The fragile illusion of modern prosperity

One of the most defining moment and notable event in history, the Stock Market Crash revealed weaknesses within capitalism and our very human nature. The stock Market Crash of 1929 was very important in history for causing the great depression, displaying the weakness of capitalism, and ending a decade of prosperity. During the roaring twenties, during which prosperity flourished within cities of North America, leading to a cultural revolution, which are represented by the Harlem renaissance, and increase of market economy, material cultural, and mass consumerism.

• The source of the wealth in the 1920s is based on an increase in demand for consumer products, most notably the radio, automobile, and houses. The growth of American economy is based on the growth in the automobile and construction industry, both of which leads to more industries that are related. The increase in inventions and efficiency, and the growth of certain industry and prosperity is genuine; there is nothing wrong with it.
• The problem the American economy has is that it relies heavily on the two industry of automobile and construction, and not on many others.
• There is 2 things wrong with this situation...
• First of all, by relying heavily on any industry, you tie your lifeline onto that industry, you certainly grow when it grows, but you also fell when it does so, and no one can assure you that it doesn't fell lower than where you start growing.
• Second of all, automobile and construction (housing), are two rather "permanent" products, not "expendable" products (food, drinks, electricity, fuel). A car and house are very expensive in comparison to the "expendable" products, relatively few families can afford more than one (unless using credit). Once the family have enough cars and housing, they won't need more. Afterall, there is no reason (other than comfort and luxury) why a family of four need to purchase a total of more than 3 cars and 2 houses. There is also no reason (other than comfort and luxury) why a family need a new car and house each year whether to replace their old one or to add to a collection. Once the family stop buying cars and housing, the demands decrease, and the incomes of the automobile and construction companies decrease.
• On the other hand, we use "expendable" products every day. Even though a drink (coca cola) is cheap, the constant purchase every day fuels a constant demand for the drink company. This doesn't means, however, that a "expendable" product company never runs out of customers and demands. Once the product gone out of trend or is replaced, the demands nonetheless decrease.
• The only way to fulfill a constant demand for the type of product a industry create is by making it more attractive to customers with practical innovations and inventions.

• However, apart from the actual "market" there is also the "stock market". When a company is declared to be public, it will divide its worth (a quantity amount) into numerous small portions, called stocks to be purchased by investors. The worth of the company, the amount of stocks available, and the price of each stock are all related. When you purchase a stock of company, you own a share of the wealth of that company that is proportional to the amount of stock you purchased and the total amount of stock there are.
• For the investor, the stock market is beneficial because it is basically a new platform for economic speculation, in another word, it is an opportunity for the investors to earn wealth when the company grows and the price of the stock goes up, to buy cheap but sell high, and to earn money with money. Also, it is good for investors because they did not just own a share of the wealth of that company when they purchase the company's stock, but also a chance to control that company. As a result huge investors who bought huge percentage of the stocks of a company (we are talking about 50% to 70% of the total amount of stocks)  have a huge authority within the company and can control what the company could do. In this way, huge investors can control a company without being the executor or founder of that company.
• Stock market is good for the entrepreneur and the company, because it is an attempt for it to get enormous amount of money, after all, huge portions of the money that the investors pay to buy the stocks of the company went to the company itself.

