How big is too big? On the social efficiency of the financial sector in the United States

Abstract

PREFACEThis working paper is one of a collection of papers, most of which were prepared for and presented at a festschrift conference to honor the life's work of Professor Thomas Since the early 1970s, Tom Weisskopf has been challenging the foundations of mainstream economics and, still more fundamentally, the nature and logic of capitalism. That is, Weisskopf began putting capitalism on trial over 40 years ago. He rapidly established himself as a major contributor within the newly emerging field of radical economics and has remained a giant in the field ever since. The hallmarks of his work are his powerful commitments to both egalitarianism as a moral imperative and rigorous research standards as a means.We chose the themes and contributors for this working paper series, and the upcoming festschrift, to reflect the main areas of work on which Tom Weisskopf has focused, with the aim of extending research in these areas in productive new directions. The series is divided into eight sections, including closing reflections by our honoree himself, Professor Weisskopf. Each section except for the last includes comments by discussants as well as the papers themselves.

Long-Term Trends in Intra-Financial Sector Lending in the U.S. 1950 - 2012

“…Prominent regulators, investors and economists have asked whether the financial system is "bloated", whether financial innovation contributes to social welfare, and whether, at the margin, more financial activity contributes to economic productivity or economic growth. (Volcker [22]; Turner [20]; Phillipon [17]; Epstein and Crotty [11]; Arcand, et. al.…”

What Is Financialization?

“…A literature is emerging on the financial sector being 'too large' (Epstein and Crotty, 2013), with some straddling of mainstream and heterodox literatures.…”

Intra-Financial Lending, Credit, and Capital Formation

“…Similarly, Phillipon [27], using an extended version of the neoclassical growth model with an explicit financial sector, finds that the US financial system has become less e cient over the last several decades. Epstein and Crotty [16], utilizing di↵erent measures than Phillipon, suggest that the rent extraction by finance for every dollar contribution of finance toward productive investment has risen significantly in the US during the post-war era. Greenwood and Scharfstein [19] also raise questions about the social vs. private benefits of the recent growth of financial activities in the US.…”

“…The growth of the financial sector is remarkable whether one measures it as a share of GDP, the stock of financial assets, or in terms of employment (Epstein and Crotty [16]; Greenwood and Scharfstein [19]). But the changes in the US financial sector are not only quantitative in nature: the growth of finance has been accompanied by major qualitative changes in the structure of finance and in a proliferation of complex new financial instruments.…”

“…The third perspective is the financial ine ciency or rent extraction perspective (Epstein and Crotty [16];…”