What would happen if we banned the stock market?

[Rye]

I was wondering in a rather whimsical style what it was like before there was a global stock market, and whether it would be so bad if we abolished the whole thing as it stands? Other than the obvious stuff of economies as we know them crashing and soforth, assuming there was a stated, agreed buildup and cutoff for stock trading, where afterwards, they'd be banned outside of state or individual investment?

Would it reduce the scale of the companies to nation-state levels and thus render everything a bit more manageable and stable? States could invest in say, steelworks when they need steel for public works (and employment in such an area), and the companies would serve the shareholders as usual. Also, has this been tried before? I'm guessing communist systems abolish such systems since they have total state control of the economy. I'm not proposing a communist state per se, but one with a market made up of companies that can only invest in new buildings, technology, etc based on money they already have from having sold goods already or from loans they have a good chance of paying back based on how much money they make. Has that ever been tried?

[Guardsman Bass]

So, are you basically arguing for the elimination of the concept of "shareholding" with regards to corporations? From your last line, where you describe companies only being able to invest in new stuff based on either loans or the past capital they've accrued, that seems to be it. Does that include bonds?

You need to clarify more what you mean when you say that stock-trading would be banned outside of "state and individual investment". Does that mean that a person could buy bonds in a company (basically, IOUs issued by the company in exchange for getting the money back later with interest)? Could the state take equity in a company? How would that equity be represented other than stock (which is a share of ownership in the company)?

[K. A. Pital]

Yeah, one should clarify what rules for stocks and capital in general are created. The free selling and buying ("market") is eliminated, allright, but there's a huge many other types of transactions with capital. Which are banned, and which are not?

[Starglider]

So, are you basically arguing for the elimination of the concept of "shareholding" with regards to corporations?

The vast majority of companies are not listed on any public exchange. I agree the premise needs clarification but it is not inherently unreasonable.

[Guardsman Bass]

So, are you basically arguing for the elimination of the concept of "shareholding" with regards to corporations?

The vast majority of companies are not listed on any public exchange. I agree the premise needs clarification but it is not inherently unreasonable.

Oh, I agree - sorry if that wasn't clear. You'd basically be eliminating one of the largest types of investment vehicles in the world. That will hurt some companies' ability to raise funds (since they'd have to sell bonds and/or qualify for loans instead), but most companies' source of financing wouldn't be directly affected.

I suppose my other question is "How will ownership of a company that is currently denominated in stock evolve?" Think of a major corporation whose ownership is split up under stock and listed on a major stock exchange - like Microsoft, or General Electric. Who owns these companies if the sale and trading of stock is outlawed?

[Surlethe]

What sort of market are you looking at eliminating - public offerings entirely, or simply people swapping stakes in companies? What about bonds -- are governments and companies no longer allowed to sell debt to raise money, or are they no longer going to be traded publicly? Like Stas said, you need to considerably clarify this, since the financial system is so complex.

My gut reaction is this. Stock markets spread risk and wealth, limit liability, generally permit efficient distribution of financial capital, and serve to let companies know what public opinion is of their value at any given time. Moreover, they generally do this automatically. It makes more sense to regulate them to mitigate the damage they can cause (e.g., stupid-ass bad debt trading) while trying to keep as much of their benefits than to do away with them entirely.

[K. A. Pital]

If seen as a measure of breaking down capital mobility (crushing down international capital flows), this can be done without banning the stock market, just ban international capital transfer or make it so painstakingly hard to be not worth the effort.

[Guardsman Bass]

If seen as a measure of breaking down capital mobility (crushing down international capital flows), this can be done without banning the stock market, just ban international capital transfer or make it so painstakingly hard to be not worth the effort.

That's a good way to impoverish the Third World, and stock many developing economies in their tracks. Little or no international capital flow means very few investments in Third World countries (China would have been fucked severely under this system), and next-to-no sources of hard currency for the Third World if the Developed World decides it wants to keep its agricultural subsidies and tariffs. Even if they got the technology to industrialize and develop, they'd have very few ways to pay for equipment and the materials that they don't have in order to as such.

