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Matt Levine on Marxist indexing

Bitcoin Dividends and Marxist Indexing by Matt Levine

Should index funds be illegal / Are index funds Marxist?

Here is a Jacobin interview with leftist economist J.W. Mason about "finance's role in capitalist society" that is fascinating throughout. Mason endorses a "functional view of finance, as the enforcement arm of the capitalist class as a whole":

There are people and institutions whose job it is to ensure that corporations remain within capitalist logic, that they remain oriented towards production for sale and for profit. On some level, this is the fundamental role of shareholders and their advocates, and of institutions like private equity.

I think that a lot of quite mainstream financial people would agree that one thing that shareholders do is ensure that the corporations they own "remain within capitalist logic," sure. But Mason also points to the rise of index funds as undercutting capitalist logic: If all the companies are owned by the same handful of big diversified investing institutions, and if those institutions have no interest in competition between the companies they own, then what is the point of capitalism?

If you take competition out of the mix, it’s unclear what function private ownership is supposed to accomplish. If the evolution of finance gets you to a situation where you have a single set of institutions — or in the long run, maybe a single institution — that owns all of these firms, then pressure from shareholders is going to be against competition. They don’t want to see these firms trying to gain market share or anything else at each other’s expense.

Seth Ackerman, the Jacobin interviewer, responds:

It’s hard to listen to what you just said without thinking of the debates that took place in the late nineteenth and early twentieth centuries, where many people — arguably including Marx — predicted either that firms would be consolidated into the hand of a very small number of controllers or that the underlying wealth would be concentrated into the hands of fewer and fewer people. And in either case, it would undermine the basic logic that made capitalism an economically and politically successful system in the first place.

Virtually no one that I talk to in or around the financial industry really believes the "common ownership of companies by mutual funds undercuts competition" theory. It just seems too attenuated: Sure, it might be in BlackRock's and Vanguard's interests if the companies they own don't slash prices to compete with each other, but it's not (usually) like they call up executives to tell them that. Plus "competition" is usually a more nebulous concept than price-cutting: It might be in shareholders' interests to keep prices high, but it is also in shareholders' interests to see more innovation and more competition on quality. If you own the entire economic pie, your interest is in growing that pie, not in keeping each company's slices the same. And the way the pie grows is through the normal capitalist processes of innovation and competition and creative destruction and so forth.

Still I am so desperately fond of this theory. What I love -- what is made so clear in Jacobin's discussion -- is how it wraps capitalism all the way around to socialism. Index funds are in many ways a perfection of financial capitalism: Not only are they the result of scientific finance (modern portfolio theory, the efficient markets hypothesis, etc.) replacing earlier and less rigorous forms of investing, but they also concentrate and align shareholders with each other, and corporate managers with shareholders, in a way that seems like it would be well suited to "ensure that corporations remain within capitalist logic." And the result is something that both Marxists and also financial analysts think is quasi-communist, that "undermines the basic logic that made capitalism an economically and politically successful system in the first place." What if Marx was right that capitalism would ultimately destroy itself, but the way that it does so is through index funds? 

Anyway, happy 100th anniversary of Red October, I guess.

Elsewhere: "David Einhorn Is Wondering If Value Investing Even Works Anymore." And here is an excerpt from his letter to Greenlight Capital investors:

What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.

That is an alternative perfection of capitalism, I guess, if the capitalist class is subsidizing consumers without actually losing any money. 

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Emphasized: Mason disagrees with the "but" in that sentence. Marx was right all along.

Cowen on NGDP targeting; Mason on financialization

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