Are We Overfinanced (Part II)?

Uneasy Money:  The Social Cost of Finance
It seems like I have not been the only one to question the social usefulness of adding more resources to the financial sector.  Greenwood and Sharfstein (see here) have argued that much of the resources consumed by the finance industry are directed toward finding information and trading on it before others do.  This information will eventually be revealed by someone else anyways.  Hence how much social value is really created by finding it slightly earlier?  John Cochrane (see here) countered that there is a public value from getting to the socially optimal set of prices, and trading on information does move us in that direction.  Glasner (see here) responds that there must be diminishing returns to scale from getting market prices correct.  Eventually the social gains from getting prices more correct must be overtaken by the social loss due to the resources expended from finding the new information.  Glasner thinks we are probably past that point where social losses overtake social gains.

My point here was slightly different.  Finance creates private gains.  Basic scientific research creates public gains due to the positive externalities of increased knowledge.  By migrating so many people from the hard sciences to finance we are giving up the positive externalities of new scientific discoveries.  I did not consider the possibility that getting market prices correct should also be considered a public good.  I will have to think about that.