I just caught UK Labour party leader Ed Milliband’s speech at the Labour annual conference. In the talk he made a distinction between those who produce value and those who are simply predators.
“Producers train, invest, sell…Predators are just interested in the fast buck, taking what they can out of the business.”
In my view this is a crucial distinction and of utmost importance with regard to the world economy — and innovation.
It’s not my role or my desire here to debate free market versus regulated markets. I’ll simply say that when it comes to innovation, it’s not really an innovation at all if it doesn’t provide actual value. Value means useful.
Example: Is value created by mortgage derivatives? In theory, yes. In actuality, no, as the collapse of the real estate market and much of the western world has proven. There was certainly some short term value in derivative instruments gained for a very few people and organizations. In the long run it was a sophisticated shell game for the benefit of the few, with no real value created for the marketplace as a whole.
In my view, part of a free market is a clear picture of the rules of the game. If you voluntarily enter a shell game, you know there’s a good chance you’re going to get swindled — but it’s your money, your choice, your risk, your reward. In other words, fair. Take the options and commodity markets — volunteer markets (and not a shell game with some notable exceptions). I admire commodity traders, risk takers, who provide actual value to the market by providing liquidity. And by taking big risks they enable themselves great reward. More power to them.Traders also provide a value to producers like corn and wheat farmers by stabilizing prices, allowing them to produce with more confidence, allowing them to borrow to grow or build. The rules of the game (market) are clear, value is created, some win some lose, but, it’s fair.
On the other hand, if your pension account is “invested wisely” — per classic financial advice — in a diverse set of instruments, you’re only hurt if the entire market goes down long term. Due to the irresponsible use of value-less instruments like derivatives anybody invested in the broad market is hurt. Even those who took the conservative route. The game wasn’t clear, it wasn’t fair. Whole economies are hurt. A market based on real value is resilient. A market based on sand is not. This has me thinking not all regulation is bad!
I applaud Milliband for stating this distinction in clear and easy to understand language.
Whatever your political persuasion if we’re going to have a debate on markets and regulation, let’s make the distinction Milliband makes. Let’s make it part of the debate. As Milliband says:
“We must learn the lesson that growth is built on sand if it comes from our predators and not our producers.”
Clearly, there are producers who create novel new things that are useful. And there are predators who “create” things that are novel and useful to a few, to the detriment of everyone else.
Do we want an economy that is built on sand? That rewards deliberate swindling? Or one that is built on the foundation of novel, sustainable, solid, useful innovation?
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