The point of analogy is the following: The value of stock market shares (or real estate) is now determined by the flow of newcomers, or more generally, by volume increase. You have millions of Americans, Chinese, East Europeans and others coming into markets, because this is "the way" to get good living, and once they come in, they inevitably buy, regardless of intrinsic market values. Besudes, pension funds are rapidly expanding: as they collect contributions they are effectively obliged to buy, again, regardless of real market values. For an individual contributor, these purchases are excessive, not entirely voluntarily so.
The real market value hardly enters the equation of the price. The price is determined by buyers' competition and expectations. Traded shares are almost certain to be overpriced.
Surely, market shares do not have "dubious value". But mathematically, you may speak of a pyramid scheme (whether designed or emergent) whenever volume increase alone pushes share prices up.
Economic downturns might be different from outright pyramid scams. But while depresion causes remain "mysterious", we cannot say that pyramid effects do not play a significant role. Buisiness cycles might be nothing more but cycles of excessive greed, so to speak.
Surely, market shares do not have "dubious value". But mathematically, you may speak of a pyramid scheme (whether designed or emergent) whenever volume increase alone pushes share prices up..
There is a gray area in between. Very successful buisinesses indeed risk to run into pyramid modes. Investors have to make good judgements themselves.
I do not suggest to draw subtle lines in the gray area. I even consider profitting from brief fluxes of speculative interest as healthy. (That is the way to curb speculative interest.) Regulation is hardly possible in the gray area.
But government (or public) may keep an eye on the bubles without reccuring interventions. First of all, playing in stock markets does not have to be made as easy as possible. When people are tempted to make unjustified decisions, it's getting closer to a deception. Participation in the markets must still be free, of course, but it should not become the main way of making living for the masses. Or to put it other way, not only financial talent should be encouraged. People should have good chances to achieve good living standards without necessarily diving into pecularities of stock and real estate markets.
Secondly, when a bubble become more apparent and holds for longer time, public awareness should be raised. What usually happens now, a speculative bubble is disguised by all means possible as long as possible - which is very "fair" to the speculants of the moment, but eventually becomes unfair for a unspecified large group of later buyers.
Only then comes a more interventive stage of bubble management. Here the interesting problem is: how eager buyers should be "convinced" to cool off, or accept limitations.
Speculation, in the narrow sense of financial speculation, involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculation or agiotage represents one of three market roles in western financial markets, distinct from hedging, long term investing and arbitrage. Speculators in an asset have no intention to have long term exposure to the asset.[1]
It is not exactly my purpose to enlighten all buisinessmen or economists. I don't care of those who would take more trouble in detecting language formalities than getting the point. What we are discussing is that certain things in market economy walk like a pyramid scheme, quark like a pyramid scheme, and most importantly, expand and collapse like a pyramid scheme.
wchurchill - how exactly is this different to what's happening today?
Given that there's really very little of the technological innovation that you describe happening today - there's a lot of 'cheaper', but comparatively little 'new', I think the pyramid description is a perfectly apt and revealing one.
As to understanding the implications of pyramid marketing, versus speculation, versus "bubbles", there is plenty to read and gain insight. It doesn't matter to me if you and das monde choose to confuse them.
On the other hand, the Russian GKO bonds are often given as an example of a pyramid scheme, though they were traded within the stock market structure. If we call this case a "created pyramid structure" in the stock market, then it makes compatable to speak about "emergent pyramid schemes" in stock markets. That is what I am talking about.
For most consistency, the cases of Ponzi & pyramid scams, matrix schemes, and created/emergent pyramid schemes in stock markets should be grouped to one term. You may come up with a better English word combination, but here is a formal definition, as general as I can:
Entrant growth - a trading structure where profit margins of beneficiaries come predominantly from new entrants.
The special case of entrant growth in stock markets can be called... bubble growth!?! Unless there are objections from bubble specialists, we may offer a mechanism how the bubbles grow in economy, or even quantify them perhaps!
