Thought Exercise 1.01- Abolishing the Stock Market

[Cmdr_King]

Random conversation generated in chat.  Yes, I really do have these sorts of thoughts.  Whether I should share them more or less I dunno.

<CmdrKing> Y'know, I really am crazy.  I keep having this recurring idea that a great way to improve economic health would be to abolish the stock market as part of a plot to put an end to corporate profits.  The core idea is to put into place laws requiring profits at a corporate level be distributed to employees therein.
<Kotono> Uh...
<CmdrKing> This obviously ignores that the logistics of such a thing are completely impossible.
<CmdrKing> The fascinating part is whether it could even theoretically do any good.  It's certainly novel at least.
<Hal-work> Not really, what are you going to do to replace investment capital?
<Hal-work> The point of the stock market is to get money from investors so you can improve the business.
<CmdrKing> (It's logistically impossible because in order to do it you'd have to require companies to buy back their publically traded stock, and basically no one can afford THAT.)
<Aya> Enforcement of profit distribution is also a ridiculous notion on concept unless you're going to regulate every last thing, and it's not really capitalism anymore if you do.
<CmdrKing> Yeah, that's definitely one of the issues I hit in thinking this out.  Choking out the expansion opportunities afforded by IPOs and so forth isn't really desirable.
<Hal-work> True enough, that's more socialism than anything.
<CmdrKing> Yeah, I suppose so.
<CmdrKing> Like I said, it's basically a thought exercise.  One I'm pretty sure requires being crazy to actually formulate.
* Smashy (Smashnuke@h68.35.31.71.dynamic.ip.windstream.net) has joined #rpgdl
<CmdrKing> I did have this idea about basically allowing corporations to issue bonds to alleviate the investment capital issue, though it's less efficent in more ways than I probably know I'm sure.
<Aya> It is socialism.
<Aya> You are basically describing it as though the government ran and regulated everything.
<Aya> I mean that's a valid model of thought but it's not exactly a "cure all" to be applied to the current system.
<CmdrKing> Certainly the origin of this line of thinking is pretty pure-blooded socialist.  It's struck me that capitalism isn't working quite right, because money has this way of just circling around the top stagnant rather than really circulating through the system.  Maybe I'm wrong.  I'm certainly not an expert.
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<Aya> I think trickle down theory is a load of bull, sure, but I don't think complete socialism is the road to salvation either. <_<
<Aya> Money definitely does concentrate in the land of a top few percent. Works like that pretty much anywhere in the world.
<CmdrKing> Well no.  Government isn't competent enough for that.
<Aya> Even if government was competent enough for that, people won't be.
<CmdrKing> I'm not sure I see your distinction there.
<Aya> One of the biggest issues about socialism is getting everyone to buy into the concept of "for the greater good" and working equally hard, which is just a pipe dream.
<Aya> Even if government was 100% non-corrupt and did all the regulations right...
<Aya> It would not necessarily mean the system would work.
<CmdrKing> Ah.  Yeeaaah, equal profit sharing, just to call back where we started, would be a bad idea for that reason.  By the same token a more advanced system creates just that much more potential for inefficency, corruption, etc etc.
<Aya> Yeah, you're assuming an ideal meritology-based system which would be practically impossible to scale properly.
<Aya> Taking the best of both capitalism and socialism, as it were, which would assume flawless human judgment.
<Soppy-Ladykiller> I just wish there was more of a focus on long-term or sustainable profits rather than higher short term gains
<Aya> Japanese companies do it. >_>
<Aya> But the thing is, here, a company shows a loss on their quarterly report and the CEO gets thrown out to the streets.
<Aya> So it's not entirely corporations' fault - the mentality of a lot of stockholders is an issue too.
<Aya> People expect easy money when they have lots of money.
<Soppy-Ladykiller> Not always, but yeah.
<CmdrKing> Of course, going back to pure-blooded capitalism, it seems like more companies might realize that stuff like profit sharing, higher wages, and the like are for multiple reasons ultimately in their best interest.  More motivated workers, higher buying power in the workforce, and ultimately more people buying more stuff.
<Aya> I exaggerrate, but you get at the picture I'm painting.
<CmdrKing> But no.  Ah well.
<Aya> Yeah, you just eventually run into the problem that people are corrupt.
<AAA> I have an idea
<AAA> Why don't we just make being poor illegal
<AAA> Problem solved
<Soppy-Ladykiller> I think it's less corrupt and more greedy
<CmdrKing> I'd consider greed a form of corruption.
<Soppy-Ladykiller> Not always, but they do often walk hand in hand
<CmdrKing> Oh yeah.  That whole "duty to the stockholders" bit, and the short-term mercenary mentality it breeds, was one of the other factors into that whole train of thought.  No matter how you want to solve things, you really have to purge that sort of thinking.
<Aya> Eh, greed is such a vague term.
<Aya> Arguing it as motivation to succeed like Republicans do is a valid way to see it. There's just excess and it spills over to corruption, IMO.
* Ash|School is now known as Ashdla
<Soppy-Ladykiller> I usually draw the line between simple greed and corruption at the line between legal and illegal
<Aya> Taking a huge ass bonus and salary when your company is losing money everywhere is not illegal.
<Aya> I'd find myself hard pressed to not call it corrupt, though. Eh.
* CmdrKing sets mode: +v Smashy
<Soppy-Ladykiller> It's not a perfect system, yes
<Soppy-Ladykiller> There's also the ethical and unethical line too
<CmdrKing> Anyway, certainly greed in the simple sense of "hey, I want stuff" is a fundamental fact of human nature.  It's when greed becomes a pursuit of immediate gratification that spills over into all aspects of life that we run into problems

