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Bulletin of the ERI, 2007/08 no. 2

Contents: March 2008

On fat cats and sub-prime mortgages

Trillions of dollars of paper values are disappearing as markets write down house prices and sub-prime mortgage based assets. It goes to show that modern asset markets can still make big mistakes. When it's all over, however, the British and U.S. economies will still have highly profitable financial sectors.

What does it all mean? Sometimes, it helps to take a long view.

A little known fact about England in the Industrial Revolution is that the people who made most money were not the industrialists that fabricated the goods and pioneered the new production and management technologies that made England the workshop of the world. Money was made in manufacturing, to be sure, but competitive markets ensured that large profits were soon competed away. As supply increased and prices fell, the main beneficiaries were the consumers, not the producers.

In Men of Property: The Very Wealthy in Britain Since the Industrial Revolution (second edition, 2006), William Rubinstein has shown that the big fortunes made at that time accrued to the bankers and brokers that traded in goods and financed and insured their production and distribution.

At a time of rapid economic change, their most important capital was trustworthy information: knowing what to trust, and knowing whom to trust. Because reliable knowledge was scarce, and what they did was valuable, they made a lot of money. They also made a lot of mistakes. Speculative bubbles, bank runs, credit crunches, and bankruptcies were common.

Notably, neither the money these "fat cats" made, nor the mistakes they made, prevented the Industrial Revolution from happening.

Mark Harrison

Mark Harrison is director of the Economic Research Institute and chair of the Department of Economics.