In Tomorrows Company’s recent timely report Tomorrows Owners the authors described the global economic system as consisting of three sub-systems – the real economy, engaged in the production of goods and services, the financial economy, providing capital to the real economy and the ‘casino economy’ of speculative activity. In the weeks since the launch of the report, as the current financial crisis has developed, many commentators around the world have attributed blame for the crisis to Anglo-American casino capitalism.
The idea of a ‘casino economy’ is not new and it has strong academic foundations, possibly the first person to liken speculative activity to a casino was John Maynard Keynes in his seminal work The General Theory of Employment, Interest and Money.
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object. When the capital development of a country becomes a by-product of the activities of a casino, the ob is likely to be ill-done."
In her path-breaking book, Casino Capitalism, ( Manchester University Press, 1986) Professor Susan Strange likened the Western financial system to a vast casino. As in a casino, "the world of high finance today offers the players a choice of games. Instead of roulette, blackjack, or poker, there is dealing to be done - the foreign-exchange market and all its variations; or in bonds, government securities or shares. In all these markets you may place bets on the future by dealing forward and by buying or selling options and all sorts of other recondite financial inventions. Some of the players - banks especially - play with very large stakes.”
She pointed out that the big difference between ordinary kinds of gambling and speculation in financial markets is that one can choose not to gamble at roulette or poker, whereas everyone is affected by "casino capitalism." What goes on in the back offices of banks and hedge funds "is apt to have sudden, unpredictable and unavoidable consequences for individual lives."
Another distinguished economist who likened the speculative activities of Wall Street to a casino was Hyman Minsky, professor of economics at Washington University in St. Louis.
“Today’s managers of money are but little concerned with the development of the capital asset of an economy. Today’s narrowly-focused financiers do not conform to Schumpeter’s vision of bankers as the ephors of capitalism who assure that finance serves progress. Today’s financial structure is more akin to Keynes’ characterization of the financial arrangements of advanced capitalism as a casino. The Schumpeter-Keynes vision of the economy as evolving under the stimulus of perceived profit possibilities remains valid. However, we must recognize that evolution is not necessarily a progressive process: the financing evolution of the past decade may well have been retrograde.” (Minsky,H. “Schumpeter and Finance.” In Market and Institutions in Economic Development: Essays in Honor of Sylos Labini, edited by Salvatore Biasco, Alessandro Roncaglia, and Michele Salvati. New York: St. Martin’s Press, 1993.
As Keynes so aptly put it ‘the position is serious when enterprise becomes the bubble on a whirlpool of speculation’. The big question is how can the system achieve a balance which will make it more stable in the future.