Furthermore, if you count the value of global economic expansion as a benefit of U.S. expertise in capital allocation, you find the salaries are probably well earned.

We tend to only see the bad side of China/US balance of payments. But the fact is without that imbalance there would be no middle class in China. How much is thier existence worth?

Add Brazil, India, Russia, and whomever else benefits and you have a calculation problem you won’t easily brush off.

Doesn’t that claim fly in the face of economic history? For instance, didn’t Jay Gould (among others) get larger than he should, without the benefit of a bail out policy? Didn’t his failure spark a panic and usher in the Long Depression?

Also, “larger than they should” is not exactly well defined. ;) Suppose that we take it to mean, highly interconnected with the economy as a whole, and containing highly interconnected units so that the failure of a few of those units will have dire consequences for the economy as a whole. Then doesn’t network theory suggest that such highly connected units (e. g., corporations) and groups of units (e. g., industries) will tend to form simply by the formation of connections?

Guaranteeing bailouts for banks that are Too Big To Fail may be pernicious. But the claim that a policy of no bailouts will be sufficient to prevent banks from becoming too big to fail or banking from becoming too big is questionable on its face.

If GDP includes tangible and intangible values, what is the third value type that “wealth creation in the financial sector” is made of? It sure sounds like intangibles to me.

“…to trade more assets and liabilities than what can be ultimately connected to some sort of reality…”

How can anything I pay for not be connected to some sort of reality? Even if I buy a CDS and I don’t have any bonds that need insuring, the person on the other side has a liability to me. If that’s bad or not connected to reality, you have to lump nearly the entire economy of Las Vegas into your definition of “bad economics not tied to reality”, and if you ban CDS contracts not tied to some reality, you have to ban all gambling in all forms, since the event of a three and four on two dice is no more connected to the real world than the event of default behind the liability of a CDS.

“Otherwise why would bubbles, at least in finance, ever happen at all?”

Because value is always and everywhere subjective (see Human Action, by Ludwig von Mises).

“…people can be “worth more” than everyone else simply based on their connection to finance”

Absolutely! Otherwise you’re trying to declare the value of someone’s time must conform to some objective standard that some gang of planners decides is right for everyone who does business with that person. Again you try to tie value (this time of someone’s time, intellectual skill, and relationships) to an objective standard to ensure it doesn’t exceed something you decide is a limiting factor. All I can do is point back again to the fallacy of objective value.

If I want to do something brash and absurd and pay the gardener $10,000 to cut 100 square feet of grass because I hope to get in on the good side of his Dad who has connections with others I value, what business is that of you or anyone else?

Economics can easily deal with the “subsidization of moral hazard” by simply not insuring predefined outcomes by the State. Moral hazard has it’s root in the minority of decision makers who insist on specific predefined outcomes for specific events, who then coerce the population to pay for it through the use of tax dollars.

Discussion of value of labour in relation to the generation of wealth in the financial sector does not infer a exclusive relation to the production of physical objects. The problem with wealth creation in the financial sector is its potential to be entirely unrelated to GDP which includes all sorts of intangible production of knowledge etc. It is the potential for the financial sector to trade more assets and liabilities than what can be ultimately connected to some sort of reality that leads to precarious imbalance… Otherwise why would bubbles, at least in finance, ever happen at all? Of course, if we allow a sort of separate reality where people can be “worth more” than everyone else simply based on their connection to finance – this is full engagement of moral hazard and is bound to undermine democracy.

Evidently, economists are still struggling with what Keynes attempted to address in his General Theory. Given the huge changes since the early 1900′s evolution of thought is needed again to both deepen understanding of the multi-dynamic links between people and money and expand the structure of economic theory. This is how ‘subsidization of moral hazard’ can be avoided.

“Remember, in Marx’s theory labor is the source of economic value.”
(source: http://mises.org/misesreview_detail.aspx?control=127)

My comment is only trying to connect at that *one* point. This blog is focused on rents and values. I’m simply proposing that discrediting “rent”, or suggesting it has some threshold above which it is harmful is close to the Marxist theory of value (since production is labor intensive and rents are not) and that production of goods is necessarily more valuable than production of services.

It’s also ingrained in our psyche that hard work is what you do to “earn” something, and therefore to earn something without labor is somehow inferior or immoral. I suggest that’s an arbitrary distinction, if not simply archaic.

I think the reason most people buy the argument that production is superior to services is not based on economics, but on the ease at which you can value something you see and feel, and how hard it is to “experience” or quantify the value of being able to find some stranger in who-knows-where who has more money than they need that is willing to lend to a stranger in who-knows-where for productive or personal use.

