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No Free Lunches: The Role of the Stock Market--jk

Thoughts on the dinosaur.  What we have, a look at the stock market, and by extension at capitalism. 


THERE  ARE  NO  FREE  LUNCHES:  The role of the stock markets   



A warm-up—thinking about economics:

 1. Wealth of a nation, measured by standard of living (per person), increases in 6 ways:

 A. Production rate of workers increase (automation, computers).

 B.        The value of what is produced increases (population shifts from farming to manufacturing or manufacturing of high value items are examples).

 C.     A greater percentage of the populace enters the productive end of the work force.

 D.        The total value of items possessed by each person increases (durable items accumulate faster than they wear out and faster than the increase of population).

E.                                Increase in the rate of removal and/or value of minerals, farm produce, oil, and timber.

F.                                Depopulation that does not destroy or damage the infrastructure or remove an inordinate number of workers, such as a disease like influenza).


2. Negative forces:


A. Population growth.


 B.        Immigration of low skilled, low paid workers, who have large families.

 C.        Increase in service sector.

 D.        Nonproductive populace percentage increases (elderly, infirmed, unemployed, young, idle rich, mooches, homemakers, etc.).

 E.        Increase in non-productive, minimally useful, or already over represented employment/sectors (advertising, unessential services, military, sales, lawyers, stock brokers, banking, insurance, police, and like)[i].

 F. Unused capacity, such as empty offices, stores, car dealerships, and such that is operating below its ability to service customers, empty spaces on public transportation, empty house, and such.

G.     Deterioration of infrastructure, buildings, vehicles, machinery, etc.

H.  Dwindling resources and increasing costs of resources. 

I.  Rise in price of imports.

J.         War.


3.                         3.  TRANSPARENCY—a measure of economic efficiency: costs compared to selling price; viz. the difference between the sum of cost materials, cost of labor including that in distribution, the depreciation of machinery, buildings, and transportation used in production of item, compared to what the items the end user pays for the item.  This difference approximately equals the gross profits made by those who supplying materials, own the manufacturing, own the distribution, inefficiencies related to retail sales, advertising, profits made by insurance companies, and government taxes.  In ideal, transparent society, the selling price of the manufactured item would equal the total cost of labor, of transportation, and of merchandising, (fixed items would be amortized).  There would be no additional charges for materials, finance, or usage of land and building beyond maintenance and amortization for ware-and-tear.  Labor, of course, would include that involved in acquiring the resources, transportation, merchandising, planning, etc.  In the ideal society there is no need to inflate the price of lumber for the tree.  The tree is a gratis gift of the land, and in the ideal society the allocation of this resource would be guided by the promotion of the public wheal.


4. PUBLIC WHEAL, promotion thereof.  Government exists for the benefit of those governed, and thus it ought to maximize the well being of all its citizens.


Like every social, political, and economic structure, there are reasons and functions, so to for the practices under our capitalistic system; but these reasons and functions don’t entail that what we have is ideal.  The ideal society would have a much better political structure and thereby would properly manage the economy.  A truly transparent economic system would eliminate the charges for occupation of lands, extraction of resources, financing, and a transparent economy would nearly eliminate advertising.  The purpose of this paper is to analyze one archaic system, the stock market and to stimulate thought about on the ideal state of affairs. 




LIST OF TOPICS for essay below

1)    Socialist critique of capitalism, including the stock market,  robber barons, and exploitation of labor.

2)    Stock market diverts consumers’ funds.

3)    Role of the stock market.  Industries in socialist countries got along just fine without a stock market.  The economic failing in socialist countries arose from the politicians directing a bureaucracy that ran the economy.

4)    IPOs: issuance of stock by a small corporation to raise funds which they otherwise couldn’t raise.  Results, an inordinate number of bankruptcies.  


5).   The effects of rising earnings upon corporate planning.

6).   Problems with having earnings as the measure of corporate performance.

7).    Band-Aide approach, regulations.  We are near their limits given the quality of politicians and bureaucrats managing and creating reforms.

