The Price of an Invisible Hand

The 'invisible hand' of capitalism should naturally provide funding to projects and businesses that are likely to be profitable and create more value for society. Businesses that create 'value' produce real products and services that people are willing to pay for. These businesses do useful things and they do them at a cost that customers are willing to pay for.

But how much are we paying for this 'invisible hand'?

Financial services comprise over 20% of GDP - not so invisible. It's a very important sector - essential for everyone. We all need it like water and electricity, but do we have to pay 20% for it? Are we getting value for money?

I've found two great quotes:

The first one is from President Andrew Jackson in 1832 addressed to a bankers:

“Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

The second quote is a bit of dialogue from Tom Wolfe's "Bonfire of the Vanities". This is an apt explanation of finance addressed to a child - but it works for me!:

"Daddy doesn't build roads or hospitals, and he doesn't help build them, but he does handle the bonds for the people who raise the money."

"Bonds?"

"Yes. Just imagine that a bond is a slice of cake, and you didn't bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that."
Judy was smiling, and so was Campbell who seemed to realize that this was a joke, a kind of fairy tale based on what her daddy did.

"Little crumbs?" she said encouragingly.

"Yes," said Judy. "Or you have to imagine little crumbs, but a lot of little crumbs. If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake."

If banks - and other financial entities - were more closely regulated or even partially nationalized, it would probably lead to a slight impairment to the efficient flow of capital. But would this not be worth it if we could avoid situations like the one we now find ourselves in? And after all, 20% of the economy is not an 'invisible' hand.