On the Social Efficiency of Finance

What is the long-term impact of modern finance on capital accumulation and distribution of wealth and income?  This paper, "On The Social Efficiency of Finance" by PERI Co-Director Gerald Epstein, describes some key dimensions of the rise of what he terms 'roaring banking' in the U.S. in recent decades. The author outlines specific ways in which this financialized system has affected accumulation, distribution and growth and presents some results of a simple 'bottom-line' analysis of the cost of this financial system in the U.S.  He concludes that the 'social efficiency' of modern finance in the U.S. is very low.

This paper is one in a series that will be published in Development and Change in March 2018.
>> Read Introduction to full series: "Financialization and Economic Development" by Servaas Storm

Abstract

The rise in the economic and political power of finance over a number of decades is hardly in dispute these days. While there is now considerable agreement among economists that unregulated finance has the potential to contribute to financial instability and financial crises, there is much less agreement about the long-term impacts of modern finance on capital accumulation and distribution. This contribution, focused on the USA, explores some of these relations under the heading of the ‘Social Efficiency of Finance,’ a term used here to mean the impact of financial institutions and relations on income and wealth distribution and on the development of the economy. The author describes some key dimensions of the rise of ‘roaring banking’ in the USA in recent decades, outlines specific ways in which this financialized system has affected accumulation, distribution and growth, and presents some results of a simple ‘bottom-line’ analysis of the cost of this financial system in the US, reaching the conclusion that the ‘social efficiency’ of modern finance in the US is very low.

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