A friend passed along an article outlining the historical growth of the financial services industry, as a percentage of total US GDP, over the last 20 years. I was terrified by the results. As of 1965, the financial services industry accounted for only 3% of total GDP. As of 2007, that number had more than doubled to 7.5%!
So, why is this a problem?
Because, the financial services industry creates “soft” value, and you don’t want a significant portion of your country’s economy driven by soft value. “Hard” value is the type of value that spawns new industries, creates new job categories that didn’t exist 5 years ago, and exponentially self-perpetuates its own growth and the growth of other industry sectors. It’s the type of value you want produced at the core of your country’s economic engine. “Hard” value is clean energy, mobile technology software, and biomedical innovations.
On the other hand, soft value creation, while still revenue generating, lacks the long term upside and exponential growth component of hard value. Soft value is management fees and trading commissions – the core revenue of financial services companies
Yes, a healthy financial industry is a necessity in a modern economy. Access to credit, savings, and money distribution (check writing, atms, transfers, etc) are the pieces of infrastructure supporting all other business activity. However, every dollar made by adding complex layers to these basic functions is a dollar pulled out of the hard value creation economy, and every individual managing someone’s assets for a fee is one more person removed from hard value production.
Technologies that spawn new industries (or change old ones for the better) are the catalysts that drive successful, mature economies like that of the United States. Innovations that change the course of our everyday lives are the business models that will propel America into the future, not those that survive by skimming a few dollars off the top.
Be afraid of macro growth based on sectors that offer soft value. The future is built by those with big ideas. If America wants to stay ahead, we are going to have to think bigger than management fees.
Tom Friedman in, "The World Is Flat", almost makes you think that we can completely survive on 'soft' value...? I definitely buy into what you're saying here that hard value is critical to keep the engine of our economy running strong. I wonder why Friedman doesn't address this important issue?
I agree with Friedman in the sense that modern day workers need to understand the skills of the future economy which include more "soft" right-brained creativity skills (ie graphic design), as opposed to "hard" technical skills (ie accounting).
I think Friedman and I are addressing different points.
I'm making reference to the value created by industry sectors. "Hard" value being that which produces long-run exponential growth. I.e. the development of the microprocessor - this one industry spawned 1,000s more in its wake. Or, what we are seeing now with the development of complex smartphones and mobile software - entirely new and different ways of doing business are developing exponentially with their platform as a basis.
"Soft" value doesn't do this. A new type of Hedge Fund that uses a proprietary method of trading to beat its competition isn't spawning new industries or exponential growth. It is a complex form of arbitrage that finds a hole in the market system and exploits it until sucked dry. No long term "hard" value created.
@illestrator any suggestions for good free open source vector editors? 2010/09/02
@MackensieBurt you post very interesting political twitter content . . . you should start blogging ( really set you apart in the job search) 2010/09/02
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Are Financial Services Draining Our Economy’s Future?
A friend passed along an article outlining the historical growth of the financial services industry, as a percentage of total US GDP, over the last 20 years. I was terrified by the results. As of 1965, the financial services industry accounted for only 3% of total GDP. As of 2007, that number had more than doubled to 7.5%!
So, why is this a problem?
Because, the financial services industry creates “soft” value, and you don’t want a significant portion of your country’s economy driven by soft value. “Hard” value is the type of value that spawns new industries, creates new job categories that didn’t exist 5 years ago, and exponentially self-perpetuates its own growth and the growth of other industry sectors. It’s the type of value you want produced at the core of your country’s economic engine. “Hard” value is clean energy, mobile technology software, and biomedical innovations.
On the other hand, soft value creation, while still revenue generating, lacks the long term upside and exponential growth component of hard value. Soft value is management fees and trading commissions – the core revenue of financial services companies
Yes, a healthy financial industry is a necessity in a modern economy. Access to credit, savings, and money distribution (check writing, atms, transfers, etc) are the pieces of infrastructure supporting all other business activity. However, every dollar made by adding complex layers to these basic functions is a dollar pulled out of the hard value creation economy, and every individual managing someone’s assets for a fee is one more person removed from hard value production.
Technologies that spawn new industries (or change old ones for the better) are the catalysts that drive successful, mature economies like that of the United States. Innovations that change the course of our everyday lives are the business models that will propel America into the future, not those that survive by skimming a few dollars off the top.
Be afraid of macro growth based on sectors that offer soft value. The future is built by those with big ideas. If America wants to stay ahead, we are going to have to think bigger than management fees.