I've the impression that finance is in hypertrophy. But I'm not an expert on it, so I'd like those who are more knowledgeable than I am to do a [steelman] of it. The things that make me thinking this are :
- It uses many of the most talented people to lead activities that seem sometimes positive, but often neutral or negative from a global point of view (i.e either it redistributes money between ~equally rich people or it takes money from poorer people to richer ones ; the opposite seems unlikely given that financial services are more used by richer people).
- The reasons for this (for picking among most talented people) is that finance, for whatever reasons, seems to have a rent (https://www.nber.org/system/files/working_papers/w14644/w14644.pdf), partly linked to past deregulation (http://www.parisschoolofeconomics.com/reshef-ariell/papers/BGR_finwage_RoF_final.pdf) and gives much higher salaries than other sectors, making it more attractive than other sectors for many people.
My non-expert view on different parts of finance is the following :
- Actions and obligations are useful because they're directly linked with the real economy.
- Some other tools are useful in some peculiar situations (futures, options and some derivatives to hedge, reduce some risks or whatever).
- But most of it is useless (most of the flows of derivatives especially, which represents a huge amount of transaction (https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp#:~:text=The%20derivatives%20market%20is%2C%20in,quadrillion%20on%20the%20high%20end.) and thus a huge amount of human capital dedicated to it ; it looks like forex is more and more used for speculation aswell, given that the flows more than doubled since 2 decades).
If we were total utilitarianists (i.e we would like to improve global welfare) and if we were social planners (i.e we could do whatever we want without cost), should we delete a part of finance for the sake of humanity ?
If there is any literature on the utility of finance, I'd appreciate to read it. And I guess that for any asset, we can find a useful goal so please, talk about the representative use of a given tool. I'd especially appreciate if you were able to grossly quantify the share of useful resources / tools and useless ones (but no problem if it's just impossible). Feel free to take any coherent definition of finance. : https://en.wiktionary.org/wiki/steelman