In this regard the financial sector is like the trucking industry. Trucking, like finance, is essential to the economy. We need it for moving raw material to factories and finished products to stores. But an efficient trucking industry is a small trucking industry: we want to have as few resources as possible devoted to getting goods from point A to point B. This means that we don’t want to see a huge expansion in employment in the trucking industry or an explosion in the number of trucks and warehouses just to move the same quantity of goods.
The same story applies to the financial industry. We should want to see as few resources as possible committed to it, or the minimum needed to enable it to support the productive economy. Instead, we have seen a massive expansion of the financial sector, from 4.5 percent of GDP in 1970 to 7. 4 percent in 2015. 20 The more narrow securities and commodities trading sector increased from 0.49 percent of GDP in 1970 to 2.03 percent in 2015,21 corresponding to $290 billion a year in additional spending in the 2016 economy.Of course, if the transportation needs of the good produced got more complex (Amazon and internet retail?), we should expect the trucks and warehouses to expand both in size and in real dollar terms.
So perhaps the corresponding question for the financial sector should be: have the financing needs of the economy changed to require a bigger financial sector?
The answer is likely to be no but my point is that it's not just sufficient to point to a growth in the financial sector as immediately proving an increase in waste.