I've been thinking about this recently. The centrality of the stock market, while historically a great tool to allocate resources efficiently, might actually be a big weakness for the USA today. A capable adversary, like China, can kill entire strategic sectors in the US using the stock market. If they undercut the US companies and are willing to accept low returns on their investments, then the respective USA competition will be driven out of business by their investors, because there will be other sectors to invest in, with higher RoI. Do this at various points in strategic value chains, and over a decade or so it might kill entire verticals in strategic sectors, leaving the US economy vulnerable to any kinds of shocks.
As someone who is essentially financially illiterate, what does this mean, "allocate resources efficiently?" Nobody's investing in companies that promise to cure world hunger or alleviate childhood suffering. They're investing in technologies that can extract the most wealth from the population, regardless of externalities. Is that desirable?
Then again, I can't fathom what people would be doing with their money if the stock market weren't there. I imagine they might naturally wind up with some sort of...stock market.
The operating principle here being that prices are units of information, which in aggregate reveal some combination of market demand, present supply, production costs, etc. All else being equal, an investor who's looking to put an investment into a new business will try to find the best rate of return. The existence of a relatively higher profit margin for an industry suggests an unmet market need, and then directs the flow of capital into it (if you expect that for every $1 you invest into a roofing nail plant will return $1.25 over the next year vs a $2 return from a new insulin plant, more new cash will flow into the insulin plant, more insulin gets made, and if the investor guessed right about the demand for it, they turn a profit). In a sentence, money flows towards trying to give people what we think they want more of.
The theory posited above is that you could try to manipulate these signals as a sort of economic warfare. If you expect that every dollar you put into our aforementioned roofing nail factory will get you minuscule or negative return, nobody's going to want to invest in building/expanding nail factories, and they'll put their cash somewhere it can grow instead. This is all well and good so long as you've got happy trading relationships with people who can sell you nails, but if one day the nails stop coming--you've got a supply chain shock until you either open new factories or find someone else willing to sell nails to you. The theory here being that if you had a LOT of goods that became tied up in a single point of failure--someone forcing that failure could create a great deal of internal instability to be exploited for geopolitical ends.
That's what's meant by efficiency, it's allocating it to the place that has the highest return on investment.
As you point out, in practice what's efficient is what can capture the highest return, not necessarily the highest return per se. If say investing in education had high returns society wide but those returns couldn't be captured, that's not an efficient use of private capital.
As somebody doesn't consider himself a capitalist, wouldn't it be fair to say it is "the most efficient" in precisely one thing: capital reproducing itself?
And if so, why is that necessarily a good thing? Why should that be our goal as society as opposed to things like minimizing child mortality, increasing literacy rates, making sure we don't have a ton of our fellow humans living on the street in misery etc etc - things that make the lives of our fellow humans better? Why is capital growth the metric we have chosen to optimize for? Surely there's better things to optimize for?
Excuse the polemic, but infinite growth with no regard for anything else is the ideology of a cancer cell - and to me that is increasingly what it feels like when we are wasting all these resources on a dying planet just to make numbers go up.
Ultimately that money is made by people choosing to spend their money on something, because it helps them, because they like it, because they need it for whatever reason (real or imagined). That's what grounds the financial markets: eventually someone is buying a thing because they want the thing, and all the rest of it is basically just figuring out who can make the thing, how many people want the thing and how badly, and whether the stuff used to make the thing could make a different thing that people want more. Financial markets can depart from that reality for a while, but mainly because of a collective belief in some falsehood about the above (everyone really badly wants AI, right?).
Number go up infinitely is due to inflation and that's basically just an incentive to not hoard cash indefinitely, and instead use it for something useful. But the only thing that uses up is numbers. Everything else is because people, on average, want more stuff and are willing and able to work hard to get it.
(Of course, this generally means that the markets chase the desires of those who have something valuable enough. People who don't will be marginalised by this mechanism, for sure. And of course there's lots of opportunity for people to steal or abuse powerful positions in the market to the detriment of others. Which is why a free market is not the be all and end all of organising a society, and other organisational structures exist to regulate it and to allocate resources in a less transactional manner)
But isn't that counter to the very article we're commenting on? Everyone is shoving half baked AI junk into everything because that's what makes number go up on the stock market, but I'm pretty sure that's not actually what most people would want those resources to be used for.
I'd posit that markets are completely detached from the real world and are more of a speculative/religious element than an indicator of any ground truths.
Edit: I just realized I missed a sentence of yours where you kinda spoke to this. I still believe that this is more of a rule than an exception - there is nothing inherently tying markets and reality together - they're mostly about people making bets on what the next big hype is; not on what is actually useful to anyone.
