Why Does Wall Street Exist?

It was a rainy winter day in Zürich.

I was walking across the small Bloomberg newsroom when I stopped at the desk of a reporter.

I was the Global Managing Editor for Corporate Finance, and I had a little game that I would play where I would ask the people working with me

“Why does Wall Street exist?” The person I asked usually answered with

“To make money.” Which is what the reporter said to me this day.

I pushed him.

“You think Wall Street exists to make money?

You think governments created a global central banking system, special tax treatment, securities laws and an enormous regulatory architecture so that a relatively small group of people could make money?”

He thought about it.

I pushed again.

Why does the system exist?

Eventually he got there. “To help people with ideas get access to money and to help money make money by choosing the best ideas.”

Exactly. That is why Wall Street exists, as a machine to reward those best at picking winning ideas and as a way for those with ideas to compete for money.

Not to make money. Money is the reward.

The purpose is to connect capital with ideas capable of creating value for other people.

Finance connects them. A factory gets built. A medicine gets developed. A technology solves a problem. Customers get something they value.

Investors make money. That is capitalism.

And buried inside that system is an essential gate:

The thing being financed is supposed to create value for somebody else.

The problem is that the gate is broken.

Because the financial system measures profit.

It does not measure how the profit was created.

A dollar earned inventing a medicine looks exactly like a dollar extracted by a monopoly controlling access to it.

Build the world’s best product.

Profit. Capture a customer who has nowhere else to go and raise the price.

Profit.

Innovation, monopoly, fraud and political capture can all produce the same number on an income statement.

The spreadsheet cannot tell the difference.

But capitalism depends on that difference.

Because if creating value produces the highest return, capital will create value.

If extracting value produces the highest return, capital will extract it.

I wrote about this distinction fifteen years ago in Greedy Bastards. Did you make something?

Or did you take something?

Artificial intelligence makes that question urgent yet again.

AI is making us more creative and productive than we have ever been.

That is value creation.

The same technology could also be used to capture customers, eliminate competition and concentrate power.

That can be profitable too.

Which brings me back to a rainy day in Zürich.

Wall Street exists to connect money with people who have ideas.

But profit is not proof that value was created. Profit is only the signal.

The gate is whether somebody on the other side of the transaction received value.

We need to fix the gate.