GameStop made headlines this week when its stock price skyrocketed, shocking the investment community. After some hedge fund giants placed bets that the company’s stock price would fall (by short-selling the stock), their bets had abysmal results as retail investors banded together via Reddit threads and deliberately spoiled the strategy of these hedge fund managers. These investors bought the video game store’s stock en masse and collectively sent the stock’s value upward (+1,750% YTD through January 27, 2021 during the initial run-up in price).
To many, this looked like a David vs. Goliath-style victory, with many on social media celebrating the victory of the “little guy” over hedge fund titans. But first let us pause to consider what this episode teaches us and what our faith can teach us about such matters.
Catholic theology draws upon the philosophy of Aristotle as one of the means to better understand the mysteries of the faith. The philosopher also offers insights into the economy.
Aristotle distinguishes what he calls “natural finance” from “unnatural finance.” The former centers on earnings and the exchange of goods and services in order to sustain a household (oikos in Greek), whereas the latter orients wealth as an end in itself (Politics 1257b-1258b). Because unnatural finance treats wealth as an end instead of a means, Aristotle classifies it as unjust. Wealth—according to Aristotle— cannot be prioritized over the needs of the household or those of society (polis), i.e. the common good. Wealth accumulation has a self-serving end that is opposed to the common good.
Aristotle would not praise the retail traders for their defeat of the hedge fund managers in the GameStop trade. In their respective pursuits of wealth accumulation, both sides failed in their relationship to the polis and in their duty to the common good because they prioritized wealth as an end in itself. In this case, they engaged in unnatural finance. The oikos, for Aristotle, ought to be the primary driver of the economy (oikonomia).
In Pope Benedict XVI’s encyclical Caritas in Veritate, he reflects on the economy in relation to the Christian faith, namely by reiterating Aristotle’s claim that profit cannot be an end in itself but must have “the common good as its ultimate end,” otherwise “it risks destroying wealth and creating poverty” (21). But why might Pope Benedict consider a simple stock trade something that might potentially destroy wealth and create poverty?
Later in the encyclical, Benedict XVI writes, “What should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development” (40). Hedge fund short-selling and the retail investors’ mass buying of GameStop’s stock caused sharp changes in its stock price, resulting in a disruption in the stock market and an abrupt halt in trading activity on GameStop to stabilize the market.
Instability in the financial markets, such as during the dot-com burst in the early 2000s and the Great Recession of 2008 due to the mortgage crisis, results in dire effects for the poor and middle class, who largely do not play a major role in these respective crises. As a testament to the precariousness of short-term wealth accumulation, on January 28, 2021, GameStop stock fell by 44% in one day. Therefore, Benedict XVI highlights the potential harm toward the common good through speculative trading and orienting profit as the ultimate end.
The GameStop trade also signifies the zero-sum ends between the hedge fund titans and the retail investors. The hedge fund managers engaged in short-selling GameStop’s stock because they believed the company’s business model did not justify its stock valuation. Under this thesis, the hedge fund managers would gain at the expense of GameStop shareholders and insiders such as employees. If the thesis is correct, short-selling the stock to the point it inches closer to zero could accelerate the financial and operational debilitation of GameStop, and banks and business counterparties might back away from supporting the company any further. If this were to occur, GameStop might incur potential layoffs and other cost-cutting initiatives. In this scenario, hedge fund managers financially gain while GameStop shareholders, and potentially even employees, lose.
The retail investors, on the other hand, sought to pump money into GameStop’s stock to thwart the hedge fund managers’ short-selling strategy in order to harm these institutions financially. The retail investors’ intent was not only to secure a profit, but to inflict deep pain on billion-dollar money managers.
Whereas the GameStop trade was both short-term in profit and zero-sum in nature, Benedict XVI analogously offers an economic model that is not predicated on an adversarial relationship between two sides but promotes a spirit of cooperation that benefits all parties. First, Caritas in Veritate offers an alternative to the zero-sum equation. In writing on the offer of aid to developing nations, Pope Benedict XVI advocates that the “development aid for poor countries must be considered a valid means of creating wealth for all” (60). In this transaction, Benedict XVI posits that one country does not simply receive aid while another country provides financing, but that supporting a poor country allows it to improve its self-sufficiency and eventually contribute to the global market, potentially even becoming a valued trading partner to the benefactor nation. Pope Benedict offers a way for Christians to participate in the market economy that aligns the faith with the common good through a model of collaboration.
