Here's an alternative theory: Lower productivity in an economy causes a larger finance industry, not the other way around.
The financial industry is the “marketplace” where people (supposedly) figure out the best places to deploy capital when the decision is not otherwise clear, or access to such investments is difficult, or the capital holder does not have expertise or want to learn to expertise to deploy the total amount successfully. If that’s true (and I’m not sure it is but that’s the sales pitch anyways), the finance sector grows as productivity in other industries decreases, because then (a) the decision to put capital into other industries becomes less and less clear and (b) the financial services therefore become more valuable.
(If you want to change this, you need to modify the incentives to either (a) make the finance sector less appealing, (b) make other industries more appealing or (c) both - but that's another issue altogether)
(The biggest problem with the theory above is of course that prices and returns are often a function of things other than actual productivity and instead rely on future potential productivity, which is another word for speculation, and so there’s a huge opportunity to manipulate the markets which happens all that time, resulting in people making $$ without actually being more productive)
For the HN audience, the good/interesting thing is that we are currently in a market where tech is one of the industries with (relatively) high productivity (for extreme example, see WhatsApp, Instagram, etc., where very few individuals created very much value), and therefore you see interesting trends: more institutional money is pouring into the market which leads to more money competing for fewer start-ups which leads to higher valuations.
On a human capital level, talent is also moving (relative to historical trends) from finance to tech, and on an anecdotal level, the number of former bankers turned MBAs turned Product Managers has been pretty astounding to me - fair amount of press addressing the issue as well:
(Another theory as to why financial services become larger as economies develop: as markets advance and become more and more sophisticated and fluid, capital gets rapidly deployed in industries where productivity is high such that the prices in such industries get driven up quickly and the ROI lowers, rendering the productivity less financially rewarding, UNLESS you are the first one there, which is another selling point of the finance industry (aka. finance will find the deal and get their first) - really another topic though)
The financial industry is the “marketplace” where people (supposedly) figure out the best places to deploy capital when the decision is not otherwise clear, or access to such investments is difficult, or the capital holder does not have expertise or want to learn to expertise to deploy the total amount successfully. If that’s true (and I’m not sure it is but that’s the sales pitch anyways), the finance sector grows as productivity in other industries decreases, because then (a) the decision to put capital into other industries becomes less and less clear and (b) the financial services therefore become more valuable.
(If you want to change this, you need to modify the incentives to either (a) make the finance sector less appealing, (b) make other industries more appealing or (c) both - but that's another issue altogether)
(The biggest problem with the theory above is of course that prices and returns are often a function of things other than actual productivity and instead rely on future potential productivity, which is another word for speculation, and so there’s a huge opportunity to manipulate the markets which happens all that time, resulting in people making $$ without actually being more productive)
For the HN audience, the good/interesting thing is that we are currently in a market where tech is one of the industries with (relatively) high productivity (for extreme example, see WhatsApp, Instagram, etc., where very few individuals created very much value), and therefore you see interesting trends: more institutional money is pouring into the market which leads to more money competing for fewer start-ups which leads to higher valuations.
See: http://www.wsj.com/articles/venture-capital-fundraising-jump...
On a human capital level, talent is also moving (relative to historical trends) from finance to tech, and on an anecdotal level, the number of former bankers turned MBAs turned Product Managers has been pretty astounding to me - fair amount of press addressing the issue as well:
http://finance.yahoo.com/news/mbas-abandon-wall-street-for-s... http://money.cnn.com/2014/08/22/investing/wall-street-silico...