Daniel Davies d_squared_2002 at
Wed Aug 30 02:59:58 PDT 2000

Justin asked the somewhat existential question:

[disclaimer; I'm an equities guy. Debt markets might be a bit different, but since Justin's q's seem to be about markets for control, I'm assuming equities are more relevant]

>>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<<

Not sure that this is the standard Marxist answer; capital markets don't redistribute SV in the sense of taking it from one bunch and giving it to another. The redistribution/appropriation of SV has already occurred by the time the cashflow has become of interest to the equity market at least; not sure about debt. In a looser sense of "redistribution" as "spreading about", I guess this one goes through. But Joan Robinson really hit it on the head; capital markets are a convenience for rentiers. They provide the service of allowing claims on future SV to be turned into current consumption.

Your question (1) is discussed at length in Doug's book and I don't really have anything to add to what he sez. On the meaning &c of stock market efficiency, here's a link to a discussion between me and Enrique Diaz-Alvarez:

There have been much better discussions of the same point on lbo-talk, but they don't show up in my email outbox.

On the more general social question; the examples of Japan, Germany, Korea, etc suggest that a bank-driven system like the one you outline can be perfectly functional as a means of directing productive investment (though my FT today brings me the startling news that Germany's economic performance since 1950 has been "solid if not spectacular", along with the revelation that Paul Achleitner is on the supervisory board of Allianz and that state aids cases can be brought under the WTO).

What you're describing is a bank-driven capital market, with co-operatively owned banks. There's no reason why this shouldn't work. Think about it this way;

Under your scheme, the "bankers" get paid according to the success of the projects they back. (I personally am much happier with a utopia that still contains big bonuses to bankers than Chuck0's version). So what happens if we allow them to swap and divide projects between themselves, in order to diversify their income? Obviously, in order to facilitate this process, shares in prjects which are going badly will have to be discounted relative to already successful projects. But the bankers will have to look at the future of the various projects; it might be worth getting more of the salary stream associated with a lousy project than a smaller slice of a bigger pie.

What you've now created is a capital market, the only difference being that the claims being traded don't represent the right to extract surplus-value.

In any case, enterprises in a capitalist economy finance the vast majority of their projects using internally generated funds -- retained profit. Another variant on your idea would be to cut out the investment bank middlemen and just hand social investment funds to the existing project managers in proportion to their success.

Takeover discipline in the stock market is not the knock-down objection that I detect you think it might be. If one were to protect against managerial free-riding and embezzlement by having a democratically appointed oversight body, then decisions about corporate control would be taken by a small group of, say twelve people. Guess what; most takeover battles are fundamentally, decided by about twelve major investors; it boils down to the judgement of one decisionmaker (usually a chief investment officer for a big deal; a more junior fund manager for small fry) at each institution.

>>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.<<

Almost exclusively through examination of the books and operations of the enterprises. Lending bankers have a wholly justified suspicion of market signals of any type.

>> 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?<<

Absolutely. Remember, that there is separation between ownership and control in banks as well as other companies. I, for example, have only a mild, observer's interest in the returns made by my employer; what I care about is my bonus.

I still disagree with you on the general point re. Hayek and "efficiency" under socialism, but the need for a capital market is not one of the grounds.


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