First up, an apology for lateness- I know I said that this post would be up on Saturday, but had forgotten at the time that I would be spending my Saturday doing an 80km hike (18 and a half hours, if you want to know- it hurt). My feet have thankfully recovered since then, and since I really CBA to do a Six Nations Post given that there was only one game at the weekend (France-Ireland), it was a draw (17 all) and I only saw the last half hour, I thought I would give it a miss and concentrate on wrapping up my recurrent theme of money.
To quickly summarise what we’ve covered so far:
1) Money is an arbitrary human situation to give us a reference point for relative value
2) The economic system is based upon the world’s value being increased by doing work on raw materials, and people making money from it by the difference between the value the workers increase the raw materials by, and the amount they get paid [This differential is partly a necessary artificial creation, and is partly due to the price of labour being effected by the workforce’s size and attitudes itself- see point 4]
3) The process of people buying stuff in an economy almost invariably leads to inflation. A low level of inflation is indicative of this- a high level indicates an economy getting desperate, and a negative level a stagnant one
4) The process of value increase and inflation is necessary to balance out the human race’s resource consumption (for living resources we have reproduction- for finite ones, economics)
5) The fundamental rule of economics- when supply goes up, or demand goes down, the price drops.
I want to proceed from point 3, with a quick (and possibly overly simple and completely unnecessary) detour into exactly why economists and politicians want people buying more stuff. The explanation is simple really- every time something is bought, a process of value-increasing is completed. The money you pay for anything will always be greater than the total cost of supplying, making, processing and serving it (serving here meaning everything from customer support and IT to the bloke behind the counter taking your money), so when stuff is bought the company who made it makes a profit. This is the bottom line that demonstrates the process of value-increase and provides the money for more of it. Thus, people buying things means, in the long run, that the value of the economy as a whole gets increased. This is what causes economic growth, and thus growth is vital for our way of existence.
This is the classical way that businesses, and economies, make money- people buyin’ stuffs. There is a fairly well-accepted model for the stages industry goes through to make money in this way. Primary industry concerns the acquisition of raw materials (so farming, logging or mining), secondary is manufacturing, tertiary is the service industry (so selling things to you) and quaternary is basically R&D- the development of new products to push companies forward. In addition to this, modern-day business has a huge sector dedicated to helping the business function properly- this is why you have the IT, HR and customer services departments, whose aim is to ensure that other companies do not get the edge on theirs in competency.
However, in the last 400 years or so, with the advent of more organised, larger-scale and less geographically restricted business (think the East India Company or modern-day multinationals), a new form of business has risen up- that of the stock market. The idea is fairly simple- instead of companies building and saving up their profit over time in an effort to gain money and grow slowly, they persuade other people to give them money in exchange for a slice of the profits, as a way of picking up some fast cash. This as a concept at first seems rather flawed, as it basically involves gambling on the individual skill and potential success of both business and businessman, but it is often a far more preferential strategy. For smaller businesses, accruing some serious cash, or getting past the point where meeting rent is a struggle, could take several years that the owner does not want to spend tearing his hair out, so a quicker way of making cash is highly preferable (although on a smaller scale all dealings will be private, rather than in the madness of the stock market, and are more likely to be in the form of loans to ensure ownership of the business). On a larger scale, dealing with all the attempts to buy and sell bits of the company gets far too complicated to deal with privately, so larger companies who want to trade themselves on a larger scale will ‘float’ themselves on the stock market- basically this means dividing their company up into several million tiny bits and waiting for people to buy them. From hereon in, the bits of the company itself behave like any other commodity- as the price fluctuates up and down (supply and demand again), professional stockbrokers will buy and sell them in an effort to make money. As a company becomes more valuable, its shares go up in value and people buy them, hoping they will continue to go up. As the price falls, people sell them in an effort to make a profit, or at least minimise the loss. This fluctuation can happen rapidly, over the course of mere hours, which is why pictures of stock exchanges seemingly all consist of men in suits screaming into phones- the stock market changes very, very fast.
However, the stock market itself presents a huge problem to an economy- while the investment of large amounts of money in companies is undoubtedly vital to the proper functioning of an economy, this can all go rapidly wrong. The problem is that because buying shares in a company involves giving that company money, it makes the company more valuable and so its shares more valuable. Thus, people buy more shares in it because they see the price rising- you see the problem. At its worst, this leads to people investing in a company solely because other people have invested in the company, meaning that the value of the shares is artificially high based solely on investment and speculation- nothing concrete. The problem arises when everyone suddenly decides to start selling their (now very valuable) shares- this pulls the invested money, now the backbone of the company’s high share price, out of the company, and the price begins to fall. Suddenly, all the investors (sensing the price is about to drop) sell all their shares too (incidentally, they don’t actually sell them to anyone- the rules of the stock market say the company have to buy them back at the appropriate price) and suddenly, all the money is gone, with nothing real for the company to trade to make them money the old-fashioned way (or at least not enough to justify their high share price). Suddenly, the company has had all its investment taken away and is facing the prospect of having to pay back dozens of aggressive investors, and has no cash left.
This story has repeated itself several times over the years- it is known as an economic ‘bubble’. It first occurred on any significant scale in the ‘South Sea Bubble’ in 1720, which disgraced an entire British government, collapsed a company and sent the economy into chaos (although the speculation and willingness to buy everything just before the bubble burst led to pleas for investment in square cannonballs and ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’. Genuinely). The largest ever such collapsed was the American Wall Street Crash of 1929, which (among other things), condemned a large chunk of the richest nation on earth to living in slums, provoked massive rioting, bankrupted large swathes of Europe as well (and was arguably responsible for the rise of the Nazis), lead the Democrats to control both the White House and Congress and let Franklin D. Roosevelt show the American government that a little liberal socialism now and again can work wonders, advice that they have so far steadfastly ignored for the last 80 years. So yeah- bad thing.
This is the (now muchly belated) point I was trying to make whence I first started out upon this trilogy- the Stock Market is a mental place. While investment is part of the economy we now live in, the way the stock exchange handles it does, in my opinion, far more harm than good (I know I promised to try and keep my Views out of this blog, but this is just an analysis so bear with me). The stock market does not exist for the good of the companies being invested in, it exists for the good of the stockbrokers themselves- basically, professional gamblers, betting on the economy which controls the well-being of thousands with one aim and one aim only in mind: to get rich as quickly, easily and with the least hassle possible. Don’t get me wrong- I’m sure the majority of them are just as nice, normal people as the rest of us, but as for their trade… its not one I’m a fan of.
I’m not sure I support the Occupy movements, leftie though I may be, and I certainly don’t advocate the overthrow of the entire capitalist system. But, to all those who think they are just a bunch of stupid hippies, just look at the suicide rates for 1930 and ask yourself this- do you want to live in a world where the actions of so few can ruin the lives of so many?