The recent news that George Osborne would be cashing in by taking a highly-paid position within the boutique investment bank Robey Warshaw may give some greater reasonto feel dismay towards financial speculators. Or maybe just George Osborne.

News of the former Chancellor’s new gig comes amidst fervour in the world’s other major financial centre, as the New York Stock Exchange became the focal point of targeted action from Redditors determined to get one over on hedge funds with short positions in GameStop. While the short squeeze may end up bringing about little structural change, it is worth remembering that investment banks are vital cogs of the global capitalist economy. It is also worth remembering that they are a terrible way to manage investment.

The function of banks in classical economics, be they commercial or investment banks, is to translate household savings into productive investment. Under this view, households keep their savings in a bank and the bank then lends that money out to new projects – a family buying a new home with a mortgage, or a business looking to expand, for example.

This suggests that savings can be used to fuel greater economic growth – and, under conventional banking systems, it often seemed to work. Indeed, a high savings rate was chalked up among the key components of the ‘East Asian Miracle’ in the latter half of the 20th century. Marxist economists take a slightly different view, of course, arguing that investment is instead driven by capitalists looking to reinvest their accumulated profits to maintain competitiveness. This doesn’t dramatically change the role of banks, however. At least in theory, they should still be concerned with reinvesting accumulated wealth.

However, the modern stock market is a different entity from traditional banking. In his General Theory, Keynes identified this difference: the stock market is concerned with the short run valuations of stock prices, rather than the long term viability of projects. Other than when a firm offers shares for speculators to buy, the trade in stocks is largely driven by the expectation of the revaluation of these shares. This means that the wealth invested in the market is not directed towards new technologies, buildings or enterprises, but towards short-term profit.

If the purpose of investment is to find productive uses for built up wealth, then this drive to take advantage of short-term revaluation is a major issue for macroeconomic efficiency. Uber has continued to attract investment for years, even as it has failed to become profitable. This included a loss of $5 billion in just one financial quarter in 2019. Yet its stock price has continued to rise as investors continue to believe that its valuation will rise.

This apparent misallocation of resources has been enabled by the disconnect between the actual profitability of proposed endeavours and the belief that a given stock will be worth a little bit more come the end of the day’s trading. Unlike investment under traditional commercial banking, the massive amounts of money tied up in hedge funds and pension pots are now being directed towards what former Bank of England Governor Mark Carney called ‘socially useless activities’.

It is possible that a firm like Uber will eventually become profitable. After all, Amazon didn’t turn a profit until the 2000s. However, it achieved its profitability by focusing on attaining a near-monopoly level of market share. If Uber was to emulate this model, it would first have to become not just pre-eminent within the ride-hailing industry, but dominant, allowing it to exert similar monopoly control in the cities where it has the maximum level of market share.

This is hardly an argument for the broader efficiency of stock market-based investment. A firm gaining market dominance by undercutting all other businesses, something it is only able to do by operating with what should be unsustainable losses, is hardly in keeping with effective economic policy.

This issue–of a disconnect between the interests of investors and of the long-run viability of what they are investing in–has become more pronounced as the world has become increasingly globalised. Keynes also warned about this in the past, arguing in the 1930s that the part-ownership of foreign industrial projects by far away speculators could only serve to remove the investor further from any on-the-ground expertise.

While this presents challenges for industry everywhere, it is particularly dangerous for developing economies looking towards foreign direct investment. The revaluation of the Thai Bhat in the late 1990s was certainly a challenge to that country’s economy, but the widespread flight of capital from established projects across East Asia showed a complete disconnect between the facts on the ground and the decisions made in foreign financial centres. This was seen more recently during the onset of the pandemic with the flight of capital from Global South economies.

As long as our economy is driven by profits and savings–not the ultimate ambition of this magazine, of course!–those profits and savings are going to find a new home. If we accept this, it is essential that policies should be sought which ensure that investment is driven by optimal long-term economic benefits rather than short-term fluctuations in the value of shares. This means that there needs to be something connecting the profits received on an investment and the actual viability of the endeavour being invested in.

Achieving this would mean a fundamental break with financialisation, a disempowerment of investment banking and a restoration of some of the traditional functions of commercial banking. The stock market should revert from being a place of wild speculation to focusing on more useful activities, such as investing pension funds in long-term projects which offer the prospect of delivering economic benefits – rather than immediate returns on stock prices.

During the last recession, Lord Turner, the then chair of the Financial Services Authority, argued in favour of a Financial Transactions Tax in order to disincentivise frivolous activity. This, he argued, would curb the ‘swollen’ and excessive City of London and hamper what was seen as a run-away culture of high bonuses and dangerous misbehaviour by top bankers.

A similar policy could be advocated now. Taxing short-term speculation would redirect investment towards more effective projects in the real economy. It might not make anyone incredibly rich, but it would make our financial system that bit less destabilising in an already depressed economy.