5 ms·

Outside money flows into the market, this allows it to be positive sum. For the DnD analogy, it is as if you had a cleric. Eg: IPO sells at $2, next seller bu

Outside money flows into the market, this allows it to be positive sum. For the DnD analogy, it is as if you had a cleric. Eg: IPO sells at $2, next seller buys at $4, next at $6, etc. Everyond makes money in that scenario. Eventually there can be losses, do all the losses counter balance these profits? No, because on net everything went up. If there were always trades that had losses to balance the gains, only then it would be zero sum. What's more, people convert types of holdings all the time, and it is the big players that move things. When a mutual fund allocates 1% more to stocks, or 1% less and putd that to bonds, those are very big net new or net negative money flows. So, it's not just paychecks being added in, there are lots of sources of dynamism to make the stock market system anything but closed. There is net new money flowing into it all the time.

__MatrixMan__ 3y ago
Money gets created when people take out loans which creates debt which is then traded in the markets. That's not money flowing into the markets, that's just the markets doing their own internal bookkeeping (much like D&D uses HP for internal bookkeeping about character health). If you want to convincingly argue that markets are positive sum you have to demonstrate that markets produce more than they consume in terms of something besides money. E.g. when some of the factory workers quit to go be day traders, the factory ends up producing more while consuming the same or less due to the positive effects of the investments enabled by the increased trading activity. This might be the case in some cases, and it won't be the case in others, and I don't know how to sum it in aggregate. Presumably somebody does. Whether it comes out positive or negative, asset prices are an implementation detail, not the thing we're measuring.
- seadan83 3y ago
  I'm responding to only: "> How does the market grow if all trades are zero-sum?" I'm not trying to say that markets are necessarily a net positive. But we should also not be myopic about it either. There is more to it. Firstly, money being made solely by trading is rent seeking. It's maybe even the definition of rent seeking (?) Personally I'd be in favor of tax rates in the 40% to 50% region for rent seeking (long term and short term capital gains tax IMO should both be doubled). Perhaps we agree a bit there. > Money gets created when people take out loans which creates debt which is then traded in the markets This is still net new money into the market, ergo, the market is not at all zero sum. There is new money flowing into it. That _negates_ the statement that there must be one person losing for every person winning in the stock market, it is not zero sum. Everyone can actually be making money because there is new money being injected (and the opposite can be true when money is net leaving because interest rates are high and everyone is putting their money to cash or bonds instead). Same thing happens in a Ponzi scheme, everyone can actually be making money while there is new money flowing into the system. In the example you stated, if a person borrows money against their house, they are moving money away from real estate to the market. Their wealth is net-zero in that scenario, but relative to the market - the market saw a net increase. Thus, the market is not a closed system, it is therefore not by necessity zero-sum - it's possible to have more winners than losers when trading (and/or more losers than winners too) > If you want to convincingly argue that markets are positive sum you have to demonstrate that markets produce more than they consume in terms of something besides money. E.g. when half of the factory quits to go be day traders, the factory ends up producing more while consuming the same or less. Yeah, this is what happens with IPO. Oatly is an example, they had a supply crunch, they could not produce enough milk for store shelves. With their IPO money they funded the construction of additional factories to increase their production capacity. I think people forget this, the IPO of a stock is a huge injection of money to a company, as-is whenever the company issues more stock. Amazon is another example, instead of using cash to pay employees, they used stock; which freed up cash to go to other places. Though, post-IPO, shares being traded around is arguably all just rent seeking. A company can still issue more shares too though. This very thing saved both AMC and GME; both of those companies would have gone under if they were not able to raise money by issuing stock. On the other side, this situation is not always fully pure. Plenty of companies are run by MBAs that give themselves too many shares & their sole goal is to go public so they can offload their holdings rather than grow their company. Still though, the primary reason for stocks to exist is that companies can acquire additional funding without taking out loans, they get that funding by trading ownership. That's still a thing even if there is a lot of other corruption & rent seeking relating to it. Thus, we should not be myopic it, there is more to it.
