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Missing the Margin

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Another unmistakable clue that the folks at American Compass work with a faulty understanding of the economy is this passage in the opening paragraph of Wells King’s May 20th essay, “Coin-Flip Capitalism: A Primer [2]”:

But the buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity. They invent, create, build, and provide nothing. Their claim to value is purely derivative – by improving the allocation of capital and configuration of assets, they are supposed to make everyone operating in the real economy more productive.

By asserting that the financial-market activities identified above “are not themselves valuable activity” – that these activities “invent, create, build, and provide nothing” – and that their value “is purely derivative,” King reveals a pointless fetish for the physical. (Overlook here the apparent contraction between the claim that financial-market activities are “not themselves valuable activity” and the claim that the value of these activities “is purely derivative.” This contradiction is evidence of the confusion of King’s thought.)

By calling the value of financial-market activity “derivative,” King clearly suggests that these activities are less important than are the activities from which they derive whatever value they have. But this suggestion is wrongheaded.

Because modern manufacturing, modern construction, and modern farming could not occur without modern financing, modern financial-market activities are every bit as essential today to the physical production of goods as are the welders, assembly-line workers, riveters, carpenters, and farm hands who manually help to produce goods. To assume that the latter activities are somehow more ‘essential’ to production than are financial-market activities makes no more sense than to assume that the tires of an automobile, because they are the only part of the car to touch the road, are more essential to that vehicle’s mobility than are the engine, the fuel tank, the transmission, and even the brakes.

Just as a car would not be able to move as its driver wishes it to move were it stripped of any of these and other of its key parts, the modern-day physical production of goods would not occur without modern financing. Nor would this production occur without modern marketing, management, accounting, insurance, communications, transportation, wholesaling, and retailing – all of which are services the value of which is no less or more “derivative” than is the value of financing or of welding or of hammering or of snapping-components-together.

Put differently, the value of financing is no more “derivative” of physical production than is the value of physical production “derivative” of financing. All derive their economic value from the contributions they make to the value of final outputs, which itself is determined by consumer expenditures. To single out physical production generally, or manufacturing specifically, as being somehow more fundamental, more crucial, is to reveal profound economic misunderstanding.


Economists who read King’s essay immediately see that he completely misses the importance of marginal analysis – that is, a recognition of the deep importance of the fact that decisions are made at the margin. It’s true that economists did not fully grasp the importance of the margin until the early 1870s with the “marginal revolution [3],” as it is appropriately called. But the concept has been around now for nearly 150 years; it ought to be understood by everyone who today writes about economics.