GIGO

occasional links & commentary

Once you’ve stated the obvious point that the financial sector “has grown to an unprecedented share of the economy,” how do you make sense of that growth?

Well, if you’re Paul Krugman, you send us to Thomas Philippon’s unpublished essay, “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation” (pdf) [ht: br]. And that’s when the fun—or the horror—begins.

Here we have neoclassical economics in all its glory, starting with the following proposition:

Since the opportunity cost of being a banker is the wage in the non-financial sector, and since this wage is proportional to aggregate productivity, the income share of finance remains constant on the balanced growth path.

An extraordinary syllogism, based on two absurd premises—that the “wage” of a banker bears any resemblance to wages in the nonfinancial sector (has he bothered to even look at the levels of compensation…

View original post 364 more words

Advertisements