Anyway, seemed interesting enough to share with the public so to speak.  Thoughts?

[Grefter]

You guys can keep CK, I don't think he helps the communist movment.  Edit - This is a joke because I don't have time to seriously respond before work.

[SnowFire]

Well, I think the two proposals in the opening sentence are rather different: Abolish the stock market, and require profits to be distributed to workers.  You could probably do 1 without 2, though 2 would probably take the stock market down with it.  2 is a rather huger idea than 1, after all.

So, why is requiring profits to be distributed to workers a bad idea (according to neoclassical economics)?  It's all about the framing of the problem.

Socialist: The factory employees 10 people.  It makes 100 dollars net ignoring labor costs.  The boss gives his employees 5 dollars each and keeps 50 dollars for himself.  Some of that 45 extra dollars the boss is collecting is exploitation, unless the boss was somehow doing ten times as much work as each employee.

Capitalist: But wait a second, step back to before the factory was made.  The workers were getting 2 dollars from their cottage industry or subsistence farming or whatever.  The boss invested his own money to build the factory, and offers the workers an easily far better wage than what they got first.  The workers are making more money than they would without the factory, and the boss gets a big return to help recoup his investment and to reward him for enriching both his workers and society.  Everyone's happy and better off than they were before with no factory at all.

Requiring profits to be distributed to workers would have controversial effects on businesses that are currently existing.  (There are people who would argue that this would tank even pre-existing businesses, but I'm actually somewhat skeptical of that, and it's a messy issue.)  However, I can say that I do believe that it's uncontroversial that it would have disastrous effects on new industry being created.  After all, it takes money to start a business - most WILL operate at a loss at first as they wait for customers to find out about them, but they still have to pay for the location / utilities / employees / advertising to let people know they exist / etc.  What's the point if whoever invests the money is *guaranteed* to not get a return out of it?  Any profits the business makes in the long-term will just go to the employees.  Nobody will buy stock and no bank will give them a loan because it'd just be charity.  (It gets sticky if the manager/CEO and the investor are the same person, but this isn't common, and presumably setting a very high salary for yourself would be looked upon badly.)  There is exactly one way to get new businesses / expansions of old businesses under such a system - for the government to take charge and sink in the funding.  So yeah, hello socialism, which is another debate.  But basically this proposal isn't a third way, it's diving straight into the deep end.

