This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity.
Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.
Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
Sometimes it feels like everything that I care about most has been marginalized and commodified to the point of financial inviability. Meanwhile people who simply came out on the winning side of the multiverse and pulled up the ladder behind them are doing so well that they mock the rest of us for working by actively making our lives harder at every opportunity.
> Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.
OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact, I would argue that most of the improvement in modern life that we all take for granted is because capital markets are available and accessible at scale. Where does the biotech company working on the new gene therapy get the billions it takes to develop and bring that drug to market? Where does the aircraft leasing company get the money to pony up for aircraft at hundreds of millions a pop?
I think it is fair to argue about whether the financial services use their position fairly/wisely/etc but it is unfair to dismiss the industry as "middlement using other people's money to extract wealth".
These entities facilitate value creation yes, but they do not create much value and certainly not in proportion to the profits they extract.
I have met people who sincerely seem to believe that if an entity makes money then it must be societally useful because otherwise the market would not reward them with profits.
This seems to me like a self-help belief for people in these lucrative but ultimately not very meaningful positions.
The Mafia makes (made?) a ton of profit but are a net negative on society. The better heuristic may be to consider what would be lost if the industry did not exist. Anything beyond subsistence agriculture would probably be impossible without financialization. There's a reason you had banks even in the middle ages when the average person was poor.
>Anything beyond subsistence agriculture would probably be impossible without financialization.
This is patently not true. The USSR had no financial markets and engaged in the production high value goods. Whether it did so more efficiently than its capitalist competition is another matter, and I believe the answer is likely no, but it clearly did more than subsistence farming.
This assessment is not based in historical reality. The last famine in the Soviet Union ended in 1947, more than 40 years before its dissolution, and with World War 2 being a major contributing factor.
The broader economic situation of the USSR is a very different question to whether or not they were able to progress beyond subsistence farming. One is a relatively nuanced topic, the other is a question that can be answered trivially by someone with the most basic historical knowledge, or even knowledge of modern Russia which clearly has not developed from subsistence farming to a developed economy in the time between 1991 and today.
I agree that banks and many financial instruments are valuable and do facilitate value creation in the world.
But that is the extent of it, they facilitate others to create value but do not make any on their own. They are however very well positioned to extract the profit from other industries and that is why the financial world can be so lucrative.
Also, even if some financialization is beneficial that does not mean all of it is. Too much can be very harmful.
I get your point, I believe I acknowledged the usefulness of financial instruments.
Nevertheless it is not exactly the same. A carpenter’s apprentice is useful only when paired with his master.
He facilitates the carpenter in his value creation but lacks the skills to do anything on his own.
Unlike the apprentice however, finance never actually learns the stuff.
Again, all of this has it’s uses and all, it’s just gotten a bit out of hand in terms of gambling like behaviour and the push the financial world creates towards harmful monopolies.
Banks do not provide capital. When I buy 50 tons of steel, no bank has sold it to me. The smelters and miners have provided that capital. Banks allocate capital. It is management, not provision.
With that in mind, there are two types of productive financial work: actuarial services and accounting. Actuaries act as the managers of society's resources, ensuring that net profit is made and risk well distributed, and accountants determine what those resources are. It is clear that many of the people in finance are not qualified to provide either of these services and simply leach profit out of the rest of the economy.
Notice that neither of these rely on capital markets and speculation. Speculators have been repeatedly proven to be horrible managers, performing worse than random chance. History is clear on this: if left to their own devices, speculators will destroy the economy. Only by means of strict regulation can they be forced into doing the productive actuarial and accounting work for which they are hypothetically employed. Yet for some reason, we still allow these people to operate without oversight in many cases and to extract massive profit beyond the value of their work.
History is filled with bubbles and crashes. At this very moment, there are trillions of dollars invested into companies with no clear profit model who are openly and obviously fraudulent in their accounting practises. Do you think this allocation is driven by a rational consideration of the risks of investing in a business with massive obligations and no possible way to service them? Or take bit coins. They are fictional products with clear negative value, and yet some financial professional push to integrate this funny money into the real economy.
Compare and contrast: resource allocation in finance-heavy Western nations with the same in the finance-light China. It's abundantly obvious to me that, through suppressing their financial sector, China has reached a superior economic outcome than they otherwise might have. We have elected to make traders the managers of our economy, and I think they have done a clear bad job and that we aught to reassess treating their decisions with such primacy.
