Greenwood & Scharfstein (2013): The Growth of Finance

Summary

Robin Greenwood and David Scharfstein's "The Growth of Finance" (Journal of Economic Perspectives, 2013) is the standard mainstream accounting of how large the US financial sector became and why. Measured as value added, the financial services sector "contributed 8.3 percent to US GDP" at its 2006 peak, "compared to 4.9 percent in 1980 and 2.8 percent in 1950."[1] The share grew faster after 1980 (13 basis points of GDP per year) than before it (7 bp/year), and the acceleration came from the securities and credit-intermediation subsectors, not insurance.[1]

The paper's central diagnostic finding is about composition: "much of the growth of finance is associated with two activities: asset management and the provision of household credit."[1] These are the two channels the wiki cares about, and they point in different directions on the land question.

The Two Channels

• Asset management. Asset management became the single largest component of securities-industry output, growing to $341.9 billion (2.43% of GDP) in 2007, "well over four times its level in 1997."[1] Fees tracked the value of assets under management, which was itself driven "largely by an increase in stock market valuations."[1] This growth is a claim on financial asset values, not on land — the honest counterweight to any reading of finance's expansion as purely land-credit.
• Household credit. Household credit grew "from 48 percent of GDP in 1980 to 99 percent in 2007," and — the sentence that matters for the Georgist reading — "Most of this growth was in residential mortgages."[1] The credit side of finance's expansion is, on the authors' own accounting, predominantly mortgage credit, which is the composition fact the land-credit outcome page and Jordà–Schularick–Taylor build on.

Where the Rent Question Enters

Greenwood and Scharfstein do not present finance as straightforwardly rent-extracting; they credit asset management with real benefits (broader market participation, diversification, a lower cost of capital, especially for young firms).[1] But they also state, in their own words, that the persistently high cost of professional asset management "generates economic rents that could draw more resources to the industry than is socially desirable."[1] That is a mainstream, peer-reviewed acknowledgment — hedged, and about asset management specifically — that some of finance's growth is rent rather than the price of a competitively supplied service. It sits alongside Philippon's unit-cost puzzle as evidence that finance did not compete its scale gains away, without settling the size of the rent.

Why It Matters Here

This is the source behind the FIRE sector page's "finance's share tripled" figures, and it disciplines the finance-rents argument in both directions. It supports the mortgage-credit half of the land-credit claim — most household-credit growth was residential mortgages — while insisting that the other main driver, asset-management fees on financial-asset values, is not land at all. A page deploying the rentier-economy narrative should cite Greenwood–Scharfstein for the scale and the mortgage composition, and cite it again as the reminder that half the growth story is about stock-market valuations, not location rent.

Honest Limits

• The paper is a JEP survey, synthesizing BEA, Flow of Funds, and industry data rather than presenting a new identification strategy; its numbers are accounting facts, not causal estimates.
• Its "economic rents" language is explicitly qualified and applies to asset-management pricing, not to finance as a whole — it is not a measurement of the rent share.
• It is US-only and ends in 2007; for the European replication of the unit-cost side see Bazot (2018).

See Also

• The FIRE Sector — the scale figures this paper supplies
• Banking growth is largely mortgage credit against land — the composition claim it partly supports
• Philippon (2015): the finance-efficiency puzzle — the income-side companion
• Bazot (2018): the cost of finance in Europe — the European replication
• The Great Mortgaging — the long-run mortgage-share evidence
• The Rentier Economy (narrative) — the persuasive deployment, kept honest
• Geoism — the rent-domain program and its gradient

Sources

1. Robin Greenwood & David Scharfstein, "The Growth of Finance," Journal of Economic Perspectives 27(2), 2013, pp. 3–28 — used for the value-added shares (2.8% in 1950, 4.9% in 1980, 8.3% at the 2006 peak), the post-1980 acceleration, the "two activities" composition finding, the asset-management figures ($341.9bn / 2.43% of GDP in 2007), the household-credit growth (48%→99% of GDP, "most … residential mortgages"), and the authors' own "economic rents" characterization of asset-management pricing (B- and D-claims; verified against the paper this session). Free PDF (HBS) · Harvard DASH · AEA (paywalled abstract)