There’s plenty to ask, from a regulatory point of view, about last week’s GameStop hijinks. But what’s NOT being asked is far more important: Why do we route trillions of dollars toward poker instead of production?
Last week’s furor over GameStop’s price drama was by turns galling and fascinating. But it was also instructive – instructive in ways that are in some respects familiar, and in other respects not so familiar. I’d like here to highlight one of the more unfamiliar respects in which last week was instructive – a way having to do with how our economy morphed from being the ‘workshop of the world’ to being a late-Roman ‘Colosseum (‘bread and circuses’) of the world.’ And I want to do this not to engage in gratuitous lamentation, for which none of us ought to have time, but instead to suggest how to return to our pre-financialized productive roots as a ‘great commercial society’ – a Jeffersonian yeoman republic achieved by Hamiltonian means. Let’s start with a brief bit of institutional background… We like to think of Wall Street and other capital markets as places where people can participate in – or even help determine – companies’ futures by investing. If you expect that a company will do well in future, you can ‘buy a piece of it’ or lend to it at interest to help finance its capital investments and associated expansion. Then when it prospers, you prosper. But you also can lose if it loses. And this fact prompts what I elsewhere call capital market stratification. In what sense are capital markets ‘stratified’? Well, there are ‘primary’ capital markets in which you can help directly finance businesses’ establishment and growth. But there also are ‘secondary’ capital markets in which you can buy or sell ownership shares or debt instruments issued long ago in the primary markets. And there are tertiary ‘derivatives’ markets in which you can place bets on what will happen in the aforementioned ‘lower level’ markets. Why do we stratify capital markets in this way, and in what sense is it prompted by fears of failure and loss? Why do we have secondary and tertiary markets at all, rather than just primary markets? Well, the theory is that people are more willing to invest in the primary capital markets if they know they can (a) unload their investments in secondary markets if need be, or (b) ‘insure’ them in tertiary markets. For if people are not ‘trapped’ by their primary market investments, they’ll be more willing to invest in the first place – and at a lower price. (It’s a bit like how no fault divorce laws lead more people to marry.) And that, it is said, lowers the ‘cost of capital’ in the primary markets themselves, thereby rendering production in ‘ground level’ goods and services markets less expensive and correspondingly more expansive. Again, that is the theory. It’s all supposed to be ‘grounded’ in production. In theory, then, you can think of our productive and financial sectors as constituting a kind of ‘stack,’ or pyramid (no ‘scheme’ just yet, but read on). At ‘ground level’ are the markets for goods and services. At ‘level one’ are the ‘primary’ capital markets in which people invest in goods and services production at ground level. Then at ‘level two’ are the ‘secondary’ capital markets in which primary capital market investors can sell their investments when they either need or prefer money or other investments to what they hold now. And finally, at ‘level three’ are the tertiary ‘derivatives’ markets in which people effectively buy insurance for their ‘lower level’ investments by contracting for payouts from others in the event that their primary or secondary market investments fare poorly (much like your house insurance pays out if your house fares poorly in a fire). Now as I say, this is how things are meant to operate in theory. In practice things work rather differently. And GameStop’s recent drama shows both how they work differently, and why we should largely – not wholly, but largely – end market stratification and do away with most secondary capital market and tertiary derivative market activity. To see why, let’s start by recapping what happened last week. GameStop is a primarily ‘brick-and-mortar’ video game retailer. As online game retailing grew in the 2010’s, GameStop’s brick-and-mortar business model came under pressure. It grew less profitable as it lost business to online competitors. By 2016 or 2017, things were beginning to look rather bad for GameStop. It appeared to stand to online gaming somewhat as Blockbuster (remember them?) had stood to Netflix years earlier. It appeared destined to ‘change or die.’ The pandemic lockdowns last spring, which curtailed on-site shopping, then seemed to ‘seal the deal.’ This change in GameStop’s prospects quickly found expression in the aforementioned secondary markets. More and more people decided to switch-out their GameStop investments for alternatives that appeared to offer better prospects. That of course put downward pressure on GameStop’s share price. In theory, then, the secondary market in GameStop stock served as a sort of barometer of GameStop’s prospects, warning other investors either to steer clear or to buy GameStop in order to take it over, oust its incumbent management, and develop a new business model – that is, a more productive and profitable use of GameStop’s assets.
