Consider this as a thought experiment, or a dream experiment as this one came in a dream.
Stock market is the cornerstone of capitalism. Right from the times when Europeans set sail to the foreign and utterly alien shores of India & America, the concept of joint-stock ownership made the venture of mass-exploitation possible. Today, stock market drives efficiency, rewards innovators and ensures that the companies are on a growth curve and are profitable. Organizations hire & fire people, they acquire companies or shed weight, go after newer horizons or focus on their core – they do everything as per the diktats of the market in their single-minded pursuit of increasing shareholder value.
After the cold war, Russian-branded socialism was no longer hip. Capitalism had once and for all trumped Russia’s ‘All men are equal, but some are more equal than the others’ funda. There were gross inefficiencies in the process, people starved and were indigent in general, and one look at the cultural & economic divide between East- & West-Germany told us quite emphatically which model worked better.
Socialists shirk away from stock markets, as they see it as a capitalist tool to deepen the gap between the rich and the poor. But what if they had their own market economics to improve efficiencies of their processes, a market system that eventually converted everything into commodities, made things more equal as per their viewpoint? What if they had a system that exactly matched their ethos?
So here goes.
It is somewhat similar to commodities market, but not quite. Consider a system that traded everything on the bourses – steel, apple, coffee beans, house, movie – everything! Each and every ingredient, raw material & finished good at an indexed price being sold on the market. And there is an avenue in which you can transform one thing into another.
Consider a simple example.
To make steel - you require iron ore, coke & limestone. Say all four of them traded just like in a commodities exchange. Say the price of 1 unit of iron ore was 30, of coke 5, limestone 5 & steel 50. For the sake of simplicity consider that to make 1 unit of steel, you require 1 unit of iron ore, limestone and coke each. Now comes the fun part – if I own 1 unit of iron ore, limestone & coke each, I can transform my shares in the raw material to finished goods. There is a magic convertor out there, which converts my raw material stocks into 1 unit of steel. Hence the arbitrage is of 50 – (30 + 5 + 5) = 10. I make a profit of 10, if I were to buy RM stocks, transform them into Finished goods, and sell the same.
Add a bit more complexity here. There are varieties of iron ores out there, and a lot many grades of steel that can be produced. Hence the difference in value may vary more or less. Instead of companies being listed on the stock market, in a socialist regime – the products themselves would be listed. Please note that the number of shares/units and the price would be linked to the actual goods or inventory. Hence the fluctuation in the price of units would depend not just on the supply/demand of those units, but also on the supply/demand of the actual goods. Also our magic convertor would have a basis in ground reality, so 1 unit each of iron ore, coke and limestone will not yield 1 unit of unicorn! It would only yield what is technically feasible, possible and what is actually done in the manufacturing units.
Why do this? What’s the purpose of trying to mirror manufacturing when you can actually manufacture? Where does the trading part come from?
The best way to trade is through Futures contract. It entails all the benefit of a commodity exchange: it is highly liquid, it has leveraged investments, and it increases the overall transparency. In socialism, one of the main issues is corruption – there is no free market, and hence very limited transparency as everything is state-driven. Vested powers can take ad-hoc decisions to line their pockets which leads to gross inefficiencies, behemoth PSUs that can’t take off the ground and are leaden with debt, and delivery of subpar goods and services. Furthermore, as this reduces information asymmetry – a trader would try to buy the cheapest raw material units and sell off the finished goods at the highest price. Plus as there is a time pressure in a futures’ contract, there would be added pressure to manufacture faster and reduce the lead times for delivery. It would ensure that the things don’t move at a meandering pace.
So a Commodities’ exchange kind of a market, with that magic convertor can improve the overall efficiencies of the underlying machinery. An impersonal state earns and loses the money in the market, there is no single individual entity or private company that is responsible to drive shareholder value – which in this case would be the state itself.
But such an exchange would kill brands. When the ethos of a community is group over an individual, when one must strive to be the part of a whole instead of being different – distinctive brands would not exist. Everything is treated as a commodity; nothing is unique or different. An example would serve our purpose, say we trade an iPhone on such an exchange. Initially, the arbitrage between the raw materials and the finished goods would be huge considering the price of an iPhone (1000 X) as compared to the raw materials used (100 X). Traders would rush in for buying the raw materials and trying to convert everything into an iPhone. This may artificially inflate the raw material prices for short-term. Suddenly, there would be a supply glut of iPhones. Lot many would get made. In the long term, this would drive down the prices of the finished product, killing all the brand power such a phone possessed. Brand would stop being a differential for price.
In absence of competition or driving force of greed to earn more, it would, in the end, kill innovation. New technologies would stop being developed. Such a society would perfect the art of making round wheels in the cheapest and fastest way possible, but they would never take off to the air.
India is a mixed economy. It still has areas and avenues where state has absolute control – can we introduce such a system to improve the efficiencies of the PSUs that we have, of the state-machinery itself? The auctions had already improved the buying process of the government resources, can we introduce a system as suggested above to not only improve the buying process but also improve the production efficiency and ensure faster response time?
A food for thought!