Oh yes, the financial sector can be too large
YES, yes, any number of mouthbreathing lefties insist that the UK is “too reliant” upon finance. That we’ve got to cut the banksters down to size. That we should concentrate more on the production of real things.
The sad thing is, given how rarely said mouthbreathers are actually right about anything, they do have a point. It is actually possible for the financial sector to grow too large. There’s a lot of very good (ie, not lefty) research showing this. Try here if you’re into the geeky side of economics.
There’s nothing very surprising about this either: there’s a diminishing marginal value to everything. An economy that was 100% finance would be hell: as would one that is 100% manufacturing. That first 1 or 2% of finance is worth much more than the last 1 or 2% of manufacturing and vice versa. And the first few percent of the economy used to grow food is pretty essential, more so than the last few percent of either finance or manufacturing.
However, the problem comes when we try to work out how much is too much. Give people the political power to decide and they’ll take that decision politically. Which isn’t quite what we want. What we do want is that we get as much finance as adds value but no more. And it’s that that a market economy provides. Because if you add value you make a profit. If you don’t you make losses. People who continually make losses tend to stop what they’re doing.
Hurrah! so, we’ve solved the problem. Just make sure that there is indeed a free market in finance and finance will be the right size. As will manufacturing, farming and all other sectors as long as they are free markets.
Worth noting something: as a result of the losses in the finance sector the finance sector is indeed shrinking…….
Posted: 23rd, July 2012 | In: Money Comments (2) | TrackBack | Permalink
