Finance: Function Matters, Not Size
- (pp. 29-50)
AbstractIt's fun to pass judgment on waste, size, usefulness, complexity, and excessive compensation. But as economists, we have an analytical structure for thinking about these questions. "I donâ€™t understand it" doesn't mean "it's bad," or "regulation will improve it." That attitude pervades policy analysis in general and financial regulation in particular, and economists do the world a disservice if we echo it. I will not offer a competing black box [to explain the size of the finance industry]. I donâ€™t claim to estimate the socially optimal "size of finance" at, say, 8.267 percent of GDP. It's just the wrong question. Hayek and the failure of planning should teach us a little modesty: Pronouncing on socially optimal industry size is a waste of time. Is the finance industry functioning well? Are there identifiable market or government distortions? Will proposed regulations help or make matters worse? These are useful questions.
Citation2013. "Finance: Function Matters, Not Size." Journal of Economic Perspectives, 27(2): 29-50. DOI: 10.1257/jep.27.2.29
- E23 Macroeconomics: Production
- E44 Financial Markets and the Macroeconomy
- G10 General Financial Markets: General (includes Measurement and Data)
- G20 Financial Institutions and Services: General