Wealth extraction is exploitation, and can never be justified, so what can be done about it? Advertising has already been mentioned as a ratchet service and is a major driver of extraction in financial trading. I shall argue in chapter 100 section 100.9 that advertising that seeks to manipulate or persuade by any form of deception, selective information or emotional appeal should be prohibited, because it distorts markets and costs society dearly in wealth extraction and in diverting the efforts of so many talented people away from good wealth creation. These measures would also help in limiting financial trading extraction, but I believe that there are additional and more effective methods available. Most ordinary people (as opposed to those who invest professionally or from personal interest) who invest for the future don't want to spend time thinking or worrying about what to invest in, they want to put money aside, perhaps regularly, for use later in life, in the belief that it will stand a very good chance of growing over the years. The finance sector serves these people very badly. They are presented with a plethora of choices, all claiming to be better than the rest, so they are forced to gamble. Some go to financial advisers for help, of whom some have a high level of personal integrity and some haven't, some are very knowledgeable and some aren't. But how is a person to tell the difference? Adverts don't help and word of mouth is similarly unreliable because it's usually based on recent experience whereas investments take years to show their potential. Again it's a gamble.
People deserve better than this.
What drives investment growth? It is re-investment of the return from the investment. Note that this is not the same as economic growth. The economy as a whole may grow or decline, but investment return is linked only loosely to that growth or decline. If I lend money at interest, I expect to be paid whatever the economy does. Similarly if I own a factory, I expect to make profits whatever the economy does, though I can normally expect higher profits in a growing economy and lower profits in a declining economy. The return on investments as a whole relates to the share of national income taken by capital (in the broadest sense) as opposed to the share taken by labour - see chapter 97 - whereas economic growth or decline affects the amount of national income. If the national income shares are fixed then investment returns grow with a growing economy and vice versa, but in reality the shares vary continuously and the amount varies continuously, so although there is linkage it is a loose linkage. Some investments, such as high value property in capital cities, grow at certain times significantly faster than other investments, but this growth is driven by increasing willingness to buy, which is balanced by reduced willingness to buy other types of investment, which don't grow as much or decline in value. This is the basis of the investment problem - trying to pick investments that perform better than others.
At its heart investing is a simple business. Basically there are three[228] things in which to invest - equities, debt and hardware (property, commodities, antiques, precious metals, works of art, classic cars and so on). Equities and debt are financial assets whereas hardware consists of tangible assets. Derivatives are also a type of financial asset, but they are derived from one or other of these basic three and are often used to make investing in them, especially hardware, easier.
The single thing that an investor needs to specify, or be advised on, is the risk that he or she wishes to take. A high risk carries the chance of higher gains, but at the cost of the chance of lower gains or even losses. Equities and hardware in general carry higher risks, whereas debt in general carries lower risks, but there are wide variations within these groups. Another factor is inflation; debt suffers much more than equities or hardware in this respect. What is of particular note is that the potential gain from higher risk investments is higher than for lower risk investments even allowing for the risk, because the higher the risk the deeper the discount that investors demand.
Given these observations appropriate strategies can be worked out for particular investment aims. For example for pension purposes young people should invest in a wide range of equity and hardware derivative assets across the risk spectrum, the wide range ensuring adequate diversity so as to enjoy the higher average potential gain from higher risks without risk of major loss, and higher risk assets are suitable for young people because there is plenty of time for variations in performance to iron themselves out. Additionally young people don't want much exposure to inflation risk because this can erode inflation-sensitive investments very significantly over long periods of time. As working life progresses investments should switch progressively into lower risk areas, because there is less time for variations in value to recover and less time for inflation to erode inflation-sensitive investments. In the last few years before retirement the majority of investments should be in the lowest risk areas so as to keep what has already been gained. Different levels of risk can be taken to suit personal preference, or because a person has other sources of income.
It would be relatively easy for the state to sponsor an appropriate range of well-diversified not-for-profit funds covering all risk levels, suitable for all those who do not wish to take personal charge of their own investments. There would still be a need for managers of these funds, but there would be far fewer funds and therefore fewer managers, and they would be paid a normal professional salary related to the work they did, not a percentage of the funds under management. At the same time there would be free investment advice from independent state-sponsored advisers. I feel certain that these funds would be immensely popular because people would no longer need to fear being taken advantage of as they do with the vast choice of privately run investments and advice from private advisers. Privately run funds could continue, but with much tighter restrictions to prevent exploitation it is doubtful that any could compete successfully. Of course to make this happen we, and especially the government, would need to rid ourselves of the 'everything private is good, everything public is bad' neoliberal dogma. Investments by ordinary people and especially their pensions are far too important to be exposed to 'free-to-exploit' market forces.