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June 27, 2007

<< My Favorite Muppet | The Very Definition of America >>

Greenwich Office vs. Palo Alto Garage

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 Ė product entrepreneurs and financial entrepreneurs Ėand only one of them truly builds the economy. Product entrepreneurs find new ways of satisfying customers. Financial entrepreneurs find new ways of … well, making money off money.

Problem is, financial entrepreneurship is becoming more and more dominant in the economy. Thirty years ago, finance was the handmaiden of American industry. Now industry is run by finance. For every budding Steve Jobs or Bill Gates there are now thousands of aspiring private equity or hedge fund managers. Thatís because this is where the big bucks are. Which means, itís where some of our most talented young people are going.

The problem isnít just the brain drain. Itís what the brains are being used for. Competition in the real economy generates better products. But competition in the financial economy is often a zero-sum contest.

“Now industry is run by finance” — that’s an interesting claim and takes the conversation into (I think) more useful territory.

Note that I have no smart ideas or opinions about this. Just starting to wonder about it.

P.S. The next post is about Muppets.

Posted June 27, 2007 at 11:40 | Comments (1) | Permasnark
File under: Briefly Noted, Snarkpolicy


(Perhaps) little-known fact about Robin: He has a degree in Economics.

(Perhaps) uninteresting fact about Greg Mankiw: He authored my Econ 201 textbook. He seemed like a kindly nerd from his picture on the back.

Posted by: Laura on June 28, 2007 at 04:25 PM
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