How Wall Street's profits can be the economy's loss
We talk a lot about profits in this country. But we don't talk a lot about the value of different types of profits. For instance: If I steal $20 off your dresser (let's not ask how I got there), I'm $20 richer, but the economy isn't any better off. If I invent a cure for diabetes, a lot of people actually are better off. I'm obviously stacking the deck here. Theft is bad, but it can hardly bring down the whole economy. Nobel prize winner Robert Solow is being much more unfair by bringing up the financial sector:
Take an extreme example. I have read that a firm such as Goldman Sachs has made very large profits from having devised ways to spot and carry out favorable transactions minutes or even seconds before the next most clever competitor can make a move. Deep pockets in a large market can make a lot of money out of tiny advantages. (Of course, if you have any such advantage the temptation is irresistible to borrow a lot of money to enlarge your bets and your profits. Leverage is good for you, until it isn’t. It is not so good for the system.) A lot of high-class intellectual effort naturally goes into trying to invent ways to find those tiny advantages a few seconds before anyone else.
Now ask yourself: Can it make any serious difference to the real economy whether one of those profitable anomalies is discovered now or a half-minute from now? It can be enormously profitable to the financial services industry, but that may represent just a transfer of wealth from one person or group to another. It remains hard to believe that it all adds anything much to the efficiency with which the real economy generates and improves our standard of living.
You can take that a step further: Because Wall Street pays insanely high salaries as compared to, well, doing anything else, it attracts a lot of talented individuals who then spend their days creating absolutely no value. In that way, it's worse than simply moving money around. It's actively taking potential money out.
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