Tue Aug 29 20:30:22 PDT 2000

OK, I have a business-related question for Doug and anyone up on finance. What do capital markets do? A standard Marxist answer, as I take it, is that they redistribute surplus value from the immediate extractors to others, and while I suppose that is true as far as it goes, I am looking for a less abstract account. Id like to know (1) whether there is empirical evidence that businesses raise much (how much)? of their investment capital in such markets, and if so, how, whether through stock issues or bank loans or what; (2) whether such markets--which ones, too, stock, loans, etc., are in fact reasonably efficient in some sense or other (what sense)?; and what other important effects such markets have, e.g., whether there is empirical support for the proposition I was taught in law school that the threat of takeovers helps keep management from aacting so much in its own interest at the expense of shareholders.

The reason I am interested in this is somewhat peculiar to my own interest in market socialsim, but the questions are highly pertinent to those who advocate planning. Let me explain. As many of you know, I accept the Mises-Hayek argument that a wholly planned economy would be so grossly inefficient as to preclude the high standard of living necessary for socialism.

The argument, in its short form, is that planners could not deal with the tremendous amount of information about how to match up resources to demand (needs and desires), choosing the most effective means of doing so; and would also tend to stifle technological innovation, which is disruptive of planning. As I read thee argument, this points to accepting markets in consumer goods and producer goods--goods used to make consumer goods. I don't care to get into that argument now/ I just want to explain why I am interested in capital markets.

The reason is this. The basic institutions of capitalism are: private property in productive assets, wage labor, and commodity production. Commodity produxction, which I think we must accept in the absence of a plausible andswer to Mises and Hayek, is only one of these institutions. A society with CP but lacking private property and wage labor could, I think, realize enough of core socialist values to be embraced as a goal by socialists.

I am not so worried about wage labor--labor markets--because we know these are inefficient--as Keynes pointed out, labor markets do not clear; and because I am convinced that we can be confident that cooperative production, where workers are cooperators who manage the means of production themselves and capture all the profits, instead of taking wages while bosses manage production and take the profits, would be at least as efficient as capitalist organization of production. I think the record of coops and participatory managementr, with which I am familiar, shows that.

However, the abolition of private property arguably requires more and here the issue of capital markets arises. On David Schweikart's theory of market socialism, new investment is wholly planned--there are no caoital markets. Instead, cooperatives receive grants from state banks based on expectations about profitability and other goals (job creation, ecology, community, etc.). These grants are derived from fund raised by a tax on productive assets that are owned by the state and in effect rented to cooperatives.

Their allocation is decided in broad terms by a legislative body--Congress or the state leg or whatever decides that X? of the new investment will go, e.g., to consumer electronics, etc. Then the monies are allocated as described.

The income of the managers of the state banks is tied to the success of their "investments" in meeting their goals, although the bankers do not charge interest. They are paid something like a wage by the state--statew orkers are the only "wage laborers" in this system. But the wage is merit based in that if the coops to which a banker makes grants doesn't meet its goals, she is paid less, and if it does, she is paid more. Thus the Schweickart model.

OK, my interest in capital markets comes in because I want to know whether this would work. If it it would, it is because capital markets are different from markets in consumer and producer goods, which I regard as roughly efficient if they are moderately competitive. By this I mean they provide roughly accurate information about the costs of producing consumer and producer goods, at least, more accurate information that we could get in other ways.

But why wouldn't this hold for capital markets too? An advocate of capitalism--or John Roemer, who wants public ownership and stock markets--would say that it would apply, that Schweickart's system would be a very inefficient way of allocating capital among enterprises. Thus my question, which may not be the right ones:

If enterprises in a capitalist market don't raise their new investment funds mainly through stock offerings and the like, but rather through bank loans, or if they could do so, thatw ould tends to support the prospects for the DS model. However, it can be argued that stock markets keep managers in line as explained. even if they are not main sources of investment capital/ Is that true?

Likewise if capital markets are not generally efficient, at least if stock markets are not, ditto. And do banks derive their information about who to make loans to through market signals or other means, such examination of the operations of the enterprises. DS also wants to keep bank managers in line by tyuing their compensation to success in grant-making. Is that going to do as well as operating with loans for interest, however well that is?

The question of the prospects for planned investment is also even more crucial for those who advocate global planning.

I am sure that I am missing many crucial questions and wrongly phrasing many that I have asked here.

Looking for enlightenment.


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