People Have Purposes; Markets Don't
By David Henderson
In a comment on my blog post on the GameStop controversy yesterday, Jonathan Seder wrote:
Remember – the purpose of the capital markets is to facilitate price discovery for equities, and to direct capital to the most productive uses. Passive investors are outsourcing that job to traders – individuals and pros – who gather information and try to identify pricing errors. (I think there’s an argument to be made that people with business expertise have some moral obligation [on top of the financial incentives] to play The Game rather than being passive investors.)
Jonathan’s first sentence is incorrect. He has confused, as many people do, one beneficial result of markets with their purpose. Markets don’t have purposes; people do. Markets come about as a result of people pursuing their purposes. When I buy shares or sell shares, my purpose is not to facilitate price discovery. My purpose is to buy shares or sell shares and, hopefully, make myself better off. Ditto the person or institution on the other side of the buy/sell order.
The distinction between purpose and results is not specific to capital markets. It applies to all markets. In pursuing our own self-interest in any market, we, buyers and sellers, drive the price to some level that informs other people. Let’s say, for example, that the demand for and supply of computer programmers leads to entry-level programmers making $80K a year, and that the demand for and supply of social workers leads to entry-level social workers making $45K a year. Those price signals are valuable information that can help guide decisions of undergrads who are willing to pay attention to them. But the purpose of those price signals is not to tell people what jobs they should train for. Those price signals don’t have a purpose. People have purposes. Price signals are inanimate.
Notice that throughout the paragraph I quote from Jonathan, he makes the same mistake of attributing purposes. He writes:
Passive investors are outsourcing that job to traders – individuals and pros – who gather information and try to identify pricing errors.
I’m a passive investor, but I’m not outsourcing that job to anyone. Those traders are taking on the job themselves and they are trying to identify pricing errors for the same reason I’m investing: to make money. I’m glad they’re doing it. But I’m not asking them to do it.
Jonathan goes even further, writing:
I think there’s an argument to be made that people with business expertise have some moral obligation [on top of the financial incentives] to play The Game rather than being passive investors.
Whence that comes that moral obligation? Simply because they have information and expertise, they should, for reasons not connected to financial incentives, play “The Game?” I don’t agree.