8).   Corporate planning is distorted by the need for rising short-term earnings.

9).   The stock markets, their effects and costs. 





The 9 topics above:


              1)           To attract people to their cause, socialist, starting in the 19th century, would wave the flags of monopoly capitalism, surplus earnings squandered by capitalists, and the stock market as siphon of earnings.  Their primary slogan was all wealth comes from the sweat (brow) of labor.  Conditions of employment were the strongest inducement for radical solutions.  The second most important cause was the disparity between the value of what was produced and the rewards for labor.  The various causes of this incensed laborer.  Grand estates were found in every urban center.  Their wealth came from the disparity between cost of production and the price of the goods sold.  Low wages and high consumer prices radicalized large percentages from all sectors of society.  Surplus earnings were distributed through dividends based upon stock ownership.  The unions and socialist made the obvious point that these surplus earnings could be distributed to workers and could be used to lower the price of goods. 

              Fitch, Gould, Rockefeller, and hundreds of others pursued gains with an avarice that earned them the label robber barons, a phrase that became part of the language.  Their conduct was like that of the robber barons (petty chiefs), which were the bane of travelers and merchants around the world.  And like the petty chiefs who had a defacto accord that had been worked out with the regional government, so too did the robber barons have the support of the federal and state politicians.  While politicians courted the vote of the common people, they within prudent limits supported the capitalists.

                              Most workers only wanted to limit the rewards of the robber barons, to assure decent working conditions, and to increase pay.  The workers realized that capital needed to be organized so steel mills and railroads could to be built.  But the cost of this organization—as measured by the wealth generated and the bankruptcies—was excessive.  Moreover, the competition between the robber barons resulted in cycles of speculation.  There were periods of boom followed by busts that resulted in a depression once every 20 years, the first one under the Presidency of Andrew Jackson.  The principle causes of these cycles were the major industrialists and financiers.  Industrialization increased productivity and profits, but there weren’t an improvement in the workers’ lot.  Centralization of wealth with its competition for profits had terrible consequences.

              The unions, socialists made sure that everyone knew of all the flaws in capitalism.  They had their newspapers and their well-attended town meetings.  The workers knew that wealth come from the backs of the working class.  Because the ownership through stocks gave the control of business to the robber barons, labor favored the elimination of the financial markets (bonds, stocks, options, and futures, hereafter called markets).

2).     What is the effect of the markets upon the economy?  Each structure has a price.  Government takes in through its many forms of taxes about 39% of the worker’s income.  Benefits flow back, but they are nowhere nearly worth to the workers the 39%.   Another river of funds flows into the markets.  Some of these funds are consumed in commissions and in other expenses:  brokerage houses maintain themselves.  There are the trillions of dollars tied up in the markets, which could have been spent on items that improve the quality of life.  Funds consumed for commission, more held as mandated by the federal government in brokerage house accounts, Except for the occasional sale of corporate held stock and bonds when issued, these funds do not go to the corporations, but to brokerage accounts in the name of the investors, commissions to brokerage houses, and federal treasury accounts.  These funds could be used for the purchase of a more commodious housing, for education, etc.  But they are tied up in the giant stock-market bubble. 


3).                         It is argued that the stock market plays a vital role, like banking, in the production of goods and services by raising funds for corporate expansion.  Once a corporation reaches a certain size they can apply to be traded on one of the major stock exchanges.  They will be granted permission by the SEC (Security and Exchange Commission of the federal government) to issue stock.  The company then will arrange with a major brokerage house for their stocks to be offered on a certain day to the public.  Usually about half of the stocks are retained by the corporation and its officers.  Those stocks sold are income to the corporation, and those retained are assets.  It is like magic how the worth of a company, such as Yahoo and Google suddenly shoots up upon the issuance of shares.  But unlike banking these companies do not have to pay back the funds received on the day the stocks were issued or when they later sell a block of retained stock.  The issuance of stocks is a way for a company to raise funds.

