Scott Sumner tries to explain why finance is so much more lucrative today than it was in the 50s and 60s:
Today the most productive members of society are not those who produce things, they are those who discover the things that need to be produced. Once you have the blueprint, it is easy to produce many types of software and pharmaceuticals. The big money goes to those who figure out the blueprint, but also to those who allocate capital to the guy who has the idea for a Google, or Facebook, or Twitter.
….And then there’s globalization, which means decisions about allocating capital can vastly improve productivity even in the old-line industries that were dominant in the 1960s, when the rest of the world hardly mattered. Finance is not that important in an agricultural economy or even in an economy where the mass production of goods can be done with almost military precision. It becomes extremely important in an economy where it is not at all clear what should be produced, or on what continent that production should take place.
This seems pretty unpersuasive. If Wall Street were making truckloads of money on their VC investments, then OK. Maybe he’d have a point. But I’m pretty sure that true venture capital constitutes a tiny fraction of finance sector earnings. Likewise, allocating capital to old-line industries is just….allocating capital to old-line industries. Why does it matter whether those industries are in Pittsburgh or Mumbai?
If the finance sector were truly creating lots of extra value, then most of us probably wouldn’t mind that bankers were taking home outsize paychecks. But are they? Are overall global growth rates higher today than they were 50 years ago? Is productivity growth higher? Is modern finance repsonsible at all for higher economic growth than it was in 1965?
It sure doesn’t seem like it — though I’m open to contrary evidence. Rather, it seems as if the explosion in finance over the past three decades has mostly consisted of rent seeking and massive increases in leverage and hidden risk thanks to post-Bretton Woods globalization and deregulation. The actual benefit to the rest of mankind is a little hard to suss out.
