One of the arguments some have used against Robin Hood Taxes is that they reduce liquidity. A leading critic has, for example has been the Lib Dem former City trader Giles Wilkes.
Liquidity is defined as the existence of a market of such size that no one transaction can influence price.
The idea that such markets are good is based on the extraordinarily flawed logic of perfect competition inherent in standard micro-economic theory — a theory that requires assumptions to made that mean it has no relationship of any sort with the real world. It follows in my opinion that the idea that liquidity per se is good is also, similarly flawed.
Last night Lord Turner of the UK’s Financial Services Authority made a speech on the future of banking. As is his now accustomed way it was controversial. As the Guardian has noted he appeared to suggest capital controls might be of benefit — something with which I agree. He explicitly suggested the costs of some form of bank borrowing should be increased by requiring that banks hold more capital in relation to their lending to some portfolios.
But he also, and I think wisely, returned to his theme of ‘socially useless’ activity by banks — admittedly clarifying on the way that he thought ‘socially’ in this case equated with ‘economically’ saying:
There are no easy answers … but some combination of new macro-prudential tools is likely to be required." He added: "A crucial starting point … is to recognise that different categories of credit perform different economic functions, and that the impact of credit restrictions on economic value added and social welfare will vary according to which category of credit is restricted.
As the Guardian also notes:
In his lecture, he asked whether the increased trading activity in the financial sector in the last 30 years had delivered economic value by reducing transaction costs and making markets more liquid. Admitting that he did not know, he said: "We certainly need to have the debate rather than accepting as given the dominant argument of the last 30 years, which has asserted that increased liquidity, supported by increased position-taking, is axiomatically beneficial."
This requires no interpretation. He is saying that it is not clear that liquidity per sae is beneficial.
Quite so.
It’s time those who claim such things prove their case. Rhetorical assertion based on flawed assumptions is not proof — it is flawed rhetoric.
And so far the evidence is that market growth to sustain liquidity has benefitted no one bar bankers — as I argued in Taxing Banks.
These people have to engage with the argument now if they want to prove their case. And that includes an assessment of the incidence of the costs their activities impose on society, an issue of much greater importance than that of the incidence of the taxes that we propose to curtail them — which I have argued falls on banks and bankers.
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This is an absolutely key theoretical and practical question.
Let’s see if anyone can come on here and prove, rather than assert, that (say) buying and selling company shares within milliseconds is beneficial to society as a whole.
[…] in Economics. Tagged: Corporate taxes, Robin Hood Tax, Tax. Leave a Comment As Richard argues in typically forthright manner, it is not clear that liquidity to the n-th degree is always a good thing – something […]
[…] The right wing libertarian Lib Dem economist Giles Wilkes has responded to a blog here. […]
Is buying and selling company shares at all beneficial to society as a whole?
[…] The right wing libertarian Lib Dem economist Giles Wilkes has responded to a blog here. […]
[…] The right wing libertarian Lib Dem economist Giles Wilkes has responded to a blog here. […]
But nor can it assumed to be bad. Your problem is I think in your definition. “Liquidity is defined as the existence of a market of such size that no one transaction can influence price.”
A less partial, more rounded definition might run – “In business, economics or investment, market liquidity is an asset’s ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash on hand, is the most liquid asset”. Not quite as you describe it I think.
If you want to advance a policy that outlaws share trading (for example) then I suspect you will need to be a bit more precise about the assumptions you do make in concluding it would be beneficial. Particularly as history (or empirical evidence) demonstrates the opposite. If you don’t believe that then take a look at what is happening economically in China, and then try and work out what property rights has to do with it.
Alastair
What an absurd leap – when did I say I wanted to ban share dealing?
Can we keep to the issue – not some absurd straw man you can create?
Richard
@Carol Wilcox
In simplistic terms, you might argue that once a society progresses past barter, then it is property rights and the rule of law that drive economic growth. Whilst I would accept that there is a political element to that statement, I think the empirical evidence of the last couple of centuries is compelling. Particularly when you compare economies based on the extent to which they respect and support individual property rights.
So perhaps your question boils down to how much you think Society values economic growth?
@Richard Murphy
thought you supported the so called Tobin tax? What do you think that would achieve?
@Alistair
Can you explain to me why the separate ownership of capital is essential for growth? Just because that’s the way we’ve been doing it for centuries is really no answer. The factors of production remain what they are. At one time it was felt essential for labour to be owned by a separate class – land too (well that is true to some extent now). Surely it is more just and efficient for those who produce wealth to have property rights over the inanimate factors of production, rather than have a middleman (making money out of money) appropriating some of the surplus.