Thursday, 17 January 2013

Something else to blame on Bankers

Worries about a decline in productivity growth can also be pegged on a common villain

A popular topic these days among economists is to point to a decline in improvements being made by new technologies.  The claim is that the most substantial inventions such as electricity, telephones, cars and planes, and even the humble toilet are all things from the past and further innovations are either more difficult to bring into fruition or the economy is less geared to coming up with new gadgets.  The result of a lack of progress is that growth in productivity (for example, what each worker can produce in an hour) has been in decline since a peak around 1970.  Some counter arguments include that it takes time for new ways of doing things, such as making the most of the Internet, to have considerable influence on our lives and that the effects build up over time to make bigger and bigger contributions to productivity.  But there is one obvious culprit that is overlooked – the finance sector which not only caused damage to the global economy by collapsing in a crisis of its own making but also may have contributed to the slowdown in innovation by side-tracking the best and brightest of a generation and this is another reason to clamp down on the excesses of the banking industry.

To make a case against the finance sector, it is useful to consider how new inventions come into being in the first place.  Some happen just by chance but inventions typically require a significant amount of money and effort.  A system where this money and effort is rewarded is seen as being necessary to induce individuals or companies to invest their resources in such activities.  Individuals and companies will also have other options in terms of where to apply themselves and will only choose to undertake the development of a new technology if the rewards are deemed to be high enough.  Furthermore, it could also be argued that even more effort is required to come up with something new as the considerable amount of knowledge that has already amassed in different fields means it takes a big investment in time to become an expert in any field. 

Yet, in contrast to this, imagine a new industry where smart and ambitious people could make previously inconceivable amounts of money relatively easily compared to other pursuits - this is finance.  Deregulation of the banking sector which kicked off in the 1980s and picked up speed in the 1990s created an environment where clever minds could come up with new financial products which would make themselves and their employers very rich.  This innovation within finance allowed for increased borrowing which would have boosted the global economy by enabling better use of limited savings and lowering interest rates.  With ordinary people also benefiting through cheaper and more available mortgage lending, the banking sector had created a boom that everyone wanted to continue.  But the rapid increase in lending needed to be kept in check and it has become obvious in hindsight that debt level rose too high with disastrous consequences. 

As well as the global financial crisis in 2008 and 2009, the excesses of the banking sector may have also attracted talented individuals away from efforts to push forward the boundaries of progress.  Money and effort are key ingredients in innovation but many of the ideas which are the origins of something new come from a curious and creative person.  But with many of the sharpest minds lured in by the lavish rewards in banking, there would be fewer innovative ideas being realised outside of finance.  If the resulting creativeness had borne fruit in the form of faster growth, putting the best brains to work in banking would have been worth it.  But as we now know, the outcome was completely the opposite.

Along with the perils of excessive lending, the misuse of one of the most valuable resources available with dire results is another reason why banking should be limited in its scope.  Making money from money is easy compared to what is required to make a success out of a new product or service so the rewards for innovation need to be higher in areas which will make a substantial difference.  But for all of the reasons to clamp down on the finance sector, it is still a crucial part of the economy and too many restrictions on banking could be even worse than too few (refer to Another Reason not to Bank on Europe for more on this argument).  The bankers have been bad but we were all enjoying the party.

1 comment:

  1. For more about declining innovation see