Why are we in the mess we are in? There are lots of proximate causes: overleverage, global imbalances, bad financial technology that lead to widespread underestimation of risk. Readers can no doubt improve on that list.

But these still are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.

I will confess to not having addressed this particular line of thought directly, even thought it has crossed my mind plenty of times. Many readers have noted, and I agree completely, that the financial sector has become too large relative to the real economy. But many commentators, your humble blogger included, have failed to probe deeply how such a distorted economy came to be seen as a good policy outcome.

In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.

Now consider: finance is a …