the issue is fundamentally diversification. the only free lunch economists deign to recognize is not a free lunch at all from a social perspective, although it sure is from an investor perspective. it’s a transfer. 1/

if investors hold widely divergent, not-so-diversified-to-just-be-the-market, portfolios, then the mass affluent do not mindlessly habitually throw their wealth into equities, creating a mass equivalent of Trumpcoin by which to pay them off. 2/

noninformational, low risk savers live in Treasuries and CDs, which are harder to run patronage through. 3/

plus, to the degree investors are in equities, if “the market” is not investable, there is less of an easy target for the state to stimulate in order to payoff equity investors. 4/

outcomes diverge, policy that affects the market creates losers as well as winners, so it’s a noisier, less effective, circuit, political support to patronage to political support. 5/

i don’t want to overstate this: interest rate policy can help both Coke and Pepsi stock. 6/

but since less of the mass affluent’s public’s money would be in shares at all, and outcomes would diverge a lot more so much of the public is always on a losing side, it would be a much less tempting target to buy off the most enfranchised elements of the public. 7/

note the distinction here is not between active and passive — as you suggest, actively managed highly diversified funds could deliver the same political economic situation, giving everyone market returns plus tiny divergences, and just skim off higher fees for their trouble. 8/

the issue is diversified vs informationally committed investment positions. do you win no matter what — as long “the economy” as politicians and financiers define and sustain it, which isn’t how most of us experience it, goes “up”? 9/

or do you win only if you are right about some real-economic enterprise, if you actually contribute information work to the capital allocation process in directions that have proven fruitful? /fin