The Social Function of Stock Speculators
When it comes to different ways of making a living, stock speculation certainly wouldn't make the Top Ten Most Altruistic among Oprah Winfrey viewers. Indeed, even among people who think that middlemen perform vital services in tangible commodities — such as buying oranges low in Florida, and selling them high in Alaska — there seems to be something artificial about transactions involving nothing more than electronic swapping of shares to corporations. Even among people who ought to know better, there is a presumption that stock speculation is a zero-sum game, and that if one person buys low and sells high, his gain only comes at the expense of someone else, leaving society on net exactly the same. FULL ARTICLE
Comments (29)
Another common fallacy concerning stock markets is about saving; some claim that it's good thing to save via banks since banks use those monies for loans for productive investments and saving via stock markets is just a zero sum game. Fact is of course that stock exchange is just a secondary market for common stock and firms could raise capital directly from the people even if no centralized exchange would exist. Stock exchange makes stocks more liquid for the owners of stocks and makes "prices right" more quickly than otherwise would be.
Previous fallacy might be less common in US where more people hold stocks than here in Scandinavia.
Published: November 22, 2006 8:54 AM
Yes, but stocks are shares in the ownership of a Government-created legal fiction, a corporation.
What would a pure anarcho-capatalist model look like?
Published: November 22, 2006 9:20 AM
Yes, but stocks are shares in the ownership of a Government-created legal fiction, a corporation.
What would a pure anarcho-capatalist model look like?
Published: November 22, 2006 9:20 AM
Often govt's laws just recognize prevailing situation and gives it legal status; marriages, foundations and associations are examples of such.
In scenario where is no formal corporate law or laws concerning voluntary associations of peoples, such associations would be less formal and less uniform than it is today.
Suppose that following story could then happen;
Group of people decide to found a business iniative together. Each gives certain amount of assets to the joint venture. Then these people hire a litigant to make a more formal Charter for them. This Charter just gives some guidelines how profits are distributed amongst the owners and how decisions are made inside the venture. Business venture could even make only contracts with those who agree to respect that only companys assets can be taken away as a reparation, not those assets of owners which are left outside of this venture.
Next step would just be that original founders just sell their part of venture to outsiders so that the whole venture could have a longer lifespan than it's individual members.
People have always formed associations voluntarily and this is the origin of corporation.
Published: November 22, 2006 9:46 AM
Great article by Robert_Murphy. I'm glad he made the point about how one should not look at stock value as being defined *purely* as that of a discounted stream of dividends. I was in exactly this dispute with someone on Wikipedia (no links, sorry). Ownership of the corporation itself has separate value. It matters little that you, a tiny minority shareholder, have no desire or capability to make use of that voting right. All that matters is that someone else may want it and can use it. Like Murphy notes, at the very least, controlling the whole corporation would allow you to sell off its assets and pocket (something close to) the net book value. Put in this light, it's not hard to see that share ownership is like ownership of a stream of dividends attached to an option to liquidate for some amount of cash.
(I should also add that a "high" dividend yield might be 3% for stocks, far less than you can get with bonds. Is every corporation expected to grow immensely?)
That's also an error that the semi-regular poster Mike_Sproul makes when he says that issuing new shares won't affect share value. While it's true the new capital offsets the new dividend obligations, new shares still dilute the voting-rights value of all shares, which is why they typically need shareholder approval to do so.
Published: November 22, 2006 10:59 AM
Stock speculators also bring liquidity to the stock market. Without speculators, one might not be able to buy or sell as easily and the usefullness of the stock market (as a mechanism for directing the flow of investments) might be severely curtailed.
Speculators in the futures markets act as a form of insurance, so a seller can get a price for his goods today and NOT have to gamble at the same time on future prices.
Walter Block discusses other forms of usefullness of a speculator in his book Defending the Undefendable that might also apply to the stock market.
Published: November 22, 2006 12:01 PM
"Group of people decide to found a business iniative together. Each gives certain amount of assets to the joint venture. Then these people hire a litigant to make a more formal Charter for them. This Charter just gives some guidelines how profits are distributed amongst the owners and how decisions are made inside the venture. Business venture could even make only contracts with those who agree to respect that only companys assets can be taken away as a reparation, not those assets of owners which are left outside of this venture."
