Footnotes 1. Includes finance company subsidiaries of bank holding companies, but not of retailers and banks. But the question of whether finance is unstable and tends to explode (and how to deal with that) is very different from the question of whether its compensation is equal to its value added. In their JEP article , Greenwood and Scharfstein chart the well-known growth of the finance industry in America. Basically, the big growth areas were 1) asset management, and 2) housing-related finance. When assets do better, the same percentage fee gets you a lot more money, so this caused the finance sector to grow. But it is far from obvious that the finance sector, in total, creates negative value.
If you are interested in the question of whether finance is worth it, go read Greenwood & Scharfstein, and go read Cochrane. But the question of whether finance is unstable and tends to explode (and how to deal with that) is very different from the question of whether its compensation is equal to its value added. One of the fundamental problems in finance appears to be asymmetric bets (heads I win, tails you lose): the banker gets a huge pay day if a gamble pays off and the client, or government, picks up the loss if the gamble fails.
Anecdotally, Japan suffers from unproductive industries galore, which might benefit heavily from the kind of creative destruction wreaked by leveraged buyout firms on U.S. companies in the 80s (though inequality and/or insecurity might increase too). Morgan Stanley’s strong investment relationships with tech companies has given it a foothold in Silicon Valley.
Scams keep on coming back in various guises, but in the past few decades, they all seem to relate to excessive leverage, insider trading and saddling companies with debt, from which the scammer extracts huge fees. If pension funds and insurance companies realize that broker-dealers rip their faces off, we could see the permanent winnowing of the entire broker-dealer industry. The natural solution to this is, of course, to give government more power to-ahem-‘regulate’ their friends in the finance sector. But the idea (which has some advocates) of a government credit card for all citizens + all equity finance for bigger projects has a certain appeal.
Considering that the mammoth amounts of insanely cheap liquidity injected by central banks like the Fed or BOJ directly into the too-big-to-fail banks’ coffers are what has made finance into the beast it is today, you would think that might be, ya know, kinda important to mention if one were endeavoring to pass judgment on the industry. Economists don’t even have a workable definition of value-destruction apart from blowing stuff up with dynamite.