Date: Tue, 28 Oct 1997 11:07:18 -0500
From: Doug Henwood <dhenwood-AT-panix.com>
Subject: Re: M-TH: Corrective


Rakesh Bhandari wrote:

>Carchedi analyzes the limited impact of stock market crashes and himself
>underlines that they are not 'catastrophic': "Stock exchange crashes are
>not violent destructions of wealth; they are violent redistributions of
>wealth." Frontiers of Poltical Economy, p. 209.

>From whom, to whom?

>  Anwyays the stock market is only the show the bourgeoisie presents to the
>world, while marxists know that the drama is really in the fields,
>factories and mines.

This sounds like vol. 1 Marxism, the kind that treats production as
fundamental and finance as purely derivative and epiphenomenal. But the
stock market is an important mechanism of class consolidation and control.
Carchedi's assertion that shares aren't real wealth but only titles to
wealth is accurate, but isn't ownership itself socially important? If those
owners can tell the onwers of the fields, factories, and mines how to run
their businesses, is that meaningless? If ownership of those shares are
means by which capital is transferred from one group to another, or from
one firm to another, is that without impact on "the drama"?

I was mystified by this assertion of Carchedi's (p. 207 of Frontiers):
"[I]n deciding whether to invest in shares or in bonds, [investors] compare
the highest feasible dividend with the highest feasible rate of interest.
If the former is lower than the latter, they invest in bonds, and vice
versa. Suppose this rate of interest is 10%. In this case one is willing to
pay up to $100 for each share of that enterprise. That share's market price
is $100. In this case, the nominal value of that share and its market price
are equal. If however, in order to attract capital, that enterprise decides
to double the dividend, each stock gives right to $20.... More generally,
the market price is equal to the dividend multiplied by the nominal value
and divided by the rate of interest...."

Carchedi should crack a finance text or two. For most of the last few
decades, dividend yields have been lower than bond rates. For most
investors, what matters most is underlying profits, not dividends. Growth
in expected earnings doesn't enter into Carchedi's calculations at all
either; investors will pay a lot more for a stock paying a $10 dividend if
they think it will be $15 next year than if they think it will be $12. And
what's with this "attract capital" business? Does he think that firms
actually raise capital on the stock market? Or does he just mean attract
buyers to bid up the share price?

And a few pages later (p. 210): "The October 1987 crash did not have the
catastrophic effects most commentators thought it would have: it did not
usher in a major production crisis, as in 1929. The reasons for this are
basically two. First of all, the fall in the stock market was relatively
limited. Second, while many investors lost money, the bulk of the loss was
borne by relatively few big investors and institutions. The next crash,
however, might have a different outcome."

So if a stock crash doesn't destroy real social wealth, how did 1929 usher
in a production crisis? And why no mention of another important reason that
1987 didn't spread into generalized crisis - quick rescue action by the
world's central banks?

Doug





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