The Bank of International Settlements ("the central bank of central banks"): Why does financial sector growth crowd out real economic growth? (2015) [0]
"In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity."
IMF: Rethinking Financial Deepening: Stability and Growth in Emerging Markets (2015) [1]
"The analysis uncovers evidence of 'too much finance' in recent years—that is, beyond a certain level of financial
development the benefits to growth begin to decline and costs in terms of economic and financial volatility begin to rise."
On the optimal size of the financial sector, a speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank (2014) [2]:
"While finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity."
In their article, “Too Much Finance?” Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza (2011) argue that expectation of bailouts may lead a financial sector to expand in size beyond the social optimum. They use a variety of empirical approaches to show that “too much” finance starts to have a negative effect on output growth when credit to the private sector reaches 110 percent of GDP. Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli (2011, 1) likewise argues that, “beyond a certain level, debt is a drag on growth.” The authors estimate the threshold for government and household debt to be around 85 percent of GDP and around 90 percent for corporate debt. Likewise, as we were writing this article, the OECD and the IMF both issued reports warning of a financial overgrowth (OECD 2015; Sahay et al. 2015).
I've often wondered how much money is spent on the money system itself. There are people whose entire days are spent devoted to the goal of keeping the money system flowing. They could be off somewhere else, tending gardens, nurturing children, cooking, educating, repairing, cleaning, healing from stress and trauma, etc. But no, they are at some office working for the all mighty dollar. Keeping tabs on society at large.
I'm not saying that it is overall evil to count supply and demand of resources. I'm merely wondering if the current state of money systems is really well suited to do this without devastating collateral damage on its host, the "human resources."
The great success of capitalism is to allocate resources efficiently. Fundamentally, someone is paying banks for their services; either the value they're providing is more than they charge for it, or not, but in the latter case people would stop buying their services (conspiracy theories notwithstanding). Then at the individual level, the bank is willing to pay someone x amount for the value they provide the bank, and either that's where they can earn the most (because it's where they can contribute the most) or the person will be paid more elsewhere.
There are of course inefficiencies, but they're self-correcting. A bank that overpays its bankers will be undercut by one that doesn't. A company that overpays its banks will be undercut by one that doesn't. It works better than any alternative that's been tried.
Why not? There's a cost to keeping it clean. There's a finite amount. Some people consume more than others.
Answer: because keeping track of those costs and assigning them to individual persons would be way more expensive than just keeping the air clean and letting people consume as much as they want.
Food should be the same way - now that we produce so much of it, it's kind of insane to expect to keep diligent tabs on how much people are consuming.
This is why i think a basic income makes perfect economic sense. People already have the ability to consume society's resources without paying (medical care or prison care still cost money) - so we might as well just give everyone a small amount 'voice' in the system and then dismantle the barriers to entry that are ostensibly in place to protect poor folks.
Interesting question. This expense is something I'd classify as upkeep - costs that are necessary waste. Inefficiency. You need to pay them to keep the thing running, but we would do well to minimize them as much as possible.
The question of how much do we have to pay to get various financial services should in theory be solved by competition. The problem is that some financial institutions are behaving like a cartel and the government is undermining competition by stepping in to save failing financial institutions.
The problem isn't that Finance is "bad" any more than energy companies are "bad" or retailers are "bad". There are people accumulating wealth in a whole bunch of industries, why is the service Google or Facebook provides more valuable than what Bank of America provides?
I think its more than just what we pay for these services, I think there is the variability that is introduced to a market when people invest in that market not for the value of the good or service, but merely as an instrument of financial leverage.
If people bought houses merely to live in, prices would probably be lower and would be subject to much less volatility. Of course, there would be downsides as well (no houses available for rent, etc.) so I'm not suggesting we do away with finance.
In fact, I have no suggestions. I'm just pointing out that finance (treating goods and services as abstract financial instruments) creates opportunities for growth at the expense of added volatility to the markets being abstracted.
>The question of how much do we have to pay to get various financial services should in theory be solve by competition. The problem is that some financial institutions are behaving like a cartel and the government is undermining competition by stepping in to save failing financial institutions.