                A number of companies have grown without the issuance of public stock.  Ford Motor waited until the 60s before going public.  Moreover a company must have millions in assets before they are permitted to be traded on a major exchange.  Businesses can and do function without the issuance of stock.  In fact the main reason for the issuance of stock is to make the founders of a company rich. 

                A further proof is the corporations in socialist countries.  These countries didn’t fail for want of a stock market, but rather because politicians ran the economy.  Imagine our Congress running our economy.   Performance is a question of incentives and structure.   A few state run industries do exceptional well.  The Pennsylvania State Liquor Store system is an example of efficiency, organization, and use of size to maximize return.  The vital role of raising capital has been taken over by state banks.  A similar function is played by banks under capitalism, only to a lesser extent.


4).                  The stock market provides a new source of financing often utilized by small corporations for the purpose of rapid growth, development of new products, enter into new markets, purchase competitor, etc.  Stocks are the cheapest way to raise funds; there is no payback or interest. 

                There are three down sides, both to the company, to the purchaser of stocks, and to society.  First by bypassing the standard method of raising funds, banks, a company with a poorly conceived and doomed idea will, as with so many e-commerce companies of late, is able to expand.  Failures would occur far less if they were forced to prove the viability of their plans to a bank’s loan department.  Similarly, a start-up company overburdened with debt can, through creative writing of a prospective, seem to the common purchaser of stock as a company going places.  The high failure rate of newly incorporated business with stock offerings is proof of the waste generated by this form of financing.  Corporate failures underline the imperfections of this from of raising venture capital through the markets.  The morass created counts heavily against this form of financing.

5).       The effects of rising earnings (the principle factor affecting a stock’s price) upon corporate performance.  The CEO and board will provide deceptive earnings reports to make the company seem better than it is.  They will do a number of things that are not in the public interest.  Drug companies will fail to make public serious side effects.  They will tout their medication as better than their competitors, even when it isn’t.  Automobiles are made with parts that will fail prematurely.  The list of ways to improve the bottom line is long.    Before going public the increasing the worth of the corporation was the way in which the owners increased the worth of their holdings.  Now with the stock being publicly traded, the CEO & directors focus upon the price per share, for they have voted themselves millions of dollars worth of stock options.  They thus focus upon those policies which will affect the stock’s price.  Serving the public wheal does not enter into their calculations. 


6).         Earnings as a measure of performance measures only the ability of a corporation to create a gap between costs and selling price, other things valued by society such as working conditions, salary, employment of Americans, and environmental responsibility stand in opposition to maximization of earnings.  Moreover the gap between cost and selling price comes out of the consumer’s pocket.   The incentive of rising stock prices drives the CEO to cut costs, and among those costs are ones that improve working condition, wages, and protect the environment.  Moreover, when a saving can be obtained by outsourcing, it is used, and often the entire operation is moved off shore.   Under the for-profit system, our nation and our economy suffer.  There is the  stagnation in income for workers over the last 35 years, even though the production per worker has increased over 30%.  And in this millennium the work force has dramatically shrunken as production and service have been in mass moved overseas, and this loss of jobs is occurring as our population grows.  

        The motivation of government to intercede on behalf of the masses has been greatly diminished by the fact that elections are fund almost entirely by business, and the relationship they have worked out has resulted in a removal of those restrictions that have increased costs.  Social programs such as education, welfare, and medical, environmental protection, and the very infrastructure have all suffered cutbacks over the last 25.  Those who pay the piper determine the tune.  The system of maximization of profits has undesirable social, environmental, employment, and political consequences.


 7).         Band-Aids of course could be applied to deal with the glaring undesirable consequence.  Raising funds through the issuance of stocks could be ended.   Banking and venture capital would fill the gap.  There could be a tightening of SEC regulations of accounting.  The pay of CEO & board members could be limited and stock options ended.  The performance of directors & CEO could be reviewed by an independent external group of auditors.  And of course there is the need to separate business from government by prohibiting election donations and perks given by lobbyists.   Because the spirit of the robber barons persists, the intent of regulations will be circumvented. 


