Great question and interesting read. While there is a lot of data in this article, I can’t fathom exactly how they can pinpoint these metrics since GDP (and the per-worker statistic that is often referenced) is influenced by so many factors that it is difficult to extract the right information without lending any bias to data mining. Also keep in mind that I did not read the paper, only the article linked at the top.
Regardless, the analysis points out that a) finance can improve the GDP to a point where too much actually negatively affects it, and b) growth in finance competes with growth in other areas (labor competition).
“Their analysis of manufacturing industry data reveals that, as predicted by the model, sectors highly dependent on R&D do in fact suffer disproportionately during financial booms.”
That first aspect of the analysis interests me (but does not influence me) in that finance can improve the GDP, but only to a point, due to the risk adverse nature of finance itself. The article cites that the aspect of GDP of growth mostly influenced here is in physical capital, in this case the capital of buildings (manufacturing), computers, etc. As countries invest in this physical capital, they have more “opportunities” to grow because there is more availability of the required pieces of the business puzzle. Businesses rely on buildings to work in, computers to work on, and other physical things such as machines to work with (or create with). When there is too much physical capital, there is no demand or over supply, reducing prices.
For example, if there are 100 open offices and only 50 companies looking for office space, you’d expect the rent to go down, adversely affecting the amount of money the lessors will make, decreasing the amount of spending they will make, reducing GDP. The “finance” people help open offices, but they’ll never fill a building.
Taking that plus the second aspect of the analysis (intelligent workers not doing intelligent work such as R&D), there are less people doing the actual “creating”. Innovation is always the bottom line. The more a company or country can innovate, in the long run the stronger they will be. Innovative companies attract a stronger workforce, in a cyclical self-fulfilling prophecy sort of way. On the contrary, as we’ve seen numerous times (Yahoo), these companies can sometimes become the new “old guard” and drag themselves down in a heap of bureaucracy (aka Finance people), so it’s not easy to maintain the ideal balance between innovation and efficiency. When it does work though, it’s a legacy.