Small is beautiful, too big is ugly

Trading is arguably the core activity in all market economies. Free trade is the mantra of all economists — left, right and centre. Trading is considered indispensible and more trade is always seen as better. The financial crisis caused a closer look at trade and financial traders to see if these conventional beliefs are still valid and whether stock markets have spun out of control.

E F Schumacher, author of ‘Small is Beautiful’ (1973), drew our attention to issues of size and scale ignored by most economists, pointing out how huge organisations lost sight of reality in abstract statistics and models. The conventional view was that more was better: more GDP-measured economic growth, more goods, more money, more investments, more dividends, more jobs, all seen as driven by more trade.

Trading with money enjoys an exalted status in economic textbooks, government policies and corporate management. The much larger volume of daily transactions and exchanging between people in the unpaid Love Economy (as caring for the young, old and sick) is ignored in Gross Domestic Product. Yet, more money-based GDP-growth is not always better. It may also be jobless growth or damage our environment and quality of life. More world trade often harms local communities, cultures and causes social disruption and job losses.

Victimisation

Trading for profit and for trading’s sake became excessive on Wall Street and drove speculation in oil prices and volatility in currencies. Some $3 trillion of currencies are traded every day on exchanges around the world — over 90 per cent of this is speculation. When traders attack a currency in a ‘bear raid’ to drive its price down so as to buy it back cheaper, they harm the citizens of that currency’s country.  When trade rules and prices do not take into account of social and environmental costs ‘externalised’ to others, as in the case of WTO rules, then weaker countries and smaller players suffer from such trade.

Today, financial trading ballooned into major economic sectors of the US, Britain and other countries, making traders far wealthier than workers in the production of goods and services.

Trading, like finance, produces nothing. Financial ‘services’ simply take money saved by producers in the real economy and using their networks of connections, serve as ‘intermediaries’ facilitating bringing savers and investors together with new business ventures and other borrowers and households.

Since the financial crises of 2008-2009, many experts have called for the downsizing of these bloated financial sectors and curbing their trading activities and ever-more mysterious financial ‘products’ such as credit default swaps (CDSs), collateralised debt obligations (CDOs) whose totals soared to $658 trillion of these bets between traders in the few biggest banks in the world. We now know that CDSs, CDOs and all the alphabet soup of such ‘financial products’ were really bets that should be relegated to betting parlors and regulated by gaming commissions.

Means to an end

Why did real production take second place to trading which became such an exalted and highly-paid activity? Financial trading became conflated with normal transacting and exchanging information, a key activity in human relationships and evolution. Humans have always bartered, traded and shared information with each other, since early tribal societies. But trading is a means to an end: to increase the utility or wellbeing of the trading parties, and only a part of the much larger free exchange of information and mutual aid in societies.

Recently, trading itself expanded as a means to enrich traders and financial players. Recent financial bubbles: the dot.coms, housing and oil followed earlier bubbles: the tulip mania in Holland and Britain’s South Sea Bubble. The newest bubble Wall Street is salivating over is carbon trading, which they see as a new ‘asset class’ to trade and a new profit centre. Like earlier bubbles, carbon trading has not removed any real carbon from the Earth’s atmosphere and is unlikely to do more than make another group of traders wealthy.

Trading, like money and finance inflated, metastasised and de-coupled from the real world of production and physical assets. Psychologists who study traders see excessive trading as an obsessive compulsive addiction, like gambling or over-eating. Recent researchers took cheek swabs of traders on the stock exchanges in London and found elevated testosterone levels. Addiction to risky trading is now a consumer pastime as millions of ‘day traders’ sit at home trading stocks on their computers — hoping to make their fortunes.

IPS