This article originally appeared on Socialist Economic Bulletin on the 2nd of September
Words matter. But in economic discussion as elsewhere they are frequently abused. In economic commentary one of the most frequent falsehoods is to describe speculative activity as investment. Stock market ‘investors’ are in fact engaged in speculative activity. There is no value created by this speculation. The claim made by its apologists that it provides for the efficient allocation of capital to productive enterprises is laughably untrue in light of both recent events and long-run history. In fact, a vast number of studies showthat that there is an inverse correlation between the growth rate of an economy and the returns to shareholders in stock market-listed companies.
The chart below is just one example of these studies, Fig. 1. The research from the London Business School and Credit Suisse shows the long-run relationship between real stock market returns and per capital GDP growth. The better the stock market performance, the worse the growth in real GDP per capita. The two variables are inversely correlated.
The Economist found this result ‘puzzling’. But it corresponds to economic theory. The greater the proportion of capital that is diverted towards speculation and away from productive investment, the slower the growth rate will be, and the slower the growth in prosperity (per capita GDP).
This is exactly what has been happening in all the Western economies over a prolonged period. SEB has previously identified adeclining proportion of Western firms’ profits devoted to investment. The uninvested portion of this capital does not disappear. Instead, it is held as cash in banks and the banks themselves use this to fund speculation and share buybacks by companies (which simply omits the banks as intermediaries in the speculation). The effects of this are so marked that some analysts believe ‘financialisation’ is the cause of the current crisis, when instead it is an extreme symptom of the decline in investment and the consequent growth of speculative activity.