UPDATE: 06/13/09
Some shoe-drop news.
Larsson, Stieg. 2005. The Girl With the Dragon Tattoo. London: Maclehose: 519-520.
Sunday, June 7, 2009
Larssonism
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7 comments:
It would be a shame if this blather kept the more economically sophisticated away from the book, which really is quite good.
He's not at all anti-Capitalist, if you read closely. He likes productive, entrepreneurial businesses just fine.
And you can ponder how productive, entrepreneurial businesses raise capital, value themselves, or provide a return on the entrepreneur's efforts without stock markets.....
Much too sophisticated for the likes of me.
Tulkinghorn, there are always unregulated over the counter transactions that can occur. Those are soooooo much more honest and reliable than regulated and transparent stock markets.
Though in reading the analysis in the article posted, I don't find much do disagree with. I'll have to check the larger piece.
I think he is doing a service separating the genuine health of an economy from the current health of a stock or market index. The market price of a stock is a reflection of the perceived value of a company, but it has little to do with its capitalization.
The only stock that directly affects the capital of a firm is the capital gained from stocks (or bonds) when issued at the par value. Any value that the market valued stock has over that is good for the investor, but has little direct affect on the firm.
I say direct effect because most firms use growing stock value as a substitute for dividend payments, and doing this allows them to keep more retained capital at the end of the financial year. That said, we too often view the health of the stock market as a reflection of the "real" health of companies and this can be a bad thing. Much of the current recession is not due to a lack of capacity or real lack of production. It is due to fear by credit default swap investors, who lost a lot of money due to the housing bubble, combined with the restrictions this has caused in the credit markets. Add to this the fact that the average consumer sees the wealthy freaking out and thinks this means they should worry too and you have a recession.
Yes we are in a recession, but we are in one where the capacity to grow out of it is great once certain things are understood. Chief among them is that there is no real crisis in creativity and ingenuity, only in the willingness to invest. Once people are willing to invest, Sweden (and the US) will be fine. This will be good for everyone.
From the Time piece, "And without participants' exercising judgment--applying research, heeding a broker's opinion--markets stand no chance of ever getting prices right."
This is at the core of Efficient Market theory. The assumption is that markets are efficient when the above is true. It is one of the weaknesses in the theory as when one trusts the market is efficient and believes that all prices reflect all current information (without doing research or personal verification) the market becomes inefficient.
The market is the best tool for economic decisions, but it requires the free flow of information, and diligent participants, to work at its most efficient. This is Macro 101 stuff.
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