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Derivatives and The Service Economy

In the current New Yorker, John Lanchester marks the publication of Black-Scholes as the start of modernism in finance, and then remarks: “It seems wholly contrary to common sense that the market for products that derive from real things should be unimaginably vaster than the market for things themselves.”

That violation of common sense has mystified me for a long time, but not in relation to derivatives. What puzzled me for the past twenty years was why I pay 9$ for a grilled cheese, french fries and a coke to eat them for an hour in a restaurant that has to buy the bread and cheese and potatoes and soda and cook them and pay for rent, electricity and the waiter, while we pay $100 an hour or much more for someone to write C++. I cannot live without food; I can (one would think) live without C++. Why does the service cost more than the product? I

I looked at The Economist’s Pocket World in Figures, and in the U.S. 80.5% of the GDP is Services (including utilities, to be fair);. Agriculture is 1%. In China only 40% is Services. Isn’t this a much more shocking example that the market for products that derive from real things should be unimaginably vaster than the market for things themselves? Why are companies that sell intangibles (Google) worth so much more than companies that fly planes? I lived easily without googling. I would have lived much worse without airplanes. Why is service worth more than substance? And isn’t paper money the most intangible derivative of all?

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