Free Love and Free Trade: What’s Ben Stein’s take on International Finance?

The unparalleled Ben Stein wrote a good column in today’s NYTimes business section proclaiming best practices in love — a few economic hints on how to have a rewarding romantic relationship.

Stein advises the reader to stick to long term, low risk investments — this strategy tends to ensure reciprocity such that when you invest love, you are also receiving it back. “The impatient day player will fare poorly without inside information or market-controlling power. He or she will have a few good days but years of agony in the world of love,” writes Stein. That’s good advice!

But why end the analogy there?

Example: Free market theorists say that the liberty to trade and invest in anything, unhindered by government or other regulation, will bring stability and all-around prosperity in the global economy. Free love theorists have a similar take on protectionist arrangements such as marriage or monogamy. These visionaries say that boundaries to love or capital are artificial and antique; they should be made obsolete. Instead, if freed from hierarchy or relationships of power, love/trade would better the human condition. (Of course true believers in these ideas tend to be unabashed but relatively hard to find, since it’s so easy for poseurs to use “free trade” or “free love” simply as an excuse for gratification)

I should point out that the love/economics analogy is well worn in some areas of social studies, as in post-colonial history and women’s studies. This is because rape is an excellent word to describe the economic relationship that occurred between the European powers and the inhabitants of myriad other territories around the world throughout modern history.

So what’s a good word to describe globalization — the dominant paradigm of contemporary economic affairs — in terms of love?

Let’s look at some facts:

“In 1970, about 90% of international capital was used for trade and long-term investment — more or less productive things — and 10% for speculation. By 1990, those figures had reversed: 90% for speculation and 10% for trade and long-term investment.” – Noam Chomsky

Chomsky’s sweeping claims usually seem a bit suspect to me (besides which the book from which this quote is taken is almost 15 years old by now). In this case, however, Chomsky was referring to work by none other than (Lord) Professor John Eatwell, President of Queen’s College, Cambridge.

So I went ahead and emailed Lord Eatwell about it.

From Eatwell’s response:

“the figures derive from dividing the sum of foreign exchange transactions worldwide by the value of world trade and long-term investment (that it might be expected forex transactions were used to finance). In 1970, prior to financial market liberalisation this number would be roughly 2. Today it would be about 80 (Chomsky’s figure of 10:1 is far too low).

The change illustrates the internationalisation of financial markets. But not all of this can be labelled “speculation”. A significant proportion is hedging, and a large proportion is arbitrage.”

Wow, thanks Lord Professor Eatwell. This figure is much more recent and much more alarming than Chomsky’s.

For the layman (i.e. myself): Speculation is buying something with the expectation that you’ll be able to sell it for a profit in the near future. Arbitrage is buying something in one market and selling it in another so as to make a no-risk profit. Hedging (like “hedging your bets”) is buying something while also taking measures to reduce risk and ensure that something’s continued value — like taking out an insurance policy. (One way this can be done is through buying two related assets, to protect against the sudden collapse of one of them.)

In any case, it would seem that international finance is no longer about investing on foreign shores towards some perceived end goal — but rather it’s about brokering for short-term capital gain.

According to Joseph Stiglitz, capital market liberalization is “not so much the liberalization of rules governing foreign direct investment, but those affecting short-term capital flows, speculative hot capital that can come into and out of a country.” International trade of this kind, evidently the most common kind by overwhelming majority, is simply the movement of capital across national borders.

As we’ve seen, the scale of this activity has expanded enormously since 1970. Who really benefits from this development? Perhaps large corporations with international holdings. Certainly not the poor.

Stiglitz and Andrew Charlton, in their paper “Capital Market Liberalization and Poverty” (2004, draft) suggest that

“the poor are least equipped to cope with increased volatility, and they are most affected by financial crises. Capital mobility reduces their bargaining power relative to capital and leads to a decline in the labor share of output. Financial openness delivers the poor few benefits in terms of increased access to credit and other financial services, and it constrains governments’ redistributive efforts and anti-poverty fiscal policies…a compelling case that capital market liberalization is bad for the poor in developing countries.”

Capital markets are risky — and the poor bear the brunt of the risk of CML without any of the benefits.

In any case, to return to the analogy, the trend seems to be that this process of “globalization” has engendered a continuing decline in long term relationships while so called hook-ups (whereby the international financial market is like a nightclub geared towards promiscuity, perhaps) have become vastly more popular.


Incidentally, if long term investment bodes well for love (Stein’s theory), then I’ll postulate that the reverse is also true. Speculation in love, like breaking up with someone just to “trade up” to a better romantic partner, generally will not lead to satisfaction. Similarly, love arbitrage would be impossible as such since there is no such thing as risk-free love. Hedging your bets in love usually leads to disaster. (e.g. Zach Morris’ attempts on Saved By the Bell to take out more than one girl on a date at the same time always blow up in his face — but he never becomes a more conservative investor!)

On a final, and unbelievably hippie-tastic note, finance and love are both systems of communication. They just demand more or less opposite strategies for success — the one requires you to be ruthless and greedy and ignore everybody except yourself; the other rewards trust and generosity and mutual understanding. Not a sermon, just a thought.


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4 Responses to “Free Love and Free Trade: What’s Ben Stein’s take on International Finance?”

  1. David Says:

    First of all, you hippie, I am skeptical that either of your positions on the optimal strategies for finance and love bear out as maxims.

    Second: ignoring for a moment the insanity of writing a whole column based on the premise “you should approach love from a sensible and well-reasoned perspective,” I am hesitant to take Ben Stein’s advice on love after he proved himself so remarkably homophobic in light of the Mark Foley scandal two years ago:

  2. tripinchina Says:

    Stein may be a bastard, but I agree with his assessment that the most satisfaction in love stems from long term high quality investment.

    That said, my intention was to point to the very real dark side of his warm-and-fuzzy metaphor.

    If certain investment habits bespeak “love”, while others can be aptly described as “rape”, then the general scene in international finance can be called “prostitution” — lots of activity, lots of money changing hands, no commitment. And if you’re poor, you’re the one getting screwed (with little to no recompense from your pimps.)

    Also, I neglected to mention how awesome it was that Lord Eatwell replied to my email at all. This dude is a big time Professor of Finance, a member of the House of Lords, the president of a major college in Cambridge University. And he answered my email within a few hours!

  3. VG Says:

    nice work

  4. Es_ Says:

    Interesting comment on Stein. I found your blog by Googling on more Stein about love.

    That’s a great example of power of internet as for a platform of sharing knowledge and thoughts–you can find an interesting comment that you’d never had a chance to read if there was no Web and no Google.

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