Stop Me Before I Vote Again

The venerable master of the cold war neoclassical synthesis, Bob Solow, wrote this recently:

"The financial system does have a useful social function to perform, and that is to make the real economy operate more efficiently. Some human institution has to collect a nation's savings and put them at the disposal of those who have productive ways to use them. Risks arise in the everyday business of economic life, and some human institution has to transfer them to those who are most willing to bear them.

When it goes much beyond that, the financial system is likely to cause more trouble than it averts. I find it hard to believe, and I suspect that Judge Posner shares my disbelief, that our overgrown, largely unregulated financial sector was actually fully engaged in improving the allocation of real economic resources. It was using modern financial technology to create fresh risks, to borrow more money, and to gamble it away."

Straight up, with a twist of lemon. Not bad. But let's look at a couple hunks of it here:

"Some human institution has to collect a nation's savings and put them at the disposal of those who have productive ways to use them."

Now that may seem as general as all hell, but it's not: it's a formula for basically the same system we got now, only with maybe a two-drink limit. If we want to consider an alternative, we need to rise to yet a higher level of generalization. Get me rewrite!

"Some human institution(s) must accumulate and distribute the funds needed for the expansion and modernization of the production system (PS)."

Households need not "save"; firms need not hold on to their surplus; and depository/payment systems need not mediate these fund flows, for augmentation of the PS. The tasks in question can be assigned quite differently to quite different "institutions".

In short -- a class of capitalists is, well, unnecessary. With that useful theorem established, let's move on. Here's Bob again:

"Risks arise in the everyday business of economic life, and some human institution has to transfer them to those who are most willing to bear them"

This likewise is a formula for same-old same-old. Yes, risks are real, but risk bearing need not be transferred to anyone who might be less of a "those" than society as a whole.

We want to interconnect our firms and households to some optimal extent -- right? Well, it's more than mere conjecture to claim that markets acting alone will interconnect us less than we want and need. Going slightly past that insight, this is a conjecture: the optimal source of "savings" and " the optimal bearer of risk is -- society as a whole, acting as a whole. It's a conjecture, but it's a good one. In fact I bet it's true.

I'm waiting to rebottle the formal proof of this, which must exist somewhere -- operators are standing by -- come on now -- link me to it, baby!