That article could be reduced to one phrase: "banks off-load mortgage risk by selling that debt to investors".
But that doesn't drive clicks or strike the fear of corporations into your soul.
Obviously the financial sector provide a lot of value, but they also extract a LOT of value and probably even worse employ a LOT of the smartest people (I recall the rebalancing of Iceland's economy after its banks failed), and couldn't we get nearly the same benefits with far less of the global economy being dedicated to financial services and trading (which neither I nor it seems the OECD categorise under "services")?
For example according to the OECD [1] 25% of Luxembourg's GDP (excluding interest and trading profits [2]) and 10% of employment is due to financial services! For comparison, for the UK and USA it's 8.8% and 8.3% of GDP.
In particular it's hard to me to see how market trading activity that provides a price for equities to the second, instead of say holding auctions every hour (which would probably greatly reduce profits for day traders and HFT), helps any drug development or aircraft leasing company to raise money. Financing deals don't happen on the market, and if market price is involved, typically something like the last month's average daily closing price is used.
We might call middlemen parasitic if they extract more value than they provide, but as you say, without finance the global economy wouldn't function. Let's instead consider the marginal utility of more of the economy being dedicated to finance. I'm convinced it's negative.
> In the national accounts, financial services output is measured as the sum of financial intermediation services indirectly measured (FISIM) and fees, for instance on account keeping, credit cards, brokerage, financial advice and asset management. ... Trading profits and other interest income, for instance on bonds and derivative products, are excluded from the national account measure of financial services output.
You imply in your argument that finance mainly makes money from HFT("it's hard to me to see how market trading activity that provides a price for equities to the second") but this is simply not true, HFT and quants make up a very small portion of financial staff or profits.
My understanding is that the majority of big finance's income is from private equity or debt deals (pairing companies who need money with investors who have money), not from trading (there's very few people who we can confidently say are net winning traders and they don't scale).
No I didn't mean to draw attention to HFTs specifically, I understand they aren't big. I said 'second' instead of 'subsecond' because humans are also capable of reacting within seconds. But you are right that all those day traders losing money even things out and I was concentrating on the wrong thing. Investing and trading on longer time scales is certainly profitable.
> the bottom 7 lowest-margin industries ... (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
Critically, all the revenue for things you mention have yet to materialize, so they will show up in this naive analysis as losers. What they really represent is _opportunity_. Some may materialize but others have been around for decades and it turns out the "application for profit" step is much harder than anticipated.
> margin (profit) is inversely correlated with value to humanity.
You say this like it's a bad thing, but arguably the most valuable things to humanity are food, water, and shelter. These are simultaneously so important and so cheap that they embody the term "commodity," and that's a good thing! A _ton_ of human ingenuity from every society and culture has been applied to making these things better and cheaper and more plentiful. The same thing is happening to solar power (mostly for geopolitical reasons), which is conspicuously not on either of your lists.
Shelter is the one bit in the hierarchy of needs that got weird. Since it's not a consumable, there's incentive to treat it as an investment. In theory there's nothing wrong with that, but the incentives combined with local politics can become toxic. So many voters in the US own real estate (with leverage!) that everyone agrees by default that prices must never go down. That leads to a trap where politics revolve around housing prices never falling.
> This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity.
Of course, this pretty closely matches the basic Econ 101 explanations of competition and free markets. The entire goal of competition is to reduce prices, specifically to get the market price of a good to trend down towards the marginal cost. The thing that's supposed to be good for society isn't that some people get very rich by selling things at high profit margins, but rather that the stuff we want is available at the lowest feasible price.
I was about to say "Wait, you want to live in the world where gene therapy is as heavily marked up as toll roads?" in the same spirit as this. Low profit margin is the good outcome, not the bad outcome.
You seem to be in agreement with the top-level poster, then. "Margin is inversely correlated with value to humanity" corresponds to "low margin is the good outcome", presuming that you see value to humanity as the good outcome.
> Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
You're missing how the calculation works.
Suppose you work in a lab doing genomics etc. You get paid, say, $100,000/year, and you require some equipment which costs another $100,000/year to pay off and which goes to pay the salaries of the people who invented or manufactured it. Then your lab has $210,000/year in revenue, which means $10,000 in profit and a margin of ~5%, which isn't super high.
