The Proper Proportion of the Finance Sector to the Real Economy

By Joe Campbell
December 22nd, 2008

Paul Krugman:

In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier.

This data point taken in isolation seems to suggest an idea I’ve been toying with for a few months now – perhaps there is a correct proportion of the financial sector to the real economy. This might not be original – and it seems related to the initial explanation of the Great Depression as a misdistribution of purchasing power due to income inequality. But I think the distinction is important – as my knowledge of history suggests that increasing inequality and a booming financial sector often precede serious economic crises.

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