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Economic Perspectives The Journal of The Journal of Economic Perspectives Economic Perspectives The Journal of Spring 2013, Volume 27, Number 2 Economic Perspectives Symposia The Growth of the Financial Sector Robin Greenwood and David Scharfstein, “The Growth of Finance” John H. Cochrane, “Finance: Function Matters, Not Size” Andrei A. Kirilenko and Andrew W. Lo, “Moore’s Law versus Murphy’s Law: Algorithmic Trading and Its Discontents” Thomas Philippon and Ariell Reshef, “An International Look at the Growth of Modern Finance” Burton G. Malkiel, “Asset Management Fees and the Growth of Finance” A journal of the Early and Later Interventions American Economic Association Greg J. Duncan and Katherine Magnuson, “Investing in Preschool Programs” Julie Berry Cullen, Steven D. Levitt, Erin Robertson, and Sally Sadoff, “What Can Be Done To Improve Struggling High Schools?” 27, Number 2 Spring 2013 Volume James E. Rosenbaum and Janet Rosenbaum, “Beyond BA Blinders: Lessons from Occupational Colleges and Certicate Programs for Nontraditional Students” Articles Daron Acemoglu and James A. Robinson, “Economics versus Politics: Pitfalls of Policy Advice” Santiago Levy and Norbert Schady, “Latin America’s Social Policy Challenge: Education, Social Insurance, Redistribution” Shai Bernstein, Josh Lerner, and Antoinette Schoar, “The Investment Strategies of Sovereign Wealth Funds” Recommendations for Further Reading • Correspondence • Notes Spring 2013 The Journal of Economic Perspectives A journal of the American Economic Association Editor David H. Autor, Massachusetts Institute of Technology Co-editors Chang-Tai Hsieh, University of Chicago Ulrike Malmendier, University of California at Berkeley Associate Editors Katherine Baicker, Harvard University Benjamin G. Edelman, Harvard University Raymond Fisman, Columbia University Gordon Hanson, University of California at San Diego Anil K Kashyap, University of Chicago Adam Looney, Brookings Institution David McKenzie, World Bank Kerry Smith, Arizona State University Chad Syverson, University of Chicago Christopher Udry, Yale University Managing Editor Timothy Taylor Assistant Editor Ann Norman Editorial offices: Journal of Economic Perspectives American Economic Association Publications 2403 Sidney St., #260 Pittsburgh, PA 15203 email: [email protected] The Journal of Economic Perspectives gratefully acknowledges the support of Macalester College. Registered in the US Patent and Trademark Office (®). Copyright © 2013 by the American Economic Association; All Rights Reserved. Composed by American Economic Association Publications, Pittsburgh, Pennsylvania, USA Printed by R. R. Donnelley Company, Jefferson City, Missouri, 65109, USA No responsibility for the views expressed by the authors in this journal is assumed by the editors or by the American Economic Association. THE JOURNAL OF ECONOMIC PERSPECTIVES (ISSN 0895-3309), Spring 2013, Vol. 27, No. 2. The JEP is published quarterly (February, May, August, November) by the American Economic Association, 2014 Broadway, Suite 305, Nashville, TN 37203-2418. Annual dues for regular membership are $20.00, $30.00, or $40.00 depending on income; for an additional $15.00, you can receive this journal in print. E-reader versions are free. For details and further information on the AEA go to http://www.vanderbilt.edu/AEA/. Periodicals postage paid at Nashville, TN, and at additional mailing offices. POSTMASTER: Send address changes to the Journal of Economic Perspectives, 2014 Broadway, Suite 305, Nashville, TN 37203. Printed in the U.S.A. The Journal of Economic Perspectives Contents Volume 27 • Number 2 • Spring 2013 Symposia The Growth of the Financial Sector Robin Greenwood and David Scharfstein, “The Growth of Finance” . 3 John H . Cochrane, “Finance: Function Matters, Not Size” . 29 Andrei A . Kirilenko and Andrew W . Lo, “Moore’s Law versus Murphy’s Law: Algorithmic Trading and Its Discontents” . 51 Thomas Philippon and Ariell Reshef, “An International Look at the Growth of Modern Finance” . 73 Burton G . Malkiel, “Asset Management Fees and the Growth of Finance” . 97 Early and Later Interventions Greg J . Duncan and Katherine Magnuson, “Investing in Preschool Programs” . 109 Julie Berry Cullen, Steven D . Levitt, Erin Robertson, and Sally Sadoff, “What Can Be Done To Improve Struggling High Schools?” . 133 James E . Rosenbaum and Janet Rosenbaum, “Beyond BA Blinders: Lessons from Occupational Colleges and Certificate Programs for Nontraditional Students” . 153 Articles Daron Acemoglu and James A . Robinson, “Economics versus Politics: Pitfalls of Policy Advice” . 