What They Tell You
Finance is the brain of the economy. It allocates capital to its most productive uses. Financial innovation creates value by better matching savers and borrowers, managing risk, and enabling new forms of investment. A larger financial sector means a more sophisticated economy. We should be proud of our financial centers.
What They Don’t Tell You
Finance has grown far beyond its useful function. Much of its activity is socially useless or harmful. The financial sector extracts wealth from the real economy rather than serving it. Financial innovation often creates risk rather than managing it. And the political power of finance has captured governments, leading to bailouts for bankers and austerity for everyone else.
What Finance Is Supposed to Do
In theory, the financial sector serves the real economy by:
Intermediation: Channeling savings to productive investment
Payment systems: Enabling economic transactions
Risk management: Helping people and businesses manage uncertainty
Price discovery: Generating information about asset values
These are valuable functions—but how much of modern finance actually does them?
The Growth of Finance
The financial sector has exploded:
Share of GDP: Finance went from about 2% of US GDP in the 1950s to nearly 8% today.
Share of profits: Financial sector profits went from about 10% of all corporate profits to nearly 30%.
Trading volumes: Daily foreign exchange trading exceeds $6 trillion—many times actual trade in goods and services.
Derivatives: The notional value of derivatives exceeds global GDP many times over.
What Finance Actually Does
Most financial activity serves finance, not the real economy:
Trading with other traders: The vast majority of financial transactions are between financial players, not financing productive investment.
Speculation: Betting on price movements doesn’t allocate capital—it just redistributes wealth.
Arbitrage: Exploiting tiny price differences requires resources but adds nothing socially.
High-frequency trading: Algorithms competing in microseconds extract value from slower traders.
Complex products: Derivatives and structured products that even buyers don’t understand, designed to extract fees and obscure risk.
Finance as Extraction
Instead of serving the real economy, finance extracts from it:
Fees and spreads: Banks and asset managers skim off savings and investments.
Information advantages: Financial firms profit by knowing more than their customers.
Complexity: Products designed to confuse allow higher margins.
Leveraged buyouts: Load companies with debt, extract cash, leave shells behind.
Share buybacks: Companies borrow to buy their own stock, enriching shareholders without productive investment.
The Costs
An oversized financial sector imposes costs:
Talent drain: The best minds go to finance rather than science, engineering, or entrepreneurship. Does society benefit more from another hedge fund or another vaccine?
Instability: Financial booms and busts create recessions that harm everyone.
Inequality: Financial profits concentrate among the already wealthy.
Political capture: The financial lobby shapes regulations and bailout policies.
Real economy neglect: Finance is supposed to serve production, but production serves finance.
The Evidence
Studies show:
Beyond a certain point, financial sector growth harms economic growth
Countries with oversized financial sectors grow more slowly
Financial booms are often followed by deep recessions
Finance has become more profitable while contributing less
The 2008 Crisis
The financial crisis revealed the system’s pathologies:
Socially useless: Complex products that even experts didn’t understand
Massively risky: Leverage and interconnection that created systemic risk
Privately profitable, socially costly: Bankers got rich; everyone else paid
Too big to fail: Public backstops for private risk-taking
No accountability: Bailouts for banks, austerity for citizens
And what changed after? Not enough. Banks are bigger. Bonuses returned. Regulation was weakened.
What Good Finance Looks Like
Finance that serves the real economy would be:
Smaller: Less trading, more lending
Simpler: Products people can understand
Boring: Banks that take deposits and make loans, not casinos
Accountable: Failures borne by those who take risks
Regulated: Rules that prevent excess before crises, not bailouts after
Diversified: More credit unions, public banks, patient capital
The Political Economy
Why does finance remain so dominant despite its costs?
Lobbying power: The financial sector spends more on lobbying than any other industry.
Revolving doors: Regulators move to the industries they regulate.
Ideological capture: Economics has been dominated by finance-friendly theory.
Campaign finance: Politicians depend on financial sector donors.
Complexity: Few understand finance well enough to challenge it.
Conclusion: Reclaiming the Economy
Finance is a tool. Like any tool, it should be judged by whether it serves human purposes.
The financial sector has grown beyond its useful function. It extracts wealth rather than creating it. It generates instability rather than managing risk. It captures politics rather than serving democracy.
The question isn’t whether we need finance—we do. The question is what kind of finance, how much, and controlled by whom. The current system serves finance. A reformed system would serve everyone.
This concludes our series on Capitalism Unmasked. We’ve examined 23 myths that sustain the current economic system—from the myth of the free market to the myth of efficient finance. The common thread: what we’re told serves everyone actually serves the powerful. What’s presented as natural is actually constructed. What seems inevitable is actually chosen.
Economics is not physics. There are no iron laws. The economy is made by human choices and can be remade by human choices. The first step is seeing through the myths.