The Value of Finance
Brad Delong and Stephen Cohen’s work The End of Influence illuminates the role of law & policy in shaping the US economy. They calculate that, over the past 15 years,
the United States has half-consciously re-shaped its economy. The country shifted some 7 percent of its GDP out of manufacturing and added some 7 percent of GDP in the expansion of finance, insurance, and real estate transactions. . . . The communities of engineering practice and innovative technological development do move and emerge elsewhere as you shift labor from real engineering, which calculates stresses in materials and quantum tunneling in doped semiconductors, into financial engineering, which calculated delta-hedge decay and vega convexity for synthetic securities. It also means that you must create more and more debt so that other nations have the dollars to accumulate and not balance their trade—and yours.
So what was the end result of that big shift of resources into the finance sector? Some might argue we were on our way to becoming a “virtual state,” the highest link in the financial food chain. Clive Dilnot offers an alternative perspective:
For the banks and financial houses of Wall St. and the City what mattered was not the creation of wealth . . . but the extraction of realizable value from capital that could be made to flow through the institution. This explains the ‘relentless’ drive for expanded balance sheets ‘at all costs’—and for expansion on both sides of the balance sheet, assets and liabilities alike. Value is here a cull. Innovation is creating the conditions under which, and from which, immediate surplus can be won from flows of capital.
However the financial reform legislation turns out, it is unlikely to do much to stop that dynamic.