Greg Mankiw on the Value of Stock Traders

In response to a student's query that isn't all stock trading simply rent-seeking since there is no wealth creation, Greg mankiw replies:

I believe it is wrong to view investors, including long-term investors like Buffett and short-term investors like hedge fund managers, as parasitical rent-seekers. Yes, they are motivated by self-interest, but by buying undervalued securities and selling overvalued ones, their actions bring the prices of capital assets closer to fundamental value. Those asset prices govern the allocation of investment resources, which in turn is paramount for the success of the economy. So, while making themselves rich, investors make the economy more productive for everyone--as if led by an invisible hand.

It's a good answer, but let's also not forget that increased liquidity of issued stocks increases their initial value, and thus the amount of capital raised through an initial public offering. It's a lot like textbooks.