22nd
The crucial role of the financial system in a mostly free-enterprise economy is to allocate capital investment towards the most productive applications.
…
Perversely, the largest individual returns seem to flow to those whose job is to ensure that microscopically small deviations from observable regularities in asset price relationships persist for only one millisecond instead of three. These talented and energetic young citizens could surely be doing something more useful.
The fact that they are not is itself a waste of resources. But the reason they are not – what provides the incentive that attracts so many of our best students into finance – also bears on how well our financial system is serving our economy.
Benjamin Friedman (Harvard), FT 9/26/09
http://www.ft.com/cms/s/0/2de2b29a-9271-11de-b63b-00144feabdc0.html
Synopsis: Finance exists to allocate scarce investment savings toward productive ends. Can we empirically say that the benefits to productivity/growth from the current size/structure of the financial industry outweigh its costs (in resources allocated to it, as well as collateral costs)?
We don’t know. But we ought to start estimating.
