In order for capitalization to efficiently occur in a primary market, a secondary market is necessary.
Only if you assume that initial capitalisation comes from either small investors or organisations who make it their business to capitalise new enterprises with the intention of selling their commitment on the secondary market.
However, what we increasingly see is that firms are initially capitalised out of retained earnings or by enclosing commons for sale (companies spinning off subdivisions, technology commercialisation piggybacking on university R&D, pork barrel projects offering a protected environment with guaranteed revenue streams, etc.). These are generally justified on the basis of the prospective revenue stream, not the prospective resale value.
It's usually better in a number of ways (as we've all recently learned regarding private credit default derivatives) to have a market that is regulated by society in some way instead of just private, back-room deals.
In the particular case of equities, however, your ability to sell depends on the sovereign's will and ability to enforce your buyer's claim. There is no physical product to hide, smuggle or transact in. Just as a simple decision to not enforce over-the-counter CDS contracts would kill the CDS market stone dead in an instant.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
No, I only need to assume that at least some capitalisation comes from people who intend to resell at least some of their commitment relatively quickly in a secondary market. If their money is left on the table, and it is a significant amount of money, it's inefficient. My claim would be that alot of venture capital, particularly in risky investments such as technology start-ups and artistic ventures, require the ability to realize a profit wihin a very short time horizon. Risk becomes reduced as a firm or industry matures, and the risk-seeking investors who require higher returns to justify the risk they take need to be able to exit and get replaced by risk-averse investors with lower return expectations. Without a secondary market of risk averse investors -- the regulated stock markets, there would be significantly less venture capital available for innovative work.
No, I only need to assume that at least some capitalisation comes from people who intend to resell at least some of their commitment relatively quickly in a secondary market. If their money is left on the table, and it is a significant amount of money, it's inefficient.
Fortunately, that's an empirical question: How much investment into emerging companies came from investors, as opposed to securing a revenue stream from the customers before launch? Unfortunately, I don't have the data at hand to answer that question.
Have to be a damn fool to buy into an IPO but there seems to be plenty of damn fools running around ... and we know what happens to their money!
US stock markets operate under the Greater Fool Theory.
securing a revenue stream from the customers before launch
Ouch. That's tough enough when you have a going concern and an existing product - for example, a manufacturer of bespoke machine tools will be lucky to get 10% up front, the rest paid in installments as milestones are hit over the project period (say, 18 mo.). But an established company can often get financing to cover the cash flow.
It would be damn near impossible for a startup with no track record to finance development and manufacture of an unproven product through advanced sales (unless they're very good at marketing to morons). The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
re 2. many things should be regulated yes. But buying and selling ownership shares in companies if done by professional investors who are in it for the long run and buy material stakes is not something that needs to be regulated or standardised in a stock market. Although, of course, you could be right and it ends in armageddon as with the CDS market. However, I think the players in this market would not be greedy short term bonus driven investment bankers...
generally, mutual ownership in a cooperative kind of structure has in my opinion many many advantages and is a model which is underrated and needs to be looked at in more detail (myself included).
Compare it to another issue for illustration: Do you believe it would be better policy for the government to ban marijuana commerce entirely, as is usually the case today, or to regulate it? Why or why not, and whom would benefit or be harmed either way?
I would say that drug regulation depends on how spread it is in the particular society. Banning commerce (outside medicinal proscription) of drugs that are not commonplace appears sometimes to be effective to prevent it from entering, while not effective when it comes to drugs that are already established.
I think this answer illustrates that it depends on the situation... A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
Crunchyroll, for example, would not exist without venture capital: when it became untenable to proceed on its original basis, which relied on bootleg uploads, it would have simply shut down. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
The basic issue here isn't funding, it's collective social permissions and policy judgement. Businesses are only 'viable' or 'not viable' according to rules that are decided by the ownership class, and which are designed to benefit the ownership class.
VC is a lynchpin of the conspiracy which creates collective efforts - i.e. businesses and corporations - which are forced to follow the rules.
Real innovation might not be quite so constrained. If the restrictions on viability, profitability and payback were loosened it's possible we'd see an explosion of genuine inventiveness.
We'd also see more interest in projects with generational payback times, which are impossible to imagine with the current politics.
In fact the VC system guarantees that only socially trivial start-ups like Facebook are possible, and that the most interesting and creative long term R&D remains goverment funded, or in some cases barely funded (i.e. approved) at all.
Having said that, kickstarter is a new(ish) model that's doing some very interesting things, and could be retooled for other applications.
Whatever takes its place will also, if effective, be part of a conspiracy which creates collective efforts which are forced to follow the rules.
The rules that collective efforts are forced to follow may be changed, but the fact that they are is not going anywhere so long as we are social animals. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Currently the rules are hidden for very selective advantage, and it's implied that they're the only possible rules.
This is a nonsense in a nominal democracy. It excludes the majority of the population who are deprived of policy input, and it also makes rational policy choices impossible.
