8 ms·

"An economy based increasingly on rent extraction by the few and debt buildup by the many is, in essence, the feudal model applied in a sophisticated financial

by ksar 10y ago

"An economy based increasingly on rent extraction by the few and debt buildup by the many is, in essence, the feudal model applied in a sophisticated financial system." The financial services sector adds value to society by providing mechanisms to diversify risk, price assets, and make capital available for productive uses. These mechanisms are valuable, but are gamed to extract economic rents greater than their value to society. Extract too much, and you kill the underlying economy.

baq 10y ago
has anyone tried to estimate how much can finance extract to itself before killing its host economy?
- xapata 10y ago
  If so, it's not a well-known study. That sounds like it'd lend itself well to a simulation modeled with autonomous agents. That's not a popular methodology in economics.
- coralreef 10y ago
  I haven't studied this deeply at all, but the nature of capitalism posits that there could be checks and balances to incentivize against this?
  - xapata 10y ago
    Not exactly. The question is whether a capitalist society has a stable equilibrium growth path. Mainstream economics assumes a stable equilibrium, because that makes the math work nicely. Physicists have known for a long time that many systems have unstable equilibria, where a random deviation knocking the system from equilibrium can result in catastrophe. This is the general field of nonlinear dynamics and chaos. The economists, the most famous ones at least, reject the idea without discussion, that the economy could be a chaotic system or even have manifolds where it might enter a chaotic regime.
    - amelius 10y ago
      But there exists an equilibrium: one company has all the money :)
      - xapata 10y ago
        Not even that. The company might make a bad investment, then poof no wealth anywhere.
- jsprogrammer 10y ago
  Things get bad even before extractors enter the picture [0]; just a disadvantage in strategy update rate will result in the formation of cartel structures. The economy will function as long as there are sufficient physical resources and human will. Finance cannot kill it. [0] https://arxiv.org/abs/1201.3798 https://arxiv.org/abs/1201.3798
  - xapata 10y ago
    For various definitions of human will. I think humans are somewhat fickle. Society might change its mind more easily than you expect. Case in point, Trump.
- oli5679 10y ago
  What do you mean by kill? To me it's likely that finance represents a depressingly large drain on growth in output/welfare compared to a better regulated alternative but I can't see it making things bad enough to cause anarchy/ rebellion.
  - xapata 10y ago
    Why not? Civil wars have been distressingly common through history.
    - oli5679 10y ago
      Ok, that's a reasonable view. How do you a) estimate the tipping point were finance becomes so dysfunctional that it causes a revolution B) measure the dysfunctionality of anther system relative to this benchmark level. To me this can only ever be a qualitative line of enquiry.
      - deleted 10y ago
        [deleted]
      - xapata 10y ago
        Correct. Many nonlinear systems cannot be modeled beyond describing their qualitative phenomena. The "butterfly effect" prevents precise estimations. You wouldn't expect the weatherman to tell you whether it'll rain this day next year.
        oli5679 10y ago
        Ok, but there are other less ambitious questions you can answer within the paradigm of economics. What are the losses caused by the current system vs an alternative according to a specific welfare measure?
        xapata 10y ago
        But we don't yet even have a good model of the dynamics of the current system, let alone any good predictions for specific welfare measures of alternate systems.
- macawfish 10y ago
  Related: I've often wondered how much money is spent on the money system itself. There are people whose entire days are spent devoted to the goal of keeping the money system flowing. They could be off somewhere else, tending gardens, nurturing children, cooking, educating, repairing, cleaning, healing from stress and trauma, etc. But no, they are at some office working for the all mighty dollar. Keeping tabs on society at large. I'm not saying that it is overall evil to count supply and demand of resources. I'm merely wondering if the current state of money systems is really well suited to do this without devastating collateral damage on its host, the "human resources."
  - TeMPOraL 10y ago
    Interesting question. This expense is something I'd classify as upkeep - costs that are necessary waste. Inefficiency. You need to pay them to keep the thing running, but we would do well to minimize them as much as possible.
  - MarkPNeyer 10y ago
    Also related: We don't charge people for the air we breath. Why not? There's a cost to keeping it clean. There's a finite amount. Some people consume more than others. Answer: because keeping track of those costs and assigning them to individual persons would be way more expensive than just keeping the air clean and letting people consume as much as they want. Food should be the same way - now that we produce so much of it, it's kind of insane to expect to keep diligent tabs on how much people are consuming. This is why i think a basic income makes perfect economic sense. People already have the ability to consume society's resources without paying (medical care or prison care still cost money) - so we might as well just give everyone a small amount 'voice' in the system and then dismantle the barriers to entry that are ostensibly in place to protect poor folks.
  - lmm 10y ago
    The great success of capitalism is to allocate resources efficiently. Fundamentally, someone is paying banks for their services; either the value they're providing is more than they charge for it, or not, but in the latter case people would stop buying their services (conspiracy theories notwithstanding). Then at the individual level, the bank is willing to pay someone x amount for the value they provide the bank, and either that's where they can earn the most (because it's where they can contribute the most) or the person will be paid more elsewhere. There are of course inefficiencies, but they're self-correcting. A bank that overpays its bankers will be undercut by one that doesn't. A company that overpays its banks will be undercut by one that doesn't. It works better than any alternative that's been tried.
- chishaku 10y ago
