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Now I'm no economist. I'll state this right off. I doubt any of you chaps are either. However, I know a number of you probably have considerably more knowledge than me about the field, despite that. I've got a query, and I'm hoping some of you chaps will be able to help me with it to an extent.

Essentially, as things stand, the economy of the Western world runs on stocks and shares, publicly quoted companies, and the stock exchanges. When a company reaches a certain size, it sells shares in itself to raise capital quickly and efficiently, in order to allow it to expand quickly. However, this in turn renders the company vulnerable to the vagaries of the stock market, and nasty things like asset stripping.

So. What I would like to know, is whether the system of stocks and shares is truly essential, or whether it is potentially possible for a large scale economy to run without them. For all companies to be essentially private companies. Surely this would reduce the vulnerability of the various economies to boom.bust cycles substantially? I recognise that it would be more difficult to raise capital quickly (you'd need to rely on bank loans), but the stocks and shares system was not in existence forever, and trade and business have happened long before they came along.

If I recall my history correctly, stock companies were started in the colonization era to limit the investments one individual would have to place into funding the expedition. By adopting the stock system, as you said, companies were able to raise money quickly, and distribute out the weight, so the failure of an expedition/company would not completely ruin the individual who had funded it.

In my opinion, an organized stock market is--if not 100% vital--definitely important to the functioning of the modern economy. While you may be right in saying that switching over to 100% private companies could reduce the impact of the vagaries of the stock market, and the cycles that causes, but it also opens the doors to much larger problems.

As you said, without the stock system to allow for individuals to privately invest limited sums, investment would have to come in large chunks from banks or wealthy individuals. While this would prevent the vagaries of the stock market, it also means that when a company collapses, it will take these large chunks of investment out with it. Spin this up to a big enough company collapsing, and taking enough money with it out of a large enough bank.....well you can guess where that goes.

So, to answer you question, would the economy be able to function without stocks? Yes, but the boom crash cycle would still exist (imo, the boom crash cycle is a part of the capitalist system), and its peaks and troughs would likely be more extreme than they are now.

Interesting. Thanks for replying Chris, discourse with you is always thought provoking.

I'm not sure your thoughts on the damage caused by big companies collapsing are necessarily correct though. If businesses only expanded by the means of loans and private finance, than generally speaking, only those companies with good business plans/those that were already showing good profitability would even be able to secure large loans for expansion in the first place. Add that to the fact that big companies collapse all the time under the stock market system, and I'm not sure how the impact would be any greater under a private business system than under a stock market system.

So yes, I'm not sure I agree with your logic.

Ketara wrote:Interesting. Thanks for replying Chris, discourse with you is always thought provoking.

I'm not sure your thoughts on the damage caused by big companies collapsing are necessarily correct though. If businesses only expanded by the means of loans and private finance, than generally speaking, only those companies with good business plans/those that were already showing good profitability would even be able to secure large loans for expansion in the first place. Add that to the fact that big companies collapse all the time under the stock market system, and I'm not sure how the impact would be any greater under a private business system than under a stock market system.

So yes, I'm not sure I agree with your logic.

Why thank you! It's always nice to have an actual discussion rather than an online flamewar.

Now, I do agree that only those companies that could show good profitability and business models would be granted loans to begin with (something that I think would be bad in and of itself, since it would discourage risk taking with investments,) we still have to consider that people aren't perfect, adn even a company with the best plan can and will fail.

As for the fact that companies do collapse in the stock market system, I'm not going to dispute that, they do, and investors do lose a lot of money. However, if we were to switch over to a fully private business system, the individaul losses from a company collapse would be much greater. Instead of alot of investors losing a little money, we'd see a few investors losing a LOT of money. While such things do happen in the stock market system, the loss is spread out more, reducing damage to the economy as a whole. As I said earlier, with a big enough company collapsing, and a big enough bank having a big enough investment, a major collapse could hinge on only a few companies.

Of course, if you allow small enough investors to put money into companies to diffuse out the damage, you'd have a stock market system in all but name.

Ketara wrote:
So. What I would like to know, is whether the system of stocks and shares is truly essential, or whether it is potentially possible for a large scale economy to run without them.

Sure, there are a number of large, privately held firms.

You can also run cooperatives in certain regulatory environments, Mondragon is the classic example.

Ketara wrote:
Surely this would reduce the vulnerability of the various economies to boom.bust cycles substantially?

While stock price is important, it is arguable that physical assets are more so (Cisco Systems is still operating, for example) and while a plunging stock price will create problems for any corporation, the net effect of their ability to do business is always going to be dependent on the system in which they operate.

Ketara, I think you're putting the bull before the horns when it comes to market activity and economic activity. The stock market didn't create the business cycle, that existed long before we ever had stock markets. In rare cases market activity has flowed through the economy in a significant way, but in most of these cases the market merely provided the catalyst for something that was going to happen anyway. Most of the time the market's growth and decline is reflecting good or poor economic activity elsewhere.

I suspect you’ve also got a bit of a false understanding of asset stripping, and the other kinds of operations that popular media considers ‘dirty’. Functioning, healthy companies making a decent return don’t get bought up so they can have their assets stripped. Buying up a company is a very expensive process, and involves paying far more for each share than they’re worth on the open market, and in a functioning company those assets are going to be worth more than they would be for sale (the ability of a company to get more economic benefits out of an asset than it can be sold for is basically why a company should exist). So a company will only be vulnerable to asset stripping when it is failing to deliver the results its asset should be delivering. It generally only happens to companies that are losing money or barely making a profit despite having many highly valuable assets, and is exactly what should happen – those assets are put into more effective companies where they can be put to better use.

Finally, as has already been pointed out, there are a number of private companies that are very big indeed. The main difference is the rate of growth of these companies, as they grow based on retained earnings and new private investors, they tend to grow a lot slower. Which is fine for certain kinds of companies, but not a good option for companies whose expansion needs more capital than private investors and retained earnings can provide.

The end result of all that is that the stock market is just another option, that companies can choose if they want. If their business model can function under slow, steady growth then they’re still free to choose that model. But if the the company needs massive (think of a new mining operation, they might have a very valuable claim but they don’t have the half a billion odd needed to bring their operation up to commercial viability) - then they can access the stock market to get those funds.