As for the other proposal, perhaps abolishing the stock market without requiring profits to be distributed to the workers: This would be interesting, but not as different as you think.  The difference between a corporation selling stock, selling a corporate bond, and taking out a loan is actually just a matter of degree.  A bank with a loan has a lock-in on getting paid back even if the company goes belly-up, as they get first dibs at the liquidation sale.  They also come out fine if the company does poorly and simply floats along at par thanks to the fixed rate of interest.  On the downside if the company does well they are still only paid that fixed amount of interest on the loan.  If you buy stock in a company, you're in for the long haul, as you're a part owner now - even if the company makes a profit, they're likely to just reinvest that profit into themselves to expand at first.  And if the company goes bust, you get nothing.  On the bright side if they make amazing profits you can get paid back at double, triple, ten times your initial investment easily, far better than the bank loan.  If you forbade people from buying stock - which would be weird, as presumably it'd still be legal for a company to be held by more than one person - I imagine that people would create new high-risk loan vehicles to replace stock with.  Loans with terms like "will be paid at x% interest rate in a bad year (where x is near 0), and y% in good years (where y is huge)."  I guess you could then ban these too, but it'd get messy as to where the draw the line.  (Amusingly enough this would be the EXACT REVERSE of Islamic banking, as Islam forbids interest - so Islamic bonds tend to be basically stock purchases with safety valves stuck in.)

Also I'd like to point out that if you think about the idea of corporations without the generally negative connotations the word has nowadays, they sound pretty cool.  Imagine this: Rather than requiring a bunch of stodgy financiers in top hats to fund a new venture, how about if you harnessed a bunch of ordinary people!  Each can contribute their own little bit, and they can own a piece of the result!  It'll be just like the Obama campaign.  "Corporation" and "cooperative" are from the same root, after all.

[Cmdr_King]

I dunno, I can't say I'd consider a company as making a profit as long as it had the outstanding debts incurred in startup hanging over its head.

Beyond that I'd actually be more inclined to wonder how many businesses are actually corporations at startup.  Although I suppose that once you get sufficently wealthy partners starting a business they'd probably want to skip straight to the safety net of the separate legal entity.

(Yeah, as this is more meant to prompt thinking, I don't really want to make rants without exploring questions as they're raised.)

[SnowFire]

Hmm.  That could certainly be done.  Just bear in mind that part of the reason that businesses are able to raise so much cash for expansion by having a public stock sale is due to the huge return possibilities if the business does well, so there'd still need to be some vehicle for long-term, high risk loans to replace stock.  Still, you could certainly require them to be loans and thus eventually expire, and maybe even cap the amount they could pay out a la usury laws (say 100% for an established business, 500% for a small enough one).  These loans could beat the employee payments, and still provide a suitable incentive for investment in new things.

The only problem: this does interfere with some high-risk investment strategies.  As an example, if I'm a Silicon Valley venture capitalist, a solid investing strategy might well be to invest in 100 tiny tech startups.  80 will fail and lose my whole investment, 10 will break even, 7 will succeed and give me back a reasonable return, 2 will be big successes, and 1 will be the next Google.  Problem is that with the loan payments capped, that next Google might only be as profitable as the big successes, which might well turn this entire investment strategy from "risky but positive expected value" to "negative expected value." 

Also, another thought about giving the profits to the employees.  You might well want to cross over into having employee-owned companies by law at that point, because otherwise I imagine there will be endless lawsuits between the employees and the employer about money being held in reserve / for investment and that isn't being distributed, and profit-turned-into-salaries money.  The accounting in general would be tricky, actually.  Here's the issue I'd forsee: take a restaurant.  It's profitable as it stands, and the employees are doing well.  The owner wants to expand, and indeed, with his know-how, a second restaurant opened in the town next door would likely be profitable.  Can he use funds generated from the first restaurant to do this?  This is functionally giving a pay cut to himself and all his employees to do so.  I suspect that this might be problematic, so it might well be easier to use the above strategy of just taking out a long-term loan to finance the new restaurant entirely.  Still, it's kind of weird that he can't have the business "loan itself" the money like can currently be done.  (Or maybe the business can, but the employees probably wont' be happy - if the new restaurant is just as profitable as the first, the only noticeable effect for them will be their wages dipping for a time while preparing for the expansion, then going back to where they were before.)  Now, here's the really weird thing.  Suppose the business wants to expand to a third town that's smaller.  They can use the loan mechanism above to do so, sure, but at this smaller town, the profit will only be half of what's had in the first two successful restaurants.  Guess what...  despite the fact that the third restaurant is making money, and providing a service to its community presumably, the employees in the first two restaurants take a pay CUT to allow this.  After all the business is only making 2.5 as much money as with one restaurant, but now has three sets of employees to pay.  This is just bizarre.  Of course the response of the employees will be to encourage the third restaurant to open as a different business officially, even it has the exact same manager.  This may be feasible in the case of restaurants, but is a lot murkier for corporations where their parts aren't as easy to untangle.