The Social Value of Finance

__Abstract__ Address delivered in shortened form at the occasion of accepting the appointment as Extraordinary Professor of Financial markets on behalf of Vereniging Trustfonds EUR at the Rotterdam School of Management, on Friday March 7, 2014. "In this address, I consider “The Social Value of Finance” from two perspectives. First, I reflect on the value for society of finance as an academic field. The recent global financial crisis has undermined the reputation of the field of finance, with the inability to foresee the crisis as one of the most prominent criticisms voiced by the media and the general public. I argue that this criticism is by and large unwarranted, primarily because the financial system has grown to be so complex that it is virtually impossible to predict the occurrence (let alone the timing and extent) of severe financial crises. However, I do believe that there are other reasons for concern about the academic field of finance. As a field, we do not get the balance right in what questions to focus on. Also, we sometimes lose ourselves in largely academic debates. One likely explanation is the “physics envy” that many economists seem to suffer from and that has led us to seek refuge in sophisticated mathematics and statistics. This development has resulted in a focus on narrow questions that can be answered quite precisely, instead of broad questions that are much harder to answer. The social value of finance as an academic field could be greater if we would be more focused on broader questions, more open minded about other fields and methodologies, and more modest about the extent of our knowledge. Second, to follow up on these aspirations, I present a new research agenda on the value for society of finance in the sense of a financial system (that is, the social value of banks and financial markets). Although the belief that financial systems fulfill an important role in society is widespread, there is surprisingly little evidence on whether and how financial systems in different countries actually fulfill their social functions. The first project in this research agenda shows that the costs to society when finance goes wrong can be large. Using data on 187 banking crises in 126 countries, I find a significant decline in average life expectancy, birth rates, and primary school enrollment, and a significant increase in poverty and adolescent fertility in the six years after the start of a banking crisis. These effects mainly stem from less-developed countries. In the second project, I propose a cross-country empirical analysis on the extent to which financial systems fulfill two of their key social functions: capital allocation (that is, channeling capital in the economy to its most productive use) and consumption smoothing (that is, allowing households to cope with income shocks). In the third project, I will examine the development and contribution to society of a considerable number of newly established stock markets (or “nascent markets”) over the past 25 years. "