Does Finance Benefit Society?

 Abstract 

Academics’ view of the benefits of finance vastly exceeds societal perception. This dissonance is at least partly explained by an under-appreciation by academia of how, without proper rules, finance can easily degenerate into a rent-seeking activity. I outline what finance academics can do, from a research point of view and from an educational point of view, to promote good finance and minimize the bad.  * Prepared for the 2015 AFA Presidential Address. While a consultant to the PCAOB, the opinions expressed in this paper are my own and do not necessarily reflect those of the Board or the PCAOB as a whole. I wish to thank Sarah Niemann for research assistantship and Nava Ashraf, Luigi Guiso, Oliver Hart, Adair Morse, Donatella Picarelli, Raghu Rajan, Guy Rolnick, Paola Sapienza, Amit Seru, Andrei Shleifer, Amir Sufi, and Paul Tucker for very valuable comments. 2 
For an academic economist the answer to the question raised in the title seems obvious. After all, there are plenty of theories that explain the crucial role played by finance: from managing risk (Froote et al., 1993) to providing valuable price signals (Hayek, 1945), from curbing agency problems (Jensen and Meckling, 1976) to alleviating informational asymmetries (Myers and Majluf, 1984). Furthermore, there is plenty of evidence that finance fosters growth (e.g., Levine 2005), promotes entrepreneurship (Guiso et al, 2004; Mollica and Zingales, 2008), favors education (Flug et al., 2008; and Levine and Rubinstein, 2014), alleviates poverty and reduces inequality (Beck et al., 2007).  Yet, this feeling is not shared by society at large. 57% of readers of The Economist (not a particularly unsympathetic crowd) disagree with the statement that “financial innovation boosts economic growth.” When asked “Overall, how much, if at all, do you think the US financial system benefits or hurts the US economy?”, 48% of a representative sample of adult Americans respond that finance hurts the US economy, only 34% say that it benefits it.1