The Steady State Economy and the Stock Market

The Steady State Economy and the Stock Market

In some discussions I have had recently in an online peak oil forum I have encountered people claiming that the stock market will function just fine in a zero growth economy. They claim that even if the overall economy is not growing, profitable production enterprises will still exist, and the stock market will be an effective and efficient method of allocating production resources to those enterprises. Here are my thoughts about this claim.

If I make an investment that increases my wealth, then my newly obtained wealth must have come from somewhere. That wealth has two possible origins:

1. I took wealth away from somebody else

2. My investment created new wealth.

No third possibility exists. At least not in the universe that I live in. An investment which creates new wealth is, by definition, a growth producing investment. Therefore in a zero growth economy obtaining an investment income is, by necessity, a process of taking away wealth from other people. It is hard to see how such a process could be the basis of a stable and healthy economic system.

In a zero growth economy one part of the economy can grow only if another part of the economy gives up resources and shrinks. My belief is that even in a steady state economy such dynamic exchanges of production resources will be required. I do not envision the mix of products and services as being frozen for all time. If this process of reprioritizing the use of production resources is financed by private investors the investment income of those investors cannot go on increasing indefinitely since the total income of society is constant. What is the likely endpoint of a competition for investment income in such an economic system?

One possibility is that the net average investment income will be zero. That is investment will be a zero sum game in which the success of one investor will imply the failure of another. It is not clear to me why anyone would wish to play such a game.

Another possibility outcome (and in my opinion much the most likely one) is the WallMartization of the entire economy. That is a small group of investors will end up owning all profitable businesses and the rest of the population will be wage serfs working in the interests of the financial masters. After this endpoint is reached further changes in economic production will take place only at the behest of the masters.

An alternative to competitive private investment is a process which I call democratic social investment. In this process democratic decisions are made about the mix of products and services which we wish to produce, and production resource allocations are made to bring about the desired results, and to heck with paying unproductive parasites for the privilege of doing so. Elsewhere on this website I have written about a possible means for achieving such social democratic investment in the context of a market economy. That particular proposal I call public finance capitalism.

August 15, 2007