For Every Winner a Loser - London Review of Books
For Every Winner a Loser -- John Lanchester
I haven't shared articles in a while because frankly I have not read much in the past month beyond the news and school readings. I am in business school now and have been grappling with the dissonance of economic truths I (and a lot of my friends) find self-evident versus the financial delusions of the business-class. This essay, which is a book review of Ray Dalio's biography, and so much more, helped me process a little.
Notice that the final transaction is the only one in which a real exchange takes place. You grew the mangoes and the customer bought them. Everything else was finance – speculation on the movement of prices. In between the time when they were your mangoes and the time when they became the customer’s mangoes, there were nine transactions. All of them amounted to a zero-sum activity. Some people made money and some lost it, and all of that cancelled out. No value was created in the process.
That’s finance. The total value of all the economic activity in the world is estimated at $105 trillion. That’s the mangoes. The value of the financial derivatives which arise from this activity, that’s the subsequent trading, is $667 trillion. That makes it the biggest business in the world. And in terms of the things it produces, that business is useless. It does nothing and adds no value. It is just one speculator betting against another and for every winner, on every single transaction, there is an exactly equivalent loser.
The point bears repeating. There are other ways of getting rich, and in our society the classic three ways of making a fortune still apply: inherit it, marry it, or steal it. But for an ordinary citizen who wants to become rich through working at a salaried job, finance is by an enormous margin the most likely path. And yet, the thing they’re doing in finance is useless. I mean that in a strong sense: this activity produces nothing and creates no benefit for society in aggregate, because every gain is matched by an identical loss. It all sums to zero. The only benefit to wider society is the tax paid by the winners; though we need to remember that the losers will have their losses offset against tax, so the net tax benefit is not as clear as it might at first seem.
This, historically, is a unique state of affairs. Until now, most riches have been based on real assets of land or trade – often inherited rather than created ex novo, but no less real for that. This new form of riches is based on gambling. What does it mean about us that we reward so generously this work which does so little? What kind of society are we really? And what does it mean that we think about this so little? There was a brief moment during the pandemic when the question of valuable and worthwhile work was thrown into focus by the fact that the worst-paid jobs turned out to be the ones on which we all relied: retail staff, transport workers, delivery workers. We’ve done an excellent job of forgetting about that. At a societal level, this is unsatisfactory. To put it as mildly as possible, nobody would deliberately design a society that worked like this. But it turns out that the accumulation of near infinite riches based on zero-sum financial game playing has downsides for the winners too.
Every trade has a winner and a loser. Somebody makes money, and is therefore proved right; somebody loses money, and is therefore proved wrong. The binary nature of right or wrongness, repeated over thousands of transactions, confirms in many financially successful gamblers the feeling that they are right about everything. It’s not a question of being right more often than you’re wrong. It’s a question of being better than other people: right where others are wrong, clever where others are stupid, rational where others are emotional, insightful where they are blind, brave where they are timid, strong where they are weak. But awareness of superiority comes with a terrible sting, which is that the others don’t seem to see it that way. They see the riches, but think they are a matter of luck, or inequity, or unfair distribution of societal resources, or a bit of all the above. (For the record, I share that view.)
What to do? The answer is encoded in the problem. The problem is that finance is useless. The solution is to try and do something useful with the only thing it produces: the money it makes for the winners. Because gambling has no meaning, people who have made money through gambling have to find meaning outside the central thing they have done with their lives. Hence the importance of ‘philanthropy’ for the financial billionaire class. Their work has no meaning; meaning has to be found in what they subsequently do with the money they have made. For many of them, the most valuable single thing they can do with their riches is establish a reputation outside the world of finance which matches the image they have in their own heads. It is for this reason that so many people in finance, after achieving their fortune, become obsessed with wanting to be the thing they know themselves to be: a philosopher king. A spectacular example is Ray Dalio, whose story is excellently told in The Fund by Rob Copeland, a reporter at the New York Times who was formerly the hedge fund beat reporter at the Wall Street Journal.