Down the Financial Plug-hole

What could Sir Martin Sorrell possibly want with £7.4m annual income? What could the FTSE350 company directors do with their 49% annual rise? As Adam Smith put it, there are limitations to ‘the size of a man’s stomach’. Of course, he also recognised they might want to satisfy ‘other wants and fancies … Cloathing and lodging, household furniture and … equipage.’ These might include what Thorstein Veblen referred to as ‘conspicuous consumption’, or for the truly inadequate: ‘conspicuous waste’. But Sir Martin Sorrell and his colleagues on the Prime Minister’s advisory committee on economic strategy, such as arch tax avoider Sir Philip Green, would struggle to spend even a small proportion of their income on such. So, according to the current economic orthodoxy – which it has to be admitted is based on some pretty quaint ideas – most of their income will necessarily find its way, as savings, into investment.

Some might get stashed under matresses and some might be spent on works of art, fine wine etc – the sort of things Ricardo noted as being in fixed supply and therefore reasonable stores of value with the potential for speculative gain. But the vast bulk of savings will be deposited with investment banks or other financial institutions where they are lo9oked after by professional fund managers. The orthodoxy assumes, though it is known to be an utterly false assumption, that it will be invested in real firms and real projects, creating jobs for the general population. Thus, even apart from Sir Martin’s claim to be worth 300 or more of his fellow human beings, his extreme high income is justified by its benign impacts for the rest of us. Any argument to the contrary must be motivated by base envy, and not worthy of consideration.

According to the International Swaps and Derivatives Association (ISDA), by 2008, the market for financial derivative “products”, which had barely existed prior to 1986’s stock market big bang deregulation, amounted to $54,000,000,000,000 ($54tn), many times the world’s investment in stocks and shares of real firms. The distinctive feature of these “products” is that their value today is determined only by expectations of their future value, rather than any reasoned assessment of their fundamental worth. ISDA shelters behind the limited public understanding of derivative products, a limitation it actively promotes. A current ISDA website link is headed “Don’t stir the pot if you don’t understand the ingredients”. The lack of understanding of ingredients is not because people are stupid, but because the ingredients are made deliberately opaque. Any reasoned assessment of the fundamental worth of derivative products is more or less impossible.

One consequence of this is that their price can in no way be limited by the normal rules of supply and demand. Moreover, their supply is essentially infinite, restricted only by the creativity of their suppliers – see http://www.gordonpearson.co.uk/06/pity-the-poor-banker/#more-630 . Thus, far from feeding into the real economy for everyone’s benefit, Sir Martin Sorrell’s excess income is part of a massive drain of funds out of the real economy into a highly lucrative, speculative bubble, which is absolutely certain to burst at some time in the future, with huge damage to all. All, that is, except perhaps to Sorrell himself and his like, whose fund managers might be smart enough to get out at the right time and make a further killing on their behalf.

A simple way to stop this would be to require of financial derivatives the same rigorous declaration of content that is required of a jar of marmalade. And the imprisonment of anyone not listing ingredients or listing them falsely. Then Sir Martin’s excess income, and even some of Sir Philip Green’s, might find its way into something socially useful.

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