Edited by Geoffrey Poitras
Chapter 2: The Stock Market and the Corporate Economy: A Historical Overview
Ranald Michie INTRODUCTION An 1874 study of stock exchange speculation voiced the opinion that: ‘Very few persons, if any, will be found to dispute the statement that speculation on the Stock Exchange is gambling.’1 Such a view has existed from the very beginning of the modern stock market, according to Raines: ‘In popular imagery, stock markets represent the most exciting aspect of capitalism . . . where soaring bull markets bring sudden wealth only to subsequently wipe it out during spectacular crashes with the bursting of speculative bubbles.’2 The eminent American economist Robert Shiller has employed the term ‘irrational exuberance’ to categorize stock markets as perennially exposed to speculative outbursts, of which the Mississippi Bubble in Paris, the Railway Mania in London, the Wall Street Crash in New York and the global financial crisis of 2007–08 are the most prominent examples. In these speculative bubbles temporarily high prices for stocks were sustained more by investor enthusiasm rather than fundamentals. These bubbles then burst when prices reached unsupportable levels and selling began to outweigh buying. In turn that had enormous consequences for the regular supply of credit and capital as banks collapsed because borrowers defaulted on loans taken out to buy stocks and savers withdrew their deposits, leaving the entire financial system in a highly weakened state for years to come.3 In a recent study British economist and Financial Times columnist John Kay concluded that: ‘Securities markets are better described as arenas for sophisticated professional gambling than as institutions which minimize the costs...
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