Notebook, 2 April 2012: On financial markets, speculators, rentiers and rent-seeking behavior

Lately, I’ve been harping a lot on the “rentier economy” of the US, and this is not entirely accurate and by no means comprehensive. But it is very significant and a hard-headed clarification of roles and terms is called for.

The classic version of a rentier economy posits a feudal system in which landowners collect rents from farmers, and has a modern counterpart in those who rent their spare cash to businesses (whether they are viable or not) in return for expected future returns. Which all sounds fine in theory. The wealthy would be putting their money into creating new drivers of economic growth. This is the basic premise of neo-liberal/libertarian economics. Fine, but that’s not comprehensive either, not by a long shot.

As I’ve defined them, the modern rentier class aren’t the landowners of old, they are modern investors, and again, as far as this goes, this is a good thing. The modern rentier can invest directly as venture capital or in the IPO stages of “main street” business development.

After the IPO, the speculators take over. The company receives no more investment capital, and shareholders look for their ROI in dividend payouts which are voluntary or in share resale to other equities traders. We need not call these people “investors” at all, because their profits or losses, though very real, are based on taking a position in the belief of a rising market. This is the hallmark and defining characteristic of speculative behavior. By far, by a vastly greater margin, almost all stock market activity is purely speculative. How important is this? It’s huge. When you consider that the total market capitalization (the sum of the market price of all stocks) of the NYSE and NASDAQ combined is around 120% of the GDP (24 August 2011. Major HT to Barry Ritholz for finding and sharing this chart):

I’ll return to this later.

When businesses cannot innovate and/or expand into markets, how do their profits grow? By changing the rules of the marketplace, and in the US, this is expressed by the drive to lower corporate taxes and reduce (or eliminate) costs imposed by government regulation (societal regulation – the insistence that businesses refrain from generating on-the-job casualties, poisoning the commons, cheating, etc. In other words, society’s demand that businesses behave like good neighbors), and undermining the collective bargaining rights of union workers. Don’t confuse this with business, because the costs imposed here are not accounted for as cost of goods produced and sold. This is the modern equivalent of rent-seeking behavior, which is intended to cost the rest of us.

So where do we stand? Well, it’s not pretty. We have an economy on the ropes, except for equities markets, where individuals, institutions and foreign investors have pumped about $18 trillion into stock speculation. We have investors renting their money out and demanding returns in a risk-averse environment, where it is far easier to seek rent than compete and innovate, with the result that only those who already don’t need it are reaping virtually all the returns and things are so bad that even the Wall Street Journal cannot escape the obvious.

America’s economy is, at best, rentier in nature. More accurately, the only vibrant part of the US economy is speculative in its very nature. In the meantime, we have increasing fear-mongering over the national debt while any who care to look can witness for themselves exactly what this leads to.

And this is an election year. You really have to wonder whether any voter who can’t put these pieces together for themselves should be trusted with the franchise. You really have to wonder why our elected leadership aren’t able, or willing, to lay out the case for massive social and economic reform. Only those asking us to ignore what we already know can deny the need.

You really have to wonder why just one reporter can’t ask Paul Ryan or Mitt Romney or Rick Santorum what he intends to deal with this? Just once? Doesn’t the American voter deserve an answer?

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