How would others deal with this business venture?
If I were a bank accepting deposits from this business venture, I suppose I would be signing contracts with a person authorized by the Charter to do business with me. What if that person left the business venture?
Published: November 22, 2006 12:30 PM
The problem with corporations isn't that they exist. The problem is that they are given limited liability protection by the state. That one thing gives them a tremendously unfair competitive advantage over entreprenours.
Without it, corporations would still exist, but I'll bet investment and management would prove far more scrupulous.
An argument that a group of people should have this kind of protection is comparable to arguing that ten guys with clubs should have a moral advantage over one guy. Similar to a politician promising that if a majority vote for him, we will pay them off by taking it from a minority. In the extreme, it is also the same rational that lets a government contend it is allowed to torture individuals while contending it is immoral for an individual to torture another.
Published: November 22, 2006 2:45 PM
The separate legal personality of a corporation is in a sense, a logical extension of the state. The monarch is a natural person; however, the monarch is also a corporation sole (see Blackstone, Commentaries on the Laws of England). Through this legal ficition, the property and other priviledges of the monarch by could survive the demise of the monarch by means of the corporation sole.
The first corporation aggregates were priviledges granted by the monarch - by Royal Charter or Acts of Parliament. These corporations, which benefited from limited liability, were clearly benefits conferred by the monarch to petitioners. Regrettably, the belief that this structure - ie, the liability of all members of the corporation sole - was necessary for the growth of large businesses. Thus, the Companies Acts 1844 and 1856, which created the legal framework for such companies in the UK.
However, another form of business organisation exists that in a libertarian society seems more appropriate: a limited partnership (not a limited liability partnership). This organisation confers limited liability on sleeping partners but full liability on any partner who is involved in the management of the business. This seems intutively correct for there is no moral obloquy for the sleeping partners if the business becomes involvent but permits creditors to pursue those who are responsible (ie, management).
Published: November 22, 2006 3:28 PM
Alex:
Limited liability is not in conflict with libertarianism, provided that force is not used. Any corporation that is a private business, i.e. no monopoly privileges from the state (or monarch) must still persuade people to conduct business with itself. Therefore, limited liability in this respect is nothing more than an implied contract than anyone can refuse to agree with.
Naturally, if force is involved, then the entire picture changes. But sans force, I don't see any libertarian objection to a limited liability organisation.
Published: November 22, 2006 3:44 PM
Alex,
With this: "However, another form of business organisation exists that in a libertarian society seems more appropriate: a limited partnership (not a limited liability partnership). This organisation confers limited liability on sleeping partners but full liability on any partner who is involved in the management of the business. This seems intutively correct for there is no moral obloquy for the sleeping partners if the business becomes involvent but permits creditors to pursue those who are responsible (ie, management)."
I'll agree in principle, though you have illuminated a subset, the L.P, of the whole, G.P.(s), or General Partnership(s). G.P.(s) are found at the head of L.P.(s), as the "responsible" party(-ies).
Belaboring, L.P.(s) are just a variant of G.P.(s).
~
Published: November 22, 2006 3:56 PM
Corporate liability for actions of its individual employees is also an extension of the State. There's so many examples of that I don't know where to begin.
Class action lawsuits for options backdating against the corporation rather than against the specific individuals who may have committed fraud.
Intoxicated drivers, pilots, who get in accidents.
The first thing the State's lawyer class does is attempt to link liability to anyone and and anything that might increase settlements and judgements. It seems to me liability is nowhere near as limited for corporations as it would be in a more libertarian society. Just like nations don't act, neither do "corporations" act; only individuals act. Why is it so many libertarians want to hold entities and others who may not have diliberately acted liable for the actions of others who committed specific actions? Sounds awfully democratic.
Published: November 22, 2006 4:32 PM
rtr,
See also, Coins: Obverse, and Reverse.
Published: November 22, 2006 5:55 PM
Eric, ME Hoffer
Thank you for your comments.
ME Hoffer, I am ashamed to say that I did not precisely follow your reasoning although I should like to understand what you were getting at.
