One Place Where Mankiw Makes Absolutely No Sense at All
In his Defending the One Percent paper, Greg Mankiw is rather grudgingly acknowledging rent-seeking (and -getting) in the financial industry, and the allocation of top talent to that industry. He sez:
The last thing we need is for the next Steve Jobs to forgo Silicon Valley in order to join the high-frequency traders on Wall Street. That is, we shouldn’t be concerned about the next Steve Jobs striking it rich, but we want to make sure he strikes it rich in a socially productive way.
Talk about turning straightforward logic on its ear. The whole point is that if somebody makes their money by financial-industry rent-seeking, they by definition will not be the next Steve Jobs.
So yes: we should be concerned if lots of people are striking it rich in the financial industry, because the lure of those rent payments will prevent potential Steve Jobs from creating real value in real businesses. Incentives matter.
Cross-posted at Asymptosis.
Oh heck, Steve,
there was never a chance any of the “top talent” on wall street was going to be the next Steve Jobs. If those people couldn’t make millions of dollars defrauding “investors,” they’d be out running retail scams on widows and people buying used cars.
We need to regulate the bankers to protect ourselves, and the economy from wholesale fraud and delivering the country to the rule of fraudsters. Not to keep some poor bright young man from wasting his life by giving up physics and becoming a bond trader.
As for logic’s ear, I can’t see that you say anything here that is not exactly what Mankiw was saying (here).
Return education to serving society and we’ll have all the creative minds we would want being productive in a way that benefits society such that life risks are reduced for all.
Simple return the message from “go to school get a job” to “go to school, get a life”. Of course it means we have to promote the arts, culture and liberal studies. Without them, one’s basket of experience to draw on for their creativity becomes limited and ultimately sustaining of the status quo.
Oh, that’s what the conservative want.
Daniel
exactly. that’s one reason i was so unhappy with prior post about ending “grade inflation” at Yale. apparently the author was concerned that getting “Grade A” stamped on your butt by the respected authorities would no longer guarantee that you can tell yourself you are “smarter than” the second raters who only get a “Grade B.”
We should be helping all kids find a meaningful life for themselves. That may include a meaningful job,but must not stop there.
I’m curious to know when, where and how the myth of the “brilliant” stock trader got its origin. It has been well known that most of the trading is done by computor programmed algorithms. Even the results achieved by such programs appear to be influenced by the proximity of the computors to the exchange computors. Profitable trades, even if only pennies per share, are easier to attain when your computor has a temporal edge. So where does the genious of the human personnel come into play?
Also, the same question can be applied to investment bankers in general. What genious did Peter Peterson need after serving in Nixon’s administration in p;ositions directly influencing economic policy? He and his firm have enjoyed significant benefits from the success of China’s economy ever since.
Genious? Only in the sense that one can manipulate circumstances in a way that benefits them and theirs in a substantial way, even if at the expense of others.
jack
oops. sorry about the used cars. let us distinguish between honest car dealers and those who put sawdust in the transmission.
similarly, there may have been a day when stock traders were honest and it may have taken some cleverness, but now that the banks can put sawdust in the gears and the government winks and nods….
Dale,
“Used car salesman” epithets have been applied for as long as one person has been selling things to another. There is fraud in every business and in every walk of life. What I have learned in the car business is that the average consumer prefers to believe the biggest lie. How else could Madoff, or any other schemer, pull off the scam? As I like to put it, car sales take place in a turbulent sea and in a turbulent sea only the sharks survive.
That the financial industry has come to reflect the worst characteristics of business is a symptom of a bizarre compensation system that rewards quick schemes too generously. There is no one on Earth that has ever done anything that could be valued at the average compensation of investment bankers or hedge fund managers. Corporate CEOs are no different in that regard. I’d be curious to know the life time earnings of Drs. Jonas Salk and Alberft Sabin over both their working lives. And they actually did something worth while.
the thought of having potential Jobs go to wall street reminds me of something a friend, now deceased, wrote over 3 years back…
The Price of Casino-Like Finance Is Higher Than We Think
i think it still holds true…
Excellent posting at that link, RJS. Thanks. I wish somebody could link to something Mankiw has written in the past few years that is one-half as worthwhile.
pjr, rjs
maxine is a fine writer and mostly right
but i don’t think the casino economy is making good boys go bad.
what we have is a bad boy ethic in this country pretty much from top to bottom… not that there are not good people, but the public morality is “cheat the customer.”
no doubt the criminals at the top of the finance industry are the brightest criminals, but they were criminals first, and they would be criminals even if they had “real” jobs.
what’s dangerous about the casino economy is that its lack of regulation attracts criminals, and rich criminals are in a position to criminalize government, which is what we are seeing. if not aiding and abetting.
Steve:
Nice post and you are saying what I “tried” to say earlier and what Edward was also alluding to in his post.
One of the silliest myths about founders like Steve Jobs and other such inventors or leaders is that they did it to get rich. They did it because that is what they loved doing, money was an afterthought. Steve and Woz had no clue how much money was to be made by their tinkering around. The real problem is why do our best mathematicians and physics students end up on Wall Street at all? Is money the only thing they want? Apparently so. Stop trying to find an incentive based solution to a problem that solves itself. People do stuff because they like doing it and that will never change.
Wooley, as an aside regarding marginal income incentives to work, Jobs’s salary starting in 1997 was $1 per year (pre-tax). I agree with you that, from the beginning, Jobs didn’t need the incentive to earn Billions to do what he did and probably would have been pleased–and highly incentivized–to earn Millions over the years. That goes for most of the top 1 percent who earn several times what their predecessors were getting some decades ago when our economic growth was stronger overall and benefited everyone.