Based on the philosophy of Aristotle and Benedict XVI’s economic model founded on cooperation, we can conclude that our Christian faith does not call us to short-term, zero-sum and profit-centric transactions. We are called instead to turn our attention to the common good. How can we better promote this in our daily lives?
The principle of solidarity combats the self-seeking, profit-centric, zero-sum ends of the hedge fund and retail investors by orienting our activities towards the common good. Pope Francis defines solidarity as an acknowledgement of our interdependence, given our “common home” (EG 206), our “common origin in God,” and our “common destination in Christ” that combats the “increasing inequality and marginalization” that “weakens the social fabric and the environment.”
How is the principle of solidarity pertinent to this GameStop case study? Solidarity presupposes cooperation among parties to seek the common good and the betterment of all. As mentioned previously, the hedge fund short-sellers sought to profit from the decline in GameStop’s stock, and potentially the demise of GameStop as a corporation. Such a demise could result in the layoffs of employees, some of whom might have families, amid a bleak job market for re-employment. The principle of solidarity calls us to consider how our decisions might have potentially negative outcomes for other people.
This is not to say that all short-selling is always an immoral act; at times this strategy offers an offset against another investment to preserve value amid a potential decline in the investment’s price. For example, short-selling might be predicated on a thesis that a company’s stock price of $100 is truly worth $80, and the investor is not necessarily shorting the stock to drive the price to zero and cause harm to those working for the company. However, hedge fund managers, through the immediate execution of millions of dollars, can in certain circumstances perpetuate financial gain or ruin for companies. While the managers’ investment process might include valid premises for why a company ought not to exist, I believe the principle of solidarity requires consideration of how a financial decision might affect others in society. The principle of solidarity removes the “us vs. them” mentality to a “we are in this together” mindset, or as Pope Francis writes in Let Us Dream, making “space at the table for everyone” (p. 110).
The actions of the retail investors also have a negative implication, though related not to GameStop employees but to hedge fund investors. The principle of solidarity regards all people as equal, and does not justify harming the rich elite investors but seeking their well-being as well. Additionally, the spiking value of GameStop shares might influence non-wealthy investors with limited understanding of the financial system to invest in the company only to lose money when the price comes crashing down.
Both the hedge fund and retail investors in the GameStop example did not consider how their respective actions affect the overall market. Sharp price changes and trade-halting preceded the aforementioned financial crises as well as the market crashes in 1929 and 1987. Many people have retirement savings invested in the stock market, and the actions of a small group of investors could have an impact on other people’s 401K and retirement plans. Market instability could also result in a growth in unemployment and difficulty to borrow money from banks. And most recently in the 2008 recession, people witnessed their home prices decline precipitously. This is significant since residences are often an individual or a family’s most valuable asset. The principle of solidarity calls on these investors, as well as all of us, to make decisions mindful of how our actions affect others, most especially the poor and most vulnerable.
With regard to the GameStop trade, while the pursuit of profit without the common good in mind could have resulted in an economic crash, and thankfully it didn’t. However, precarious trading practices have resulted in crashes, which had brought financial ruin to many persons, especially poor and middle-class families. Solidarity, on the other hand, entails that we are only as strong as our weakest member. If someone in our society suffers, then we suffer too, and we therefore have a duty to alleviate that suffering.
The GameStop case study offers an opportunity to reflect on our Christian call in the economic sphere. We are not agents outside of the marketplace but active participants, and our faith is not to be removed from this activity but be our governing model. The principle of solidarity teaches us that our common home forms the basis of our understanding of the economy. We are not to work for short-term, zero-sum ends, but to make economic and societal decisions aimed toward the common good through the principle of solidarity.
Image: By Michael Rivera – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=71025399