Just in case anyone thought that we here are prejudiced against the left – something that would be strange for we consider ourselves to be on the left, only the rational left that insists that the just aim of improving the lives of the poor is best performed with capitalism and markets – an example of how right wing economic analysis can be just as loopy.
The argument here is that financial markets don’t add much value, if any at all. A contention well up there with 2+2 = 5 in its usefulness. For to gain this insight it is necessary to entirely ignore the people doing the buying and the selling. Something really a bit strange – to the point of drivel – among those on the right who might be expected to support things like private property and the ability to acquire and dispose of it.
This comes from American Compass who appear to be the people unable to achieve the sophistication of Pat Buchanan’s economic analysis.
But the buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing. Their claim to value is purely derivative—by improving the allocation of capital and configuration of assets, they are supposed to make everyone operating in the real economy more productive. The practitioners are rewarded richly for their effort.
The inestimable Don Boudreaux takes on the first level of error here, of not thinking at the margin. Which does show that American Compass are more than a little archaic in their views given that the Marginalist Revolution – the point at which economics started to make sense when compared against reality – was 150 years ago.
But let us do our habitual thing here and look at this from the other end of the telescope. Forget all of the effects of what is going on and ask about the primary activity, what is going on?
Well, people own property. We’re in favour of property rights. The definition of actually owning something being that you’re able to dispose of it. Sell it that is. Or give it away, or change the use of it. If society tells you which of those, and how you can, do then society owns it. If your wife does then your wife owns it – as any man who has been paying the mortgage for 20 years finds out if he thinks of changing his wife as the property goes with her*.
So what is a market in property or property rights? Well, it’s just that, it’s a market in which people can exercise their rights over their property. Financial markets are just clearing houses for our exercise of our rights over our own financial property. Sure, there are rules about what can be done and who may do it and all that but this is what is the point and purpose of the entire game. That people who wish to sell property may do so with a modicum of efficiency and that those who wish to purchase may do so with that same modicum of truth and honesty.
Everything else that comes after that is entirely secondary. Sure, companies get financed, the world gets richer as a result. The upper middle classes have somewhere to send those children that can count. Everyone else gets the investment bankers to hold up as hate figures, all useful additions to the health and enjoyment of a well functioning society.
But the actual purpose? That people gain somewhere to buy and sell their own property. As Zoopla with houses, Sotheby’s with Granny’s Ming chamberpot and Craigslist with the Superman comic collection.
There are other joys that result, the ability for the average schleb to diversify, to change mode of investment from capital gain seeking to income as lifetime mileposts increasingly speed by, we all get to transfer risk to speculators by adding in futures markets and just oodles of lovely side effects.
But those are all, as with the initial claim of justification through greater productivity, just those side effects. The value of financial markets is that people get to buy and sell financial property as they wish. And if you don’t think that has a value then just try living in a society that doesn’t allow that. Oh, and don’t forget, if no one can sell this stuff then so also no one can buy it. How’s that for embedding in concrete the asset ownership pattern of the society? Still think there’s no value to markets in this stuff?
*One of the joys of the economic emancipation of women is that this is no longer so gendered.