Is the financial sector a zero-sum game?

Factual Questions
1

Well, obviously there were big profits to be made in it in boom times (e.g. Porsche’s financial division was earning much more than the people making the cars recently), but doesn’t that all cancel out with the current crash?

Or, as another way of looking at it, money is only a means to distribute the wealth we’ve got, but the wealth itself is in goods and services that we use.
Isn’t the only function of the financial sector to distribute the money/resources it represents to somebody who can put it to use most efficiently, so at best it facilitates the creation of wealth by the industry and service sectors?

2

I don’t think your question is stated very clearly for good responses but I’ll try.

I think you’re saying that the financial sector’s only purpose is to “lubricate” the flow of money/wealth instead of actually “creating” pure wealth.

I don’t think that’s true. If a financial whiz spends weeks innovating and inventing a “risk” model so that investors can pool their money. That “risk model” can be considered a “product” and he has created wealth from nothing. Yes, it’s abstract wealth (intangible) and not something concrete like a building a boat but it’s still real goods/services. Another “product” they create is to package “trust” between parties. Seems weird that a concept like “trust” can be packaged but that’s one of the things financial companies do.

A “risk model” is a real product and therefore real wealth. A sequence of musical notes is also intangible but also “real wealth.” An author’s particular sequence of words (a bestselling book) is also “real wealth.” Ditto with computer programming source code that lives underneath the computer you’re typing on.

Yes, the financial sector has gotten a lot of bad press. They simply built “bad products” that crashed – just like engineers build bad bridges that collapse.

If you disagree with these assertions that maybe we’re disagreeing over semantics.

3

If you prefer, you might think of financial services as preventing the loss of wealth, rather than creating new wealth. But the result is the same: We have more wealth with financial services than we would have without them.

For instance, let’s say that an inventor has developed some great new product. It can do something better or more cheaply than the existing products can, or maybe something that existing products can’t do at all. I think we can agree that if that great product goes to market, the wealth in the economy will have increased, right? But the inventor can’t put the product on the market himself. He needs machines to make it, and a factory to put those machines in, and a store to sell them, and all of those things cost money that he doesn’t have. So he goes to a bank and takes out a loan, or forms a company and sells stock, or the equivalent. Some other people who have the money but don’t have the great idea for a new product cooperate with him, and now we do get that great product coming onto the market.

4

Even if we limit our acceptance of finance’s role to being a lubricant of commerce, there are still lots of machines that don’t work, or don’t work well enough to bother with, without lubrication.

A lot of the gains in physical machinery since the 1800s have been about better lubrication permitting more power to be applied more quickly to accomplish the cutting, moving, bending, whatever. Many machines, internal combustion engines for example, would be completely impractical without decent lubrication.

Metaphorically speaking, a lot of the gains in commerce since the 1800s have come from better financial lubrication.

Another thought …

Ultimately, the reason an American worker today is more productive than his/her grandfather is that he has a lot more capital at his disposal. At the limit case, in the old land, labor, and capital triangle the Stone Age folks had to make do with just land & labor. The slow steady accumulation of capital over 20,000 years is the story of Man climbing out of caves.

So the efficient & effective deployment of capital is a key driver of any commerce more complex than Og knapping flint for himself.

Having said that, cocaine can be viewed as a phsychological lubricant. Just one with very bad side effects. Reckless lending & “it won’t happen to me” attitudes to risk can turn finance into the commercial equivalent of cocaine. Everything gets real fast & real fun, and miracles seem not only possible, but to actually be happening all around you.

Then reality reasserts itself, and the low is not only lower than the norm, but feels even worse.

The challenge is to use the cocaine/finance wisely, for the actual lubrication it gives, not for the temporary high.

5

Are you asking if over the long run, the financial industry itself will end up making zero dollars? If so, then absolutely not.

6

A dollar is not always a dollar.
A dollar now is worth more than a dollar later.

A dollar is not valued the same as a 50% chance to get two dollars.

The promise of a dollar is sometimes worth almost a dollar.