Thursday, August 27, 2009

On finance and fertilliser

Complementing this morning's blog, from Benjamin Friedman of Harvard University:

Aside from the recession, it is important to ask what this once-admired mechanism (the financial system) costs to run. If a new fertiliser offers a farmer the prospect of a higher crop yield but its price and the cost of transporting and spreading it exceeds what the additional produce will bring at market, it is a bad deal for the farmer. A financial system, which allocates scarce investment capital, is no different."


He looks at, among other things, the opportunity cost of allowing so many talented people to be sucked into the financial sector - a cost that doesn't show up on most calculations of the cost-benefit analysis of allowing a country's financial sector to run amok. He continues:

"What makes a more efficient financial system worthwhile is not just that it allows us to achieve greater production and economic growth, but that the rest of the economy benefits. The more the financial system costs to run, the higher the hurdle."

Indeed. If you haven't already, follow this up with this morning's blog. It's amazing it's taken people so long to wake up to truths like this. The logical solution for Britain - prepare for a major political assault on the City of London corporation and its praetorian guard at the heart of the British state - the Bank of England.

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