John H. Cochrane: The Grumpy Economist


Is finance too big? Here’s a draft essay on the subject. There is a pdf on my webpage, and updates, revisions and a final version will end up there.
This came about as a “response essay” to Robin Greenwood and David Scharfstein’s “The growth of modern finance” for the Journal of Economic Perspectives. That’s why Robin and David are the target of a lot of criticism. But they’re really just standing in for a lot of opinion that finance is “too big,” in part because they did such a good and evenhanded job of synthesizing that point of view. So, sorry for picking on you, Robin and David!
I’m sure the JEP will make me cut it down and tone it down, so this is the fun first draft.
Is Finance Too Big?
John H. Cochrane [1],[2]
January 7 2013
I. Introduction
The US spends $150 billion a year on advertising and marketing[3]. $150 billion, just to trick people into buying stuff they don’t need. What a waste. 
There are 2.2 people doing medical billing for every doctor that actually sees patients, costing $360 billion[4] — 2.4% of GDP. Talk about “too big!”
Wholesale, retail trade and transportation cost 14.6% of GDP, while all manufacturing is only 11.5% of GDP. We spend more to move stuff around than to make it! 
A while ago, my wife asked me to look at light fixtures. Have you seen how many thousands of different kinds of light fixtures there are? The excess complexity is insane. Ten ought to be plenty.
It’s ridiculous how much people overpay for brand names when they can get the generic a lot cheaper. They must be pretty naive.
Business school finance professors are horribly overpaid. Ask an anthropologist!  We must really have snowballed university administrations to get paid nearly half a million bucks, and work a grand total of 10 weeks a year, all to teach students that there is no alpha to be made in the stock market.
Did you know that Kim Kardashian gets $600,000 just to show up at a nightclub in Vegas?  How silly is that?
It’s a lot of fun to pass judgment on “social benefits,” “size,” “complexity” of industry, and “excessive compensation” of people who get paid more than we do, isn’t it? But it isn’t really that productive either.
As economists we have a structure for thinking about these questions.

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The Grumpy Economist

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