Sunday, 14 August 2011

The Goat Market

I have this problem with the stock market.

OK, I have many, many problems with the stock market, but this is one, maybe the biggest one, of them.

Before I speak directly about it, let’s take a moment for a little allegory.

Let’s assume I have a goat. I put it about in the village market that I have plans to mate my goat with someone else’s ram, and that after this happy event, my goat will give birth to six kids. I will then raise and breed these six kids, and so on, until in a few years’ time, I will be the possessor of an entire herd of goats, not just one. And suppose then that what happens (because there’s an increased demand for goat milk or meat) is that my goat’s market price instantly rises through the roof – the price people were offering me for her doubles, triples, even quadruples – without my even having bred the goat, but just having announced my intention of breeding her.  

Now, let’s say that a rumour is heard in the village market that there has been a fall in demand, so the price of meat may drop sharply. At once, the price of my goat goes right back down to the original value, or lower, even though there has been no actual fall in meat prices, and even though – in reality – nothing at all has changed in her status from the moment I first began telling of my plans for her in the market. And if I’d sold my goat before the rumour hit the streets, wouldn’t I have earned substantially more than her market value – despite doing nothing at all? And if the price of the goat falls, the money I “lost” is only a notional loss, isn’t it – since I never converted it into concrete financial terms?

Isn’t this situation absurd?

I am aware that the according to “received wisdom” these days, the stock market is the arch “creator of wealth”, and its indices make or break economies and governments. After all, aren’t we devastated at the news that the stock markets around the world crashed by 5%, or 10%, or whatever? And doesn’t a stock market crash in New York spell disaster for speculators in Tokyo?

But, actually, in what way is that different from the goat story I postulated? How much of the rise and fall of stock prices, which allegedly make or break fortunes, are real fortunes, real losses? Isn’t the stock market based on perceptions – the imagined value of a company’s assets, rather than the actual value itself?

And isn’t this why stocks can be manipulated? You aren’t actually raising or lowering anything of real and quantifiable value. You’re raising or lowering perceptions. It’s like making a kid happy by telling him you’ll buy him a video game console for Christmas, or making him sad by informing him you won’t.

I remember when the Indian stock indices, known as Sensex, hit the 20000 mark a few years ago. Newspapers exhorted the people to feel happy and proud at this “sign of India’s economic resurgence” (their barf-making phrase, not mine) – even though well over 90% of India’s population has never owned a share and will never own one. And sure enough a lot of people said they felt happy and proud – until, of course, the market crashed, when they didn’t come out and say they felt unhappy and ashamed.

Of course, since the stock market deals only in notional values, it can afford to be utterly amoral. Whatever drives up those notional values is excellent, no matter how you manage it. If oil companies have to finagle the invasion of an Arab country in order to lay hands on its petroleum, that’s all excellent; as long as they actually get the oil, that’s all that matters. As long as a timber company gets the rights to strip-cut a rain forest, all that is important is that the price of the shares goes through the roof. The investors can make a killing in a figurative as well as literal sense as long as they have the smarts to sell while they’re ahead (and re-enter the market when the values crash, as they will sooner or later - or a crash can be arranged).

But, if capitalism is about actual wealth creation (whatever "wealth creation" might mean when it's at home), and if the stock market is all about
notional wealth, isn't the stock market actually anti-capitalism? By manipulating and dealing in nonexistent values, isn't the stock market actually subverting the (alleged) free-market spirit of capitalism? It's far from the only contradiction in the capitalist model that leaves me hopelessly confused.

For instance, back in the goat market, if I’d sold my goat while the bidding was on, I’d have been rich, and the story of breeding her that I’d made up would’ve been irrelevant. And then I could have started the rumour of demand falling, bought back my goat at a lower price than she’d initially been worth, and after a suitable interval got her value to rise all over again with a few words in the right quarters, and started the cycle over again, making profits without doing anything at all except flap my jaw. Am I right?

Somehow, this goat model of business no longer seems all that absurd to me!

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