- AnthonyMouse 3y ago
  In general there are two ways for companies to make money. 1) They make something that otherwise wouldn't have been made, or make it more efficiently than the competition and then capture volume with lower prices. 2) Rent seeking; they extract higher profits from the same activity, e.g. by buying their competitors and raising prices. Traders do the work of finding the companies that can do one of these things and allocating resources to them so they can do them. When it's the first one, the societal gains are quite significant. When it's the second one, well, there are supposed to be laws against that and if it's happening then we need better laws or better enforcement.
  - __MatrixMan__ 3y ago
    I'd argue for a third category where the new thing addresses a problem that the company themselves is making more problematic (e.g. TurboTax) or where "more efficiently" involves cases where costs to the company are exchanged for costs to society (e.g. petroleum companies, cambridge analytica). I think this category represents the majority of economic activity today, which is why I'm skeptical of markets being zero sum. The result is the same though: find was to get more of (1) and less of (2) and (3).
    - AnthonyMouse 3y ago
      The third thing is just the second thing. TurboTax lobbying to avoid free tax filing is obviously rent-seeking. It might even be more accurate to call this category rent seeking through regulatory capture. Fossil fuels would have been trounced by nuclear except that they lobbied to require nuclear to internalize all of its costs (and then some) but not their own, extracting undue rents by handicapping the competition. The closest you get to a third category is Cambridge Analytica, in which case the third category would be criminal enterprises. But these rarely remain listed on the stock market; you won't find shares of the Guadalajara Cartel at your brokerage. It's the companies in the second category that do, because they're doing things that should be illegal but aren't.
      - __MatrixMan__ 3y ago
- everforward 3y ago
  > If you want to convincingly argue that markets are positive sum you have to demonstrate that markets produce more than they consume in terms of something besides money. E.g. when some of the factory workers quit to go be day traders, the factory ends up producing more while consuming the same or less due to the positive effects of the investments enabled by the increased trading activity. Price discovery would be the function of the markets that allows this. If the markets find out that iron ore production is going to crash because of a flood or something, they create demand for futures of that iron production, raising the price of iron and encouraging stability in the supply of iron via more companies mining it. These futures then provide stability of supply and price (somewhat) to the factory. Conversely, they provide stability of demand and price to the mine, who can sell their production ahead of time. I would not be surprised if most factories do employ investors, even if indirectly via a third-party supplier. Knowing that the price of iron was going to go up would be tremendously useful, and they would be able to produce their goods cheaper than everyone else if they stocked up on materials at lower prices. They're traded in dollars, but the same would be true in a barter system. Liquidity would be incredibly important in any non-monetary system; people would pay a pretty penny to be able to exchange payment in goods they don't want to something they did want. > Money gets created when people take out loans which creates debt which is then traded in the markets. That's not money flowing into the markets, that's just the markets doing their own internal bookkeeping (much like D&D uses HP for internal bookkeeping about character health). That is meant to reflect the new value being created by all of the entities in the market. If you don't add currency to account for growth, the currency increases in value equal to demand for it, making the currency itself a very attractive investment. Those loans have interest rates, so the borrowers need to be doing something with the cash to generate value in excess of the interest rate, which in turn creates value on the market. Loans backed by actual currency are dramatically more expensive to service because of opportunity costs. The borrower's interest rate would be higher than what the loan offerer thought they could get in return for safer investments. Current loan rates for practically everything are far below that. The factory benefits by having access to extra cash for cheap. They don't have to stockpile cash for a decade to open a new factory, they can borrow money and do it now at an interest rate that still allows them to keep most of the value.

