Submerged Wall Street sign.
Getty
Americans have always had something of a love-hate relationship with finance, and while strong financial markets have always been a key driver of American prosperity, the hate has usually outweighed the love in this relationship.
Progressive attacks on financial markets and the endemic greed of Wall Street have been rampant since the Great Depression. Recent complaints from politicians like Sen. Elizabeth Warren (D-Mass.) and Sen. Bernie Sanders (I-Vermont) differ in some details from those of the 1930s, but they are not actually new.
But in recent years, many conservatives (often national conservatives) have launched their own populist offensive, often using the term financialization, which, according to its proponents, refers to a kind of excessive reliance on financial markets in which too many resources are diverted from the “real” economy.
But as my new book (co-authored with Jennifer Schulp) shows, this latest criticism is not new either. In fact, it makes little difference to the attacks launched by socialists, Democrats, and Republicans whether they use the term financialization or not.
They all use the same themes and most of them date back hundreds of years.
The most common theme is the idea that “speculators” are “non-producers” and contribute nothing to the “real” economy; they only profit from the labor of others. For America, this theme has been around since the founding of the country. It was at the heart of the Jeffersonian-Hamiltonian conflict, and was even featured in the popular musical “Hamilton.”
Since then, many people have added their own interpretations.
For example, Karl Marx, in his famous book Das Kapital, derided bond traders as an “idle pensioner class” whose sole purpose was to circulate money, and he made a derogatory distinction between “productive capital” and “commodity capital,” the latter of which was apparently the kind he most disliked.
In a 1936 economic pamphlet, John Maynard Keynes harshly rebuked speculators (of which he was one), scorning their trade and likening it to casino gambling. In the 1960s, Nobel Prize-winning economist James Tobin echoed Keynes’s comments, and several critics of socialism launched their own attacks over the course of more than two decades.
Interestingly, the socialist views were very similar to those of current national conservatives who argue that excessive financial activity and speculation contributed to economic stagnation — so similar, in fact, that my Cato colleagues and I recently conducted a series of X polls and, overall, found that roughly half were off the mark, making it impossible to tell whether a particular statement was made by a socialist or a national conservative.
Worse yet, a disturbing feature shared by all these critics is that they back up their attacks on financial markets with opinion-irrelevant statistics: they have no evidence, for example, that reckless speculation caused the Great Depression or that financialization (whatever that may be) caused the stagnation of the 1960s, 1970s, 1980s, or since.
This problem appears to have worsened in recent years.
In 2019, Sen. Marco Rubio (R-FL) released a report on the dire state of business investment in the country. The report asserted that “for the first time, the nonfinancial corporate business sector is consistently spending more on acquiring financial assets than on capital development.” Even if this statement were factually correct (the report provides no direct evidence), it is irrelevant. There is no specific dollar figure that shows that corporations are spending too little on capital development.
More broadly, the idea that economic growth is harmful unless it comes from direct investment in capital goods rather than investment in financial assets is objectively false.
All investments are speculative, and investments in capital goods are no exception. And even investments that do not directly raise funds for capital goods indirectly contribute to capital development. An active secondary market indirectly helps companies raise capital, as it makes it easier for them to raise funds in the primary market. (It helps to know that primary investors can sell their shares in the secondary market.)
Obviously, some financial investments have a smaller impact on the development of capital goods and the wealth of the economy as a whole than others, but the same is true for direct investment in capital goods. In any case, this is not a sufficient reason to ban certain types of investment.
And doing so would be harmful.
First, such policies make it harder for people to diversify their investments, thereby increasing risk. Ultimately, it makes it harder to raise capital in primary markets, making it harder for people to build wealth.
To make matters worse, implementing this kind of policy would require giving someone the legal power to block certain types of investments from being made legally — a small number of people, perhaps members of Congress or federal regulators, would be explicitly given the power to make investment decisions on behalf of everyone else.
For example, government officials would decide which investments were “too speculative” or likely not to generate “enough” value. What investments people could make would be determined by the subjective opinion of the government, not by the people putting their money into them.
Many contemporary financial critics hope for this outcome, justifying extreme levels of government control in the name of safety and stability. However, history has already shown that such restrictive legal/regulatory frameworks only make financial markets more vulnerable. (No, financial markets were not deregulated before the 2008 financial crisis.)
And yet many lawmakers try to sound reasonable when proposing these kinds of restrictive policies.
For example, they focus on the fact that secondary market transactions are not investments in actual capital goods, but they make this innocuous fact seem obscene with phrases like “what we call investment is simply buying and selling assets for profit and power.” However cleverly they phrase it, this fact does not justify their proposal.
Natcon claims to love free enterprise and freedom, and just want the market to work for ordinary Americans, yet their policy proposals undermine nearly every fundamental aspect of freedom and free enterprise. They can interpret it however they like, but they want to hand over economic decision-making for Americans to a bunch of bureaucrats.
What the Congress wants for the financial markets is great for those in power, but not so great for everyone else. Hopefully Americans are starting to wake up.
