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The socially useless City

Lord Turner, head of Britain’s Financial Services Authority (FSA), this week described much of the City’s activities as “socially useless” and questioned whether it has grown too large.

What the City ought to be doing is to arrange finance to enable trade and industry to function smoothly. But what amounts to a casino has grown up on the back of these legitimate functions. The money appears to be made like this…

  • Shift it from A to B and it grows
  • Shift it from B to C and it grows again
  • Shift it from C back to A and it grows yet again

Yet this money has not come from nowhere at all. This bubble-like growth consists of money, credit, foolishly created by bankers, for land purchase, on the security of land prices which have themselves been pumped up by lots of other people in this so-called “industry” playing the same game.

But land price is not the same thing as land value. The value of land is the rental stream it will yield. The price of land is what people will pay to get their hands on the rental stream, and as the bubble grew, the price became unrealistic in relation to those rental values. So by about 2006 the bubble was ready to implode.

It is not just house (the land on which houses stand) prices which bubbled. Much security trading is actually also trading on the land values which comprise a substantial proportion of their value – the supermarket chains, for instance, are essentially real-estate empires and much of their income is economic rent, plus a monopoly component squeezed out of their suppliers and customers. This income from securities consists, to a greater or less extent, of land rent and the price of securities is the capitalisation of that revenue stream.

You will not read any of this in standard economic textbooks or in the writings of those who have been brought up to think along standard lines, so the whole issue is misread and only the downstream phenomena are addressed, like the obscene pay enjoyed by the moneyshifters. If the problem is to be addressed at source, one is forced to repeat the usual mantra – tax the rental value of land.

I posted the above comments in response to a blog on the Tax Justice Network (TJN) site. TJN have joined in the call for a “Tobin Tax” on transactions, which would solve nothing and do a lot of harm to boot. My comment was followed up by Adrian Wrigley as follows.

Henry is right. The private appropriation of land rent is the main “fuel” behind the finance sector’s “profit”. The problem is not the number or total value of transactions (which a Tobin Tax would seek to reduce), but the securitisation or hypothecation and distribution of land rents. Remove this “fuel” from the economy and the finance industry would shrink dramatically. The burden of the industry on the economy would be lifted and overall living standards would rise.

It’s great to see influential people beginning to understand that the finance industry is largely parasitic on the real economy. But the deeper understanding is lacking. Don’t be surprised if Tobin Taxes as proposed reduced the volume of transactions and the number of staff, but increased City pay (same rents, fewer staff, fewer transactions => bigger bonuses).

Henry neglected to mention the other key part of the story – the seignorage “profits” from a privatised money supply. The finance industry is the beneficiary of the issuance and control of money, via a state-backed currency and private cartel.

Perhaps TJN can explain how a Tobin Tax could help rein in The City, given that transactions are a cost to the finance industry, not the source of the industry bloat?