The enormous growth of the financial sector is one of the wonders of our age. In the 1960s the business of banking, broking and insuring accounted for just 10 per cent of total corporate profits in most developed economies. By 2005, this proportion had swelled to nearly 35 per cent in the US and roughly the same in Britain—the two countries that host the world’s largest financial centres. Last year a staggering one in five Britons earned their living in finance.
Of course, the profitability of the financial sector is declining on account of the credit crisis. But the politicians and financial authorities have felt obliged to plug the holes that have appeared in a deflating system with vast public support, and now even direct capital injections. Finance is now not only big, but worryingly unstable. Moreover, embedded in this growth is a mystery. Whereas companies such as Microsoft and Google have risen by devising products that have added to the productive capacity of the economy, finance provides no such final good or product. It is a utilitarian mechanism for bringing together savers and borrowers, and this has not changed markedly since the 1960s (although, as we shall see it has become considerably more complex). So what explains its relentless expansion?
more from Prospect Magazine here.