Theoretically the justification for our vast “financial system” is to channel savings into investment. People who are foregoing current consumption in order to accumulate funds for future expenses are supposedly making it possible for the economy to invest in enterprises and prosper. A cynic might be inclined to point out that what the textbook actually says is “channels resources from savers to investors” without specifying exactly how these resources are used by those investors. “Investment,” however, has a specific meaning in economics: Macroeconomists use the term “investment” or “real investment” to mean additions to the stock of productive assets or capital goods. Needless to say this is not what most people have in mind when they are looking for a good investment for their extra cash – unless “productive assets” include financial “products” which yield a return.

How do we as a society decide what to invest in? With the current system a billionaire who thinks colonizing Mars is a great idea can pour money and resources into a long-range program for doing so even though most people might think the resources would be better devoted to solving problems on earth. On the other hand the decision to send astronauts to the moon was made by the federal government. A group of millionaires can develop a stylish electric car to the point where they can sell stock in their company, but the roads and bridges on which to drive such a car are built by the government. A “market” economy is supposed to be driven by “consumer preferences,” but in 2019, government expenditure amounted to 35% of the gross domestic product. [ see Samuelson p.54]

Relying on individuals seeking a profit is not the best way to insure the health of an economy. Obviously we have opted for a combination of “public” and “private” sectors with markets driving the private sector. [see Markets] Many Americans cannot imagine any alternative except an extreme form of socialism in which the government owns all the means of production and has a bureaucracy deciding how to allocate resources. This is because our imagination and theory are constrained by an outmoded concept of the nature of money and how it can be created to finance productivity which benefits the whole community. It is also because of the “American Dream” in which any entrepreneur can make it big through innovation and hard work. We refuse to believe that the economic system in which each of us must earn a living can be anything other than a zero-sum game like Monopoly where the object is to accumulate money at the expense of everyone else.

Decisions about investment and the allocation of resources are ultimately political choices, but they do not have to be made exclusively at the federal level. They can also be made by a local bank chartered to serve the community rather than global financial interests. [see Banks] They can also be made by entrepreneurs using their own money and that of their partners, but not money obtained via financial markets.

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