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Finance: Function Matters, Not Size

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  • John H. Cochrane

Abstract

It's fun to pass judgment on waste, size, usefulness, complexity, and excessive compensation. But as economists, we have an analytical structure for thinking about these questions. "I don’t understand it" doesn't mean "it's bad," or "regulation will improve it." That attitude pervades policy analysis in general and financial regulation in particular, and economists do the world a disservice if we echo it. I will not offer a competing black box [to explain the size of the finance industry]. I don’t claim to estimate the socially optimal "size of finance" at, say, 8.267 percent of GDP. It's just the wrong question. Hayek and the failure of planning should teach us a little modesty: Pronouncing on socially optimal industry size is a waste of time. Is the finance industry functioning well? Are there identifiable market or government distortions? Will proposed regulations help or make matters worse? These are useful questions.

Suggested Citation

  • John H. Cochrane, 2013. "Finance: Function Matters, Not Size," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 29-50, Spring.
  • Handle: RePEc:aea:jecper:v:27:y:2013:i:2:p:29-50
    Note: DOI: 10.1257/jep.27.2.29
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.27.2.29
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Tomas Klinger & Petr Teply, 2016. "The Nexus Between Systemic Risk and Sovereign Crises," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 50-69, February.
    2. Jarko Fidrmuc & Philipp Schreiber & Martin Siddiqui, 2015. "The Transmission of Bank Funding to Corporate Loans: Deleveraging in Germany," Open Economies Review, Springer, vol. 26(3), pages 581-597, July.
    3. Pablo Kurlat, 2016. "The Social Value of Financial Expertise," NBER Working Papers 22047, National Bureau of Economic Research, Inc.
    4. repec:ibn:ibrjnl:v:11:y:2018:i:3:p:162-178 is not listed on IDEAS
    5. Agapova, Anna & McNulty, James E., 2016. "Interest rate spreads and banking system efficiency: General considerations with an application to the transition economies of Central and Eastern Europe," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 154-165.
    6. Emmanuel Carré & Guillaume L’Œillet, 2017. "Une revue de la littérature récente sur le nexus finance-croissance après la crise : apports, limites et pistes de recherche," Revue d'économie financière, Association d'économie financière, vol. 0(3), pages 271-290.
    7. repec:cai:refaef:ecofi_127_0037 is not listed on IDEAS
    8. Kei Kawakami, 2014. "Excessive Dynamic Trading: Propagation of Belief Shocks in Small Markets," Department of Economics - Working Papers Series 1188, The University of Melbourne.
    9. Roger M. Gomis & Sameer Khatiwada, 2017. "Debt and productivity: Evidence from rm-level data," IHEID Working Papers 04-2017, Economics Section, The Graduate Institute of International Studies.
    10. Pablo Kurlat, 2017. "The Social Value of Financial Expertise," 2017 Meeting Papers 134, Society for Economic Dynamics.
    11. Francesco D'Acunto & Laurent Frésard, 2018. "Finance, Talent Allocation, and Growth," CESifo Working Paper Series 6883, CESifo Group Munich.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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