The ambiguity of a phrase
In itself, the financial market is essentially a zero-sum game. Money stays in it because people think they can make money in it, but these gains are sterile: one investor’s gain is another’s loss. There is no productive activity going on here. Productive activity takes place when goods are produced or services rendered. It does not take place when money goes in one pocket and out another. Hence the epithet, zero-sum game.
Nevertheless, financial markets are helpful tools for allocating savings toward productive activity, thus, when liquidity finds its way to the ordinary market. When it does not find its way there, and simply goes round and round on the financial market, from one bank account to another, it is a sign of problems in the ordinary market which are keeping it from generating satisfactory returns, leaving investors to try their hand at generating a different sort of return on their “capital,” the kind which is more akin to the casino than the productive economy. We end up with the fabled “global savings glut.”
This points up the two distinct meanings the word “investment” can have. On the one hand, it can mean the application of funds to the furtherance of productive activity. On the other, it can mean the application of funds in the financial markets in order to gain a return on the assets traded there. But this latter has only an indirect and tenuous connection to the first meaning.
The fact that money runs in two circuits corresponding to the two markets can give rise to all manner of pathologies that afflict the economy. Because the very fact that these markets are discontinuous means that the liquidity which originates in the ordinary market can get stuck in the financial market, and be kept from returning, stifling investment and productivity, even though “investors” make a “killing” there. This can have all manner of deleterious effects on the real economy — but as we pointed out above, this is not a cause but a symptom. But before we turn to pathologies, we need to add another set of factors to our picture.