Eric - I overlooked that point and I quite agree with you that limited liability - say, a liability cap in a professional service contract - is consistent with the principles of a libertarian society when freely entered into. I suppose that what I am questioning is the wisdom of setting up a limited liability company as the default form of business organisation, as it seems to be. Limited liability clearly has a place: you have given a good example and I referred to passive investors in my earlier posting . I note in the UK that some large professional service firms continue to operate through a traditional partnership; perhaps, with modifications, that might serve a suitable model? Or maybe there is no alternative to the limited liability company?
Published: November 23, 2006 2:53 PM
In Man, Economy and State, page 1144, Murray Rothbard wrote and I quote;
“It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations”.
(Go to; http://www.mises.org/rothbard/mes/chap15d.asp#3R._Policy_Toward_Monopoly)
Björn Lundahl
Göteborg, Sweden
Published: November 23, 2006 3:01 PM
“Libertarian economists typically adopt a two-pronged approach in their advocacy of free markets. On the one hand, they stress that people have rights (whether God-given or self-evident from the exercise of reason) and therefore should be able to engage in any voluntary activities with each other, free from political interference. Unfortunately, this appeal to principle is never enough, since the type of person who votes for today's politicians doesn't care much about abstractions”.
Very true indeed, abstract reasoning can lead to true conclusions and principles but is by far not enough to gain support among voters. Economics can fill that vacuum.
People want prosperity, full employment, an end to business cycles etc.
Austrian economics can deliver those “goodies”.
Austrian economics is an indispensable tool in the fight for liberty.
Björn Lundahl
Göteborg, Sweden
Published: November 23, 2006 3:26 PM
Alex,
Rereading your post, I see that I may have misunderstood you as proposing the L.P. form, in general, as opposed to in specific, as a replacement for "Corporations".
Thus, I was alerting you to the idea that L.P.(s) are a just a subset of G.P.(s) in the taxonomy of Business Law.
see: http://www.google.com/search?hl=en&q=business+law+partnerships+general+partnerships+limited+partnerships
for general background.
But, now I see that you meant to offer L.P.(s), in specific, even to the exclusion of LLP(s).
My point, thereby moot, the alert, now mute. :)
Published: November 23, 2006 8:50 PM
Björn wrote;
"people want prosperity, full employment, an end to business cycles etc.
Austrian economics can deliver those “goodies”.
Austrian economics is an indispensable tool in the fight for liberty"
Björn, you are too optimistic about the economics. People want to have a Land of Milk and Honey and think that it's reachable target. It's easy to politicians to promise that now we are very wealthy nation and more equal distribution of wealth is just a political decision. This rhetoric is common in Finland like it's in Sweden.
Second think is that I always think that econ is value free. Natural law has nothing to do with the formal economics. You could probably classify me as a consequentialist libertarian.
Alex and M.E, of course specific legal rules concerning different forms of business organizations influence the form of organization which in different situations is adopted. Main point I still think, is that only man's creativity is limit to what kind of organizations could exist. In another world, where would not be govt's rules about business organizations, these organizations could be more diverse and specific to situation. Some uniformity would be forced on them by competition and transparency requirements by creditors/customers.
Published: November 24, 2006 12:52 AM
Adi
Adi “Second think is that I always think that econ is value free. Natural law has nothing to do with the formal economics”.
Björn Yes true, economics as a science is value free. It is, of course, also true that Natural law has nothing to do with formal economics.
Adi “People want to have a Land of Milk and Honey and think that it's reachable target”.
Björn As we know this obvious fact that people, generally, wants prosperity, we need not to be value free. Austrian economics, as I said, can deliver all the “goodies”.
I believe that ethics based on Natural law or only through abstract reasoning (in a style like Hoppe’s), is also an indispensable tool in the fight for liberty.
Björn Lundahl
Published: November 24, 2006 4:17 AM
Alex,
Also, in rereading my own, previous, post, I see that the other point I was trying to illuminate should still shine. That is, the org. that "runs" the L.P. is always termed a G.P..
I think that was, also, why I was alerting you to the fact that L.P.(s), and the structure thereof, are derivative of G.P.(s).
