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Comment by candiodari | Hacker News Reader

When push comes to shove these things determine the allocation of resources in society. How many people does a company making spoons gets to hire or should we put more of them on webforum moderation ? Same for cars/glass/shoes/...

The idea is that letting algorithms decide will result in better/more productive allocation of resources, which will result in more and better everything.

Of course, is that reality ? I would point out, however, that stock markets resource allocations are far better than royalty/governments allocating resources.

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> When push comes to shove these things determine the allocation of resources in society.

John Bogle, founder of Vanguard and renowned investor, seems to disagree with you: "The stock market has nothing—n-o-t-h-i-n-g—to do with the allocation of capital. All it means is that if you’re buying General Motors stock, say, someone else is selling it to you. Capital isn’t allocated—the ownership just changes. I may be an investor, you may be a speculator. But no capital goes anywhere. This is basically a closed system. You have new IPOs and whatnot, but they’re very small compared to this vast thing we call a market, which is now around $24 trillion. The allocation of capital? That’s just nonsense."

I think you are mixing up the concept of a market economy with a specific kind of market, the "stock" market.

That sounds like an exaggeration in order to make an unrelated point.

Why would people sell equity in their company except for cash, and why would you pay cash for ownership in a company except for the stream of income it represents and the secondary market for that ownership?

How come people decided it is illegal to trade ivory from an elephant killed a couple hundred years ago? Was it made illegal to possess child pornography that was already created only because it is morally toxic, or does said consumption also induce demand for additional victims?

Even though debt markets have a lot more to do with day to day financing of corporations, equity markets have a great influence on terms. Furthermore, the unavoidable importance of secondary markets for debt and their derivatives can be understood by considering the importance of secondary markets with respect to prices of homes, automobiles, or any other large consumer purchases.

I didn't mean to imply that stock markets were not important, just that "allocating resources" in the sense that parent meant, e.g. "How many people does a company making spoons gets to hire or should we put more of them on webforum moderation ?", being its primary purpose seems like a stretch (except for the occasional new IPO / stockholders' meeting). If anything, venture capital and as you mentioned, debt markets are closer to this idea of allocating resources.

My main point really was that the examples parent gave seemed much closer to examples of market economics in general and would hold true, with or without stock markets.

I can see the limitations in equating stock price directly with GM retooling a factory for a new model year, but it is a far more accurate depiction of what is going on, even if a little abstract, than to say that they have nothing to do with each other and even spelling it out letter by letter. Saying that it is basically a closed system is even more bizarre.

John Bogle is either clearly incorrect, or the quotation may be taken out of context and may be unrelated (I don't know); however, the price that the seller sells at is usually not the price that he originally bought at. This difference, specifically the change in dollar value for the same object being sold, is how capital enters and leaves that system. Note that this is specifically about money-capital, and not capital based on other resources -- so if Bogle was talking about some other kind of value, he could easily be correct; although from that quotation alone, it really looks like he's talking about stock-trading money, and even values the market at $24T, so... I'm guessing he just didn't think it all the way through.

> The idea is that letting algorithms decide will result in better/more productive allocation of resources

Is it? I thought the idea behind HFT was to make a shedload of money for the firms with the most effective algorithms. To be clear, I have no problem with that, and I'm not close to the industry. But it would surprise me to hear that those in it conceive of themselves as optimizing social resource allocation, rather than, say, setting themselves up to retire at thirty with all the money they'll ever need.

There isn't just one argument. The liquidity argument is focused on why would we allow HFT, instead of limiting transactions to traditional investors only.

The algorithms talked about here are not HFT algorithms, but investment algorithms. Things like "if it's down for 3 days in a row, allocate 5% in the stock" type programs, written using machine learning. They generally will not change orders rapidly. They are about more efficient/effective investment, and the argument I gave is more focused on what the function of a stock market and investing is.

Because these algorithms are much more like traditional investors than HFT.

"Locking in the losses."

Can't you say that about any profession, especially other forms of middlemen? Does it really matter if your grocer's motivation is having a nice house and good schools for his kids vs. feeding people and providing a market for farmers?

Yes. A grocer with illicit intent can poison the food that they serve because some God told them to do it. We need to ensure that they both are sane and correctly motivated. This isn't simply about providing welfare for people; it also concerns the identification of malicious intent and the avoidance of harm. There may be a few professions where this doesn't matter, but by and large I'd say an individuals motivation for choosing a profession does really matter (especially with middlemen).

The investment side of that equation is tiny compared to the demand side of that equation. GM's stock has very little to do with GM's actions. Much like the most profitable approach when a companies tax rate is 10% is effectively the same approach as when there tax rate is 20%.

I'm not following.

GM's stock price has very much to do with GM's actions. GM can do countless things which will impact its equity value.

Also, changing the effective|marginal tax rate by 50% has material implications on your business model and capital structure, e.g. debt (and tax shields).

> changing the effective|nominal tax rate by 50%

10% to 20% is a 100% increase not a 50% increase. Now sure, paperwork changes, but the price of your widget or the layout of the factory etc don't really care about the taxes outside of extreme cases.

Anyway, profitable companies like GM can issue stock to raise capital or buy back stock. Buybacks don't really depend on the stock price as it's not an investment it's another form of dividend. Issuing stock is an inefficient way to raise capital better to issue bonds or not issue dividends.

Now sure, there are second order effects of stock price such as stock options. But again +/- 10% to stock price on a given day does not do much.

PS: Consider Microsoft if the tax rate where to increase to say 40% what would they change?

Microsoft (and other international companies) go to great lengths to optimize and defer taxes into the future. As the US already has among the highest corporate tax rates in the world not much would change as all international revenue is being held overseas anyhow. There would be changes in how they allocate their resources but only a CFO might be able to tell you what those would be.

US has some of the lowest effective tax rates and some of the highest nominal tax rates. Making it a poor example for these discussions.

...and 20 to 10 is 50%. I chose the smaller % as it's still substantial.

For your widget company, it does matter! ;-) What widgets you make, your price, your price relative to competition, market share protection, pricing power, where you build your factory, PP&E decisions, and more all depend on your tax rates. I promise, and want to compete against firms that overlook these parameters.

For GM, you're overlooking other (mis)management decisions that will show up in the share price.

Right now, MSFT is facing just such an issue re: re-patriating money from overseas. If there were a one time foreign tax holiday as floated by Obama, MSFT would choose very different decisions than the status quo in terms of buy backs and R&D spend. In terms of operations changing, I guarantee they'd re-think their debt and their product mix within their 3 reporting segments. Some products wouldn't be profitable enough to sell if the profit margin shifted 2-3%.

I don't nessisarily disagree with you examples. But, I think you are misssing the forest for the trees.

I have had several successful CEO's all tell me to ignore taxes. That does not mean you install or don't install solar panels based on tax breaks. It can be very important, but it's generally premature optimization. Further, it's not the top tax rate that is important it's differential tax rates aka A @X or B @ less than X.

MSFT's re-patriating money is a good problem to have. They may see a tax holiday in the next administration or they may not. But again, it's getting to that point is the issue.

I agree that taxes aren't the primary determinant of a business' success. I'm assuming that's what your acquaintances were arguing.

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