How productive is finance?

Labor productivity measures how much output workers produce per hour. It is the ratio of output to employee time. But employees are paid for their time, often at an hourly rate. Saying output per hour is not far removed from saying "output per dollar of labor cost". 

To figure the labor productivity for our economy, we divide GDP by a cost factor, the hours of labor required to produce GDP. We want to do something similar when we ask how productive finance is.

But when we ask "How productive is finance?" we do not mean to ask how much the employees produce. We mean to ask how much the industry produces. The appropriate unit of cost is not the wage, but the profit. The appropriate ratio is not output-per-hour, but output-per-dollar-of-profit.

You could figure the productivity of an industry like finance by using components of GDP, if GDP was reported by industry. GDP isn't reported that way, but "Gross Value Added" (GVA) is. To figure the productivity of finance, you can use the GVA of financial corporate business, divided by the profit of financial corporate business.

Today's graphs present an example.

This graph, which we saw the other day, uses GVA as a measure of output. The graph shows profit per dollar of output:

Graph #1: Corporate Profits as Percent of GVA (output) for
Financial (red) and Nonfinancial (blue) Corporate Business

Finance runs high.

If we take that ratio and turn it upside down, we'll be looking at output per dollar of profit. We will get to see how much output is produced (and how much income is created) per dollar of reward to some bunch of corporations. Now, that is a measure of industry productivity!

Profit-per-dollar-of-output measures the benefit to the business that generated the profit. Output-per-dollar-of-profit measures the benefit to the economy that generated the output.

Profit-per-dollar-of-output has micro-economic significance. Output-per-dollar-of-profit has macroeconomic significance. 

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This graph, then, shows the macro view:

Graph #2: GVA (output) as Percent of Corporate Profits for
Financial (red) and Nonfinancial (blue) Corporate Business

Here finance (red) runs low. Red is approximately half, maybe less than half the blue. Output per dollar of profit, for financial corporations, is half or less than half the output per dollar of nonfinancial corporate profit. Per dollar of profit, the benefit to the economy produced by finance is half or less than half the benefit produced by nonfinancial corporate business.

How productive is finance? Half or less than half as productive as nonfinancial business. 

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Less than half. The nonfinancial measure of "output per dollar of profit" runs consistently higher than the financial measure. The nonfinancial measure sets the standard. How does finance compare? The next graph shows the financial measure as a percent of the nonfinancial:

Graph #3: GVA-to-Profit for FCB as a Percent of GVA-to-Profit for NCB

40 percent, about. Less than half. Give or take, the financial measure is about 40 percent of the standard set by the nonfinancial measure of output per dollar of profit.

The average, for all the quarterly (Q4 1951 to Q3 2021) data shown on the graph is 37.9%. Less than 40% of the nonfinancial measure, on average.

If output per dollar of profit is a measure of how productive business is, financial business is less than forty percent as productive as nonfinancial business. That's based on corporate "Gross Value Added" data and corporate profits. I'm not making it up.

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Now... The calculation of Gross Value Added has been tinkered with, to make GVA of Finance bigger. There is evidently some disagreement about which parts of financial business activity should count as "productive" and which parts shouldn't. We'll review the history of this tinkering tomorrow.

For now, suffice it to say that when we count every dollar of GVA reported for corporate finance, and count it all as productive, financial corporate business is still only 37.9% as productive as nonfinancial corporate business. If we undo the tinkering and take out the changes that made the GVA of finance bigger, we make it smaller again. If we do that, finance will be less than 37.9% as productive as nonfinancial corporate business.

This all is based on output per dollar of profit, which makes good sense to me as a measure of industry productivity.