… is from page 153 of Tyler Cowen’s excellent 2019 book Big Business: A Love Letter to an American Anti-Hero:
Let’s say a nation experiences domestic peace for many decades on end. The ratio of wealth to income in that country is very likely to rise. Many durable structures, durable companies, and good institutions are put in place, and their value accumulates over time. The wealth-to-income ratio in that society will go up. Measured as a share of GDP, the assets controlled by the financial sector will go up too, and that is a desirable state of affairs. When the financial sector is a higher share of GDP, all other things being equal, that implies some basic things have been going right in that economy. The relatively large size of the financial sector is not causing the good news, but it does reflect it.
DBx: This point, which is typically overlooked, is deeply important.
I pick one very tiny nit with Tyler’s last sentence. While it’s true that the relatively large size of the financial sector does reflect a prosperous, well-ordered, and well-functioning market economy, and while this relatively large financial sector is not the sole cause of the well-functioning economy, the relatively large size of the financial sector under these circumstances does nevertheless contribute to the continued good functioning and growth of this economy. If the size and reach of the financial sector is artificially reduced, economic growth will slow and ordinary people will be less prosperous than otherwise.