Either way, NBD.~
Published: November 24, 2006 8:01 AM
Adi,
This: "Main point I still think, is that only man's creativity is limit to what kind of organizations could exist. In another world, where there would not be govt's rules about business organizations, these organizations could be more diverse and specific to situation."--is, to me, no doubt, True.
Especially, this: "these organizations could be more diverse and specific to situation."
Though, this: "Some uniformity would be forced on them by competition and transparency requirements by creditors/customers."-- might not necessarily be so.
In reference, see Bloomberg: Bond Prices, Acquisition and dissemination, thereof.
Background: We have communications platform, aka: "The inter-tubes" ("New and Improved, Now, No vacuum required!"), while not fully flowered, is fully functional.
Point being: The diversity that would arise in a Free Market is easily communicable & computable. The level of uniformity, that you give rise to, would not have to be very great, if at all.
Further, again with this: "these organizations could be more diverse and specific to situation."
I would suggest that, in this World2.0, the S&P 500(for example), if such a conceit would still have any value, would be refracted through "a thousand points of lights"( to borrow from XLI ), becoming the S&P 500K, at the minimum. (The 1984( MCMLXXXIV ) break-up of "Ma Bell" gave us a twinkling inkling of how much, and how many, had been "unitized" in 1.0)
Published: November 24, 2006 9:00 AM
Regarding the quote by Rothbard from MES, it seems to justify the limits on liability to creditors, but it would not justify the limits on liability in cases of harm caused to customers or to the environment, no?
Published: November 24, 2006 9:07 AM
first of all the article was an interesting read.
my comment is mostly of semantic nature with regards to your choice of words:
when it comes to determining the right price with regards to under/overpriced assets. the process is with regards to price determination is called arbitrage and people in that line of business are called marketmakers or arbitrageurs.
the easiest way to remember is to keep in mind that a price is an arbitrary value. As such there are no homogeneous expectations of price.
I'll stop here as i do not wish to go into assymetries and such. My main point is that there should be a distinction made between arbitrageurs and speculators
Published: November 24, 2006 6:05 PM
D. Saul Weiner
“Regarding the quote by Rothbard from MES, it seems to justify the limits on liability to creditors, but it would not justify the limits on liability in cases of harm caused to customers or to the environment, no?”
At least, if it is criminal activity which you are referring to or negligence, the answer, I believe, must always be: no limits on liability.
Björn Lundahl
Published: November 24, 2006 7:31 PM
Björn
Thank you for that very interesting quotation from Man, Economy and State. However, I must say that I did not find Rothbard's view wholly convincing.
It seems to me that if our actions have consequences, then the mere assertion that our liability is limited is not sustainable. Rothbard’s error, I submit, is that he fails to see that limited liability is not conferred by the assertion but, rather, by a Judge’s finding in favour of limited liability in such civil matters that are brought before him. In finding, the judge will take account of custom and accepted business practice.
One might argue that, if asserted, limited liability is an implied term of each contracting partner. However, if this analysis is correct, it must also be possible for counter parties to assert that the opposite - that is, that each member to the arrangement will have unlimited liability, which might be to the counter party’s advantage. Therefore, the judge is still required to consider the matter based on the facts and in light of custom and business practice.
I should be interest in your views on the matter.
Also, it was rude of me not to say earlier that Robert Murphy’s article was excellent.
Published: November 25, 2006 6:26 AM
Alex Owen
I also want to thank Robert Murphy for an excellent article. I have learnt a lot from it.
I quote from an article written by Gary North:
TO JOIN A CHURCH
Let us say that I want to join a church. As a future member of this local church, I wish to avoid legal liability for anything the elders do that might inflict damage on someone else in the name of the church. For example, if they decide to excommunicate someone from membership, and that person then sues the church in a civil court, I do not want to have all of my assets at risk in that court. This is not a hypothetical situation. Churches do get sued by excommunicants. This undermines the authority of churches. The state's authorities are sometimes happy to do this. It increases the power of the state.
The church can specify this arrangement in writing before anyone joins. Members agree to this as a condition of joining. This contract – called a church covenant – can also specify that the church's judicial decisions not be matters of future lawsuits in a civil court.
What libertarian principle is violated here? What Christian principle is violated here?
Over time, civil law in the West formally recognized the existence of an implicit agreement with respect to the legal immunity of church members. The state does not create this legal immunity. On the contrary, the state has recognized a previously existing legal immunity.
