Wall Street sign under water.
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Americans have always had something of a love/hate relationship with finance. And although robust financial markets have always been a critical driver of Americans’ prosperity, the hate portion of this relationship has typically eclipsed the love.
After the Great Depression, progressive attacks on financial markets and the supposedly unique greed of Wall Street have been pervasive. The recent complaints of politicians such as senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) differ slightly in detail from those of the 1930s, but they’re really nothing new.
However, in the last few years many conservatives (often among the national conservatives) have launched their own populist attacks, frequently adopting the term financialization. According to its proponents, financialization represents some kind of overreliance on financial markets, where too many resources have been diverted away from the “real” economy.
But as my new book (co-authored with Jennifer Schulp) demonstrates, even this latest critique is nothing new. In fact, there’s virtually no difference between the attacks launched by Socialists, Democrats, or Republicans, regardless of whether they use the term financialization.
They all use the same themes, most of which go back hundreds of years.
The most well-used theme is the idea that “speculators” are “nonproducers” who contribute nothing to the “real” economy. They merely profit from the work of others. For America, this theme dates to the nation’s founding. It was so central to the fight between the Jeffersonians and Hamiltonians that it even made it into the popular Hamilton musical.
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Later, many others put their own spin on it.
For example, in his famous work Capital, Karl Marx derided bond traders a “class of lazy annuitants” who just shuffled money around. He also made the disapproving distinction between “productive capital” and “commodity capital,” the latter being the kind he apparently liked the least.
In his 1936 tract on economics, John Maynard Keynes chastised speculators—even though he himself was one—and scornfully compared their trading to casino gambling. In the 1960s, Nobel prize winning economist James Tobin echoed Keynes’s remarks, and several socialist critics begin a two-plus decade assault of their own.
Interestingly, the socialists sounded very much like the present-day national conservatives, both arguing that excessive financial activity and speculation had contributed to economic stagnation. In fact, they sounded so much alike that my Cato colleagues and I recently ran a series of X polls—overall, almost half missed the mark, unable to identify whether a particular quote was from a socialist or a natcon.
Worse, all these critics share a disturbing trait: they’ve supported their attacks on financial markets with nothing more than opinions and irrelevant statistics. They had no evidence that, for instance, wild speculation caused the Great Depression or that financialization (whatever it is) caused stagnation in the 1960s, 1970s, 1980s, or beyond.
This problem appears to have gotten worse in recent years.
In 2019, Senator Marco Rubio (R-FL) released a report on the supposedly sad state of domestic business investment. The report argued “For the first time, the nonfinancial corporate business sector now consistently spends more on acquiring financial assets than on capital development.” Even if this statement is factually correct—the report does not provide direct evidence—it would be irrelevant. There is no inherent dollar amount that indicates firms spent too little on capital development.
More broadly, the idea that economic growth is harmful unless it comes from directly investing in capital goods, as opposed to investing in financial assets, is objectively wrong.
All investments are speculative, even investments in capital goods. And even investments that do not directly raise money for capital goods still indirectly contribute to capital development. A vibrant secondary market indirectly helps people raise capital for their companies because it makes it easier to raise capital in primary markets. (It helps when primary investors know they can sell shares on the secondary market.)
Obviously, some financial investments will have less influence than others on developing capital goods and wealth in the broader economy, but the same can be said for direct investments in capital goods. Regardless, that’s hardly sufficient reason to prohibit people from undertaking certain types of investments.
And it would be harmful to do so.
For starters, this kind of policy would make it more difficult for people to diversify their investments, thereby increasing risk. Ultimately, it would make it more difficult to raise money in primary markets and make it more difficult for people to build wealth.
Worse, implementing this kind of policy would require giving someone the legal authority to prevent people from lawfully undertaking certain types of investments. It would explicitly empower a small group of people—members of Congress or federal regulators, presumably—to make investment decisions for everyone else.
Government officials would decide, for instance, which investments are “too speculative” or might not produce “enough” value. Their subjective views, not the views of people putting their own money up, would determine what investments people can make.
Many modern critics of finance want this outcome, and they justify extreme levels of government control in the name of safety and stability. History has already shown, however, that this kind of restrictive legal/regulatory framework only makes financial markets more fragile. (No, financial markets were not deregulated prior to the 2008 financial crisis.)
Still, many of the natcons do a great job of sounding reasonable when they propose this kind of restrictive policy.
They focus, for example, on the fact that secondary market trades are not investments in real capital goods. But then they make this innocuous fact seem dastardly with language like “what we often call investment … is merely the trading of assets for profit and power.” No matter how devious they make it sound, this fact doesn’t justify what they’re proposing.
While the natcons insist they love free enterprise and freedom, and they only want to make sure markets work for the typical American, their policy prescriptions undercut pretty much every basic aspect of freedom and free enterprise. They can spin it however they like, but they want to turn Americans’ economic decision making over to a group of bureaucrats.
What the natcons want for financial markets would be great for the people in power, but not so hot for everyone else. Hopefully Americans start noticing.