Economists miss the point
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Although economists tend to have a high opinion of their abilities they have a knack of missing the point in key debates.
Economists are trained to see themselves as scientists as against the woolly thinking of other social studies disciplines. In recent years many have also started making pronouncements on areas outside their traditional remit including happiness and the family. Economists, particularly the celebrity variety, are often smug about the powerful tools their discipline supposedly gives them.
A debate on financial innovation on the Economist website gives a striking example of where they go wrong. Ross Levine, a professor of economics at Brown University in Rhode Island, defends the motion that: “financial innovation boosts economic growth”. He gives financial institutions substantial credit for what he sees as a surge in innovation in the past 30 years–although he does caution on the need for reasonable regulation
Joseph Stiglitz, a Nobel laureate and professor at Columbia, opposes the motion. He questions whether financial innovation has bolstered growth while also noting the danger of excessive risk taking that complicated financial instruments can encourage. However, he also argues that a better regulated financial sector could contribute more to growth. So the differences between the two are more about the best form of regulation than over the principle of financial innovation. (article continues below)
Of course it is true that financial markets have become more innovative in recent years: if innovation is taken to mean inventing ever more complex financial instruments. The rationale for the financial markets has increasingly moved from helping to channel capital to managing risk.
“The key point, however, is that the driver of economic growth is to be found in the real economy”
But it is not true that there has been a surge of innovation in recent years. Most often the internet is given as the example of high innovation but its origins go back over 40 years and its original funding came from the Department of Defense. Contemporary commentators also tend to forget the huge impact earlier technologies had in their time including the railways, the widespread use of electricity and the car.
The key point, however, is that the driver of economic growth is to be found in the real economy. Dynamism within the productive sphere is central to raising output. The revenues of the financial sector are ultimately a commission on productive activity carried out elsewhere.
