speculation. Any part of income that is not speculative is either originary interest or wages.
So according to your definition of gambling, gambling would be synonymous with profit-making.
From Human Action, Chapter 14 (emphasis added):
The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action.
and
In the context of economic theory the meaning of the terms concerned is this: Entrepreneur means acting man in regard to the changes occurring in the data of the market. Capitalist and landowner mean acting man in regard to the changes in value and price which, even with all the market data remaining equal, are brought about by the mere passing of time as a consequence of the different valuation of present goods and of future goods. Worker means man in regard to the employment of the factor of production human labor. Thus every function is nicely integrated: the entrepreneur earns profit or suffers loss; the owners of means of production (capital goods or land) earn originary interest; the workers earn wages.
J. Grayson Lilburne:Profit, in the strict sense, is, by definition, ALWAYS based on speculation.
No it is not. As I already told you, I make profit all the time and I'm not speculating. I offer my services to customer, if he accepts, I work. He pays me 50% before I start to work, and 50% when I finish. I have profit, and I did not speculate, and what is more important, no one else speculated between me and my customer.
Manic:No it is not. As I already told you, I make profit all the time and I'm not speculating. I offer my services to customer, if he accepts, I work. He pays me 50% before I start to work, and 50% when I finish. I have profit, and I did not speculate, and what is more important, no one else speculated between me and my customer.
Lots of speculation there. One that when you offer services, there is someone to take your services. That you will receive your final 50% when the work is complete. That your cost to produce won't exceed the cost you quoted (you cannot lock in the unknown unknowns which could disrupt your work) and so on.
There is uncertainty in all economic activity.
Manic: J. Grayson Lilburne:Profit, in the strict sense, is, by definition, ALWAYS based on speculation. No it is not. As I already told you, I make profit all the time and I'm not speculating. I offer my services to customer, if he accepts, I work. He pays me 50% before I start to work, and 50% when I finish. I have profit, and I did not speculate, and what is more important, no one else speculated between me and my customer.
You did speculate. As Mises wrote, ALL action involves speculation, because in the real world, uncertainty is pervasive. When you trained for your profession, you speculated that their would be a market for the skills you were acquiring. As you are doing the job, you are speculating that your employer will follow through with the other 50%. You are speculating that activities of your job won't cause an accident to befall you. You are speculating that spending your time on THAT job will be more remunerative than spending it on some other job.
What you are calling profit is not pure profit in the Misesian sense; it is income. The component of your income that you would have received even in an evenly rotating consists of WAGES, not profit.
Realize that you move from example to example, or analogy to analogy, you are diluting the actual question and the answers you can ascertain.
Because the future is uncertain, because there is more than 1 person on the earth, becase of human interaction and the endowment of subjective value upon all items of worth, ... there is only speculation. Speculation is the beauty of a free-market and of the social contract. It indeed will include ethics and personal obligation on the part of both parties in order to fulfill the current transaction and another one in the future.