  Yes. The Bank of International Settlements ("the central bank of central banks"): Why does financial sector growth crowd out real economic growth? (2015) [0] "In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity." IMF: Rethinking Financial Deepening: Stability and Growth in Emerging Markets (2015) [1] "The analysis uncovers evidence of 'too much finance' in recent years—that is, beyond a certain level of financial development the benefits to growth begin to decline and costs in terms of economic and financial volatility begin to rise." On the optimal size of the financial sector, a speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank (2014) [2]: "While finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity." [0]: https://www.bis.org/publ/work490.htm https://www.bis.org/publ/work490.htm [1]: http://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf http://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf [2]: https://www.ecb.europa.eu/press/key/date/2014/html/sp140902.en.html https://www.ecb.europa.eu/press/key/date/2014/html/sp140902....
- YZF 10y ago
  Finance doesn't have its own economy. The question of how much do we have to pay to get various financial services should in theory be solved by competition. The problem is that some financial institutions are behaving like a cartel and the government is undermining competition by stepping in to save failing financial institutions. The problem isn't that Finance is "bad" any more than energy companies are "bad" or retailers are "bad". There are people accumulating wealth in a whole bunch of industries, why is the service Google or Facebook provides more valuable than what Bank of America provides?
  - WalterSear 10y ago
    >The question of how much do we have to pay to get various financial services should in theory be solve by competition. The problem is that some financial institutions are behaving like a cartel and the government is undermining competition by stepping in to save failing financial institutions. This is the endgame of all capitalist markets. There isn't any other end game, no matter how much people would like there to be one to satisfy their personal ideologies.
    - hueving 10y ago
      It would be nice if you had some evidence other than your own personal ideology.
      - WalterSear 10y ago
        There are mountains of evidence. Though none, I suspect, that will rock you off your little throne. Edit: I should have made this comment with more tact and empathy, and maybe have been a whole load more hearable for it.
        lliamander 10y ago
        There is, of course, plenty of evidence for the narrative of capitalism as exploitation. There is also plenty of evidence for the narrative of capitalism as spontaneous collaboration and growth. Denying only one or the other of these statements is indicative of one beholden to an ideology.
- TuringNYC 10y ago
  That is a great question -- but there are also other aspects to the problem -- human talent is one. Finance can extract rents from society, and it can also lure away promising PhDs, academics and many of the brightest with superior salaries (financed via rents extracted.) I'm not passing judgement on the workers here -- I was one, trapped in the system for 10+yrs with golden handcuffs and nothing to show my family on what I actually created.
  - tikhonj 10y ago
    It's way too hard to have a career in research or even get into a decent PhD program at all for the "finance brain drain" to matter. Research salaries are low, the conditions are hit or miss and yet, somehow, a faculty job is one of the hardest positions to get. We can worry about that when mid-tier universities stop getting hundreds of resumes for tenure-track positions. For now, the fact that technically minded people can have a backup plan that pays well is most definitely a feature, not a bug.
  - manachar 10y ago
    I had a professor who gave up a good job at Harvard because he was tired of losing his best students to investment banking. It wasn't a field in any way directly related to business or finance, but Harvard students are highly recruited into lucrative investment banking positions.
- buzzybee 10y ago
  From TFA: In their article, “Too Much Finance?” Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza (2011) argue that expectation of bailouts may lead a financial sector to expand in size beyond the social optimum. They use a variety of empirical approaches to show that “too much” finance starts to have a negative effect on output growth when credit to the private sector reaches 110 percent of GDP. Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli (2011, 1) likewise argues that, “beyond a certain level, debt is a drag on growth.” The authors estimate the threshold for government and household debt to be around 85 percent of GDP and around 90 percent for corporate debt. Likewise, as we were writing this article, the OECD and the IMF both issued reports warning of a financial overgrowth (OECD 2015; Sahay et al. 2015).
  - deleted 10y ago
    [deleted]
- branchless 10y ago
  I would imagine the increase non-linear. As finance takes more ever more people catch on and realise there is no point working. This removes well-educated wealth creators from wealth creation and into finance. We've seen this in the UK where biologist, physicists and mathematicians are engaged in arbitraging each other. No point working when work doesn't pay. UK is about to implode if Brexit goes ahead and all the fake fiat from The City evaporates with the confidence.
Zigurd 10y ago
You can take a best practices approach: are we spending more, but getting no more, or even less than other industrial economies? The same could be applied to any part of the economy that does not directly produce goods: criminal justice, health care, military. I fear that a measure of GDP that takes overspending on non productive activities into account would leave the US looking much worse.
- rayiner 10y ago
  It sounds like our measure of GDP needs to be narrower. For example, why are legal services revenues included in GDP? In theory, value created by the legal industry should already be reflected in the real economy. If two companies enter into a joint venture to produce widgets, in reliance on the legal system enforcing their joint venture agreement, that will be directly reflected in additional widgets being produced. But the cost of paying people to draw up the contracts is a transaction cost that should be excluded from GDP. Similar reasoning can be applied to the financial system. If two companies rely on financing to jumpstart the joint venture, the value created by the financial system will be reflected in the production of widgets. The investment banking fees and interest are transaction costs that should be excluded from GDP. Of course, doesn't the same reasoning apply to everything that isn't consumption? For example, any value created by Google Search should be reflected in the productivity of the real economy. Any revenues to Google from search should be excluded from GDP, right? It's not like GDP doesn't have other major flaws. For example, after Fukushima, Japan's GDP went up due to rebuilding. I.e. GDP is susceptible to the broken window fallacy!
