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Evolution in Nature and Society

Evolution in Nature and Society

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09/12/2013

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    Evolution in Nature and Society: The Evolution of Stock Markets
 
Prof. Edward Peter StringhamHackley Endowed ChairSchool of Business and EconomicsFayetteville State University, North Carolina, 28301 
Can the theory of evolution be applied to topics other than the evolution of species?French economist Alain Marcaino argues that both Charles Darwin and Nobel prizewinning economist Friedrich Hayek refer to the same theory of human nature, which isborrowed from the founding fathers of political economy, Hume and Smith.
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This essayprovides support for the idea that theory of evolution can be used to describe manyimportant market institutions. Markets involve people who are often consciously choosingvarious business practices so the analogy between evolution in markets and evolution innature has some importance differences. But just as different species vary or adapt so dodifferent economic practices. Those that are more suited for their time and place willbecome more successful and will be copied and replicate. The history of stock marketsillustrates this point well.
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 Stock markets were not suddenly invented. Harold Wincott begins
The Stock Exchange
with the following, It would be nice to start this book with a satisfyingly round
  
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Alain Marciano Why Hayek is a Darwinian (after all)? Hayek and Darwin on social evolution
ournal of Economic Behavior & Organization
, 2009, vol. 71, issue 1, pages 52-61
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This essay draws from Edward Peter Stringham, The Extralegal Development of Securities Trading inSeventeenth Century Amsterdam.
Quarterly Review of Economics and Finance
, 43(2) Summer  2003: 321-344and Edward Peter Stringham. The Emergence of the London Stock Exchange as a Self-Policing Club.
ournal of Private Enterprise
, 17(2) Spring 2002: 1-19.
 
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sentence: one the th day of  in the year of our Lord  , the Stock Exchange,London, came into being. Alas for those with tidy minds, the Stock Exchange is a typicallyBritish institution. No-one can say with any certainty exactly when it started. Like Topsy, it almost seems it never was born, but just growd.
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No governor declared theestablishment of the London Stock Exchange; rather it evolved over time.The first major joint stock companies had come into being in the sixteenth century
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 and it was not for some time before there were enough tradable stocks to warrant thespecialized occupation of stockbrokers. At the end of the seventeenth centuryimprovements in banking led to an increase in the quantity of joint stock companies fromfifteen to a hundred and fifty in a matter of six years.
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At first sales were conducted on asmall scale directly between the buyers and the sellers. After there were enough stocks,obviously the time was ripe for the emergence of some kind of middleman who wouldbring the promoters and subscribers together.
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 The earliest evidence of stockbrokers in England appears in the late seventeenthcentury and in 1692 the trade was important enough for the weekly periodical
ollectionfor Improvement of Husbandry and Trade
to begin publishing stock prices for eight companies.
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Although trading of stocks took place, as Jenkins points out, they were by nomeans necessarily stock-brokers. They could deal in anything they likedstockes, gold,
  
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Harold Wincott,
The Stock Exchange
, (London: Sampson Low, Marston & Co, 1946.) p.1.
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Charles P. Kindleberger
A Financial History of Western Europe
(George Allen & Unwin: London 1984) p.196.
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Jenkins, p.18.
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Jenkins p.18.
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Larry Neal, The Integration and Efficiency of the London and Amsterdam Stock Markets in the EighteenthCentury,
ournal of Economic History 
, Vol.XLVII, No.1(Mar.1987):p.99.
 
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haberdashy, fish, bread, carpentry, spectacles, even bows and arrows.
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Anyone who was abroker could become a stockbroker if he wished.
 
 Eventually people began specializing in stockbrokerage but they still traded amidst other merchants. Over time those specializing in stocks would meet at JonathansCoffeehouse. But the coffeehouse attracted many people including some brokers who wereunreliable and would unintentionally or intentionally default. At first they started postingthe names of defaulters on a blackboard but that was only partially effective. Certainbrokers then decided to turn Jonathans into a private club that could create and enforcerules. Some of the excluded brokers argued against this exclusivity, so when Jonathanseventually reopened to the public the more established brokers created a Stock Subscription Room elsewhere that was a private club. The Stock Subscription Room wasoriginally referred to New Jonathans and eventually the Exchange. The members of theExchange were then able to create and enforce rules. They experimented with rules andthose who broke the rules would be fined or eventually expelled. This system of ruleenforcement enabled brokers to congregate in a venue where they were much less likely tobe defrauded than if they traded on the curb. The London Stock Exchange competed withother trading venues in London (some people traded at a Rotunda) and around the world.Those that came up with superior business practices became more successful and werelikely to be copied.Other stock markets such as the New York Stock Exchange evolved in a similarmatter creating a system of competing self-regulating stock exchanges. In the United States,
  
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Jenkins pp19-20

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