Thorsten Veblen's classic sociological work, The Theory of the Leisure Class, divided human societies, for hueristic purposes, into two generic forms, the productive, in which most everyone works and participates in networks of solidarity, and the barbarian, in which a dominant class expropriates some portion of the production of society, rules over the productive segment of the population, and legitimates its status by elaborating myths according to which this idle exploitation is somehow finer and more noble than actually doing stuff.
Verily, the contemporary applications fain would make themselves, and indeed, one Etay Zwick has served as their facilitator:
The myth of the financial sector goes something like this: only men and women equipped with the highest intelligence, the will to work death-defying hours and the most advanced technology can be entrusted with the sacred and mysterious task of ensuring the growth of the economy. Using complicated financial instruments, these elites (a) spread the risks involved in different ventures and (b) discipline firms to minimize costs—thus guaranteeing the best investments are extended sufficient credit. According to this myth, Wall Street is the economy’s private nutritionist, advising and assisting only the most motivated firms—and these fitter firms will provide jobs and pave the path to national prosperity. If the rest of us do not understand exactly why trading credit derivatives and commodity futures would achieve all this, this is because we are not as smart as the people working on Wall Street. Even Wall Street elites are happy to admit that they do not really know how the system works; such admissions only testify to the immensity of their noble task.
Many economists have tried to disabuse us of this myth. Twenty-five years before the recent financial crisis, Nobel Laureate James Tobin demonstrated that a very limited percent of the capital flow originating on Wall Street goes toward financing “real investments”—that is, investments in improving a firm’s production process. When large American corporations invest in new technology, they rely primarily on internal funds, not outside credit. The torrents of capital we see on Wall Street are devoted to a different purpose—speculation, gambling for capital gains. Finance’s second founding myth, that the stock market in particular is an “efficient” source for funding business ventures, simply doesn’t cohere with the history of American industrial development. When firms have needed to raise outside capital, they have generally issued debt—not stock. The stock market’s chief virtue has always been that it allows business elites to cash out of any enterprise by transferring ownership to other elites. Old owners then enjoy their new wealth, while new owners manage the same old corporation. The reality is that business elites promote the stock market far more than the stock market promotes economic growth. (snip)
Proceeding further, Zwick illumines the sociological meaning of financial innovation:
Early on, capitalism encouraged entrepreneurs to invest in new technology, thus unleashing incredible productive potential. Yet as the hunger for profits outpaced technological innovation, the modern barbarian developed new instruments for increasing the value of his assets—without having to produce anything new. Rather than focus his energies on developing more productive ventures, he started to sell the promise of increased future revenue—which he called an “immaterial asset.” The first immaterial assets were patents and trademarks; what were formerly strategies for being more productive, the barbarian now learned to package and sell by themselves. The next step was to sell claims to these immaterial assets in the form of yet another immaterial asset: capital stock. This stock represented a promise of revenue based on other promises of revenue. Over time, more and more immaterial assets were created and sold, then listed on balance sheets as corporate bonds, credit derivatives and hybrid securities. Eventually, a corporation started to look less like a producing firm and more like a bunch of immaterial assets and liabilities. Today a corporation’s success often depends on how much credit it can raise—that is, on how successfully it can sell the promise of future success.
Salesmanship and future earnings projections have replaced productivity and innovation as the engines of our economy. The barbarian’s pursuit of financial profit now determines how a corporation employs its labor and technology—that is, whether it is valuable to be productive. Capitalism, once propelled by technological investment (classical capital), is now driven by immaterial technology that increases the value of immaterial assets (financial instruments moving modern capital). Today Goldman Sachs and JP Morgan don’t invest in the promise of producing things of use or real value. They invest in the promise of rising asset prices (or in the case of shorting stocks, the promise of falling asset prices). In their world, value is defined by gain. It used to be the other way around.
Because of the dynamic of constant financial innovation, patterns of economic boom and bust no longer follow the traditional business cycle model in which: (1) a low interest rate (meaning cheaper credit) leads to (2) increased investments and economic growth; followed by (3) a period of overheating and excess capacity; which is then balanced by (4) a re-stabilizing period and a cooling of inflationary tendencies. The “new business cycle” is determined by financial innovation, not national productivity and consumer demand. Booms are born when a new financial instrument is dreamed up, and busts occur when the conjurer’s secret is uncovered and collapses.
The most recent boom and bust (i.e. our current financial crisis) was based on this secret: “The market for subprime mortgages is not determined by the number of newly aspiring homeowners, but by the promise of profits from mortgage-based securities.” Irresponsible lending spelled profits for investment banks, so naturally they encouraged irresponsible lending. The story is familiar by now. Banks invented two kinds of risky securities that promised higher yields: collateralized debt obligations (that pay if high-interest mortgages are repaid) and credit-default swaps (that pay if they aren’t). Trading these shadow-financial (i.e. unregulated) securities generated enormous profits—both from constant trading fees and from speculation gains. But selling more subprime mortgage securities required selling more subprime mortgages. So investment banks bought mortgage-lending outfits and themselves offered subprime loans (even to individuals who qualified for better loans). As inevitable loan defaults started to pile up, the value of collateralized debts fell, and heavily invested banks couldn’t cover the swaps they sold. Wall Street’s expert salesmen had sold too many immaterial assets—too many promises of future value. The entire edifice of lending was paralyzed because it had become profitable to lend irresponsibly.
Zwick then continues by describing the manner in which an elite, in this case, the "meritocracy" of haute finance impresses its image upon the entire society, a lifestyle of instability, anxiety, enforced flexibility, and gratuitous, vulgar displays of transient status. And a sense that genuinely productive work is a sucker's game. But, don't you dare question them, because they are not only smarter than you, but are the very instantiations of Americanism.
The entire essay is worth a read.
Nevertheless, for those disinclined, for whatever reason, to read it, there is a Youtube video which nicely encapsulates both The Theory of the Leisure Class and the American instantiation of barbarian economics: