My response on the OP article itself:
Capitalism is brilliant at setting the price of potatoes. But how good is it at setting the price of a large company?
What's so good about the price of potatoes that's lacking from the price of companies? Does the author imply that potato prices reflect something other than supply versus demand? Or that share prices don't?
To all appearances, the stockmarket is capitalism operating under near-laboratory conditions.
Nope
—real-life conditions. In the lab you can control for things like perfect information, unfettered competition, and everything else that you can't control in the market itself.
Yet the prices set are patently wrong. That is not my opinion. Well, yes, it is my opinion. But it is not only my opinion. It is held by America's financial leaders, though they don't put it quite that way. Actually, it is close to a provable fact.
Result of this mish-mash: "It's my opinion, not provable fact." Quite funny, this dancing around and backtracking on the page.
The free market cannot be setting the right price for financial assets like shares of stock, because often there are different prices with equal claims to be the product of free-market capitalism. They can't all be right
There's just one market clearing price at any time. Not everyone will think it is "right", and they will transact accordingly. If people trade with each other at off-market prices, that's no longer on the open ("free") market
All of this depends, though, on the assumption that the stockmarket sets the right price for shares of big companies. But a whole separate part of corporate finance is based on the assumption that the prices are wrong. These special deals used to be called leveraged buy-outs. Now the term is "private equity".
Taking a company "private" in this sense is taking it off the public market (by owning it all yourself), because you think that you can increase it's worth. In no sense does this undermine or refute capitalism.
The details are different, but the principle is the same. Private investors buy a company from its public stockholders. They have a letter from an investment bank saying the price is fair.
Ridiculous implication that private equity investors' due diligence consists of not more than a "letter" from the arranging bank. Yeah, right.
They usually have the support of management, or actually are the management. The public stockholders have little choice.
Shareholders have been forced against their will to sell their stock to a buy-out firm? Rubbish.
But time and again - surprise, surprise - the bank turns out to be wrong. The company is actually far more valuable. Soon the company is sold at a large profit, to another company or back to the public.
Oh right . . . the bank never thought that the buy-out value would ever change? That'll be why it put up so much money I suppose. Nothing like a zero return on capital to get banks interested!
So free-market capitalism has decreed three different values for this company. One is set by the stockmarket; one is what the private investors are offering - usually a bit more than the market capitalisation. And one is what the private investors sell the company for a blink of an eye later - usually a lot more than the other two. Which is the true capitalist price?
There's only one market clearing price at any time. There are a lot more than three views about what the price should be. And there are even more views about what the price might be in the future. getting very muddled here.
Which one represents the most sublime interaction of supply and demand? Anyone? Anyone?
Defenders of this procedure say it's not that the stockholders have been swindled. It's that the company is actually far more valuable in private hands because managers - even the same managers - can manage far better without the constraints of public ownership.
Maybe
Maybe. It's less about "the constraints of public ownership". More "If I'm going to make this company more valuable, then I'd rather like to own it's equity first".
But if these deals aren't a swindle, then the stockmarket is a swindle. It does not maximise value for its working- and middle-class investors.
Wait a minute. Did we not just observe that they have been invited to sell their shares above the public market's capitalisation? What a swindle! Robbery!
It leaves money on the table waiting for "private equity" to swoop and pick it up.
If it was risk-free "money on the table" then the public market would swoop it up.
Furthermore, Friedman was wrong and the other famous economist who died this year, John Kenneth Galbraith, was right: the free market in corporate shares doesn't produce well-run companies.
Er, what? I wonder why their financial value increases then . .
