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).
Increase in the rate of removal and/or value of minerals,
farm produce, oil, and timber.
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].
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.
of infrastructure, buildings, vehicles, machinery, etc.
H. Dwindling resources and increasing costs of resources.
I. Rise in price of imports.
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
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
critique of capitalism, including the stock market, robber barons, and
exploitation of labor.
market diverts consumers’ funds.
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
NO FREE LUNCHES, THE STOCK MARKET
The 9 topics above:
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.
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).
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.
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
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.
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.
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
[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.