alt Hacker NewsAs someone who is essentially financially illiterate, what does this mean, "allocate resources efficiently?" Nobody's investing in companies that promise to cure world hunger or alleviate childhood suffering. They're investing in technologies that can extract the most wealth from the population, regardless of externalities. Is that desirable?
Then again, I can't fathom what people would be doing with their money if the stock market weren't there. I imagine they might naturally wind up with some sort of...stock market.
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That's what's meant by efficiency, it's allocating it to the place that has the highest return on investment.
As you point out, in practice what's efficient is what can capture the highest return, not necessarily the highest return per se. If say investing in education had high returns society wide but those returns couldn't be captured, that's not an efficient use of private capital.
The operating principle here being that prices are units of information, which in aggregate reveal some combination of market demand, present supply, production costs, etc. All else being equal, an investor who's looking to put an investment into a new business will try to find the best rate of return. The existence of a relatively higher profit margin for an industry suggests an unmet market need, and then directs the flow of capital into it (if you expect that for every $1 you invest into a roofing nail plant will return $1.25 over the next year vs a $2 return from a new insulin plant, more new cash will flow into the insulin plant, more insulin gets made, and if the investor guessed right about the demand for it, they turn a profit). In a sentence, money flows towards trying to give people what we think they want more of.
The theory posited above is that you could try to manipulate these signals as a sort of economic warfare. If you expect that every dollar you put into our aforementioned roofing nail factory will get you minuscule or negative return, nobody's going to want to invest in building/expanding nail factories, and they'll put their cash somewhere it can grow instead. This is all well and good so long as you've got happy trading relationships with people who can sell you nails, but if one day the nails stop coming--you've got a supply chain shock until you either open new factories or find someone else willing to sell nails to you. The theory here being that if you had a LOT of goods that became tied up in a single point of failure--someone forcing that failure could create a great deal of internal instability to be exploited for geopolitical ends.