The monopoly of finance

Given the recent post by Noah Smith on the profitability of finance, I thought I would put up a link to a previous post of mine that asked the same question.

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3 thoughts on “The monopoly of finance

  1. I admit I don’t really get the way these things are calculated. I tend to think in terms of input-output analyses.
    As a short take, it seems finance makes large profits because they are at the ‘top of the food chain’—they run the cash register, or work in the kitchen or at the salad bar, as opposed to cleaning the bathroom or a delivery truck. They have time to think about money as opposed to other things, and also have direct access.
    But, to me the basic question i have after seeing smith’s article, is what does this whole %of GDP vs %of profits mean. Finance supposedly is about 8% of GDP—so I guess about 1 in 12 dollars goes towards cash management as opposed to food, housing, energy, education, health etc. But 30% of profits is what they get. But what are profits? Presumably what non-employees get—ie perhaps dividends for stockholders, or cash used by corporations for aquisitions or savings—or perhaps bonuses above salaries. I am not sure one can really seperate salaries of employees (which can be high if one is a banker, though not if you are a janitor at goldman-sachs) from what is ‘profit’—the cash that goes to non-employees. In a sense an investor is an employee (who gets paid for moneylending); and corporate aquisitions (mergers, real estate) can be thought of as part of employment (cost of doing business) as opposed to pure ‘profit’.
    I guess I really wonder (and I used to know the number) is how many people work in finance—what is the per capita cost of finance.
    The oil industry for example makes about 8% profit, but the refining industry only makes 3% (which is why noone wants to build refineries). Again this appears to be because the oil people are at the top of the food chain (gasoline).
    How many people do what and what do they earn, and how is that decided, to me is the question. Is banking better paid than picking tomatoes?

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  2. Profits are simply revenue minus costs and costs include all salaries. Finance is definitely more lucrative than picking tomatos. Finance (at least until the Financial crisis) was better than any industry since the nineties.

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  3. i hypotheSize that salaries and hence costs and profits are conventions or conventional. (krugman mentioned this is the NY Times mag several years ago). they can go up and down within certain limits — perhaps you have seen the stuff on ‘symmetry in economics’ (i think by R Sato, or more recently by Smolin of the Perimeter Institute on gauge symmetries in economics). Because there are conserved quantities the economy is more like rotations on a hypersphere. “what comes up, must come down’. (see my blog on PIL in seattle).

    Money is one example; maybe labor too. (eg Yakovenko of U Md on the income distribution—he finds assuming the world is ideal—like a gas—- you get a Boltzman or exponential, and it fits the data not too bad —a sort of nomralized Pareto. (And though he doesn’t mention it, because of this fact there really is not, over time, any financial inequality because eventually random exchanges make everyone equal. In the log run we’re all dead too as keynes observed, but i guess then we get reincarnated—without even having to travel to Veranasi.)

    I hear ‘we’ got a new pope; religion too is likely a conserved quantity—its not going anywhere despite Darwin, Weinberg, Dawkins, or Harris. Soon as you get rid of one specie, a new one pops up from the vaccum to fill the consumer niche. Intolerance, hate, bigotry, stupidity, etc. also may be as stable properties of the universe as rocks and higgs bosons. I guess as the universe rotates, maybe the Roman empire will arise again, and then like the phases of the moon, so will the Caliphate, and then maybe one gets some slave trades, democracy, and financial swaps.

    Might even get to the point where money dissapears —the center for ‘alturism and compassion’ at Stanford will join with the Pope and his ppriests and the US military to share their love with the world. Its a brand nubian day.

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