  - Zigurd 10y ago
    Too reductive, and disingenuous. Of course some finance is a needed part of a healthy economy. But financialization generally isn't. At best that rent seeking is shifted onto overseas "customers." Similarly, saving lives is good, but costing a multiple of other industrial nations makes that part of health care a drag on the rest of the economy. Comparables can be compared. It's not as complex or inscrutable as you imply.
    - 10y ago
TheOtherHobbes 10y ago
>The financial services sector adds value to society by providing mechanisms to diversify risk, price assets, and make capital available for productive uses. Capital isn't an object, it's a belief system, with a strong faith-based component. So in a purely rational sense it's impossible to "make capital available." Capital is actually an executive instantiation of social patronage. Someone says "I want to try this..." and someone else with capital - usually of higher status - says 'OK, I think that's a good idea. Here are some imaginary social credits you can swap for resources because everyone believes in them. Now that you have credits, your project looks more believable too." Nothing real changes hands. There's simply a nod of political approval from interests who stand to gain status if the project succeeds. The system would work just as well without the credits. The credits are really only there to hide the politics. Risk doesn't exist at all in the market sense, because risk is only defined by loss of capital - i.e. loss of face and status - and not by any other possible losses, no matter how physical. (E.g. loss of biosphere and future carrying capacity, social opportunity costs, loss of life through profitable war, and so on.) I doubt you can have an economy without at least some executive decision-making and planning. But the current system is so completely disconnected from true social and economic value creation that it's actively hampering real growth.
- MarkPNeyer 10y ago
  This is why i think it makes sense to consider the financial economy as "a discussion happening in a formal language" Issuing credit, defaulting, borrowing - these are all primitives in the formal language. That language decides who gets ownership over what goods. > But the current system is so completely disconnected from true social and economic value creation that it's actively hampering real growth. Totally agree. It's like we've mistaken 'ideas about reality' for reality itself. https://medium.com/@MarkPXuNeyer/consider-money-as-a-formal-language-ab10d8251ddb#.t0rlz7toc https://medium.com/@MarkPXuNeyer/consider-money-as-a-formal-...
- laretluval 10y ago
  > Risk doesn't exist at all in the market sense, because risk is only defined by loss of capital - i.e. loss of face and status - and not by any other possible losses. Why is social status not something that has value? Almost everyone wants more social status and would trade things for it, so it seems that it has value. You're drawing a distinction that I don't understand between things that are "real" and "not real".
ilaksh 10y ago
I can't help but put my own related ideology out there. My belief is that whether you start from a fundamentally cooperative approach (communism) or a primarily competitive one (capitalism) you are ultimately going to run into the same main problem: over-centralization. This could be a large bureaucracy of state-run corporations or just large companies in a primarily capitalistic society that evolve into monopolies over time. It seems in both systems whether they start with the sharing or competing idea that ideology gets diluted by practicalities over time. Which makes sense because we must be able to cooperate on some level in order to have a holistically functioning society, and we must also be able to compete in order to have some freedom for things to evolve. But also in both systems we have conglomeration and over-aggregation. My belief is that we have proven that the basic structures are missing some key components that might prevent this from happening. I think that the key is really to improve the basic technology of money and government as it intersects. To do that we need to examine carefully the underlying assumptions of what money and government are, and take a contemporary approach to improving those systems, employing our high technology. And as I said, one of the key problems we have with the relatively primitive systems in place is over-centralization. Capital/power accumulates and that makes it hard for the system to adjust to local circumstances, hard to evolve, and even hard to function. So I subscribed to subreddits like r/rad_decentralization, r/bitcoin, r/btc, r/ethereum, r/polycentriclaw. I think those kinds of technologies and ideas are the general direction we need to go.
- wu-ikkyu 10y ago
  >we need to examine carefully the underlying assumptions of what money and government are What would you say are the most important assumptions we should challenge?
  - ilaksh 10y ago
    The most important part is that the fundamental structures and mechanisms are assumed to be unchangeable and correct. Unquestionably. As part of the belief system. To the degree that they are invisible. And the these basic societal technologies of money and government are not evaluated from the ground-up in a high technology context. We exchange money for goods and services. It is paper or some digital token. It has universal application. It is scarce to some particular degree. It is one-dimensional even though it is universal. It is issued and maintained by authority. It is stored in digital or real form by banks. The allocation of money to various purposes is tracked internally only. Government has absolute authority and power over deadly force. Government is monolithic or at least has a monopoly on public control. Government has a central control system. Government is primarily organized and operated by actual human beings in hierarchical groups. Government is enforced by traditional taxation, manually applied fees determined by repetitive human judgement, legal writings, groups of human lawyers, and physical policemen or agents with physical force.

