On 3/23/07, David B. Shemano <[EMAIL PROTECTED]> wrote:
Precisely because all economic activity is inherently speculative and risky, the decision to allocate capital to an economic activity (as opposed to any other activity) is a critical component of the economic process. The financier, by considering all of the investment options available and then choosing and risking his capital in certain options to the exclusion of others, performs that critical role. The compensation to the financier is a product of the negotiation between the financier and the entrepreneur. The price paid by the entrepeneur in turn will depend on a myriad of factors, but the market for capital may be one of the cleanest and most competitive we have, so we can have some assurance that the price paid is rationally tethered to the process.
David, The biggest difficulty answering this argument (as with most free-market econ arguments) is that there is a grain of truth in it. The financier does sometimes perform this role of taking risks and supporting entrepreneurial activities that have promise. Perhaps the venture capitalists who funded Google may be a good example of this. But far too often financiers seek to increase their wealth in plainly unproductive ways. For instance what good did the private equity firm that flipped Hertz recently do? (They loaded the company with debt paid themselves $1B and IPOed it.) One way to make the anti-financier case is that in the vast majority of cases financiers make their money by gaming the system and they do so on a scale that simply cannot be ignored or dismissed as exceptions. -raghu.