In fact, the only ways I can imagine a Developing Nation getting hard currency under this type of system would be if

a)They taxed foreign factories operating in their borders, exporting goods back to the Developed World (assuming they could set up such factories with little-to-none international capital flow). Of course, since there would be quite a few impoverished locations in this system, the companies could play countries off against each other, to see the absolute minimum amount of payments they could in taxes to the host countries.

b)They exported a scarce resource which the Developed World absolutely has to have, and demand hard currency for it. Good for oil states, and other scarce resource states - bad for everyone else in the Developing World.

c)Hand-outs. Basically, either aid agencies or Developed Nations giving them hard currency for one reason or another.

[K. A. Pital]

That's a good way to impoverish the Third World

They already are impoverished. The longer they do nothing about domestic industry, the poorer they will get. Their poverty relative to the First World has grown. China and India would be fucked.

However, that would just mean there would be a set of internal capital markets and still remain international market for goods, except capital. So after some time, the nations will learn to live with it.

Would it require major suffering? Yeah. Would the new system be superior to the modern one? I seriously can't say. For once, the Third World governments will only have domestic markets to rely on and thus a direct impetus for industrialization is created. On the other hand, immediate impoverishment...

[Surlethe]

If seen as a measure of breaking down capital mobility (crushing down international capital flows), this can be done without banning the stock market, just ban international capital transfer or make it so painstakingly hard to be not worth the effort.

Instead of banning, it would be easier to do this simply by taxing international capital transfers. That way governments would at least get some money out of the deal while they watch their economies adjust. (I'm not sure what the adjustment would look like, but I assume it would involve sharp economic downturns.)

Edit: If we're looking to slow down international capital, I have to question why stopping it entirely is preferable to slowing it down considerably. The method of taxation I outlined above would significantly benefit the government while still decreasing capital mobility; if it is stopped entirely, several revenue sources dry up while the economy tanks.

[K. A. Pital]

I'm just discussing the implications of such a ban; it's clear that simply taxing it in such a fashion that capital flight becomes untenable, or at least the government is compensated for the capital loss is better.

[Guardsman Bass]

They already are impoverished. The longer they do nothing about domestic industry, the poorer they will get. Their poverty relative to the First World has grown. China and India would be fucked.

Under the new system, they would - and they represent more than 3 billion people between the two of them. Africa is the main area that isn't doing well under the current regime, and I doubt they would do much better under the new one - they lack not only the capital, but usually the technology, materials, and skills to do more than some minor industrialization in most of these countries.

However, that would just mean there would be a set of internal capital markets and still remain international market for goods, except capital. So after some time, the nations will learn to live with it.

A set of small internal capital markets, which tends to hamper poor countries - there's very little for their prospective industrialists and businessmen to borrow for starting up new enterprises (plus the whole issue of governments needing to borrow money from their respective bonds markets), and if the Developed Nations decide to hang on to agricultural tariffs and subsidies, they have essentially no sources of hard currency to buy any imported goods or machinery unless they have access to a strategic resource to trade.

Would it require major suffering? Yeah. Would the new system be superior to the modern one? I seriously can't say. For once, the Third World governments will only have domestic markets to rely on and thus a direct impetus for industrialization is created. On the other hand, immediate impoverishment...

It would probably be worse, but the situation would vary from country to country. Small, poor countries with no strategic resources and little existing capital would be fucked completely, but bigger countries, like China as it is now (although they would have been fucked if this was in place 30 years ago) would probably survive (they can still import and export goods, and thus buy new equipment and technology), but I doubt they would grow very quickly, if it all in terms of living standards and GDP.

Instead of banning, it would be easier to do this simply by taxing international capital transfers. That way governments would at least get some money out of the deal while they watch their economies adjust. (I'm not sure what the adjustment would look like, but I assume it would involve sharp economic downturns.)

There have been some proposals along this line, like the Tobin Tax IIRC (which would place a transaction fee on currency exchange transactions).

To be honest, though, why would you want to discourage international capital flow even in this system with no stock trading? The flow of capital has been tremendously important throughout the entire process of Industrialization, going back to the Industrial Revolution and the 19th century. British capital, for example, was one of the primary sources of funds under-writing the initial phase of America's Industrial Revolution.

[K. A. Pital]

The flow of capital has been tremendously important throughout the entire process of Industrialization

Perhaps because of capital flight? After all, not a few poor nation-states were even further ruined by capital flight severely (Argentina for one). A capital more solidly tied to the nation-states bourgeois' (as opposed to the transnational), at least, would be more stable in case of market volatility. It would also be heavily integrated into the domestic industry, making the issue of removing it a non-trivial one.

Essentially, this action forces the citizens of the nation invest in the nation, and not into other nations' companies.

[PainRack]

Perhaps because of capital flight? After all, not a few poor nation-states were even further ruined by capital flight severely (Argentina for one). A capital more solidly tied to the nation-states bourgeois' (as opposed to the transnational), at least, would be more stable in case of market volatility. It would also be heavily integrated into the domestic industry, making the issue of removing it a non-trivial one.

Essentially, this action forces the citizens of the nation invest in the nation, and not into other nations' companies.

Why? By banning capital investment, you not only abandon finanicial investment, but the physical investment in capital that is derived from that. Factories, land, machinery and other form of FDI are physical and would easily provide value to the community even if they're sold. The problem rests in the subsidising of such physical investment, such as cheap utilities, free land, no taxes and poor environmental/labour laws that Third World countries adopt so as to attract international investment and industrialisation.

Without such mobile capital, East Asia would had been incapable of industrialising to the extent they did. Look at India for an example where restricted capital had hindered their own economy.Certainly, various small countries such as Taiwan and Singapore would had been utterly incapable of building up an industrial network that has facillated their modern lifestyles and economies as they would be incapable of deriving the capital required for industrialisation.

[K. A. Pital]

Why? By banning capital investment, you not only abandon finanicial investment, but the physical investment in capital that is derived from that.

Foreign investment. I never said as much about domestic investment.

Without such mobile capital, East Asia would had been incapable of industrialising to the extent they did.

On the other hand, arguably Latin America and post-Soviet nations would not be de-industrialized and economically wrecked to the extent they were.

[Guardsman Bass]

Why? By banning capital investment, you not only abandon finanicial investment, but the physical investment in capital that is derived from that.

Foreign investment. I never said as much about domestic investment.

Not every country has access to a significant domestic capital market, never mind one large enough to finance industrialization in the country.

[K. A. Pital]

Not every country has access to a significant domestic capital market, never mind one large enough to finance industrialization in the country.

There is always the government, which can amass the necessary funds by taking loans from other nations. It's also not a situation of some sort of full autarky - trade of goods over border is still happening.

[Guardsman Bass]

Not every country has access to a significant domestic capital market, never mind one large enough to finance industrialization in the country.

There is always the government, which can amass the necessary funds by taking loans from other nations. It's also not a situation of some sort of full autarky - trade of goods over border is still happening.

But there's the problem - for your government to get those kinds of loans, they usually have to be able to pay them back in hard currency (at high interest rates). It's getting the hard currency that is the problem - with very limited international capital flows (meaning none of those factories in special Export Zones like they had in China), the only way your country will get hard-currency is

1. Exporting some goods. This is fine for the "strategic resource" countries - they get hard currency that way. Not so good for the countries that can only export, say, agricultural products (and industrialized countries tend to be fond of agricultural trade barriers) - very little hard currency will be flowing in.

2. Money sent home by relatives working in the First World (assuming this is allowed under the international capital flow ban, and it probably isn't).

3. Whatever hand-outs your country (and government) gets in terms of direct aid.

4. Illegal activity (like drug smuggling, etc) that said third-world country government turns a blind eye to.

[K. A. Pital]

Yeah, just disrupting the international capital flow in all directions will lead to unpleasant consequences. On the other hand, the poorer countries in our example - those which are "invested in" - can utilize some sort of "one-way airlock" laws which still allow some forms of investment (China's special zones - why not, they are isolated), but most of the capital is controlled and cannot move out of the nation.

After all, we only have to ensure we get something moving in to build machines and plants and tools. We don't have to care about letting people move stuff out. Yes, it will lead to a decreased volume of FDI, but it has to be determined by the nations individually whether the losses from capital flight offset the benefits of foreign investment, or not.

If losses are greater than benefits, they should be content with the reduction of FDI for the sake of saving a greater amount of capital inside their nation for reinvesmment. After all, the only thing they should maximize is the capital available for industrialization, through whatever policies they choose.

[Guardsman Bass]

but most of the capital is controlled and cannot move out of the nation.

At the very minimum, you're going to have to let investors take enough money out in terms of profit to make it worthwhile to actually invest in the first place. You could nationalize what physical capital they create in terms of factories and so forth later on, but it's not exactly a permanent solution, since those factories will ultimately break down, or become obsolete via technology.