                Thus it would seem that greater regulation could bring the level of failures and abuse to an acceptable level.  There is a limit to improvement:  first because there are limits to regulation and the costs of administration, and secondly because politician pass the regulations and appoint the bureaucrats who implement these regulations.  Finally, the system is inherently flawed:  the for profit motivation which are essential properties of businesses and the stocks they issue, this result in various business ploys to increase profits, dividends, and the squirreling away of profits.  All these entails an economic burden borne by consumers and workers. 


8).             Normally upper management including the board of directors owns a share of the corporation.  This supposedly insures good management.  However, the effect is to encourage short-term planning which will soon have a positive effect upon profits, and thus the value of their stocks.  Capital-intensive, long-term development often is not pursued even when prudent.  It was this kind of thinking which resulted in the Ampex not developing a consumer line of VCR equipment after they had developed studio equipment.  Product development lowers profits in the short term.  In Japan, however, there is less an impact of short-term decline in profits upon stock prices (there is much more of the buy-and-hold approach in their stock market); thus they developed consumer VCR equipment.   The directors in the U.S. are much more concerned with the short-term performance than they are in Japan.  This is one example of how short-term earnings impacts decisions. 

        Another example is that of corporate buyouts.  Funds available for internal developments are siphoned off in buyouts so as to create the illusion of growing revenues and earnings due to internally generated expansion.  Business are bought which have a favorable earnings to revenues ratio.  Corporate planning is distorted by the drive for rising earnings and revenues. 


 9).       The theory that the maximization of profits is the best way of serving the public wheal; this is a chimera.  Stock prices reflect the success, within a sector, of a company’s efforts in maximizing profits.  The theory holds that for a company to increase profits, it must cut costs, streamline production, and offer superior value.    But that is not true.  If it were, then all that would be needed would be an independent laboratory rating showing that the product in question would for its price range out performs competitors.  But as we have already shown the drive for profits results in the production of shoddy parts, the lack of interchangeable parts, making the product difficult to repair, planned obsolescence, a large percentage of the price going for advertising, are principle the ploys for maximizing profits.  Environmental concerns, conditions of employment, and wages are all adversely impacted by the drive for profits.  Moreover, the impact upon management of stock prices produces less than ideal corporate planning when measured by public wheal.  The profit system needs to be replaced by one which places all human values first, not just the one value of lower prices, and then damns the environment, the worker, and the nation. 



Remember, there are no free lunches.  What appears free is carried by all of us.  Is television free?  The 17 minutes per hour of product advertisements are paid for by higher consumer prices.  Incredible the fools are thankful for what they consider to be free programming.  They are paying for the interruption of programming by ads for products.  Most people pay double, for there is the monthly cable or satellite bill.  The junk mail for credit cards is paid for by higher interest charges and the one to two percent charged the retailer.  Every failed commercial development, every factory closure, ever job shipped overseas, every wasted minute of program viewing, every advertising dollar spent by corporations, all these are part of the costs of our profit driven system.  And yes, every brokerage house is maintained by the sweat of the workers who lay the material foundation.  The capitalistic system is far from transparent:  it is very inefficient. 

[i]   Many of the example above fulfill in varying degrees more than one of the three categories.  Lawyers and military are over represented.  We don’t need 10 times the per person ratio of attorneys compared to Japan or a military proportionally larger than that of Canada’s or Japan’s, and being over represented they are to that degree minimally useful.  Advertising does not contribute to the wealth of the country and could easily be dispensed with.  .  Not of the above sectors or types of employment contribute directly—as a farmer or factory worker does--to the material wealth of the nation. 

AFTERWORD:  an alternative

The design of an alternative system to the markets ought not be placed in the hands of the politicians—the socialist economies grew up to the limits of the politicians’ competence, than collapsed.  Politicians are venal and duplicitous.  Nor should, as just shown, the system proceed blindly with its goal of maximization of profits.  The two traditional solutions, minimally regulations and extensive bureaucratic controls work up to their unsatisfactory limit.