That's good! It means the people paying for your services aren't paying a huge margin on top of your salary to receive your services so more people can afford it. Or it means you're getting paid $100,000 instead of $60,000, the latter of which would have quintupled the investors' profit but reduced your incentive to do that work, reducing the quality of the people they can attract to do it.
Whereas industries with high net margins are the ones that are the most dysfunctional or captured by incumbents. It's no surprise that all the finance stuff is there at the top since that's the most thoroughly captured industry in the country. But that doesn't mean you want other things to be like that, it means you want those things to be more competitive so the money is going to customers as lower prices or workers as higher wages instead of going to fat cats as higher margins.
This is true. But there’s another side to it too, which is that if the industry was more profitable it would (probably) attract more investment, specifically in the form of new companies.
That depends what the startup costs look like. If the barriers to entry are low then you don't need a lot of investment to enter the market -- which is one of the things that causes margins to be lower, because otherwise people would keep doing it until the returns fell below the normal market rate of return.
The industries with excessive margins are the ones where the incumbents make it prohibitively expensive for anyone to invest in those industries by entering them as a new business, as opposed to buying the stock of the incumbents. Which is one of the risks to their investors -- their stock prices are thereby inflated and they're running the risk both that voters will never get mad enough to actually push through regulatory reform and that the huge market incentive to find a way to disrupt them will never actually find a way do it.
>> This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity.
9th from the bottom is EV charging. You might think that's going to improve quality of life, but the reality is these are companies trying to be middle men in a commodity market. They want to profit from delivering electricity to locations along the highway. It's kind of stupid because most people can charge at home overnight and be good for the next day or three. OTOH if you're going on a long trip you'll want to plan stops at these places but since you're planning you can check prices too.
While these are bogeymen, they do provide clear services that people need.
Banks should be obvious. A toll road is the worst offender in the list, it's tough to justify the eternal regressive tax.
The rest falls into financial markets. A steelman argument here could be that those services all make the power of compound interest broadly available. It's maybe the only exponential power available to average people.
I think there's a good argument that financial markets are a big reason that people can ever retire.
> I think there's a good argument that financial markets are a big reason that people can ever retire.
There isn't. The reason people can finally retire in the 20th and 21st centuries is due to extreme exploitation of fossil fuels and using multiples of stored energy to make goods, which would normally be unavailable compared to the energy budget coming from the Sun in a given year.
You can argue in some way that the financial markets made this wealth easily accessible to the average joe through a 401k, but it could have been just as easily allocated using a different not-for-profit mechanism.
Agree with the general point. I’d maybe add that a lot of times it’s the scale of the profit that makes something a net negative for humanity, not the percentage based margin. A lot big tech started small and in the early stages created a ton of positive value, sometimes with a respectable margin, but once they are at billions of market capitalization and starts chasing profits for investors, the positive societal value gets eroded.
> stock exchanges, banks, toll road operators, financial services and asset management are in … rent-seeking.
This is an absolutely insane take. If you truly believe it, then I propose two tests:
1. You should start a business that provides the same services without rent seeking. If they’re really these low-value things that are just charging high prices, then you should be able to setup very attractive alternatives, make a ton of money yourself, and improve the world in a big way.
2. If you don’t have the energy or willingness to start them yourself, you could limit your use of them to the absolute bare necessity. If you believe they extract value, you could probably do better for yourself by using them less.
All of the money is mostly tied up in safe bets for boomers. You don't see capital chasing big bets because folks would rather get their 4-7%+ "guaranteed" than risk it on a startup.
There's probably some meta commentary on the global risk climate in general since COVID here.
Longer life expectancy has led to stagnation due to those older in power and owning wealth to have reduced risk appetite for investment and innovation, leading to maintaining the status quo and their quality of life for the balance of life remaining. They are stealing from the future through the demand for profits today.
Peter G. Peterson wrote about this in Gray Dawn 25 years ago, Scott Galloway talks about it today.
Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.
Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
Sometimes it feels like everything that I care about most has been marginalized and commodified to the point of financial inviability. Meanwhile people who simply came out on the winning side of the multiverse and pulled up the ladder behind them are doing so well that they mock the rest of us for working by actively making our lives harder at every opportunity.