Financial Actions vs Gambling

Abstract

The advantages and the shortcomings of the financial sector for the real economy are well known. In two previous articles we have elaborated, from a theoretical point, our views on the New Classical School (NCS) which espouses the functions of this sector in modern capitalist economies, and is mostly liable for its pros and cons. Here we discuss two additional negative side-effects that have emerged from the operation of this sector, and argue for the benefits of a proposal we have made in the articles mentioned above: The side effects are: (a) the acquisition of enormous power by some firms in that sector, and (b) the focus of its activities towards gambling. These effects are contrary to the purpose of the existence of the financial sector, and the spirit of the competitive economy. The first one reinforces the strong tendency of modern capitalism towards income inequality, and corrupts the moral of open markets. The second one, is opposing the long-run growth of the economy, and preys on not well informed, and unsophisticated in financial matters private agents. To deal with such (and many other) problems we have recommended that financial sector firms should become, in a fair manner, quasi-partners with firms in the private sector that use their services to finance investment projects they undertake. Here we repeat the technical core (with minor changes) of our proposal, and stress its effectiveness in reducing several of the obstacles the financial sector creates to the real economy. The main advantages of our proposal are that it induces firms in the real sector to develop more concrete investment strategies, and financial firms to evaluate carefully the plans they accept to finance. When financial firms are interconnected the proposed quasi-partnership minimizes the risks of domino effects (in cases of liquidity shortages). In addition, it reduce the tendencies to gamble, and brings the economy closer to the state the NCS wishes: to the state where the economy faces only irreducible risks.