That is easily the least constructive comment I’ve seen on this blog this year – congratulations!

Let’s see, this post discussed that we actually need to think what a bubble is – and what different changes in investment mean for how we look at an issue. If ensuring that my arguments are logically consistent is “destroying the world” then I apologise.

However, instead I think that people who overuse the word bubble live in a nasty little world of class wars and zero sum games. This makes me feel extremely sorry for them.

This isn’t to attack heterodox economists – as many of them are willing to do exactly the same thing, and discuss which assumptions we differ on. This is to attack a lot of the emotive bullshiz used to attack economists on the internet without providing any sort of coherent argument.

I think deep down the idea is the same as the idea of “crowding out” from government investment. We have some real stock of goods and services sitting around, which can be used for consumption or investment – if we choose to invest in something, it will bid up prices (including the interest rate) such that we invest less in something else.

However, the trade-off needs to be looked at in terms of actual investment – the fact that house prices have appreciated in of itself doesn’t tell us anything about what is going on with investment and what SHOULD happen with investment … to do this we need to discuss the “nature of the shock”. In other words, never reason from a price change – try to figure out where something fundamental might be going wrong 😉

With regards to trading stocks on a secondary market (so once the claim on the firm has been made by some of their equity being listed), the price is just a useful way for the firm to get an idea of:

a) What the market expects for their profitability (inc the value of the capital),
b) What the cost of raising more equity to fund investment would be.

Transfers between people (changes in the price) don’t tell us terribly much about the underlying idea of savings-investment … and I think these ideas can accidentally get muddled sometimes, something I’m sure I am guilty of on occasion 😉

In summary, other than initially buying share, I don’t see how trading stocks “helps” businesses at all other than making big demands on their profitability. (Note : I am in no way an ecomonist or have studied economics, it is just an interest, so if someone wants to tell me why I am wrong and answer my question then feel free.