Finance Ate the World

In 2011, Marc Andressan told us that software is eating the world. In large part, he was right. Amazon replaced Borders. Netflix replaced Blockbusters. Facebook replaced face to face interaction.

But there’s another predator that has silently eaten us.

That predator is finance.

How Finance Controls Intensive Economic Development

It’s often repeated that economies in the American colonies developed differently based on their exports. The South, for example, had large plantations so that they could grow crops like cotton and indigo more efficiently. However, in states like Maryland, farmers held much smaller plots. This is because wheat is grown more efficiently on smaller plots. This is the essence of the staple thesis.

In development economics, the staple thesis holds that institutions—such as land use—and societies develop in ways to maximize the output of their key export (or staple).

Borrowing some language from Coehlo, I like to say that a society conspires to maximize the output of its key export.

In London, that export is certainly finance.

Let me paint you a picture.

London FinanceLondon is a diverse global city. It has two financial districts. One is downtown, centered around the Bank of England—the country’s central bank. The other sits in the Docklands, which were converted from loading docks to office buildings in the 1980s.

For the financial professional going to the Docklands, it is as if London has conspired to make life as easy as possible for her.

She simply needs to land at London City Airport, board the Docklands Light Rail (DLR) and get off at a station that is often directly inside her office. At the Docklands, Starbucks dominates the caffeine supply. Because we wouldn’t have someone who works in finance to spend 10 more seconds on their coffee order? Instead, we bend our economy to serve them.

How Finance Controls Our Human Capital

It’s estimated that the financial services industry makes up “12% and 19.5% of the total global economy.

But when you think about what financial services actually does for the economy, you realize how ridiculous number that is.

As Jeff Hammerbacher once said in an interview, “The best minds of my generation are thinking about how to make people click ads.” The same could be said on how today’s best minds may be wasted in finance.

Finance’s Ironic Misallocation Problem

The goal of finance is simple: allocate resources within an economy. Finance achieves this goal, for example, by connecting investors with entrepreneurs. Savers with borrowers. And insurers with those seeking to reduce their risk. But to say that role should make up between one eighth to one fifth of the entire global economy seems absurd. Perhaps said more correctly, it seems as though we have misallocated our resources.

For sure, finance provides an incredibly valuable service to the world. People can transfer their wealth across time with mortgages and IRAs. Businesses can invest and hire new works with a business loan. But, in an era of great automation, one would think financial firms would leave a greater proportion of this work to computers. And we could unleash more brilliant talent into, what economists appropriately call, the real economy.

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