The limited convertibility of the capital goods does not immovably bind their owner. The investor is free to alter the investment of his funds. If he is able to anticipate the future state of the market more correctly than other people, he can succeed in choosing only investments whose price will rise and in avoiding investments whose price will drop.
Entrepreneurial profit and loss emanate from the dedication of factors of production to definite projects. Stock exchange speculation and analogous transactions outside the securities market determine on whom the incidence of these profits and losses shall fall. A tendency prevails to make a sharp distinction between such purely speculative ventures and genuinely sound investment. The distinction is one of degree only. There is no such thing as a nonspeculative investment. In a changing economy action always involves speculation. Investments may be good or bad, but they are always speculative. A radical change in conditions may render bad even investments commonly considered perfectly safe.
Stock speculation cannot undo past action and cannot change anything with regard to the limited convertibility of capital goods already in existence. What it can do is to prevent additional investment in branches and enterprises in which, according to the opinion of the speculators, it would be misplaced. It points the specific way for a tendency, prevailing in the market economy, to expand profitable [p. 518] production ventures and to restrict the unprofitable. In this sense the stock exchange becomes simply "the market," the focal point of the market economy, the ultimate device to make the anticipated demand of the consumers supreme in the conduct of business.
The mobility of the investor manifests itself in the phenomenon misleadingly called capital flight. Individual investors can go away from investments which they consider unsafe provided that they are ready to take the loss already discounted by the market. Thus they can protect themselves against anticipated further losses and shift them to people who are less realistic in their appraisal of the future prices of the goods concerned. Capital flight does not withdraw inconvertible capital goods from the lines of their investment. It consists merely in a change of ownership.
It makes no difference in this regard whether the capitalist "flees" into another domestic investment or into a foreign investment. One of the main objectives of foreign exchange control is to prevent capital flight into foreign countries. However, foreign exchange control only succeeds in preventing the owners of domestic investments from restricting their losses by exchanging in time a domestic investment they consider unsafe for a foreign investment they consider safe.
If all or certain classes of domestic investment are threatened by partial or total expropriation, the market discounts the unfavorable consequences of this policy by an adequate change in their prices. When this happens, it is too late to resort to flight in order to avoid being victimized. Only those investors can come off with a small loss who are keen enough to forecast the disaster at a time when the majority is still unaware of its approach and its significance. Whatever the various capitalists and entrepreneurs may do, they can never make inconvertible capital goods mobile and transferable. While this, at least, is admitted by and large with regard to fixed capital, it is denied with regard to circulating capital. It is asserted that a businessman can export products and fail to reimport the proceeds. People do not see that an enterprise cannot continue its operations when deprived of its circulating capital. If a businessman exports his own funds employed for the current purchase of raw materials, labor, and other essential requirements, he must replace them by funds borrowed. The grain of truth in the fable of the mobility of circulating capital is the fact that it is possible for an investor to avoid losses menacing his circulating capital independently of the avoidance of such losses menacing his fixed capital. However, the process of capital flight is in both instances the same. It is a change in the person [p. 519] of the investor. The investment itself is not affected; the capital concerned does not emigrate.
Capital flight into a foreign country presupposes the propensity of foreigners to exchange their investments abroad against those in the country from which capital flees. A British capitalist cannot flee from his British investments if no foreigner buys them. It follows that capital flight can never result in the much talked about deterioration of the balance of payments. Neither can it make foreign exchange rates rise. If many capitalists--whether British or foreign--want to get rid of British securities, a drop in their prices will ensue. But it will not affect the exchange ratio between the sterling and foreign currencies.
The same is valid with regard to capital invested in ready cash. The owner of French francs who anticipates the consequences of the French Government's inflationary policy can either flee into "real goods" by the purchase of goods or into foreign exchange. But he must find people who are ready to take francs in exchange. He can flee only as long as there are still people left who appraise the future of the franc more optimistically than he himself does. What makes commodity prices and foreign exchange rates rise is not the conduct of those ready to give away francs, but the conduct of those refusing to take them except at a low rate of exchange.
Governments pretend that in resorting to foreign exchange restrictions to prevent capital flight they are motivated by consideration of the nation's vital interests. What they really bring about is contrary to the material interests of many citizens without any benefit to any citizen or to the phantom of the Volkswirtschaft. If there is inflation going on in France, it is certainly not to the advantage either of the nation as a whole or of any citizen that all the disastrous consequences should affect Frenchmen only. If some Frenchmen were to unload the burden of these losses on foreigners by selling them French banknotes or bonds redeemable in such banknotes, a part of these losses would fall upon foreigners. The manifest outcome of the prevention of such transactions is to make some Frenchmen poorer without making any Frenchmen richer. From the nationalist point of view this hardly seems desirable.
Popular opinion finds something objectionable in every possible aspect of stock market transactions. If prices are rising, the speculators are denounced as profiteers who appropriate to themselves what by rights belongs to other people. If prices drop, the speculators are denounced for squandering the nation's wealth. The profits of the speculators are vilified as robbery and theft at the expense of the [p. 520] rest of the nation. It is insinuated that they are the cause of the public's poverty. It is customary to draw a distinction between this dishonest bounty of the jobbers and the profits of the manufacturer who does not merely gamble but supplies the consumers. Even financial writers fail to realize that stock exchange transactions produce neither profits nor losses, but are only the consummation of profits and losses arising in trading and manufacturing. These profits and losses, the outgrowth of the buying public's approval or disapproval of the investments effected in the past, are made visible by the stock market. The turnover on the stock market does not affect the public. It is, on the contrary, the public's reaction to the mode in which investors arranged production activities that determines the price structure of the securities market. It is ultimately the consumers' attitude that makes some stocks rise, others drop. Those not saving and investing neither profit nor lose on account of fluctuations in stock exchange quotations. The trade on the securities market merely decides which investors shall earn profits and which shall suffer losses.
. The popular doctrine that the stock exchange "absorbs" capital
and money is critically analyzed and entirely refuted by F. Machlup, The Stock Market,
Credit and Capital Formation, trans. by V. Smith (London, 1940), pp. 6-153.