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Perhaps M\’Lord Myers, perhaps

\”Investment banking has spread into everything we do in business. Company executives spend more and more time with investment bankers,\” he writes in the Guardian…….Insisting that he wants a vibrant City to contribute to GDP, Myners says his intention is to promote discussion and debate. \”I think this is a suitable subject for a major independent review after the election into how investment banking has permeated so many corners of society,\” he said .

I\’ll leave aside in it\’s entirety the vailidity or not of the argument and ask you to look solely at this piece of logic.

There are two possible different worldviews here. The first being that investment banking has crept into every corner of the economy and thus the pinstriped (b)ankers control us all to our detriment: they\’re rent seeking in short.

The second is that investment banking is about the efficient allocation of capital. Thus it should indeed be in every nook and cranny of our economy as the efficient allocation of capital affects every such.

No, leave aside entirely which is true and which you would prefer. The thing is, if investment banking is in every nook and cranny, if chief execs are indeed spending more time with bankers etc, you don\’t know which of the two you\’re observing. The outcome, in observable actions, will be the same whichever scenario of motivations is correct.

It\’s a little like, say, the petrol market (retail that is). Prices pretty much move in lockstep. There are two possible explanations: collusion among all petrol wholesalers or a free and efficient market. The outcome, in observable changes in prices, will be exactly the same. We need to go and look at other things to determine which is the correct exlplanation for that lock step move in prices. With petrol retailing we can look a thte margins of the reiners and wholesalers (and retailers). They are very low so we usually conclude that it\’s a free and efficient market at work, not collusion.

So, the question thus becomes, what should we be looking at to determine whether this infestation of the economy by investment bankers is as a result of rent seeking and thus undesirable and which as a result of efficient allocation of capital and thus desirable?

That everyone kowtows to the investment bankers isn\’t, on its own, enough for us to tell.

Anyone any ideas?

6 thoughts on “Perhaps M\’Lord Myers, perhaps”

  1. How about a study of profit growth versus dealings with investment bankers. My hunch is that if they are evil parasites predating on the rest of us, there would be a negative correlation whereas if they are provide a useful service, the correlation would be positive.

    My belief is that they get everywhere because they offer a worthwhile service. In fact they grovel to me on a regular basis. But then maybe I am just a exploitative capitalist lynch pin (not according to the contents of my wage packet) rather than just a potential customer.

  2. Oh, and ‘linch pin,’ not’lynch.’ The discovery of the aberrant apostrophe is left as a test for the blog owner.

  3. Given that you can’t bug the boardroom and hear what was said, I suspect there isnt anything you can reliably monitor and measure that would allow you to differentiate between the two activities. The outcomes of either process are so similar as to be indistinguisable. Don’t bother trying, save the money/braincycles for something useful .

  4. If I remember rightly there was an econometric study done about ten years ago which concluded that investment bankers did add value but took it all for themselves (quelle surprise). Does any body else remember this, when it was and who did it?

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