__MatrixMan__ 3y ago

Money gets created when people take out loans which creates debt which is then traded in the markets. That's not money flowing into the markets, that's just the markets doing their own internal bookkeeping (much like D&D uses HP for internal bookkeeping about character health). If you want to convincingly argue that markets are positive sum you have to demonstrate that markets produce more than they consume in terms of something besides money. E.g. when some of the factory workers quit to go be day traders, the factory ends up producing more while consuming the same or less due to the positive effects of the investments enabled by the increased trading activity. This might be the case in some cases, and it won't be the case in others, and I don't know how to sum it in aggregate. Presumably somebody does. Whether it comes out positive or negative, asset prices are an implementation detail, not the thing we're measuring.

seadan83 3y ago
I'm responding to only: "> How does the market grow if all trades are zero-sum?" I'm not trying to say that markets are necessarily a net positive. But we should also not be myopic about it either. There is more to it. Firstly, money being made solely by trading is rent seeking. It's maybe even the definition of rent seeking (?) Personally I'd be in favor of tax rates in the 40% to 50% region for rent seeking (long term and short term capital gains tax IMO should both be doubled). Perhaps we agree a bit there. > Money gets created when people take out loans which creates debt which is then traded in the markets This is still net new money into the market, ergo, the market is not at all zero sum. There is new money flowing into it. That _negates_ the statement that there must be one person losing for every person winning in the stock market, it is not zero sum. Everyone can actually be making money because there is new money being injected (and the opposite can be true when money is net leaving because interest rates are high and everyone is putting their money to cash or bonds instead). Same thing happens in a Ponzi scheme, everyone can actually be making money while there is new money flowing into the system. In the example you stated, if a person borrows money against their house, they are moving money away from real estate to the market. Their wealth is net-zero in that scenario, but relative to the market - the market saw a net increase. Thus, the market is not a closed system, it is therefore not by necessity zero-sum - it's possible to have more winners than losers when trading (and/or more losers than winners too) > If you want to convincingly argue that markets are positive sum you have to demonstrate that markets produce more than they consume in terms of something besides money. E.g. when half of the factory quits to go be day traders, the factory ends up producing more while consuming the same or less. Yeah, this is what happens with IPO. Oatly is an example, they had a supply crunch, they could not produce enough milk for store shelves. With their IPO money they funded the construction of additional factories to increase their production capacity. I think people forget this, the IPO of a stock is a huge injection of money to a company, as-is whenever the company issues more stock. Amazon is another example, instead of using cash to pay employees, they used stock; which freed up cash to go to other places. Though, post-IPO, shares being traded around is arguably all just rent seeking. A company can still issue more shares too though. This very thing saved both AMC and GME; both of those companies would have gone under if they were not able to raise money by issuing stock. On the other side, this situation is not always fully pure. Plenty of companies are run by MBAs that give themselves too many shares & their sole goal is to go public so they can offload their holdings rather than grow their company. Still though, the primary reason for stocks to exist is that companies can acquire additional funding without taking out loans, they get that funding by trading ownership. That's still a thing even if there is a lot of other corruption & rent seeking relating to it. Thus, we should not be myopic it, there is more to it.
AnthonyMouse 3y ago
In general there are two ways for companies to make money. 1) They make something that otherwise wouldn't have been made, or make it more efficiently than the competition and then capture volume with lower prices. 2) Rent seeking; they extract higher profits from the same activity, e.g. by buying their competitors and raising prices. Traders do the work of finding the companies that can do one of these things and allocating resources to them so they can do them. When it's the first one, the societal gains are quite significant. When it's the second one, well, there are supposed to be laws against that and if it's happening then we need better laws or better enforcement.
- __MatrixMan__ 3y ago
  I'd argue for a third category where the new thing addresses a problem that the company themselves is making more problematic (e.g. TurboTax) or where "more efficiently" involves cases where costs to the company are exchanged for costs to society (e.g. petroleum companies, cambridge analytica). I think this category represents the majority of economic activity today, which is why I'm skeptical of markets being zero sum. The result is the same though: find was to get more of (1) and less of (2) and (3).
  - AnthonyMouse 3y ago
    The third thing is just the second thing. TurboTax lobbying to avoid free tax filing is obviously rent-seeking. It might even be more accurate to call this category rent seeking through regulatory capture. Fossil fuels would have been trounced by nuclear except that they lobbied to require nuclear to internalize all of its costs (and then some) but not their own, extracting undue rents by handicapping the competition. The closest you get to a third category is Cambridge Analytica, in which case the third category would be criminal enterprises. But these rarely remain listed on the stock market; you won't find shares of the Guadalajara Cartel at your brokerage. It's the companies in the second category that do, because they're doing things that should be illegal but aren't.
    - __MatrixMan__ 3y ago
everforward 3y ago
> If you want to convincingly argue that markets are positive sum you have to demonstrate that markets produce more than they consume in terms of something besides money. E.g. when some of the factory workers quit to go be day traders, the factory ends up producing more while consuming the same or less due to the positive effects of the investments enabled by the increased trading activity. Price discovery would be the function of the markets that allows this. If the markets find out that iron ore production is going to crash because of a flood or something, they create demand for futures of that iron production, raising the price of iron and encouraging stability in the supply of iron via more companies mining it. These futures then provide stability of supply and price (somewhat) to the factory. Conversely, they provide stability of demand and price to the mine, who can sell their production ahead of time. I would not be surprised if most factories do employ investors, even if indirectly via a third-party supplier. Knowing that the price of iron was going to go up would be tremendously useful, and they would be able to produce their goods cheaper than everyone else if they stocked up on materials at lower prices. They're traded in dollars, but the same would be true in a barter system. Liquidity would be incredibly important in any non-monetary system; people would pay a pretty penny to be able to exchange payment in goods they don't want to something they did want. > Money gets created when people take out loans which creates debt which is then traded in the markets. That's not money flowing into the markets, that's just the markets doing their own internal bookkeeping (much like D&D uses HP for internal bookkeeping about character health). That is meant to reflect the new value being created by all of the entities in the market. If you don't add currency to account for growth, the currency increases in value equal to demand for it, making the currency itself a very attractive investment. Those loans have interest rates, so the borrowers need to be doing something with the cash to generate value in excess of the interest rate, which in turn creates value on the market. Loans backed by actual currency are dramatically more expensive to service because of opportunity costs. The borrower's interest rate would be higher than what the loan offerer thought they could get in return for safer investments. Current loan rates for practically everything are far below that. The factory benefits by having access to extra cash for cheap. They don't have to stockpile cash for a decade to open a new factory, they can borrow money and do it now at an interest rate that still allows them to keep most of the value.