Does Capital add "value"

At face value, these trends would be consistent with large productivity gains in finance. Pre-crisis, that is what the bald numbers implied. Measured total factor productivity growth in the financial sector exceeded that in the rest of the economy (Figure 1). Financial innovation was said to have allowed the banking system to better manage risk and allocate capital. These efficiency gains in turn allowed the factors of banking production (labour and capital) to reap the benefits through high returns (wages and dividends).

But crisis experience has challenged this narrative. High pre-crisis returns in the financial sector proved temporary. … In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.

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