Most people or most people with money? Ultimately it's the people making investment decisions you need to convince in order to get the money from them. Then the reality check is whether you can give them that money back and more. Those investors should in theory be self-interested in making sure that this is actually useful, because if they don't they'll lose their money, but in practice they are not superhuman and prone to fads and echo-chambers (especially because it's a relatively smaller group that can move a lot of money around, and short-term investing rewards running with the crowd to some degree), but there's not a single group of people that would not fall victim to poor decisions in this regard (whether you're imagining a centrally managed economy, the electorate, or some hypothetical benevolent dictator).
Optimizing for capital returns is a simplification of the real world, where it allows for comparing whether it makes more sense to put one's money into opportunity A or B.
There's a lot that's not captured by solely looking at dollars, like the examples that you bring up, such as quality of life, human welfare, and so on.
If you care about minimizing child mortality, increasing literacy, pulling people up out of poverty, you should be a capitalist, as it's empirically the best way to meet those goals. This seems to be a hard thing for many to understand or accept because it is largely a second order effect, the capitalist primarily concerned with their own personal gain but winds up improving the lives of others as a side effect.
This is the essence of Adam Smith's often misunderstood invisible hand metaphor. Of the individual he observed: "By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it." Second order effects stack up and improve quality of life for more people better than trying to do so explicitly.
Multiplying capital creates abundance and that abundance allows for improved standards of living for and the means to spend excess resources in support of charitable endeavors. Growth is good because it means more abundance and opportunity. I would argue that pursuit of growth is not an ideology but a force of nature. Life is opportunistic and will expand to wherever there is fertile conditions, and often adapt even when they are not. We are part of nature and understand this intuitively, seeking growth opportunities. As an example, one is better off being part of a growing company (more wages and opportunities) than one that is stagnant or declining (fighting for scraps and survival).
>If you care about minimizing child mortality, increasing literacy, pulling people up out of poverty, you should be a capitalist, as it's empirically the best way to meet those goals
If you look at it empirically, the majority of people brought out of poverty (and I suspect the other metrics but am not as familiar with them) in the past few decades have been in China as the result of deliberate policies by the CPC.
We’re already there when it comes to having the industrial base necessary to fight a protracted conventional war with china. Which leaves a large ? over the US dominance over the pacific.
Y-yeah. HYPOTHETICALLY, this is something an adversary to the USA might attempt to do, and it would really kneecap the US if they were successful.
But would only happen if USA decided to totally financialize all sectors of its economy and make a small set of oligarchic corporations THE load-bearing element of its strategic capacity, leading us to chase market returns even if those returns totally kneecapped our ability to build anything at all of actual value.
While not strictly necessary, it is a great power multiplier.
It helps as it is both a gauge of the success of the strategy, and also a lever where the process can be fine tuned, eg. slowly buying stock then strategically dumping in the right time, correlated with other external shocks can have wider effect to whole industries through controlling the public opinion on specific industries.
It rewards self-destructive behavior in favor of short-term gains. Shareholders have *zero* commitment to the companies they buy shares from and will happily switch their entire portfolios on a whim. It's essentially people chasing the new shiny thing every single day.
Let's not forget it's a known fact that people with insider knowledge will profit over everyone else.
How is that efficient in any shape or form?
> If they undercut the US companies and are willing to accept low returns on their investments, then the respective USA competition will be driven out of business by their investors, because there will be other sectors to invest in, with higher RoI.
You're basically explaining one of the reasons stocks are a horrible idea for distributing resources.
It has nothing to do with whether or not it's central or distributed, it's merely the incentives they create. It's essentially Goodhart's law on steroids.
Depends what you compare it with. I grew up in the post soviet union. That system allocated resources to various monopolies who were too big to fail. Turns out allocating capital based on who can make things that people want/need to buy, and do it with a profit, multiplies said capital way faster. From this point of view, over time your initial base grows into all kinds of industries etc. That's probably why the USA won the cold war.
Until your economy congeals into various monopolies who are too big to fail, and you lose the rematch because you're so busy counting beans you stop paying attention.
A bad system is still bad even if something else is worse.
> That system allocated resources to various monopolies who were too big to fail.
Like our banks today? Like OpenAI is trying to sell themselves as so the US government bails them out when they inevitably can't pay off their debts? Like all the other monopolies that are too big to fail?
I can't see the difference.
> turns out allocating capital based on who can make things that people want/need to buy, and do it with a profit, multiplies said capital way faster.
That assumes the stock market does that. It simply doesn't and history is proof. It's also a fact that free market capitalism has consistently done worse than before based on actual numbers.
I highly suggest you read 23 things they don't tell you about capitalism. It goes into a lot more detail and helps you understand things in a broader perspective.
If we want to improve our world we need to move past the faults of the current capitalist system and the soviet union. We need better incentives. Profit has proven to be too disconnected from actual value.