by ksar 10y ago

baq 10y ago

has anyone tried to estimate how much can finance extract to itself before killing its host economy?

xapata 10y ago
If so, it's not a well-known study. That sounds like it'd lend itself well to a simulation modeled with autonomous agents. That's not a popular methodology in economics.
coralreef 10y ago
I haven't studied this deeply at all, but the nature of capitalism posits that there could be checks and balances to incentivize against this?
- xapata 10y ago
  Not exactly. The question is whether a capitalist society has a stable equilibrium growth path. Mainstream economics assumes a stable equilibrium, because that makes the math work nicely. Physicists have known for a long time that many systems have unstable equilibria, where a random deviation knocking the system from equilibrium can result in catastrophe. This is the general field of nonlinear dynamics and chaos. The economists, the most famous ones at least, reject the idea without discussion, that the economy could be a chaotic system or even have manifolds where it might enter a chaotic regime.
  - amelius 10y ago
    But there exists an equilibrium: one company has all the money :)
    - xapata 10y ago
      Not even that. The company might make a bad investment, then poof no wealth anywhere.
jsprogrammer 10y ago
Things get bad even before extractors enter the picture [0]; just a disadvantage in strategy update rate will result in the formation of cartel structures. The economy will function as long as there are sufficient physical resources and human will. Finance cannot kill it. [0] https://arxiv.org/abs/1201.3798 https://arxiv.org/abs/1201.3798
- xapata 10y ago
  For various definitions of human will. I think humans are somewhat fickle. Society might change its mind more easily than you expect. Case in point, Trump.
oli5679 10y ago
What do you mean by kill? To me it's likely that finance represents a depressingly large drain on growth in output/welfare compared to a better regulated alternative but I can't see it making things bad enough to cause anarchy/ rebellion.
- xapata 10y ago
  Why not? Civil wars have been distressingly common through history.
  - oli5679 10y ago
    Ok, that's a reasonable view. How do you a) estimate the tipping point were finance becomes so dysfunctional that it causes a revolution B) measure the dysfunctionality of anther system relative to this benchmark level. To me this can only ever be a qualitative line of enquiry.
    - deleted 10y ago
      [deleted]
    - xapata 10y ago
      Correct. Many nonlinear systems cannot be modeled beyond describing their qualitative phenomena. The "butterfly effect" prevents precise estimations. You wouldn't expect the weatherman to tell you whether it'll rain this day next year.
      - oli5679 10y ago
        Ok, but there are other less ambitious questions you can answer within the paradigm of economics. What are the losses caused by the current system vs an alternative according to a specific welfare measure?
        xapata 10y ago
        But we don't yet even have a good model of the dynamics of the current system, let alone any good predictions for specific welfare measures of alternate systems.
macawfish 10y ago
Related: I've often wondered how much money is spent on the money system itself. There are people whose entire days are spent devoted to the goal of keeping the money system flowing. They could be off somewhere else, tending gardens, nurturing children, cooking, educating, repairing, cleaning, healing from stress and trauma, etc. But no, they are at some office working for the all mighty dollar. Keeping tabs on society at large. I'm not saying that it is overall evil to count supply and demand of resources. I'm merely wondering if the current state of money systems is really well suited to do this without devastating collateral damage on its host, the "human resources."
- TeMPOraL 10y ago
  Interesting question. This expense is something I'd classify as upkeep - costs that are necessary waste. Inefficiency. You need to pay them to keep the thing running, but we would do well to minimize them as much as possible.
- MarkPNeyer 10y ago
  Also related: We don't charge people for the air we breath. Why not? There's a cost to keeping it clean. There's a finite amount. Some people consume more than others. Answer: because keeping track of those costs and assigning them to individual persons would be way more expensive than just keeping the air clean and letting people consume as much as they want. Food should be the same way - now that we produce so much of it, it's kind of insane to expect to keep diligent tabs on how much people are consuming. This is why i think a basic income makes perfect economic sense. People already have the ability to consume society's resources without paying (medical care or prison care still cost money) - so we might as well just give everyone a small amount 'voice' in the system and then dismantle the barriers to entry that are ostensibly in place to protect poor folks.
- lmm 10y ago
  The great success of capitalism is to allocate resources efficiently. Fundamentally, someone is paying banks for their services; either the value they're providing is more than they charge for it, or not, but in the latter case people would stop buying their services (conspiracy theories notwithstanding). Then at the individual level, the bank is willing to pay someone x amount for the value they provide the bank, and either that's where they can earn the most (because it's where they can contribute the most) or the person will be paid more elsewhere. There are of course inefficiencies, but they're self-correcting. A bank that overpays its bankers will be undercut by one that doesn't. A company that overpays its banks will be undercut by one that doesn't. It works better than any alternative that's been tried.
