Always a Step Behind Keynes

by Shihang

In a recent essay, I wrote:

“One possible solution is to see financial banking as a fundamentally different sort of economic activity, not to be mentioned in the same breath as barbers, bakers and brewers. The investment banker is different from the baker, the brewer and perhaps even usurers in the past in that they earn profit, not by aiming to produce ends, but means to other ends, which are irrelevant to the financial firm. For example, a baker earns profit by baking bread, the brewer by brewing beer. Bread and beer is consumed as ends in themselves. However, the banker attempts to profit by earning more monetary credit through interest and speculation, which is then used in economic activities to ends like beer and bread. Secondly, especially in the modern era, the performance of a banker depends upon his success in consistency over the long term and through many transactions, and current compensation structures have failed to make this distinction. Theory’s failure to treat these activities as fundamentally distinct from other sorts of economic activity has made it, to an extent, “palpably inapplicable”.”

It turns out that Keynes was one step ahead, noting back in the 1940s:

“Thus the fact that our knowledge of the future is fluctuating, vague and uncertain renders wealth a peculiarly unsuitable subject for the methods of classical economic theory. This theory might work well in a world in which economic goods were necessarily consumed within a short interval of their being produced. But it requires, I suggest, considerable amendment if it is to be applied to a world in which the accumulation of wealth for an indefinitely postponed future is an important factor.”

If economics had always known this, why hasn’t a separate theory been developed for financial economic activity?