Regarding your idea that other countries might compete rich people to move to them (they 'might manage to avoid such takings via international competition to attract them "), the US has gone a long way toward preventing this by enacting a law to tax people with high net worth who give up their citizenship as if they were still citizens for ten years after they give up their citizenship.
You don't need to over think this. Are Wall Streeters that went to Harvard generally smarter then the people they steal from, sure. That explains some of it. Wealth flows upwards from the 401k middle class schmuck to the mediocore state college mutual fund manager ripping him off to the wall street trader ripping him off. But the IQ differential is really a side show. Most of the problem can be attributed to market failures.
Asymmetric information and principal agent problems explain most of the problems in finance. Lets take your average 401k participant. Maybe he is an expert at plumbing or some such stuff, and he gets his 5% weekly deduction and employer match into his 401k. He never got any education in finance, and it doesn't really make any sense for him to. Proper investing could take a lifetime for him to learn, and its not like he has that much in his 401k. If he really wants to improve his life he should focus on being a better plumber. The guy managing his 401k knows that, so he charges him a few percent to "manage" his investments, even though he doesn't add much value.
Now let's look at the incentives for the mutual fund manager. He gets a bonus if he outperforms some benchmark, so he has a strong incentive to start trading. He doesn't mind risk because if he doesn't do well its not his money, he doesn't share the downside, just the upside. Even if he under performs for a few years he will probably get another job at a different investment company doing the same thing. So when some slick Wall Street guy calls him up with a trade idea he is all over it. He's willing to play around with other peoples money for the chance to get some compensation. He doesn't have to be dumber then the Wall Street guy (though it helps) he just needs the wrong incentives.
Finance is a very abstract sector. Its very easy to end up with market failures when everyone acts in their own interest.
Dave,Your analysis feels fresh to me and I like it, but I'd like some more pinpoint accuracy on who the virtuous producers are who are getting ripped off in your model, and who are the relatively virtuous within the financial sector.
You said the virtuous producers are small savers, taxpayers and some ambiguously defined non-taxpayers.
Those don't sound to me like populations at the far left tail of America -taxpayers in 2011 sounds relatively elite to me (although I don't know how payroll and sales taxes wash out, though I don't think payroll is being used for finance sector bailouts?), particularly with regards to income taxes.
So are you basically saying that people with degrees in finance are ripping off people with degrees in (non-financial) engineering? And is it a rip off or a collective stupidity resulting in an overall systemic efficiency drag?
The model I'm working with here is engineers smart about creating value stupidly overpaying for medical care to signal that they care, stupidly overpaying for education to show that they care and to participate in a zero sum family status competition with each other, and stupidly overpaying for financial services because an alternate trait population has done a better job overcoming coordination costs to extract rent from the engineers in exchange for macrosocial financial management.
The biggest losers in financial markets are savers, especially small time savers, and taxpayers. If you save in dollars you have to invest them. Anything the finance sector takes off the top above and beyond what is necessary for finding good investments (rent) is wealth that you rightfully deserve but cannot consume. Taxpayer liability is rather explicit through bailouts.
You could also argue that even those that don't save end up losers in that a country with badly allocated capital doesn't produce as much for its citizens to consume. So even if you don't have any stocks you might have lost your job in the recession.
Yes, people are always trying to break into the sector to share in the rent seeking spoils. The rise of hedge funds and other shadow banking entities shows that. While that increases competition for rent it doesn't necessarily reduce it, it may even increase overall rent levels. And in crisis its clear that the biggest insiders (Goldmen, JP Morgan, Citi) have a place above relatively upstart firms (Bear Sterns, Lehmen). Most bailout funds were used for banks to acquire other banks, so I think you can see how competition is dealt with.
Dave,If what you say is true, that the financial sector is rent-seeking rather than creating value, how come they are so poorly challenged by other sectors? Value is coming from somewhere. Who's getting ripped off? Manufacturers? Miners? Public administrators? High fertility-encouraging religions?
I like Mr. Ygleasis' frame that a lot of subpopulation conflict is economic sector pitted against each other, rather than exploiting overlords vs. exploited masses.
In my understanding the financial sector offers value when it improves the efficiency with which capital is allocated, allowing society to optimize its wealth and minimize its financial risk. I imagine some portions of the financial sector do this better than others, and that where there's pure rent-seeking waste that goes unchallenged, its due to mass bias problems larger than a financial elite tricking a dumb mass population (just like I think it's inaccurate to reduce waste in the educational and health care sectors to a smart elite tricking a dumb mass public). There's chicanery, but I don't think chicanery alone sustains such macrosocial formulations (or even the bulk of it, I think it's just nibbling in the margins).
LOL, if the US Government has its population's interests at heart, there will apparently be drone strikes on Davos. That there is not should tell you allot :). Also what about the "rising tides lift all boats" mantra?
I think Robin doesn't know the characteristics of some of these "elites". Some of them is definetly not very nice or very "worthy".
That's not really Robin's vision, after all life would be similar as now, just virtual. (Virtual offices, robot bodies). This is more like the "Vile Ofspring" idea of Charles Stross, everybody is in a modification arms race to keep competing in the "Economics 2.0". Robin's "utopia" is purely Darwininian in contrast.
“His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,”
From my perspective as an American, this particular overlord doesn't sound very worthy to me.
No one would write an article saying that things are going relatively well,even though much data she sites says they are. She also plays down the fact that the rich pay a vast percentage of income taxes and their businesses pay a lot of taxes. Theses taxes pay for the public infrastructure and entitlements that many of us enjoy. We also get to buy the goodies these rich people produce. Yet the sky is falling. People are unequal. Yawn.
