Financial Markets Work Without Coercion

by Donald J. Boudreaux
The American Institute for Economic Research

What’s the purpose of financial markets? The conventional answer runs along these lines: Financial markets’ core function is to get resources from people who save to people who can use saved resources productively.

In the process of fulfilling this function, financial markets attach prices to different assets – for example, prices to different bonds and prices to different businesses, including prices to shares of corporate stock. In turn, these prices help to inform investors of the most promising opportunities. Asset prices also prompt people to make ‘efficient’ spending, savings, and investment decisions – decisions that direct resources into those particular lines of production that will best ensure sustained economic growth.

In short, the conventional story goes, financial markets exist to promote maximum economic efficiency.

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