There has been a series of articles by Umair Haque challenging all of us to conceive a new set of institutions more apt for the creation of real enduring value. In fact, being aware of the distinction between activities that generate vs distribute wealth is crucial to reorganizing our economic activity so that it supports the truly productive. In that sense, the stock exchange as a pillar of modern economic activity is deeply flawed as we have all experienced of late, and in as much as it serves the crucial role of connecting capital to productive enterprise during the security issuing phase, the subsequent speculative trading of those securities has failed to, and one could argue that is incapable of, continuously evaluating the actual worth of the enterprises the securities represent. A conceivable mechanism to address this shortcoming of the current exchange system would be to restrict the trading of all shares as taking place between the issuing corporation and the security holder. If additionally, corporations were allowed to counter any and all trade requests, then the share price would reflect the convergence between the company's assessment of its own worth and the public's perception of that worth. A resulting behaviour would be that companies would need to maintain a more solid liquidity position at all times, and companies would be more cautious to pretend they are worth a fortune when there is little to back up such a claim. Yes, such a system would lead to slower growth, but primarily because it would severely restrict speculative growth disconnected to the creation of value, which inevitably turns the stock market into a Casino. As Jeremy Grantham eloquently points out, the dual standard of the federal reserve of not intervening when markets are irrationally overinflated and rushing to the rescue when the bubble bursts, results in a self-perpetuating boom-bust cycle that is damaging to both long term investment and value creation. Speculation only benefits the speculators but their actions are damaging to society as a whole.
If such a system of non speculative investment was in place, it would open up the possibility of making long term investments in an individual's equity. If you think about it, when we are born in a wealthy nation, we are entered into a contract with the state. This contract, to which neither ourselves nor our parents have any choice in opting out of, states that I, the government of X, will provide you with an infrastructure, in some cases an education, and a system of law and order that includes ensuring that your home will meet some minimum (if rather low) standard. In exchange, you, little newborn, will grow up a hopefully productive member of society and while you will have the right to occasionally choose the people who craft our elaborate set of rules, you will also have the obligation to pay Me, the government, a healthy fraction of all monies you ever earn in the form of Taxes. What this amounts to for all intents and purposes is that your government owns a piece of your personal equity equal to the fraction of your earnings that you pay in taxes. Even more, this shareholder of us all is so strict that they have enforced an annual dividend on everyone to keep the whole thing going. But you know what? it really isn't so bad. When you consider the option, which is the contract offered to the newborns in poor countries, you realize that this stately shareholder of ours is not such a bad guy after all. We are offered a system of institutions and opportunities that allow us to make something of ourselves. They are offered a void of opportunity, a lack of services and a glum future, even if at the end of the day they don't have to pay much in the way of taxes.
All this was a somewhat convoluted preamble to say that given an appropriate and sufficiently constraining set of rules that discourage speculation and divorce from real value creation, private corporations could have a mechanism to invest in personal equity. We currently allow individuals to issue more bonds than they can manage in the form of debt, yet other than through incorporation, we don't have a means to invest in the future of individuals in a traditional sense. It sounds neocolonialist and ugly, but if we encouraged private capital to invest in the health, education, nutrition and creative potential of people, with the promise of participating in a share of their success, we could have a marriage between the corporations drive to maximize returns and our human desire to contribute to the betterment of others. I believe the place to start is reforming the exchange of securities in such a way that it discourages speculation, encourages investment in the creation of enduring value, but most of all by devising a mechanism for capital to be truly invested in people. People are, after all, the undisputed main source of our collective wealth and yet we are allowing for the overwhelming majority of that resource to go underutilized because we lack the mechanisms to invest in what matters the most: our own humanity.
