by We have known for some time that the financial economy is an order of magnitude (or more) greater than the real economy. I have always found the quite disturbing, but have been reassured by “financial types” that this is the proper order of things. So it’s nice to come across a study reported in the New York Times, done by “financial types” (apologies for typecasting) suggesting that “as finance flourished, other industries find themselves starved for cash and talent.” This excellent study is called “Why Does Financial Sector Growth Crowd out Real Economic Growth?” (which you can download). They studied 33 manufacturing industries in 15 advanced economies around the world. The key finding is that overall productivity gains are dragged down in economies with rapidly growing financial industries.
- Part of it is that finance tends to invest in the “safest” bets with real assets, but often are the last productive, e.g., finance assisting a construction boom.
- Part of it is the tendency of the financial sector to rig the rules of the game to favor itself. The study observed that “by draining resources from the real economy, financial sector growth becomes a drag on real growth.” (R&D intensive sectors hurt in particular)
- And another tendency is for the financial sector to drain talent from the real economy.
Of course, a few studies don’t close the case, but there is some evidence to back up my (and Is suspect others) suspicions.
Fans of Carlotta Perez’s model of technology transformation will recall the model suggests there is a pattern in finance-heavy periods of the economy, but these are typically in the early stage of a tech transformation. Yet, we are in the more advanced stage of the I/T transformation – so the real economy ought to be on the upswing vis-à-vis the financial economy – but that doesn’t appear to be the case. It will be interesting to untangle whether this study is detecting a pernicious long-term trend, or a mild aberration in an ongoing historical cycle? Andy Hines
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