WHAT is the purpose of the finance industry? Everyone knows that it provides a very good living for many of its employees and that it is prone to occasional crises that can disrupt the global economy. But what good does it do the rest of humanity?

A new book* by Stephen Davis, Jon Lukomnik and David Pitt-Watson lists four main roles for the industry: providing safe custody for assets, a payments system, intermediation between savers and borrowers, and risk reduction (insurance). Its performance should be judged by its success or failure in providing those services.

The financial crisis in 2007-08, when many banks had to be rescued by governments, shows that finance does not always do a bang-up job of providing safe custody. Banks were allowed to gear up their balance-sheets in pursuit of short-term profits—not a good deal from society’s point of view. There has also been an explosion in the volume of securities trading in recent decades. But it is not clear how that helps the economy: liquid markets are a virtue, but do deals really need to be executed in milliseconds?

Another important issue is how efficiently the finance industry provides those services. The authors refer to a recent paper** by Thomas Philippon of New York University which tried to measure the unit cost of financial services over time. This is a tricky business given the complexity of the industry; Mr Philippon divides the income of the sector by the quantity of the assets it intermediates. On that reckoning, the costs of intermediation have stayed roughly constant at between 1.5-2% (see chart). In other words, finance is no more efficient than it was at the end of the 19th century.

Financial titans might splutter into their champagne at Mr Philippon’s finding, and point to the reduction in trading spreads or even the rise of firms like Vanguard. But it is the cost to the end-user that is the key. Mr Philippon’s data suggest that money saved in one area has been offset by new charges elsewhere.

In particular, Messrs Davis, Lukomnik and Pitt-Watson point to the multiple layers of intermediaries that take a chunk out of a saver’s money. Invest your pension in a mutual fund and you may pay a record-keeper to check your savings are going to the right place; the mutual-fund manager; the third-party research firms that fund managers pay to help them select stocks; the platform on which the mutual fund is listed; the broker who handles the fund’s orders to buy and sell when it trades shares and bonds; a custodian to look after those securities; and an agent to price them for reporting purposes.

Those charges add up, and make an enormous difference. If a 25-year-old saves for 40 years for a pension, paying fees of 1% a year, the accumulated charges will reduce his or her retirement pot by a quarter (based on the average dollar being in the pension for 25 years). Annual charges of 1.5% will result in a 38% cut. In a world where many people have defined-contribution pensions, and there is no pledge from the employer to provide a decent income in retirement, such charges are very important. But employees may not be fully aware of the “price” they are paying for the management of their savings.

Why hasn’t regulation eliminated these problems? The authors think regulators have pursued a policy of “whack-a-mole”: identifying specific problems after they surface and then producing elaborate rules in response. The result is too much detail: new American credit cards come with 31 pages of legalese. Instead regulators should adopt a more systemic approach, focusing on the “fiduciary duty” intermediaries owe to their clients and making sure that clients are aware of all the costs that are loaded onto them.

In the authors’ ideal world, banks should hold more capital to ensure the safety of deposits; stock exchanges should be prevented from giving high-frequency traders faster access to market prices; and executives should be paid bonuses linked to the long-term growth of the business rather than the share price. Above all, they argue, the interests of the underlying clients of the finance industry—the depositors, the workers and the pensioners—should come first. Everyone is a capitalist these days. That means keeping a much closer eye on those who manage that capital.

* “What They do With Your Money: How the Financial System Fails Us and How to Fix It”, Yale University Press
** “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation” http://pages.stern.nyu.edu/~tphilipp/papers/Finance_Efficiency.PDF