chishaku 10y ago
Yes. The Bank of International Settlements ("the central bank of central banks"): Why does financial sector growth crowd out real economic growth? (2015) [0] "In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity." IMF: Rethinking Financial Deepening: Stability and Growth in Emerging Markets (2015) [1] "The analysis uncovers evidence of 'too much finance' in recent years—that is, beyond a certain level of financial development the benefits to growth begin to decline and costs in terms of economic and financial volatility begin to rise." On the optimal size of the financial sector, a speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank (2014) [2]: "While finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity." [0]: https://www.bis.org/publ/work490.htm https://www.bis.org/publ/work490.htm [1]: http://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf http://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf [2]: https://www.ecb.europa.eu/press/key/date/2014/html/sp140902.en.html https://www.ecb.europa.eu/press/key/date/2014/html/sp140902....
YZF 10y ago
Finance doesn't have its own economy. The question of how much do we have to pay to get various financial services should in theory be solved by competition. The problem is that some financial institutions are behaving like a cartel and the government is undermining competition by stepping in to save failing financial institutions. The problem isn't that Finance is "bad" any more than energy companies are "bad" or retailers are "bad". There are people accumulating wealth in a whole bunch of industries, why is the service Google or Facebook provides more valuable than what Bank of America provides?
- WalterSear 10y ago
  >The question of how much do we have to pay to get various financial services should in theory be solve by competition. The problem is that some financial institutions are behaving like a cartel and the government is undermining competition by stepping in to save failing financial institutions. This is the endgame of all capitalist markets. There isn't any other end game, no matter how much people would like there to be one to satisfy their personal ideologies.
  - hueving 10y ago
    It would be nice if you had some evidence other than your own personal ideology.
    - WalterSear 10y ago
      There are mountains of evidence. Though none, I suspect, that will rock you off your little throne. Edit: I should have made this comment with more tact and empathy, and maybe have been a whole load more hearable for it.
      - lliamander 10y ago
        There is, of course, plenty of evidence for the narrative of capitalism as exploitation. There is also plenty of evidence for the narrative of capitalism as spontaneous collaboration and growth. Denying only one or the other of these statements is indicative of one beholden to an ideology.
TuringNYC 10y ago
That is a great question -- but there are also other aspects to the problem -- human talent is one. Finance can extract rents from society, and it can also lure away promising PhDs, academics and many of the brightest with superior salaries (financed via rents extracted.) I'm not passing judgement on the workers here -- I was one, trapped in the system for 10+yrs with golden handcuffs and nothing to show my family on what I actually created.
- tikhonj 10y ago
  It's way too hard to have a career in research or even get into a decent PhD program at all for the "finance brain drain" to matter. Research salaries are low, the conditions are hit or miss and yet, somehow, a faculty job is one of the hardest positions to get. We can worry about that when mid-tier universities stop getting hundreds of resumes for tenure-track positions. For now, the fact that technically minded people can have a backup plan that pays well is most definitely a feature, not a bug.
- manachar 10y ago
  I had a professor who gave up a good job at Harvard because he was tired of losing his best students to investment banking. It wasn't a field in any way directly related to business or finance, but Harvard students are highly recruited into lucrative investment banking positions.
buzzybee 10y ago
From TFA: In their article, “Too Much Finance?” Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza (2011) argue that expectation of bailouts may lead a financial sector to expand in size beyond the social optimum. They use a variety of empirical approaches to show that “too much” finance starts to have a negative effect on output growth when credit to the private sector reaches 110 percent of GDP. Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli (2011, 1) likewise argues that, “beyond a certain level, debt is a drag on growth.” The authors estimate the threshold for government and household debt to be around 85 percent of GDP and around 90 percent for corporate debt. Likewise, as we were writing this article, the OECD and the IMF both issued reports warning of a financial overgrowth (OECD 2015; Sahay et al. 2015).
- deleted 10y ago
  [deleted]
branchless 10y ago
I would imagine the increase non-linear. As finance takes more ever more people catch on and realise there is no point working. This removes well-educated wealth creators from wealth creation and into finance. We've seen this in the UK where biologist, physicists and mathematicians are engaged in arbitraging each other. No point working when work doesn't pay. UK is about to implode if Brexit goes ahead and all the fake fiat from The City evaporates with the confidence.

