Cultural Revolutions

Kiss Wall Street Goodbye

Does the public stock market actually serve a purpose?  To some free-market zealots, the answer is obvious: The public markets increase liquidity, and this enables fledgling businesses to get off the ground by allowing them access to capital.  Moreover, we can all reap the benefits of capitalism’s “creative destruction” and become a nation of investors (as opposed to one of actual producers).  For well over a decade, the public bought this line with increasing gullibility.  New research, however, suggests that the only institutions public financing helps are those which arrange the financing.  That is to say, public equity finance is a business whose greatest beneficiaries are its salesmen.

Lawrence E. Mitchell, a professor of business law at George Washington University, argues in a recent paper that the “empirical evidence is clear that the American public stock market rarely has been a significant factor in financing industrial enterprises in the United States.  The only American business sector to rely upon public stock issuances as an important source of financing public activity is the financial industry itself.”  Based on data going back to 1955 and in some cases even earlier, Mitchell finds that “America’s economy is increasingly based on finance, and our public financial markets principally are financing finance.”  In fact, he concludes, “the...

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