BERKELEY – No one questions the usefulness of “low” finance: the ability to use checks, banknotes, and credit cards rather than having to cart around chests of silver, scales, and reagents to assay purity, and needing armed guards to protect the silver – and more guards to watch the first set of guards – has obvious efficiencies. So does the ability of households to borrow and lend in order not to be forced to match income and expenditure every day, week, month, or year.
But what use is “high” finance?
Economists’ conventional description depicts high finance as providing us with three types of utility. First, it allows for many savers to pool their wealth to finance large enterprises that can achieve the efficiencies of scale possible from capital-intensive modern industry.
Second, high finance provides an arena to curb the worst abuses by managers of large corporations. Shareholder democracy simply does not work, but managers’ fear that if the stock price drops too low they will be out on their ears provides a useful restraint.