Should-Read: Noah Smith: Peak Finance Looks Like It’s Over

Should-Read: Noah Smith applies standard economic logic to declare that Peak Finance has passed. The problem is that standard economic logic would not have predicted the hypertrophy of finance in the first place, especially given the zero sum nature of active portfolio management:

Noah Smith: Peak Finance Looks Like It’s Over: “How much of the financial industry will soon be obsolete?…

…As long as capitalism lives, there will be a financial industry. What’s happening, however, is a winnowing…. For the past seven decades, but especially since 1980, finance has grown fat indeed. The share of gross domestic product going to the finance, insurance and real estate industries rose from less than 4 percent in the early 20th century to more than 8 percent by the start of the 21st…. Financial-industry profits also soared, briefly topping 40 percent of all U.S. business profits in the first years of the century. Compensation for financial sector employees far outpaced that of workers in other industries, even after accounting for their average higher skill levels….

Asset management is a second area that will probably be squeezed by the double fists of technology and regulation. As [Thomas] Philippon has shown, asset management, along with real estate, is one of the two sectors responsible for most of the financial industry’s growth. But that might just make it ripe for compression. As with trading, the biggest force putting pressure on asset management is new technology…. Each asset manager will be able to handle much larger volumes…. Passive investing also means that each dollar of assets takes less time and effort to manage…