Knowing and Making

Just a hypothesis here, suggested by Chris Dillow's reference to Baran and Sweezy: ...tends to generate ever more surplus, yet it fails to provide the consumption and investment outlets required for the absorption of a rising surplus and hence for the smooth working of the system. Since surplus which cannot be absorbed will not be produced, it follows that the normal state of the monopoly capitalist economy is stagnation (p108). The essence of the market is that surplus goes to those who produce it: this is a stable situation because it gives the producer an incentive to produce more surplus. But perhaps modern economies of scale and scope lead naturally to ownership, or at least control, being concentrated in the hands of a small number of people: control can't be spread more broadly because of the rational ignorance of the crowd. Sharing a growing amount of wealth among a smaller number of people means that - as Baran and Sweezy suggest - those in control are no longer sign...

The FT's Market Insight column from a couple of days ago contained a reference which at first I skimmed over with barely a glance: "[bankers] feared that public sales would produce painfully low prices. That is a valid fear. After all, there are very few investors in the system right now with any appetite or capacity to take risk." A rather orthodox assertion and hardly worthy of note, thought I. And yet - a little thought shows that the riskiness of an investment is not only a characteristic of the underlying asset itself. Recall that, just a year or two ago, lots of not-very-risky assets with unexciting yields were being converted into riskier, high-return instruments by the simple trick of leverage. Borrow £200,000 at 4%, bung in £10,000 of equity, buy £210,000 of property or shares yielding 5%, and your £10,000 of cash magically earns a return of 25%, in return for a vast increase in risk. But the same trick is even easier to do in reverse. Let's say you are offe...

HBOS today announces losses of about 6% on its total corporate loan book, according to Robert Peston (ignore the 47% figure that he also gives - that is only generated by cherrypicking the scope of the statistic to get the most serious-looking number). Can a bank charge a sufficient additional premium on its interest rates to cover this size of loss? It's unlikely. Small businesses regularly pay a spread of 6-10% over base (I've heard from some bank managers that they are charging up to 15% to some) but most loans are to much larger companies which have been able to get much better terms in the past. So, if a bank can't charge enough money to cover its costs, should it stop providing the service? Strict microeconomic logic says yes: the service is not viable in the marketplace at the current price, so its price should go up and the volume of loans provided should be much lower. But this is a classic example of market failure due to uncompensated externalities. Most discuss...