Category: Investment

The social value of finance: problems and solutions

How do we stop the financial system from occasionally blowing up the world and producing – as it has post 2007/8 – a severe post-crisis recession?

How do we stop the financial system from occasionally blowing up the world and producing – as it has post 2007/8 – a severe post-crisis recession?

How do we stop the financial system from occasionally blowing up the world and producing – as it has post 2007/8 – a severe post-crisis recession? Let me start with the fact that finance has got much bigger. Over the last 50 years, finance has come to play a far bigger role in modern advanced economies. In the 1950s the total finance sector in the US accounted for about 2.5 per cent of GDP; by 2007, that was about eight per cent of GDP. There is a very similar growth pattern in the UK. In other countries the absolute figures are often smaller, but the direction of change is the same.

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Fast finance and slow growth

How can the state deter short-termism in finance and facilitate a better environment for the ‘patient capital’ needed for growth?

How can the state deter short-termism in finance and facilitate a better environment for the ‘patient capital’ needed for growth?

Consider two countries – China and Italy. As recently as 1990, these economies were equal in size as measured by aggregate GDP at purchasing power parity exchange rates. But let us now put these countries on quite different trajectories for capital accumulation. Let China begin investing at double-digit rates for 20-plus years, while Italy accumulates capital at a rate of only two per cent per year. By 2013, China is now seven times larger than Italy. Indeed, China is creating an economy the size of Italy’s every two years; an economy the size of Greece’s every quarter; and an economy the size of Cyprus’ every week.

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