The quote from the original posting is: “The resources devoted to gaining informational advantage are mostly wasted, being used to transfer, not create, wealth.”

The quote from David Glasner’s comment is: “But an increase in the size of the financial sector does not by itself prove that the increased use of resources by the financial sector has been a waste. There could have been an increase in the demand for financial services. If more resources were necessary to meet the increase in demand, the resources were not wasted”

Sorry.

From the original post:

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This is my point of view. Granted, in the transferring of wealth, sometimes value is added. But this is rather the same sort of value added provided by a truck, in rearranging goods, as opposed to a factory, or a farm, or a mine, in creating those goods. And in the rearranging of assets, value is not necessarily added, as when a fund manager, or a broker, churns his clients’ accounts.

From your comment:

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This is true, but there is a problem. Two actually. The second is that just because resources go to meet some demand, that does not mean they are not wasted. This may be a rather eccentric perspective, suggesting that the price mechanism does not always work to society’s advantage. Suppose we have a handful of wealthy financiers, who control a disproportionate share of an economy’s wealth, and spend it all on yachts, when that economy labors under the burden of increasingly obsolete infrastructure. Is that an efficient allocation of society’s resources? The free market would say so.

But the first problem is that that demand for financial services can be manipulated, and is, by the financial sector itself. The financial sector controls the flow and supply of money, and by controlling the supply of money, they control the demand for their services. The financial sector controls the supply of money through the issuing of loans. The important factor here is the ratio of interest, or actually total bank income, to bank expenditures. If this ratio is greater than one, the money supply in the real economy will contract unless the banks issue more loans. (We assume the absence of government simply issuing the stuff.) From society’s point of view, which is that of the borrowers, unless they can borrow more money, some of them will default. Thus, to avoid default, there must be more borrowing. Someone, to avoid default, must borrow. This leads to a never ending spiral of debt, and an ever larger financial sector, supported by that debt.
(These days we have the government taking up this burden.)

The only way this debt spiral can be deconstructed, and for the financial sector to be brought down to size, is for the banks to operate, for a time, with expenses greater than income. Unless a total indebtedness, in the US, of $50 to $60 Trillion is necessary for an efficient allocation of the economy’s resources. That I don’t believe to be true.

See: http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

Tas, You are an optimist. Good luck.

http://www.nakedcapitalism.com/2013/01/37705.html

From a different perspective, have we seen Finance allocate resources for social efficiency, or for its own, and its officer’s, benefit?

Finally, Finance, in allocating real resources, makes loans to the real economy. The return on these loans is the only way it draws real resources to itself. (The activity it does internally is, to the real economy, merely the churning of financial assets.) The return on these loans must be proportional to the size of Finance, in order to support Finance. This return to Finance is demand taken from the real economy, unless re-loaned. Clearly, when the indebtedness of the rest of the economy to Finance is too great, paying back the loans to Finance drives out the ability of the rest of the economy to invest in itself, that is to grow and, taken to an extreme, even maintain itself.

Indeed, under these circumstances, were Finance to demand the full payment of its loans to the real economy, we would first expect the destruction of the real economy. And Finance, too, although as they have some of the highest cabins, they would experience the flooding last.

See:
http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html