Austro-logic and the stock market

As a few of you have correctly ascertained, the question to which I took exception to the asserted “Austrian” position and instead chose the “socialist” answer was Question 20: “What is the Function of the Stock Market”. The “Austrian” answer was as follows:

The stock market constitutes a vital part of the process by which we coordinate production. Stock market prices reflect the productivity of business firms as well as entrepreneurial judgments concerning future productivity. Competition in stock markets enables us to ascertain the value of real investment. Takeovers, mergers, and insider trading are wrongly maligned because these practices represent real competition. Without the stock markets, rational coordination of production in modern society would be impossible. Governmental regulation cannot improve on the workings of stock markets because it is the market that most directly informs us regarding the best use of resources.

This statement is rife with errors. First, to explode one possible defense, the question is quite clearly referring to the particular entities known as stock markets; it is not a general reference to trade in the ownership of the means of production. Otherwise, this question could have just as reasonably been entitled “What is the Function of the Fruit Market?” It’s important to remember that a publicly-traded stock is itself a government creation, as it represents a percentage of a government-created entity known as a corporation and as such inherently represents government interference in the free market. To argue that there is no place for government regulation of an entity that government has itself created is intrinsically illogical.

As has become increasingly obvious, stock prices may in part measure corporate productivity, but they rest far more on other elements, most significantly inflation of the money supply. And it is downright false to assert that “rational coordination of production in modern society would be impossible” since the fundamental irrationality of the stock markets currently inhibits production; there is no evidence that it coordinates it in anything approaching a rational manner. It is certainly true that the free market is the best provider of information related to the complex calculation of intersecting values, but the point that the Austrians who concocted this answer appear to have missed is that the stock markets no more represent free markets than NAFTA represents free trade.

The truly Austrian position would be to reject the concept of government-created artificial persons in favor of historical free partnerships which sell shares to anyone willing to buy them through any mechanism it cared to sell them. Some form of recognizable bourse would surely evolve from these operations, but there would be no artificial limits on which organizations were permitted to sell shares through them, much less the bevy of government restrictions that currently exist.

The “socialist” answer, on the other hand, is demonstrably more correct. Only the last sentence is incorrect, but it doesn’t have anything to do with the actual question of the stock market and its functions and so can be safely disregarded. There’s nothing socialist about the rest of the answer except for the mention of “class”, which is not identified with any of the actual Marxian class divisions; the rest of the assertions made are undeniably true in the context of a government-regulated entity managing the trade in the ownership of other government-created entities.

The stock market represents the interests of an unproductive class in society. The investor class profits off of the labor of others, while roping the public into the system through investing schemes. Stock market speculation, insider trading, takeovers, and mergers, work to destabilize the economy. Financial acquisitions concentrate control of the means of production in the hands of a few. Bull markets produce no real wealth, and are really financial bubbles. These waves of stock market speculation lead to financial panics that disrupt the production of real wealth. What we need are not more high-flying financial centers but more common work at the local level toward common goals.