The Mangoes.

And the missing link.

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1. John Lanchester:

Lending money where it’s needed is what the modern form of finance, for the most part, does not do. What modern finance does, for the most part, is gamble. It speculates on the movements of prices and makes bets on their direction. Here’s a way to think about it: you live in a community that is entirely self-sufficient but produces one cash crop a year, consisting of a hundred crates of mangoes. In advance of the harvest, because it’s helpful for you to get the money now and not later, you sell the future ownership of the mango crop to a broker, for a dollar a crate. The broker immediately sells the rights to the crop to a dealer who’s heard a rumour that thanks to bad weather mangoes are going to be scarce and therefore extra valuable, so he pays $1.10 a crate. A speculator on international commodity markets hears about the rumour and buys the future crop from him for $1.20. A specialist ‘momentum trader’, who picks up trends in markets and bets on their continuation (yes, they do exist), comes in and buys the mangoes for $1.30. A specialist contrarian trader (they exist too) picks up on the trend in prices, concludes that it’s unsustainable and short-sells the mangoes for $1.20. Other market participants pick up on the short-selling and bid the prices back down to $1.10 and then to $1. A further speculator hears that the weather this growing season is now predicted to be very favourable for mangoes, so the crop will be particularly abundant, and further shorts the price to 90 cents, at which point the original broker re-enters the market and buys back the mangoes, which causes their price to return to $1. At which point the mangoes are harvested and shipped off the island and sold on the retail market, where an actual customer buys the mangoes, say for $1.10 a crate.

Notice that the final transaction is the only one in which a real exchange takes place. You grew the mangoes and the customer bought them. Everything else was finance – speculation on the movement of prices. In between the time when they were your mangoes and the time when they became the customer’s mangoes, there were nine transactions. All of them amounted to a zero-sum activity. Some people made money and some lost it, and all of that cancelled out. No value was created in the process.

That’s finance. The total value of all the economic activity in the world is estimated at $105 trillion. That’s the mangoes. The value of the financial derivatives which arise from this activity – that’s the subsequent trading – is $667 trillion. That makes it the biggest business in the world. And in terms of the things it produces, that business is useless. (Source: lrb.co.uk)

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