Finance Capitalism
09-08-2024John Lanchester argues that finance, an activity that accounts for $667 trillion dollars of the world economy–making it “the biggest business in the world”, is practically useless.
“'The point bears repeating. There are other ways of getting rich, and in our society the classic three ways of making a fortune still apply: inherit it, marry it, or steal it. But for an ordinary citizen who wants to become rich through working at a salaried job, finance is by an enormous margin the most likely path. And yet, the thing they’re doing in finance is useless. I mean that in a strong sense: this activity produces nothing and creates no benefit for society in aggregate, because every gain is matched by an identical loss. It all sums to zero. The only benefit to wider society is the tax paid by the winners; though we need to remember that the losers will have their losses offset against tax, so the net tax benefit is not as clear as it might at first seem."
Lanchester knows that in economic theory, there is a practical use for finance. “Common sense, and the textbook, both say that finance is the business of moving money from A to B. There are times when money in place A, a saver’s bank account, say, would be usefully deployed in place B, a business needing cash to expand, or an individual wanting a mortgage to be able to buy somewhere to live. It’s easy to extrapolate from this that finance is mainly about supplying money to businesses and individuals that need it, as and when they need it. And modern finance does do that.” But in our complicated financial world, most financial transactions are not about moving money from one place to another or supplying money to the most efficient businesses or those enterprises that will use the money in the most impactful ways. The vast majority of financial transactions—well over 90% of them—are simply ways for people to gamble. Lanchester writes:"Lending money where it’s needed is what the modern form of finance, for the most part, does not do. What modern finance does, for the most part, is gamble. It speculates on the movements of prices and makes bets on their direction. Here’s a way to think about it: you live in a community that is entirely self-sufficient but produces one cash crop a year, consisting of a hundred crates of mangoes. In advance of the harvest, because it’s helpful for you to get the money now and not later, you sell the future ownership of the mango crop to a broker, for a dollar a crate. The broker immediately sells the rights to the crop to a dealer who’s heard a rumour that thanks to bad weather mangoes are going to be scarce and therefore extra valuable, so he pays $1.10 a crate. A speculator on international commodity markets hears about the rumour and buys the future crop from him for $1.20. A specialist ‘momentum trader’, who picks up trends in markets and bets on their continuation (yes, they do exist), comes in and buys the mangoes for $1.30. A specialist contrarian trader (they exist too) picks up on the trend in prices, concludes that it’s unsustainable and short-sells the mangoes for $1.20. Other market participants pick up on the short-selling and bid the prices back down to $1.10 and then to $1. A further speculator hears that the weather this growing season is now predicted to be very favourable for mangoes, so the crop will be particularly abundant, and further shorts the price to 90 cents, at which point the original broker re-enters the market and buys back the mangoes, which causes their price to return to $1. At which point the mangoes are harvested and shipped off the island and sold on the retail market, where an actual customer buys the mangoes, say for $1.10 a crate.
Notice that the final transaction is the only one in which a real exchange takes place. You grew the mangoes and the customer bought them. Everything else was finance – speculation on the movement of prices. In between the time when they were your mangoes and the time when they became the customer’s mangoes, there were nine transactions. All of them amounted to a zero-sum activity. Some people made money and some lost it, and all of that cancelled out. No value was created in the process."
Notice that the final transaction is the only one in which a real exchange takes place. You grew the mangoes and the customer bought them. Everything else was finance – speculation on the movement of prices. In between the time when they were your mangoes and the time when they became the customer’s mangoes, there were nine transactions. All of them amounted to a zero-sum activity. Some people made money and some lost it, and all of that cancelled out. No value was created in the process."