Zigurd 10y ago

You can take a best practices approach: are we spending more, but getting no more, or even less than other industrial economies? The same could be applied to any part of the economy that does not directly produce goods: criminal justice, health care, military. I fear that a measure of GDP that takes overspending on non productive activities into account would leave the US looking much worse.

rayiner 10y ago
It sounds like our measure of GDP needs to be narrower. For example, why are legal services revenues included in GDP? In theory, value created by the legal industry should already be reflected in the real economy. If two companies enter into a joint venture to produce widgets, in reliance on the legal system enforcing their joint venture agreement, that will be directly reflected in additional widgets being produced. But the cost of paying people to draw up the contracts is a transaction cost that should be excluded from GDP. Similar reasoning can be applied to the financial system. If two companies rely on financing to jumpstart the joint venture, the value created by the financial system will be reflected in the production of widgets. The investment banking fees and interest are transaction costs that should be excluded from GDP. Of course, doesn't the same reasoning apply to everything that isn't consumption? For example, any value created by Google Search should be reflected in the productivity of the real economy. Any revenues to Google from search should be excluded from GDP, right? It's not like GDP doesn't have other major flaws. For example, after Fukushima, Japan's GDP went up due to rebuilding. I.e. GDP is susceptible to the broken window fallacy!
- Zigurd 10y ago
  Too reductive, and disingenuous. Of course some finance is a needed part of a healthy economy. But financialization generally isn't. At best that rent seeking is shifted onto overseas "customers." Similarly, saving lives is good, but costing a multiple of other industrial nations makes that part of health care a drag on the rest of the economy. Comparables can be compared. It's not as complex or inscrutable as you imply.
  - 10y ago

