A more efficient engine might be as good a metaphor as many others. Five percent, equivalent to about a quarter percent faster growth over 20 years isn't a bad starting point either, depending on just how constrained the simplified capital markets would be. The increased friction that would be created by simplifying financial instruments across the board would probably facilitate a lot of rent extraction for people working in finance, but only up to a point, since the less efficient allocation of resources would also eventually leave a smaller pot for them to extract their share.
Like an engine, generalizations about quantities of reagents and thermodynamics aren't going to be violated by the real world, yet the engineers designing engines will understand the dynamics of low level interactions that are unexpected by someone with only a top level view. That is, in general more funding and more instruments that fine tune allocations of resources and risk really do accelerate growth. And yet, the details within the financial industry that can pervert incentives or corrupt signals do undermine some of the gains in funding efficiencies that are to be had. Given a fixed amount of design work a simpler engine might be more reliable than a complex one, but it won't be as efficient as one with more features and sufficient engineering to make them reliable.
> The increased friction that would be created by simplifying financial instruments across the board would probably facilitate a lot of rent extraction for people working in finance
You can have rent extraction through complexity as well as through friction. It's not obvious to me that a more complex, deregulated system is more efficient than a regulated, simpler system. I know that is the dichotomy that is usually talked about - a balance between efficiency and morality, but the sort of marginal increases in GDP we're talking about could easily be wiped out by other factors, for instance complexity that the clients can't understand, and greater instability in the general economy.
I agree that regulation is an important part of controlling information asymmetries, obfuscation of risks etc, and that regulation can mean better signals and be more efficient than only relying on the reputation of institutions.
What I was saying though, is that a blunt approach of declaring that financial instruments can only have some specific measure of complexity would eventually limit the resources available to new projects and businesses. The tangent about rent extraction was a distracting and motivated by my suspicion that a lot of people simply resent incomes in the finance industry, and want to see them make less money regardless of net impact on the economy. However, just as a baker counter intuitively makes more when the price of flour increases, less fine-tuned and efficient financial markets could ultimately make more money for the people working in finance.
I think that there is a belief that complex financial instruments inefficiently insert extra steps into the flow of finance and extract rent from those manufactured inefficiencies. Yet, a better reading is that they circumvent some inefficiency elsewhere in the financial system, and the people who implement that gain in efficiency are able to extract a little of the decreased waste until they too are circumvented.
Like an engine, generalizations about quantities of reagents and thermodynamics aren't going to be violated by the real world, yet the engineers designing engines will understand the dynamics of low level interactions that are unexpected by someone with only a top level view. That is, in general more funding and more instruments that fine tune allocations of resources and risk really do accelerate growth. And yet, the details within the financial industry that can pervert incentives or corrupt signals do undermine some of the gains in funding efficiencies that are to be had. Given a fixed amount of design work a simpler engine might be more reliable than a complex one, but it won't be as efficient as one with more features and sufficient engineering to make them reliable.