June 27, 2007

| The Very Definition of America >>

Interesting pair of posts here.

In response to a student’s question about the social value of a Wall Street career, economist Greg Mankiw argues replies that yes, investors make a big contribution to society by making the economy more efficient.

The comment thread that follows is insanely good. Very long, and very detailed, but worth a look. I thought this was the gem:

The “invisible hand” works great when it is forcing productive firms to be more efficient.

However, some activities in our complex economy don’t directly produce anything — some portions of litigation, advertising, lobbying, and stock analysis simply shuffle existing production. In these cases, profit maximizing firms aren’t automatically controlled by the invisible hand.

Prof Mankiw’s student is correct in asking whether one more worker in those areas will really help grow the economic pie.

Economists can find positive externalities in any of these activities. Probably the first million hours of stock analysis (or litigation, or …) provides an efficiency gain that justifies the deployment of those talented individuals. But that doesn’t guarantee that the last million is a net positive.

The “deployment of talented individuals” angle is important. Over on his blog, Robert Reich also hits it (I feel like he must have read Mankiw’s post, though he doesn’t mention or link to it, so, uh, maybe not):

America is the greatest entrepreneurial nation in the world. But there are really two kinds of entrepreneurs here