As an economist, I get asked for financial advice. I say, "Buy and hold." The questioner turns away in embarrassment, as if I was too stupid to understand the question. The questioner finds someone willing to take his commission fees to execute valueless trades and everyone goes home happy.
Finance accounts for 8% of GDP. Not all of this is the deadweight loss of rent-seeking, but neither is all of it the earned return of a needed service. Yes, the financial sector steers investment funds to proper enterprises, but it also diverts from those enterprises when investment returns are divorced from productivity gains. And I'm inclined to believe that most finance activity has little to do with productivity gain and all to do with return on investment (hint to those wondering what's wrong with this: they should be the same).
The problem, as Caplan points out, is self-interest and collective action. Being the only person gaming the system would be incredibly lucrative. Others would join you and erode your profits to normal profits, where there is no longer any incentive to join the gaming. But everyone in finance helping investors profit by gaming the system has been diverted from a productive pursuit, not only siphoning off GDP to non-producers, but reducing GDP as well. This is attractive to those who view their fellow man as adversaries standing between themselves and gain, but it certainly reduces overall welfare (especially when one considers the declining marginal utility of money).
The Zion outlook would realize that claims to wealth should be based on more than "I bought at the right time," which necessarily means someone else sold at the wrong time. Is there a reconciliation between an economy based on competition and self-interest and a moral code based on cooperation and communitarianism?
via oneofthebest
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