Money for nothing

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  • 01/10/2024

    Money for nothing

    John Lanchester · For Every Winner a Loser: What is finance for?

    In his indispensable guide to the current condition of the financial industry, Other People’s Money, published in 2015, John Kay talks about the state of the UK banking sector, whose assets then were about £7 trillion, four times the aggregate income of everyone in the country. But the assets of British banks ‘mostly consist of claims on other banks. Their liabilities are mainly obligations to other financial institutions. Lending to firms and individuals engaged in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3 per cent of that total.’

    That’s finance. The total value of all the economic activity in the world is estimated at $105 trillion. That’s the mangoes. The value of the financial derivatives which arise from this activity – that’s the subsequent trading – is $667 trillion. That makes it the biggest business in the world. And in terms of the things it produces, that business is useless. It does nothing and adds no value. It is just one speculator betting against another and for every winner, on every single transaction, there is an exactly equivalent loser.

    The point bears repeating. There are other ways of getting rich, and in our society the classic three ways of making a fortune still apply: inherit it, marry it, or steal it. But for an ordinary citizen who wants to become rich through working at a salaried job, finance is by an enormous margin the most likely path. And yet, the thing they’re doing in finance is useless. I mean that in a strong sense: this activity produces nothing and creates no benefit for society in aggregate, because every gain is matched by an identical loss. It all sums to zero. The only benefit to wider society is the tax paid by the winners; though we need to remember that the losers will have their losses offset against tax, so the net tax benefit is not as clear as it might at first seem.