It’s easy to quantify and value the sum total of cars produced by GM. But how do you quantify and value the sum total of economic activity brought about by facilitating the productive use of savers’ capital in the hands of young consumers and entrepreneurs?

If that doesn’t make sense, check out this MIT material on how the secondary market in bonds facilitates the allocation of capital. The relevant part is the prequel, which frames the problem and demonstrates the efficiency and economic benefit of such a system.
(source: http://ocw.mit.edu/NR/rdonlyres/Urban-Studies-and-Planning/11-432JReal-Estate-Finance—Investments-II–Macro-Level-Analysis—Advanced-TopicsSpring2003/2DCB3B29-17E5-43FD-850B-5758E17A9BA7/0/ch20new.pdf)

I’ve heard it said that America excels at the efficient allocation of capital. If that’s true, and if in fact that is a valuable service to the entire global economy, then this system of “rents” can hardly be considered inferior to a system primarily based on production.

I’m not trying to argue for throwing caution to the wind and being cavalier about financial services. I’m simply suggesting it not be disparaged as some inferior economic value to the production and sale of manufactured goods. As a matter of fact, since the 90′s, the global economy has expanded phenomenally from the advent of the adoption of capitalism by the former command economies of the world. If then, America was the most efficient allocator of capital, it’s stands to reason that the financial services industry in America would have experienced the most phenomenal growth.

Totally by coincidence, as I was looking up the link to mises.org, there was this title promoted on the home page. I’ve never heard of Fetter or this book, but it might be of interest to someone who wants to dig deeper into this concept of rent, interest, and financial markets. I’ve ordered it for myself.
“Capital, Interest, and Rent” (source: http://mises.org/store/Capital-Interest-and-Rent-P345.aspx)

no I was not being sarcastic probably I was being nostalgic for a world view that for good or for evil could convince itself that it felt it had a clearly defined starting point from which to go somewhere

– that struck me as a different world view
- the way my “tutor” explained it to me Marx saw the condition of the world he lived in as something given something from which either further “progress” towards exploiting the masses or something better would come (about that part we haven’t much talked yet for him it is opening up a lot of old wounds, he was a believer and he is a decent man but we’re getting there, my admiration for Orwell helps) i.e. a starting point from which things would progress like a road does.
Today we seem to see the world more in a constant waving up and down round and round bubble to bust to bubble (maybe that already existed at Marx’ time but maybe he didn’t acknowledge it as much as inevitable as we do or maybe he just rebelled against it while we have become meek and docile?
- I’ve noticed that “plus ca change …” is currently very popular. I am very much in favor of the image of Yin and Yang when it is cleared of all esoterics and think it is a very apt image for how we think today (i.e. the seed of the opposite always ready in the dominant). But even if I believe that this way of thinking is right for our times I can still feel nostalgic for somebody who could think something through he felt he could be sure of.

hope I didn’t mess it up again

I read this, “if they were right how interesting that 150 years ago somebody smart could not yet be “philosophical” about a bust and cheerfully rely on the certainty that the next bubble will surely come.”, and was not sure what you meant by it.

Were you being sarcastic? Could you elaborate?

the info-bit is that at the writing of Kapital England was in a long lasting slump – the article mentioned a Dickens novel being written at that time and describing life in England at the time (I’m not a Dickens reader but seem to remember Bleak House) – of course the most vulnerable were hardest hit but the article wanted to suggest that Marx maybe saw this downturn this slump going on for all time – if they were right how interesting that 150 years ago somebody smart could not yet be “philosophical” about a bust and cheerfully rely on the certainty that the next bubble will surely come.

To me the idea that people should work all the time to make “stuff” is not Marxist at all; it is the very essence of capitalism.

One thing thing Marx was concerned about was the negative effects that modern production techniques had on human nature (Gattungswesen). To paraphrase wildly, Marx thought people who were being forced to use modern production techniques were treated like machines instead of being treated as human beings with intrinsic dignity. When labor is bought and sold in the marketplace, laborers (much like slaves) become commodities to be bought and sold. Marx believed this to be a huge problem because he believed the thing that made people uniquely human was their ability to transform the world they live in through work.

Nowhere that I have read did Marx say people should work all the time. He felt that when people work all the time using modern production techniques they lose an essential part of their humanity.

To me, What Marx wrote about work more than 150 years ago still rings true today. I think you are attributing to Marx everything he criticized when he lived and wrote.