[K. A. Pital]

You could nationalize what physical capital they create in terms of factories and so forth later on, but it's not exactly a permanent solution, since those factories will ultimately break down, or become obsolete via technology.

If no technology transfer occured for you to set up your own viable national industry in the same sector, then something was wrong with the "investment" in the first place - it did not shorten your technical gap from the investor. That is not good policy, and so you should question once again, whether you want that gap - and relative poverty - to rise, or whether you want technology transfer to occur.

China certainly doesn't want to be in the "left behind" category, thus it actively employs reverse-engineering to create it's own analogues of imported technologies with the eventual goal of replacing domestic market supply with their own industries (see China's shot at their own, full processed from start to finish, computer processor with comparable performance to P4).

China's policy of "rent out factories and ground, but never sell" is also remarkable because it allows China to take measures if something is not bringing the desired result. An open borders with no-holds-barred capital transfer don't give a lot of controls.

[PainRack]

You could nationalize what physical capital they create in terms of factories and so forth later on, but it's not exactly a permanent solution, since those factories will ultimately break down, or become obsolete via technology.

If no technology transfer occured for you to set up your own viable national industry in the same sector, then something was wrong with the "investment" in the first place - it did not shorten your technical gap from the investor. That is not good policy, and so you should question once again, whether you want that gap - and relative poverty - to rise, or whether you want technology transfer to occur.

China certainly doesn't want to be in the "left behind" category, thus it actively employs reverse-engineering to create it's own analogues of imported technologies with the eventual goal of replacing domestic market supply with their own industries (see China's shot at their own, full processed from start to finish, computer processor with comparable performance to P4).

China's policy of "rent out factories and ground, but never sell" is also remarkable because it allows China to take measures if something is not bringing the desired result. An open borders with no-holds-barred capital transfer don't give a lot of controls.

So, you're now suggesting that FDI and other capital inflows can take place, but you can't remove physical assets?

China is a relatively unique situation, as she had a backward economy with a large, domestic market. Thus, foreign industries were eager to move in and play by China rules of domestic partnerships, industrialisation and etc so as to tap into this large, untapped market. Countries which have a small domestic market and must cater to the international markets would find it difficult to attract foreign investment this way.

[Count Chocula]

I get the feeling Zuul's standing back and laughing his ass off at us taking this seriously. So, I'll ask for some clarification FROM ZUUL:

Are you proposing a "what-if" based on the global stock market being "disappeared" like Pinochet's critics? Gone, not to return? Or, are you asking "what-if" the TSX, DAX, NYSE, etc. only traded stocks in their nations and there was no cross-border trading of multinational stocks?

Clarification, please.

[K. A. Pital]

China is a relatively unique situation, as she had a backward economy with a large, domestic market.

Not only that: China was largely not industrialized, and at the same time it had an enormous population reserve. These two factors combined drove the labour costs - not just in China, but in all of Asia - to a very low barrier, which attracted capital that was fleeing from higher profit margins.

But if a nation is small or, heaven forbid, already industrialized, it would be rather hard for it to compete for FDI, the volume of which is generally fixed throughout each year and there's a very fierce competition of nations vying for investment. What if your life conditions already are high enough so that they do not allow dropping labour costs to such baselines - what is possible as a wage in China, would mean for example literal death in Russia. In that case, no cookie from the itnernational capital for you.

[PainRack]

Not only that: China was largely not industrialized, and at the same time it had an enormous population reserve. These two factors combined drove the labour costs - not just in China, but in all of Asia - to a very low barrier, which attracted capital that was fleeing from higher profit margins.

But if a nation is small or, heaven forbid, already industrialized, it would be rather hard for it to compete for FDI, the volume of which is generally fixed throughout each year and there's a very fierce competition of nations vying for investment. What if your life conditions already are high enough so that they do not allow dropping labour costs to such baselines - what is possible as a wage in China, would mean for example literal death in Russia. In that case, no cookie from the itnernational capital for you.

Despite what Third World Countries believe, wages are not the end all for capital investment. For any company looking to do anything beyond loot and burn, they require a relatively stable finanicial, social and political environment, a well educated labour force and any other number of factors. A factory isn't something that's capital mobile, even for sweatshops.