Is Wall Street One Big Casino?

If you are a student of economics, then conversations with other students of economics about the economy generally go relatively smoothly. But if you are a student of economics and you engage someone without a background in economics, then conversations about the economy can get messy very quickly. This is because economists take things for granted. And a lot of times, economists have a hard time explaining why they take certain things for granted.

A colleague of mine once told me that the stock market is like a casino and investing in the stock market is no different from gambling. This comment annoyed me, but I had trouble articulating why this perception was so misguided.

Well, now, as "Wall Street" is demonized in the press and described as being fundamentally separate and in opposition to "Main Street," I feel the need to go back and reconsider that statement about the stock market being like a casino. The relevant question is, Why do financial markets exist? It is a daunting question, and I won't pretend to answer it thoroughly. But off the top of my head, I come up with the following reasons:

1) To provide liquidity. What is this thing, "liquidity," and why is it important? Another daunting question, but I will try to answer it as simply as possible. Liquidity allows companies to raise funds for the expansion of their activities. Fundraising can take many forms, including but not limited to initial public offerings, issuance of bonds (debt), or borrowing from banks.

2) To allow for the smoothing of consumption. Nobody wants to have to save $500,000 before buying a $500,000 house. Mortgages and the credit market allow people to smooth their consumption and savings over time so that the $500,000 can be paid incrementally over time.

3) To allow public ownership of equity. When Karl Marx looked at the economy and its organization, he separated society into two broad categories: capitalists and laborers. The existence of Wall Street, in theory at least, fundamentally blurs this distinction as laborers can increasingly become owners of capital.

These reasons that I have listed, I am sure, are crude and full of holes. And I am sure that other reasons exist as well. But my hope is that they show at the very least that "Wall Street" and "Main Street" are not in antagonistic relation to one another. Also, despite what might appear in the press, Wall Street does not exist solely to feed the greed of super wealthy individuals and corporations. In fact, Robert Shiller, a Yale economist, argues that further expansion and democratization of financial infrastructure is required to prevent crises like the one that we find ourselves in today. To people who regard Wall Street as one big casino, that kind of proposal sounds particularly counterintuitive.

In the past, when I have been confronted with statements or questions about the economy from people without a background in economics, I have often felt frustrated over my inability to respond intelligently or intelligibly. I ascribed my failures to explain economic thinking to the failings of my own intelligence or alternatively to pitfalls in my education. I don't discount the former possibility, but I am as well increasingly convinced that more attention needs to be paid in education to the issue of communication. Economists must learn to communicate economic thinking. I think the political process in the United States would benefit at the very least as economics takes a more central role in the public conscious.