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The Great Divorce: Finance and Economy



ARTICLE | | BY Orio Giarini, Ivo Šlaus, Garry Jacobs

Author(s)

Orio Giarini
Ivo Šlaus
Garry Jacobs

Social networking did not begin with the Internet. It is as old as human history. For what we now call social networking is really the evolution of human relationships which constitute the backbone of civilization. The emergence of the Internet is the third giant leap forward in a saga that began with the development of symbolic spoken language, the first great instrument that enabled human beings to evolve beyond their animal ancestry. Second came the invention of money as a symbol of value. Language connects people and facilitates the exchange of information, emotions and ideas. Money connects activities and events, facilitating the exchange of goods, services, property and anything else of social value. The progress of humanity over the past two millennia would have been inconceivable without this remarkable invention. But like all human inventions, money has a downside which arises from the inevitable tendency of we human beings to bind ourselves to the wheel of our own triumphant machinery and be conquered by our apparatus.

Today, we are witnessing the consequences of that great invention wreaking havoc on the very fabric and stability of civilization, of humanity passively surrendered and blindly subordinated to its own creation. That which was intended to serve humanity now dictates. That which was intended to promote prosperity now undermines it. That which was intended to liberate human beings from the bondage of physical dependence, now robs people of the fundamental freedom to pursue a sustainable livelihood. At the root of the current crisis are not subprime mortgages, credit rating agencies, financial institutions or central banks. It is the Great Divorce between finance and economy, which is a subset of the widening precipice between economy and human welfare, between money value and the value of human beings. So great a divorce could well give birth to a great depression.

The question boils down to what is the purpose of financial markets? Why did we create them? Why do we have them? Why do we need them? Financial markets were founded a few centuries ago to support the growth of joint stock European trading companies, whose capital requirements for development of new markets far exceeded the personal wealth of their proprietors. Instead of borrowing for interest, these proprietors invited other investors to risk their capital and share in the rewards of successful entrepreneurship. Thus was born the forerunner of the modern, widely-held, publically-traded, professionally-managed corporation. As commerce and industry developed and prosperity grew, more and more ordinary people had an opportunity to invest their savings to share in the ownership and profits of huge productive enterprises. The financial market became capitalism’s answer to communism. Instead of everyone being equally poor by distributing limited wealth equally, all had an opportunity to become equally rich by sharing in the gains of industrialization and real economic growth.

Money is not the root of all evil that it has been blamed for. But the cancerous growth of unregulated specu­lative financial activ­ity may be a good can­didate.

 This system helped channel household savings to finance the remarkable economic progress of the last century. But it did not stop there. Capital accumulation for industrialization gradually broke away from its origins and principal purpose to become an end in itself – money chasing money, money producing money, but not producing real goods, wealth, employment and human welfare.

This conquest of reason and human values has taken place right under our noses and been heralded every step of the way in the march of human progress. Today, ninety percent of the transactions on the world’s financial markets are conducted by computer programs, known in the trade as black box algorithms, capable of performing thousands of transactions in a millisecond. This invention is so marvelous that two Nobel prizes in economics have been awarded to its creators. Mistaken as the latest technology for creating real wealth, these mysterious equations have produced havoc and instability of global proportions instead, and are responsible for the wholesale destruction of trillions of dollars and millions of jobs.

But the disease is not rooted in technology. It is rooted in the current organization of business which generously rewards investment bankers billions of dollars in incentives for collaborating with the incentivized executives of the world’s largest corporations to sacrifice real growth and employment generation on the altar of short term profit. A recent study found that transnational corporations form a giant bow-tie structure in which a large portion of control flows to a small tightly-knit core of financial institutions.1

Money is not the root of all evil that it has been blamed for. But the cancerous growth of unregulated speculative financial activity may be a good candidate. Today we live in a world where the right of hedge fund managers to leverage public funds to earn windfall profits by destabilizing markets and national economies takes precedence over the right of individual citizens to stable and secure access to opportunities for gainful employment. Under the rubric of free markets, national governments rush to bail out huge financial institutions and their wealthy investors, while leaving billions of people to helplessly struggle for their daily bread.

