Steve Talbot, a wise neo-Amish philosopher and author of Netfuture, asks a very insightful question in his latest issue:
Why does a certain obvious distinction not figure more centrally in economic theorizing - namely, the distinction between the application of capital in order to increase that capital itself, and its application in order to achieve something worthwhile in the world? Or, more simply: why do we not distinguish between using money to make money, or using it to do meaningful work?
Yes, it requires a little subtlety to sustain the distinction between the pursuit of monetary gain and a striving to accomplish something worthwhile. But economists are nothing if not subtle, and the task is hardly beyond them. And in this matter the underlying difference at issue, however subtle its playing out in particular circumstances, is in principle as dramatic as it could possibly be. Everyone can immediately recognize the incompatibility of the two stances.
Moreover, money chasing its own tail sounds rather like the very definition of an economic bubble. Untethered to reality, such money will follow any scheme that is, for the time being, profitable. It matters little whether the scheme involves subprime mortgages or an investment plan based on the monthly, weekly, or even daily upslopes and downslopes of a stock market graph. When the immediate connection between money and useful work is in this way severed, we lose the means to distinguish a sound enterprise from a bubble - as in fact virtually all economists failed to foresee the current crisis. This is not so much a failure of foresight as acquiescence in economic realities that make foresight impossible. No matter how assiduously regulators seek to address previous excesses by strapping safeguards around the economic balloon of our economy, the money-seeking investor will be driven to invent ever new strategies and the balloon will simply bulge outward in new and novel places.
Somehow the fiction that profit automatically translates into real accomplishment, into real value for society, prevails no matter how evident its fallacy - no matter how evident the truth that, for example, one can make at least as much money selling cocaine as selling penicillin. Moreover, bubbles, which economists have never found any agreed-upon way to explain, continue to occur, and they always involve the disastrous absence of real value in favor of vacuous, mathematical profit (to which investors easily become addicted). It's about time we faced this fact squarely, and explored the significance of the inevitable disconnect between the mere drive for return on investment and the effort to accomplish something substantial in the world. And then we will need to ask ourselves further: how can we as a society discourage this disconnect rather than strive to maximize it as we have now been doing for many years.
Talbot is doing more than asking a rhetorical question about making a distinction between these two modes of money making. He would like ways to diminish, if not eliminate, the cycles of wealth by wealth, or what we might call derivative wealth, vs. productive wealth.
I don't know enough economics to know whether there are technical terms for this distinction, or whether anyone else has thought about it. Pointers welcomed.