• The problems that exist in the concept of a stock market, however, is present in two part. One part is how much the company actually worth, the other part is how the price of each individual stock is determined.
• First, in terms of how much a company is worth, we often think the worth of the company is determined upon its assets, its existing wealth, and its existing income, but there is also what we call the company's "potential". 
• In another word, if a company is expected to have a lot of potential, it is "expected" to grow very large and successful in the future and as a result is valued much higher than what it now is. That huge difference between what a company really worth and what a company is expected to worth, is a source of trouble.
• Second, in terms of how the price of each individual stock is determined, there is a lot of factors. The most simple factors are the worth of the company and the number of stocks in circulation, or in another word, in existence; therefore, when a company's income grows and the number of stocks stays the same, its worth and, respectively, the price of each individual stock, increases. The vice versa is true as well.
• However,  there are more than just the physical growth of a company that increase the price of stocks. The "supply and demand" principle also works with stocks in a stock market and artificially pushes up prices of the stock, just like how it works with products in a product market. When a company is expected to grow very big and successful in the future and the limited amount of stocks of that company are all bought already, many investors would spend more than what it is currently worth to purchase that stock. 
• If others are willing to pay more for the stock  of a company, why wouldn't the stockholders (the investors who already bought the stock) of that company raise the price of the stock to earn more themselves when they sell the stocks they owned? And if every stockholder raise the price of their stocks, the investors have to pay more than the current price of the stock just to get them. 
• What this means is that if a demand for a company's stock is high enough, the stockholders, who are constantly changing, could continuously raise the price of the stock to unimaginable height.
• If you buy a stock and want to do something to increase it in price, you don't even need to go to the company to convince them to do something to increase the actual worth of the company, you simply need to convince more investors to buy the stock you just bought, and you can just sit and watch your stock rise in value.

• (Note: On the stock market, the "potential" worth of a company is often a representation of the value of the company that results from the rising prices of stocks that is driven up by supply and demand)

• What happened prior and during 1929 stock market crash was the result of a fatal combination of human's logical and emotional nature.
• The spike of stock price in the 1920's is a indication of the overconfidence that people have in the price of stock. The rise of the price of stock is caused by the buyers constantly outnumbering the sellers.
• Once people realize the "potential" of a company, they all went to buy the stocks of that company, once the people rushed to buy the stock of that company the company's stock price rise higher, once the stock price rose, more people notice its "potential" (more like the potential of the stock, not the company) and more people rush to buy it, and it goes on and on. It is a constant cycle that fueled the ludicrous increase in stock price during the 1920's. 
• The sheer number of investors rushing to buy the stock lead to the physiological phenomena that those who never buy stocks before start buying as well simply because everyone else around them is doing so.
• But, no matter who it is, everyone has a limit, eventually they felt satisfied by the illusion of their new fortune and stop buying and start selling.
• And of course they tell their fellow investors about selling the stock
• Then there are those intelligentsia who realizes that the worth that is written on the stock market continue to grow although the actual wealth of the company is shrinking due to decreasing demands in its products, and they starts writing about how there is going to be a crash.
• Not to mention how much impact this is going to have on emotional human beings.
• Last of all, people go with the flow. Once the voice of sellers overwhelm the voice of buyers, the buyers immediately disappeared as they follow suit.
• The buyers represent the demands in a supply and demand situation. Once the buyers and the demands are gone but the amount of stocks remained the same, the price of the stock falls not just according to the supply and demand principle, but also according to  history.
• With everyone selling, and no one buying, sellers lower their stock price to minimum just to get back any of those money they initially spend to purchase the stock.
• The new intensity of selling eventually equals (and possibly exceeds) the past ferocity of buying as the price of stocks plummet at a speed no slower than the speed at which it increases.
• After years of falling price, the stock price at last stops when the "alleged" worth of the company equals to what it actually equals and when the inflated stock price decreased to what it actually should have been.

• In retrospect...
• The stock market starts on a rational ground that the price of a stock correspond to the true value of a company, and therefore when a company grow in size and wealth (ignoring the value of the company on the stock market) the price of the stock increases. 
• However, the stock market ends on a ground of chaos, with the company that is referred to on the stock market completely detached from the actually company that is creating and selling goods, as if the stock market broke from the companies and became an entity of itself, setting the price of the company and the stock without considering what actually is the case. The price of the company and its stock become solely based on the investors demand for it, and the growth of the values become based on the amount of buyers.
• In this type of situation, you don't sell your stocks when the company's actual value is increasing, but when there are still buyers.
• The fall of the price can (at least in theory) represent the difference between our expectations and illusions (the pinnacle of the price), and the hard reality (the rock bottom).

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Bibliography

https://www.youtube.com/watch?v=ChcBfJCdYyA
Book - How the economy grows and why it crashed by Peter Schiff
https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929