The stock market is the reason people are alive to complain about the stock market

The first stock markets were formed in the early 1600s. In the UK, they were formed 100 or so years later. That is probably the reason why you were born.

Article updated: 4 June 2019 11:00am Author: Michael Baxter

Of course, it’s not the only reason, certain activity carried out by your parents helped, but what I can say is that the global population has doubled many times over since the invention of the stock market. In 1600, when the first company — the Dutch East India Company — traded shares in Holland, the world population was around 500 million.

It took 1000 years for the population of the world to double between nought AD and 1000 AD. It took 600 years for the population of the world to double between 1100 AD and 1700.

Shares were traded in the UK in coffee houses in the early 1700s. In 1773, the London Stock Exchange was formed, just over 100 years later, the population of the world doubled.

Is it just a coincidence? I don’t think so, but I confess that the formation of the stock exchange wasn’t the only reason.

In fact, it was the great chess player Gary Kasparov who said technology is the reason most people are alive to complain about technology. He is every bit as correct as I am when I make a similar claim about the stock market. To be clear, the reason why these days, the global population of the world doubles every few decades, is because of the industrial revolution of the 1700s and 1800s. There was more than one reason why the industrial revolutions occurred, but it seems that the formation of the stock market is one of them.

Before I go any further, lets provide a few other examples of what caused the industrial revolution. There was the printing press, because it spread ideas. There was the discovery of the New World. Maybe the discovery of gold in the New World boosted the money supply which meant that the additional money floating around the system was able to fund innovation. The end of enclosures, 100 years or so earlier, created a new entrepreneurial class. The revolutions also occurred because of technology, ideas build upon ideas and by the 1700s the state of the art in technology was at a tipping point. Some people argue that the innovation of the puritan religion, of the so called puritan work ethic, created industrial revolutions. I have no idea if that is true, and I don’t want to get into religion here. I have heard it argued that the slave trade, creating huge volumes of cheap cotton that underpinned the revolution in the textile industry, was a cause. I really hope that’s not true. I don’t like the idea that most of us are alive today because of the slave trade.

But the stock exchanges created a way to raise money. Back in the 1600s, merchants had big ideas that needed funding. Let’s face it, the Dutch East India Company was pretty big. These merchants needed far too much money to raise it from a bank or their next door neighbours. The stock markets introduced a new fund raising mechanism, one in which investors were compensated for risky investments by taking a share in future profits.

The stock market spread to England in the early 1700s. The London Stock Exchange was formally named in 1793. The industrial revolution began in the UK in the mid-1700s. Markets make it possible to raise the money that funded these revolutions.

A downside from stock markets is the creation of bubbles. So severe was the South Sea bubble that the issuing of shares was banned by the UK government until 1821. This may have been a huge error. It meant that when the US stock market was founded, the UK did not have the head start that it should have had. The reason why the New York stock exchange is so much bigger than the London exchange may have been because of the ban in issuing shares in Britain caused by the South Sea bubble.

There is a view, held by many people, that buying and selling shares is risky. I have argued here many times that providing your investment portfolio is diversified and held over a long-time horizon, buying shares isn’t risky.

But I see another benefit to buying and selling shares. It’s good for society. Don’t get me wrong, I’m not suggesting you should invest in shares because it’s for the greater good. I’m not suggesting you should buy shares for altruistic reasons. I am merely suggesting that this is one of those occasions when what’s good for the individual happens to align with what’s good for society.

Don’t get me wrong. I am not saying stock markets are perfect and always create the best outcome. But quite often, when things don’t go right, it’s because of the stupidity of us humans. One of the main criticisms of the stock market is that they lead to short-term thinking. In theory, however, they shouldn’t. They are supposed to value a company by looking at projected profits off into perpetuity, discounted to give a net current value. There is no theoretical reason for stock markets to create short-term thinking. To find out why some businesses do indeed apply such thinking look towards behavioural science.

In one sense, stock markets, along with capitalism as a whole, can be self-destructive. That is because the markets are not so good at dealing with collective consequences — capitalism can create inequality, inequality can suck demand out of the economy, when demand is sucked out, growth can stall, and capitalism can appear self-destructive.

That is why we need regulation. But stock markets, when they are appropriately regulated, can be a main driver of wealth creation, innovation, the elimination of poverty, and a reason why most people reading this are alive today.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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