Tuesday, October 19, 2010

The Stock Market, if Only it Were as Simple as You Say it is.

I wanted to focus my writing about the stock market article this week, as I have a fundamental understanding of how the stock market works, but focus very little of my time studying it. I think the course that I took which covered the stock market more than any other econ course was Money and Banking, but even in this course we spent very little time on the subject.

In Robert Murphy's work, some of his arguments as to why the stock market does have a functioning price system were easier to follow. However some of the points were harder to follow due to the gaps within his logical framework. I think that most of the gaps were in effect the result of over simplification, below are some of the gaps that stuck out:

1.) This starts in the quote used in the first paragraph "Murray Rothbard once asked Ludwig von Mises if there were a sharp dividing line between a heavily interventionist state versus an outright socialist one. Mises answered, "There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist."" I would like to mention (perhaps I am being a bit to literal here), but what about the Swedish stock market,the German stock market, and the Canadian stock market. Since I tend to think of socialism as a spectrum where a country can be more or less socialized. There are inconsistencies in this logic that the presence of a stock market is an indicator as to whether a country is socialist or not.

2.) The next point that was a little over simplified was his mention, that to obtain the price tag of a corporation all one needs to do is take the share price of the corporation x and multiply this by the number of shares. At first this makes sense however, if you think about the real U.S. stock market you can obtain the corporation by holding 51% of the stock meaning that the price tag can change depending on the situations created between stock owners rather than just the value of the corporations. I believe that to make his point it was necessary to over simplify the concept of a corporate price tag. If this wasn't simplified one would find their thoughts wandering to the class of stocks that are available to a buyer (in a sense here the market is often one which is often not fully open).

3.) Another point that leads me to think outside of this argument was the mention of how the stock market channels savings to production investment through the creation of new equity rather than debt. However, maybe someone could make this more clear for me but in a sense don't corporations basically change the they supply of stock when this is done (wouldn't the effect of this be similar to how the value of our dollar decreases if the money supply is artificially increased)Aren't the stocks now worth less to the owners?....This makes me question the author and I'm not sure if I can run down the bunny trail with him here.

Murphy then moves to a focus on how people just distrust stock traders as they are spectators who profit by being middlemen. We forget that middlemen are important, as they create information. Yes, this is a point that I can follow. However, I think the article lacks a focus on asymmetric information problems that are fervent in the stock market were. This is a shame as I think this could actually aid Murphy's argument. As the number one argument that I hear for government regulation of the stock market is that this should occur to conquer externalities that stem from asymmetric information. And if we look at the Securities and Exchange Commission many of it's regulations, such as making it mandatory for corporations to post their 10-k's on the website for easy access also create information. Too bad the situation isn't always as clear as one tries to present it, huh Murphy?

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