Marxist Bubbles and Taleb’s Turkey: It’s Going to Be an Awkward Thanksgiving

Over a third and growing quickly. That’s the share of the market that’s now comprised of blind sheep passive indexers.
That much passive money is nothing to sneeze at. Call me old-fashioned, but I was originally led to believe that the function and role of markets in a capitalist society can direct capital to its most productive end – you know, Smith’s ‘Invisible Hands’ and the productivity/profit link and all that jazz.
So what happens when instead of being deployed by thinking profit-driven investors… a growing portion of a nation’s savings is invested with the same diligence generally utilized by a co-worker choosing donuts for his office mates: ‘Umm…yeah, I’ll take two dozen of whatever you got?’
That’s the question research firm Sanford C. Bernstein asked in a recent piece comparing the current passive investing craze to a lesser form of Marxism – it being appropriately titled ‘The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism.’
The report notes the different types of capital allocation models societies can choose, saying (bolding is mine):
Active investment decisions form a crucial part of the capital allocation process in an economy and as such there is a clear and distinct social worth in their aggregate action. A possible alternative is a Marxist economy where the capital allocation is planned, such a system is perfectly viable but just less effective. However, a supposedly capitalist economy with no active investment – where passive management is the only capital allocation process – is, in our opinion, worse than either of these alternatives, hence our assertion in the title of this note.

This post was published at FinancialSense on 08/31/2016.