I propose that the brightest and most knowledgeable about businesses and economics, a blue-ribbon panel of university-economic professors selected by their peers would direct the economy.  Issues of what is produced would be decided by them as well as issues about transportation, pollution, distribution, wages, and advertising/product ratings.  They would set the economic goals. 


The actual running of the factories would be turned over to lower management who would select upper management.  An independent personnel department would hire and fire lower management.  A limit would be set on rewards given management to that of 3 times that given the lowest worker.  Each factory in an industry would compete with others for bonuses, bonuses based upon the quality of the items manufactured, the design, and the cost.  However all would have comparable working conditions and pay scales.  Piecework as an incentive for greater productivity would be far more common.  The bonus system, and other measure, would be used to create a team spirit.  The bonus system would be under the direction of the professors directing the economy. 


Another change would be to remove research and development from the grasps of a particular company.  There would be, like with our universities, independent research centers whose results would be shared with all factories and industries.


Many people have been inculcated with the belief that planning is a bugaboo.  But we cannot get away from it.  Each corporation makes plans on how to increase its profits.  Politicians make plans on how to raise revenues and spend them.  What I have suggested is that those who by training, goals, and intelligence are better suited to make economic plans, that they be empowered to do so. 


      The system has convicted itself.  The world is full of myopic apologists, ones who forget the fabulous scandals.  The S&L collapse of the early 90s cost the U.S. government directly $350 billion, and with interest on the funds our government borrowed to cover this, nearly $500 billion.  The brokerage house of Drexel Lambert issued a flood of junk bonds until the collapse of a number of the unsound corporations so funded produced a panic that resulted in the collapse of the junk bond market and the imprisonment of Milikan, who head their bond division.  Billions again were lost.  Then there was in 2000 the collapse of e-commerce and electronics technology stocks.  Over a trillion dollars in funds vanished as stock prices plummeted.    Executives of MCI World Com, Global Crossing, ENRON, and TYCO have been in the news for violation of SEC regulations governing accounting.  Their stocks plummeted in value and 10s of thousands of jobs were lost.  But these are only recent scandals, every decade since the administration of President Grant has produced like financial disasters.  But those who have faith in our economic system ignore its history. 

Popular writing in this connection is far below the zero of knowledge or common decency.  On this plain not only is any real knowledge of the classical writers nonexistent, but their place has been taken by a set of mythological figures passing by the same names, but not infrequently invested with attitudes almost the exact reverse which the originals adopted.  These dummies are very malignant creatures indeed.  They are the tools or lackeys of the capitalist exploiters.  I think that has the authentic stylistic flavor.  They are extremely indifferent to the well being of the working classes.  Hence when a writer today wishes to present his own point of view in a special favorable setting, he has only to point to these constructs with the attitude of these reprehensible people and the desired effect is produced.  You’d be surprised how many well-known authors who have resorted to this device.—Lionel Robins—1939, Lectures for the London School of Economics.  The English classical economists included the 2 great Scottish philosophers David Hume and Adam Smiths, and their followers.  Among these followers are Thomas Malthus, David Ricardo, and John Stuart Mills.  Disc II, track 1, 1:30 ff.  From lecture at Cambridge given in the 1930s.  



I had no intention to write atheistic, but I own that I cannot see as plainly as others do, and I should wish to do, the evidence of beneficence and design on all sides as there seems to be too much misery in the world.  I cannot persuade myself that a beneficent god would have designedly created the Ignomonidi to feed inside the body of a caterpillar or that the cat should play with mice.

Charles Darwin in a letter to Prof. Asa Gray.

For the best account of the Federal Reserve  (  One cannot understand U.S. politics, U.S. foreign policy, or the world-wide economic crisis unless one understands the role of the Federal Reserve Bank and its role in the financialization phenomena.  The same sort of national-banking relationships as in our country also exists in Japan and most of Europe.