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| Should the Financial Sector “Subsidize” the Real Sector？ —Facts, Theory, and Global Evidence |
| WEN Shuyang, LIU Xiliang, DONG Qingma
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| Institute of Chinses Financial Studies, Southwestern University of Finance and Economics |
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Abstract Development is the eternal theme of human beings. Supporting the high-quality development of the economy is the mission of the modern financial industry, and a frontier topic in financial research. In recent years, the “transfer of financial profit to the real economy” has become an important means of promoting financial support for the development of the real economy. From the perspective of national policies and public opinion, the profit transfer policy is widely supported. However, in the field of theoretical research, there is little rigorous analysis or empirical evidence. From the perspective of the needs of the state and society, the purpose of “financial profit transfer” is to serve economic development; therefore, this paper proposes that the questions of “whether financial profit should be transferred” and “how to transfer profit” should be answered by examining the relationship between financial profits and economic development.
Compared with Western financial theories, the theories of Marx pay more attention to the analysis of profit sources. Although there are many types of modern financial products and services, the ultimate source of profits remains the real industry. However, with the development of the financial industry, financial institutions have changed from service providers of enterprises to strong market players, which can restrict the development of the real sector. The problem of profit sharing is the natural link between finance and industry. High financial profits mean high financing costs for enterprises, which may result in damage to economic growth. Marxist political economy realizes the importance of the source of profits in the financial sector and puts forward the view that high profits in the financial industry may damage economic development, but provides little detailed theoretical analysis based on economic growth. Conversely, in Western economic research, there are many discussions of the “too much finance” hypothesis, but few analyses of financial profits.
Starting from the literature and economic phenomena, this paper organically combines Marxist economic growth theory with the Western neoclassical framework, seeks common ground between them while reserving differences in mathematical form, and integrates Marx's famous view that “interest comes from profit” into modern economic growth theory to build an economic growth model that considers the distribution of profits between the real sector and the financial sector. The model explains the impact mechanism of excessive profits in the financial industry on economic growth: the ultimate driving force for economic growth comes from the real industry, and the essence of financial profits is to share the value created by the real sector. Although finance can help real industries improve their efficiency, excessive financial profits will affect capital accumulation in the real sector, and this will damage economic growth. Based on the theoretical model, this paper uses cross-country panel data on 187 countries for the period from 1996 to 2017 to test the relationship between financial industry profits and economic growth. It verifies the negative impact of excessive financial profits on economic development, and supports the inferences of the theory. Thus, this paper scientifically answers the question of whether the financial industry should transfer profits to the real sector, provides a rigorous economic explanation for China's actual problems, and points out directions for establishing a reasonable mechanism for distributing profits.
The contributions of this paper to the literature are as follows. (1) First, it connects Marx's classic discourse on financial profits with modern Western economic research, and proposes an innovative approach to study financial profits. Using this framework, we provide theoretical support for the practical problem of “whether the financial sector should transfer profit to the real sector.” (2) In terms of its theoretical model, this paper compares the modeling methods of Marxist and modern Western economic growth theories. Incorporating Marx's famous point that “interest comes from profit” into the theoretical model of economic growth, this paper innovatively endogenizes the financial sector's bargaining power and supervision costs and considers the profit distribution between the financial sector and the real sector in the framework of economic growth. The model developed is based on the empirical literature and economic phenomena, and describes well the dynamics of financial development and “over-financialization.” (3) This paper provides empirical evidence of a nonlinear relationship between financial profits and economic growth. Empirical evidence of over-financialization attributes a nonlinear relationship to financial development and economic growth, but there is much debate about the internal mechanism of this relationship. Our empirical work, together with the model, provide a new interpretation of the over-financialization phenomenon.
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Received: 01 August 2021
Published: 08 August 2023
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