As if on cue, I saw Matt Levine yesterday throwing some paragraphs at my question (What do financial markets do and why/how are they benefitting society? #867043). What a schmuck.
His explanation is, as ever, more eloquent and precise than mine:
The traditional way to invest was that you would pick the stocks you wanted to own, you would go to the stock exchange, and you would buy them. This was, you hoped, good for you: You paid the market price for the stocks that you thought would go up. But you were also participating in a collective process that was good for everyone else. By picking stocks, you were doing your part to allocate capital to its best uses: The stocks that everyone picked would go up, making it easier for those companies to raise money to do worthwhile things; the stocks that nobody picked would go down, and they would have to stop doing the worthless things they had been doing.
So far so good. This intuition is also the logic behind prediction markets (#833261):
You were also doing your part to make the pricing of stocks efficient: Everyone competed to find out relevant information and to figure out how it might affect companies, and so those companies’ stock prices reflected all of the relevant information. The companies’ stock prices were “right,” or at least as right as everyone could make them.
Also, index funds are great in moderation, but crap when dominating (#861085):
The thesis of an index fund is that a lot of smart hard-working people compete to pick the best stocks. As a product of their competition, all the stocks are pretty fairly priced; if they weren’t, those smart hard-working competitors would buy the underpriced ones and sell the overpriced ones. So you can just opt out of that competition: You buy all the stocks at their market prices, trusting that everyone else's hard work will make the prices right. And so you will be able to buy long-term economic growth at the right price.
That last idea is critical, and one non-obvious way in which bitcoin surpasses the fiat system; the re-arrangement/-distribution of benefits of economic productivity happens more broadly—everybody holds money, not everyone holds stocks or equity funds.
(oh yeah, the story here -- with dark trading markets -- is that an estimated majority of trading now takes place off central exchanges, meaning that price discovery is less widespread than usual... but possibly more efficient/cheap for trading??)
Levine also discusses the ways in which an overly financialized economy (hashtag fiat economy, #743123) quite plausible harms society. I think these are the things people see when they instinctively reject financial markets/capitalism as exploitative and wasteful:
The way I would tell this story is that the modern world has created conditions in which it is incredibly lucrative to get very good at statistical inference....Modern AI has many uses — but nobody learns the essential skills to build fusion reactors or perform brain surgery at a hedge fund. It is perhaps a fortunate coincidence that maybe the highest-profile generally useful technology these days is the sort of thing that you can learn at a hedge fund.
Nice newsletter, as always.
non-paywalled here: https://newsletterhunt.com/emails/148593