French president Nicolas Sarkozy reportedly wanted the G20 leaders to introduce a special tax on all financial transactions, known as the Tobin tax. Mr. Sarkozy took the idea from Adair Turner, the head of the British Financial Services Authority. Lord Turner suggested last month that the tax might be used to shrink the financial sector, which has grown too big and is in part “socially useless.”
The argument that activities like securities trading add no social value and the labor is better channeled into other areas has now become popular. Hence the resurgence of James Tobin’s 1970s proposal of a tax on foreign exchange transactions to discourage speculative trading. But the notion of socially useful work dates back centuries. In fact, it reached its zenith with Marxian labor theory and Soviet planning.
According to Soviet ideology, any work in state-run factories or farms was socially useful, whereas private economic activities were likely motivated by greed and could harm public well-being. Another belief was that manufacturing and agriculture made “real” contributions but services like wholesale and retail trade did not.
This real vs. trade distinction is now to be found in commentaries on the financial sector. Thus a pundit writes that a Tobin tax “would squash the profitability of much of the short-term trading which swells investment bank profits without doing anything to create value in the real economy.”
The Soviets thought they were building a rationally organized economy by investing very little in services. Yet the shortage of those supposedly useless middlemen was a disaster. Russian central planners’ presumption that you can identify and squash unproductive activities turned out to be a historic blunder.
A Soviet hallmark – the ugly, unpleasant and empty store – was the visible symptom of a systemic disease. Not having a well-developed wholesale and retail industry was a colossal impediment to matching production and consumption. It resulted in gigantic inefficiencies, with resources wasted making the wrong products while the population’s needs went unsatisfied.
The Soviet economy was also badly hobbled by the lack of financial services, another “unproductive” field of endeavor. Now we have come back full circle to this way of thinking: the powers-that-be decide what’s productive and what’s not. That they could be wrong does not appear to even occur to them. It did not occur to Soviet planners, either, until the irreversible decline became obvious.
Any human activity can be unproductive. How productive is all that pork embedded in the recent federal stimulus package? As Mario Rizzo pointed out, members of Congress could not have even read the 1,400 page monster bill. Ah, but interest groups knew what’s in it for them—-they probably wrote their own portion. Great rent extraction; great damage to the public interest.
Not surprisingly, the political elite is not concerned about the value it itself adds to society. It never is. Whatever the government does is by definition taken to be productive. The Soviets knew that, for sure.