To argue that the state should no longer recognize this immunity in the name of a universal principle of full liability without any exceptions is to grant enormous power to the state to undermine both custom and contract.
Today, investors in corporations are governed by commercial limited-liability law. Critics of limited-liability law argue that this is a grant of privilege by the state. But would they also argue that a comparable grant of immunity from lawsuit for church members is a state-granted privilege? The existence of such immunity long preceded the modern nation-state. Conclusion: it is not a grant of privilege.
In the late nineteenth century, Anglo-American civil law began to acknowledge a right of contract that had always governed churches. In doing so, the state made possible the modern economy, which is marked, above all, by increasing per capita investment.
It is not random that the most rapid period of economic growth in mankind's history took place from about 1875 to 1914 – the era of the modern limited-liability corporation. It took place because the state, at long last, extended the same right of contract to businessmen that churches had enjoyed from the beginning. Rothbard wrote in Man, Economy, and State (1962), "The great advantage of the joint-stock company is that it provides a more ready channel for new investments of saved capital" (p. 369).
A GRANT OF PRIVILEGE?
The modern nation-state has asserted an original authority over the granting of limited liability. We should not take this assertion seriously. What the modern State does is to restrict by law the right of contract. This means that a group of people, acting in the name of the divine right of the State, assert the monopoly privilege of limited liability. Then they sell the right of incorporation or grant it to their favorites.
The Anglo-American nation-state ever since the days of the Tudor kings has claimed the monopoly privilege to grant such a right of contract. That is, it claims an original privilege, which it can then ladle out to cronies and purchasers of privilege.
The king was said to be above the civil law. Only God is superior to the king's authority, the people were told. This is the judicial meaning of "the divine right of kings": no higher earthly court of appeal. The king therefore claimed limited liability as a monopoly. That claim ended in Anglo-American law no later than 1688: the Glorious Revolution. Parliament wanted in on the deal. Parliament's claim ended in 1783 in the North American colonies. Then Congress wanted in on the deal. Then the U.S. Supreme Court. And so it goes. The state wants its divine rights: complete limited liability except from God, who is thought to be on an extended vacation.
This state's perennial argument in favor of state sovereignty over the right of contractual limitations of liability should not be taken at face value. It is in fact a highly self-serving view of the power of the state.
Henry VIII stole monastic property in order to enhance the revenue of the state, but he and his successors were not so arrogant as to argue that church members were legally liable for whatever church officers did as representatives of the church. Even today, politicians will not touch this third rail.
If civil courts can lawfully impose complete liability on investors in corporations, then it in principle has the right to impose the same liability on church members. To join a church is to open your wallet to those who would take the church to court. If this principle were enforced by the state, it would have the effect of forcing the church underground.
If a law banning the right of contract regarding limited liability were enforced by the state, it would have a similar effect on the capital markets. Overnight, American capital would disappear. Call it "green flight." There would be a collapse of the stock market dreamed of only by the most wild-eyed newsletter publishers – my kind of guys.
Let me assure you, I could write a direct-mail ad piece that would make me rich beyond the dreams of avarice if American politicians ever began considering the adoption of a view of strict liability of contracts. I would show subscribers where to invest their money off-shore after selling their shares of American-based corporations. Any nation that made it clear that limited contractual liability is available to all comers would gain a windfall the likes of which CNBC commentators only dream about.
This law would de-capitalize America overnight. Americans would be not just become impoverished. The resulting contraction of the division of labor would probably lead to starvation. There would be a run on the banks that even Alan Greenspan, acting as the nation's equivalent of Donna Reed in It's a Wonderful Life, could not overcome”.
http://www.lewrockwell.com/north/north408.html
I hope that this article gave you some answers.
Björn Lundahl
Published: November 25, 2006 9:38 AM
The other use of stock speculation is to give compulsive gamblers an outlet that produces deductable losses.
Published: November 25, 2006 2:03 PM
Björn
Thank you for that posting. The article was most interesting.
Rgds, Alex
Published: November 28, 2006 3:49 PM
Alex Owen
My pleasure!
Björn
Published: November 29, 2006 5:47 AM