This is the endgame of all capitalist markets. There isn't any other end game, no matter how much people would like there to be one to satisfy their personal ideologies.
> There is also plenty of evidence for the narrative of capitalism as spontaneous collaboration and growth.
There is? Has capitalism developed in any region of the world without the explicit help of a state? Even the birth of capitalism in Europe was facilitated by governments forcibly enclosing land into larger estates.
The endgame is the endgame, not the beginning or middle. Ultimately, there is no capitalist mechanism to prevent the sale of the market, or the tragedy of any other commons.
That is a great question -- but there are also other aspects to the problem -- human talent is one. Finance can extract rents from society, and it can also lure away promising PhDs, academics and many of the brightest with superior salaries (financed via rents extracted.) I'm not passing judgement on the workers here -- I was one, trapped in the system for 10+yrs with golden handcuffs and nothing to show my family on what I actually created.
It's way too hard to have a career in research or even get into a decent PhD program at all for the "finance brain drain" to matter. Research salaries are low, the conditions are hit or miss and yet, somehow, a faculty job is one of the hardest positions to get. We can worry about that when mid-tier universities stop getting hundreds of resumes for tenure-track positions.
For now, the fact that technically minded people can have a backup plan that pays well is most definitely a feature, not a bug.
I had a professor who gave up a good job at Harvard because he was tired of losing his best students to investment banking. It wasn't a field in any way directly related to business or finance, but Harvard students are highly recruited into lucrative investment banking positions.
What do you mean by kill? To me it's likely that finance represents a depressingly large drain on growth in output/welfare compared to a better regulated alternative but I can't see it making things bad enough to cause anarchy/ rebellion.
Ok, that's a reasonable view. How do you a) estimate the tipping point were finance becomes so dysfunctional that it causes a revolution B) measure the dysfunctionality of anther system relative to this benchmark level. To me this can only ever be a qualitative line of enquiry.
Correct. Many nonlinear systems cannot be modeled beyond describing their qualitative phenomena. The "butterfly effect" prevents precise estimations. You wouldn't expect the weatherman to tell you whether it'll rain this day next year.
Ok, but there are other less ambitious questions you can answer within the paradigm of economics. What are the losses caused by the current system vs an alternative according to a specific welfare measure?
But we don't yet even have a good model of the dynamics of the current system, let alone any good predictions for specific welfare measures of alternate systems.
Not exactly. The question is whether a capitalist society has a stable equilibrium growth path. Mainstream economics assumes a stable equilibrium, because that makes the math work nicely.
Physicists have known for a long time that many systems have unstable equilibria, where a random deviation knocking the system from equilibrium can result in catastrophe. This is the general field of nonlinear dynamics and chaos. The economists, the most famous ones at least, reject the idea without discussion, that the economy could be a chaotic system or even have manifolds where it might enter a chaotic regime.
Things get bad even before extractors enter the picture [0]; just a disadvantage in strategy update rate will result in the formation of cartel structures.
The economy will function as long as there are sufficient physical resources and human will. Finance cannot kill it.
For various definitions of human will. I think humans are somewhat fickle. Society might change its mind more easily than you expect. Case in point, Trump.
I would imagine the increase non-linear. As finance takes more ever more people catch on and realise there is no point working. This removes well-educated wealth creators from wealth creation and into finance. We've seen this in the UK where biologist, physicists and mathematicians are engaged in arbitraging each other.
No point working when work doesn't pay. UK is about to implode if Brexit goes ahead and all the fake fiat from The City evaporates with the confidence.
The Bank of International Settlements ("the central bank of central banks"): Why does financial sector growth crowd out real economic growth? (2015) [0]
"In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity."
IMF: Rethinking Financial Deepening: Stability and Growth in Emerging Markets (2015) [1]
"The analysis uncovers evidence of 'too much finance' in recent years—that is, beyond a certain level of financial development the benefits to growth begin to decline and costs in terms of economic and financial volatility begin to rise."
On the optimal size of the financial sector, a speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank (2014) [2]:
"While finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity."
[0]: https://www.bis.org/publ/work490.htm
[1]: http://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf
[2]: https://www.ecb.europa.eu/press/key/date/2014/html/sp140902....