The dilemma we face is not the result of intrac­table Newtonian laws of the natural economy or Marxian fatalistic determinism. It is the product of erroneous choices we have made in the process of defin­ing our values, laws, policies and power structures.

Ironically, today we live in a world in which unparalleled wealth and productive capacity co-exist alongside unconscionable and totally unnecessary poverty and deprivation. Since 1980, the world’s financial assets have multiplied 20-fold, from $12 trillion to $212 trillion, while real incomes have risen just 2.7-fold. About $4 trillion circles the globe every day in search of lucrative short term speculative returns, producing very little of tangible value to human beings. Less than one percent of this money is used for actual purchase of goods and commercial services. At the same time, hundreds of millions of people are unemployed and several billion are grossly under-employed.

This massive divergence of financial resources explains the paradox of surplus capacity and extreme poverty. For the first time in history, the world possesses more than sufficient technology, financial capital and human capital to eradicate poverty from the globe. Yet, humanity continues to suffer from a plethora of unmet human needs for food, housing, education, medical care, transportation and other essential components of human welfare. Our problem is not a shortage of capacity but a system that has short-circuited. It is not the failing of human beings that is responsible but the failure of economic theory, policy and practice.

Is the current system inevitable? The dilemma we face is not the result of intractable Newtonian laws of the natural economy or Marxian fatalistic determinism. It is the product of erroneous choices we have made in the process of defining our values, laws, policies and power structures. Prominent among those choices is the failure to properly measure the costs of financial instability and assign those costs to the transactions that generate them. The recent financial crisis has cost the global economy trillions of dollars, yet the price has been paid by the general public rather than by the would-be beneficiaries of speculation. This is not the only example of economic values that do not reflect reality. The incentives for capital investment that replace labor with technology fail to take into account the enormous social cost of unemployment and underemployment, including the resultant social cost of crime, drug abuse, social unrest, and violence associated with rising levels of disengaged and disenchanted youth. Similarly, the pricing of scarce natural resources does not reflect their real replacement value, a cost surreptitiously passed on to future generations.

To understand that the current system is not inevitable, one need only imagine what would be the impact of introducing a Tobin tax on speculative investments sufficiently large to redirect a portion of this huge investible surplus, say $50 trillion, into productive investments that meet human needs and create employment, rather than chasing elusive forms of phantom wealth that will never feed real people, construct real factories or create real jobs. The Tobin tax has been hailed as a means to recover the huge costs of the financial crisis or pay for environmental remediation, but the real justification for such a tax is the need to redirect the world’s financial resources to productive investments that produce real products, services and jobs. This is only one of many practicable policy options available – e.g. eradicating tax havens – to transform the world economy from a Wild West land grab into a system that promotes the security, welfare and well-being of all humanity.

Orio Giarini, Garry Jacobs & Ivo Šlaus

Notes

  1. Stephania Vitali, James B. Glattfelder and Stefano Battiston, “The network of global corporate control,” PLoS ONE 6, no.10 (2011) http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025995

About the Author(s)

Orio Giarini

Director, The Risk Institute, Geneva, Switzerland; Fellow, World Academy of Art & Science; Email - oriogiarini@cadmusjournal.org

Ivo Šlaus

Honarary President, World Academy of Art & Science; Member, Club of Rome, European Leadership Network and Pugwash Council; Dean, Dag Hammarskjold University College for International Relations & Diplomacy, Zagreb.

Garry Jacobs

Chief Executive Officer, World Academy of Art & Science; Vice-President, The Mother’s Service Society, Pondicherry, India; International Fellow, Club of Rome.  
Email - garryj29@gmail.com Website: www.mssresearch.org

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