Why market cap is dumb

When I was a kid, I went to a tag sale “for kids, by kids” where kids sold their junk/toys to other kids. I was wandering around and saw a shoebox filled to the brim with marbles. I went over and there was a sign on the box that said, “25 cents/marble”.

“How much for the whole box?” I asked the kid.

He thought for a second. He was around my age, maybe a little older. “\$5,” he said.

“Sold!” I said quickly, handed him \$5, and ran off with my hundreds and hundreds of marbles before he realized how deep a discount he had just given me.

Suppose there were 300 marbles in the box. The box “should have” cost 300*25 cents=\$75. Obviously no one is going to pay \$75 for a box of marbles, which brings us to the basic problem with market cap and the stock market.

The market cap of a company is basically the number of shares it has issued multiplied by price per share. However, if we think of a share as a marble, the market cap is that ridiculously inflated \$75.

How much of this stock are people actually trading? Google, for example, has 723,000,000,000(ish) shares outstanding. Daily trading volume is around 1,500,000. That is .0002% of the outstanding shares. Translating that into marbles… that’s a lot less than one marble.

But let’s say a couple of people buy individual marbles, and then start trading them between themselves for 25 cents. Someone who hasn’t seen the kid’s booth offers a buyer 30 cents for a marble. Doing some quick math, people realize that marble boy’s net worth has gone from \$75 to \$90. “Hey, that kid just made \$15. We should tax him on that.”

And that’s why a wealth tax is stupid.

2 thoughts on “Why market cap is dumb”

1. Eric says:

I’m all for automation and freeing people out of tedious jobs (heck, I’m working incredibly hard to make my own current job operating on-premise systems redundant, thought I doubt I’ll succeed as the industry as a whole is not really cooperating… a lot of wonderful tooling, but little of it is trivial to operate), but realistically, if a big chunk of your workforce becomes redundant, you need something to keep them afloat in the form of viable minimum guaranteed income, but if the bulk of the tax burden is borne by a shrinking middle class, it won’t work.

You need some sort of functional wealth redistribution mechanism.

If the humanitarian element is unappealing, maybe view it in terms of security. It doesn’t make for a safe stable society when a significant proportion of the populace lives in misery. Personally, I’d much rather not have to hire private security when I get back home from my cushy job.

I’m looking at the price of housing, food and other amenities relative to the minimum wage here, the diminishing prospects for a lot of professions (the grocery store where I used to work in college has replaced at least half its cash registers with automated checkouts) and I do worry. By all means, tax away, especially the wealthy who can afford it. They are certainly employing far less people than they used to.

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1. kchodorow says:

I’m not super worried about automation. Maybe eventually everything will automatically work perfectly without human intervention, but we’re so far from that it hardly seems worth worrying about.

I get the sense most pro-wealth-tax arguments are vengeance based: those rich people, living in compounds and not employing people anymore, should suffer. While that might be satisfying, it doesn’t seem useful. If the goal is improving as many peoples’ lives as possible, the government should be enacting policies and getting funding for them. But obviously lack of funds hasn’t held them back from spending money over the past couple of years.

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