Bastiat: the seen and the unseen

I couldn’t resist posting this screencap. It’s pretty emblematic of how people are victims of Bastiat’s “that which can not be seen.”

The OP asks why quarterly projections determine stock values when it’s so limiting and not reflective of how a company behaves. They claim that only short term gains are required to keep “Wall St. happy.”

It’s hard enough to inform myself without taking it upon myself to inform others, but on this occasion, I couldn’t resist and explain what price is. Strangely enough, 21 people disagreed with my explanation. Their disagreement represents a class of errors in economic thinking revolving around confused identities.

Referring to the original post, the author says rather nonchalantly that a company reduces it’s bottom line causing it’s stock price to go up regardless of the long term consequences. The confusion here is that in order to sell a stock and make the short term profit claimed, someone else must buy it! I emphasize this because people often only think of one side of the coin. The person who buys the stock must be looking at some point in the future and estimate that the stock will be worth even more than he paid. Who would make this purchase unless they thought that the company would be worth something in the future? Who would buy the stock without studying it’s future? Without a buyer, there is no seller.

Because every stock sold is also a stock bought by someone else, the price represents the sum of every opinion of the stock. Some investors exclusively use price and volume histories to make speculative decisions. The price is a proxy for what everyone knows regardless of what you know. For example, if investor A has inside knowledge or insight about a stock, he bids higher or lower to be sure he gets more or gets rid of his shares, that drives price up or down alternatively. Investor B doesn’t need to know specifically what investor A knows, because that knowledge got embedded in the new price. Price reflects all knowledge and opinion, hunches and guesses.

What is seen is the profits made by the seller.
What is not seen is the investment made by the buyer who decides the business will be worth more in the future.

By not thinking about the unseen, people misunderstand how markets work. It should not surprise anyone that governments can so easily buy votes with stimulus bribes when few people understand the basics of price. Without understanding the basics of how markets work, they can not see how governments have been destroying markets while claiming that the markets themselves have failed.

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One Response to Bastiat: the seen and the unseen

  1. rainswept says:

    Heh. I was wondering why you had posted the image, and then I saw the "thumbs down" count!Without viewing the economy as an expression of all individual decision making & subsequent choices, one has no hope of understanding… well, anything.

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