TheOtherHobbes 10y ago

>The financial services sector adds value to society by providing mechanisms to diversify risk, price assets, and make capital available for productive uses. Capital isn't an object, it's a belief system, with a strong faith-based component. So in a purely rational sense it's impossible to "make capital available." Capital is actually an executive instantiation of social patronage. Someone says "I want to try this..." and someone else with capital - usually of higher status - says 'OK, I think that's a good idea. Here are some imaginary social credits you can swap for resources because everyone believes in them. Now that you have credits, your project looks more believable too." Nothing real changes hands. There's simply a nod of political approval from interests who stand to gain status if the project succeeds. The system would work just as well without the credits. The credits are really only there to hide the politics. Risk doesn't exist at all in the market sense, because risk is only defined by loss of capital - i.e. loss of face and status - and not by any other possible losses, no matter how physical. (E.g. loss of biosphere and future carrying capacity, social opportunity costs, loss of life through profitable war, and so on.) I doubt you can have an economy without at least some executive decision-making and planning. But the current system is so completely disconnected from true social and economic value creation that it's actively hampering real growth.

MarkPNeyer 10y ago
This is why i think it makes sense to consider the financial economy as "a discussion happening in a formal language" Issuing credit, defaulting, borrowing - these are all primitives in the formal language. That language decides who gets ownership over what goods. > But the current system is so completely disconnected from true social and economic value creation that it's actively hampering real growth. Totally agree. It's like we've mistaken 'ideas about reality' for reality itself. https://medium.com/@MarkPXuNeyer/consider-money-as-a-formal-language-ab10d8251ddb#.t0rlz7toc https://medium.com/@MarkPXuNeyer/consider-money-as-a-formal-...
laretluval 10y ago
> Risk doesn't exist at all in the market sense, because risk is only defined by loss of capital - i.e. loss of face and status - and not by any other possible losses. Why is social status not something that has value? Almost everyone wants more social status and would trade things for it, so it seems that it has value. You're drawing a distinction that I don't understand between things that are "real" and "not real".

ilaksh 10y ago

I can't help but put my own related ideology out there. My belief is that whether you start from a fundamentally cooperative approach (communism) or a primarily competitive one (capitalism) you are ultimately going to run into the same main problem: over-centralization. This could be a large bureaucracy of state-run corporations or just large companies in a primarily capitalistic society that evolve into monopolies over time. It seems in both systems whether they start with the sharing or competing idea that ideology gets diluted by practicalities over time. Which makes sense because we must be able to cooperate on some level in order to have a holistically functioning society, and we must also be able to compete in order to have some freedom for things to evolve. But also in both systems we have conglomeration and over-aggregation. My belief is that we have proven that the basic structures are missing some key components that might prevent this from happening. I think that the key is really to improve the basic technology of money and government as it intersects. To do that we need to examine carefully the underlying assumptions of what money and government are, and take a contemporary approach to improving those systems, employing our high technology. And as I said, one of the key problems we have with the relatively primitive systems in place is over-centralization. Capital/power accumulates and that makes it hard for the system to adjust to local circumstances, hard to evolve, and even hard to function. So I subscribed to subreddits like r/rad_decentralization, r/bitcoin, r/btc, r/ethereum, r/polycentriclaw. I think those kinds of technologies and ideas are the general direction we need to go.

wu-ikkyu 10y ago
>we need to examine carefully the underlying assumptions of what money and government are What would you say are the most important assumptions we should challenge?
- ilaksh 10y ago
  The most important part is that the fundamental structures and mechanisms are assumed to be unchangeable and correct. Unquestionably. As part of the belief system. To the degree that they are invisible. And the these basic societal technologies of money and government are not evaluated from the ground-up in a high technology context. We exchange money for goods and services. It is paper or some digital token. It has universal application. It is scarce to some particular degree. It is one-dimensional even though it is universal. It is issued and maintained by authority. It is stored in digital or real form by banks. The allocation of money to various purposes is tracked internally only. Government has absolute authority and power over deadly force. Government is monolithic or at least has a monopoly on public control. Government has a central control system. Government is primarily organized and operated by actual human beings in hierarchical groups. Government is enforced by traditional taxation, manually applied fees determined by repetitive human judgement, legal writings, groups of human lawyers, and physical policemen or agents with physical force.