173 Santiago Levy and Norbert Schady, “Latin America’s Social Policy Challenge: Education, Social Insurance, Redistribution” . 193 Shai Bernstein, Josh Lerner, and Antoinette Schoar, “The Investment Strategies of Sovereign Wealth Funds” . 219 Features Timothy Taylor, “Recommendations for Further Reading” . 239 “Correspondence: Are Cognitive Functions Localizable?” Colin Camerer et al . versus Marieke van Rooij and John G . Holden . 247 Notes . 253 Statement of Purpose The Journal of Economic Perspectives attempts to fill a gap between the general interest press and most other academic economics journals . The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of economics; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and read- ings for classroom use; and to address issues relating to the economics profession . Articles appearing in the journal are normally solicited by the editors and associate editors . Proposals for topics and authors should be directed to the journal office, at the address inside the front cover . Policy on Data Availability It is the policy of the Journal of Economic Perspectives to publish papers only if the data used in the analysis are clearly and precisely documented and are readily available to any researcher for purposes of replication . Details of the computations sufficient to permit replication must be provided . The Editor should be notified at the time of submission if the data used in a paper are proprietary or if, for some other reason, the above requirements cannot be met . Policy on Disclosure Authors of articles appearing in the Journal of Economic Perspectives are expected to disclose any potential conflicts of interest that may arise from their consulting activities, financial interests, or other nonacademic activities . Journal of Economic Perspectives Advisory Board Tim Besley, London School of Economics Olivier Blanchard, International Monetary Fund Elizabeth Hoffman, Iowa State University Christopher Jencks, Harvard University David Leonhardt, The New York Times Carmen Reinhart, Peterson Institute John Roemer, Yale University Howard Rosenthal, New York University Journal of Economic Perspectives—Volume 27, Number 2—Spring 2013—Pages 3–28 The Growth of Finance† Robin Greenwood and David Scharfstein uring the last 30 years, the fi nancial services sector has grown enormously. This growth is apparent whether one measures the fi nancial sector by its D share of GDP, by the quantity of fi nancial assets, by employment, or by average wages. At its peak in 2006, the fi nancial services sector contributed 8.3 percent to US GDP, compared to 4.9 percent in 1980 and 2.8 percent in 1950. The contribution to GDP is measured by the US Bureau of Economic Analysis (BEA) as value-added, which can be calculated either as fi nancial sector revenues minus nonwage inputs, or equivalently as profi tsts plusplus compensation.compensation. FigureFigure 1,1, followingfollowing thethe methodologymethodology of Philippon (2012) and constructed from a variety of historical sources, shows that that the fi nancialnancial sectorsector shareshare ofof GDPGDP increasedincreased atat aa fasterfaster raterate sincesince 19801980 (13 basis points of GDP per annum) than it did in the prior 30 years (7 basis points of GDP per annum).1 The growth of fi nancialnancial servicesservices sincesince 1980 1980 accounted accounted for for more than a quarter of the growth of the services sector as a whole. Figure 1 shows 1 Online Appendix Table 1, which is available with this article at http://e-jep.org, covers the period 1980–2007 and is based on the national income account published by the BEA. It shows the contribution to GDP of the industries comprising the fi nancial services sector: securities, credit intermediation, and insurance. Details on all data sources and calculations are provided in the online Appendix. ■ Robin Greenwood is George Gund Professor of Finance and Banking and David Scharfstein is Edmund Cogswell Converse Professor of Finance and Banking, both at Harvard Business School, Harvard University, Cambridge, Massachusetts. Greenwood and Scharfstein are Research Associates at the National Bureau of Economic Research, Cambridge, Massachusetts. Their email addresses are [email protected] and [email protected]. † To access the Appendix and disclosure statements, visit http://dx.doi.org/10.1257/jep.27.2.3. doi=10.1257/jep.27.2.3 4 Journal of Economic Perspectives Figure 1 The Growth of Financial Services (value added share of GDP) 9% 8% 7% Insurance 6% 5% Securities 4% 3% Credit 2% intermediation 1% 0% 1929 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2004 Source:
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