Someone's got to be blind not to see that the reason wealth has concentrated at the top is the decline of labor unions. So, if envy is what it takes for workers to take back the wealth they create, let's have more envy.
Regarding your idea that other countries might compete rich people to move to them (they 'might manage to avoid such takings via international competition to attract them "), the US has gone a long way toward preventing this by enacting a law to tax people with high net worth who give up their citizenship as if they were still citizens for ten years after they give up their citizenship.
Data on the stratification of US wealth, rendered in simple diagrams:
http://www.zerohedge.com/ar...
You don't need to over think this. Are Wall Streeters that went to Harvard generally smarter then the people they steal from, sure. That explains some of it. Wealth flows upwards from the 401k middle class schmuck to the mediocore state college mutual fund manager ripping him off to the wall street trader ripping him off. But the IQ differential is really a side show. Most of the problem can be attributed to market failures.
Asymmetric information and principal agent problems explain most of the problems in finance. Lets take your average 401k participant. Maybe he is an expert at plumbing or some such stuff, and he gets his 5% weekly deduction and employer match into his 401k. He never got any education in finance, and it doesn't really make any sense for him to. Proper investing could take a lifetime for him to learn, and its not like he has that much in his 401k. If he really wants to improve his life he should focus on being a better plumber. The guy managing his 401k knows that, so he charges him a few percent to "manage" his investments, even though he doesn't add much value.
Now let's look at the incentives for the mutual fund manager. He gets a bonus if he outperforms some benchmark, so he has a strong incentive to start trading. He doesn't mind risk because if he doesn't do well its not his money, he doesn't share the downside, just the upside. Even if he under performs for a few years he will probably get another job at a different investment company doing the same thing. So when some slick Wall Street guy calls him up with a trade idea he is all over it. He's willing to play around with other peoples money for the chance to get some compensation. He doesn't have to be dumber then the Wall Street guy (though it helps) he just needs the wrong incentives.
Finance is a very abstract sector. Its very easy to end up with market failures when everyone acts in their own interest.
Question?
Can anyone here draw a parallel between Hedge Funds and the actions of the castle owners on the Rhine. The time period I am unsure of.....say 1400 AD
Dave,Your analysis feels fresh to me and I like it, but I'd like some more pinpoint accuracy on who the virtuous producers are who are getting ripped off in your model, and who are the relatively virtuous within the financial sector.
You said the virtuous producers are small savers, taxpayers and some ambiguously defined non-taxpayers.
Those don't sound to me like populations at the far left tail of America -taxpayers in 2011 sounds relatively elite to me (although I don't know how payroll and sales taxes wash out, though I don't think payroll is being used for finance sector bailouts?), particularly with regards to income taxes.
So are you basically saying that people with degrees in finance are ripping off people with degrees in (non-financial) engineering? And is it a rip off or a collective stupidity resulting in an overall systemic efficiency drag?
The model I'm working with here is engineers smart about creating value stupidly overpaying for medical care to signal that they care, stupidly overpaying for education to show that they care and to participate in a zero sum family status competition with each other, and stupidly overpaying for financial services because an alternate trait population has done a better job overcoming coordination costs to extract rent from the engineers in exchange for macrosocial financial management.
What do you think of the model?
Hopefully Anonymous,
The biggest losers in financial markets are savers, especially small time savers, and taxpayers. If you save in dollars you have to invest them. Anything the finance sector takes off the top above and beyond what is necessary for finding good investments (rent) is wealth that you rightfully deserve but cannot consume. Taxpayer liability is rather explicit through bailouts.
You could also argue that even those that don't save end up losers in that a country with badly allocated capital doesn't produce as much for its citizens to consume. So even if you don't have any stocks you might have lost your job in the recession.
Yes, people are always trying to break into the sector to share in the rent seeking spoils. The rise of hedge funds and other shadow banking entities shows that. While that increases competition for rent it doesn't necessarily reduce it, it may even increase overall rent levels. And in crisis its clear that the biggest insiders (Goldmen, JP Morgan, Citi) have a place above relatively upstart firms (Bear Sterns, Lehmen). Most bailout funds were used for banks to acquire other banks, so I think you can see how competition is dealt with.
Dave,If what you say is true, that the financial sector is rent-seeking rather than creating value, how come they are so poorly challenged by other sectors? Value is coming from somewhere. Who's getting ripped off? Manufacturers? Miners? Public administrators? High fertility-encouraging religions?
I like Mr. Ygleasis' frame that a lot of subpopulation conflict is economic sector pitted against each other, rather than exploiting overlords vs. exploited masses.
In my understanding the financial sector offers value when it improves the efficiency with which capital is allocated, allowing society to optimize its wealth and minimize its financial risk. I imagine some portions of the financial sector do this better than others, and that where there's pure rent-seeking waste that goes unchallenged, its due to mass bias problems larger than a financial elite tricking a dumb mass population (just like I think it's inaccurate to reduce waste in the educational and health care sectors to a smart elite tricking a dumb mass public). There's chicanery, but I don't think chicanery alone sustains such macrosocial formulations (or even the bulk of it, I think it's just nibbling in the margins).
Absolute lols,
I push paper for a living and I was on a derivatives desk for a major Wall Street bank.
Attacking the source of criticism is always the last refuge of the scoundrel.
LOL, if the US Government has its population's interests at heart, there will apparently be drone strikes on Davos. That there is not should tell you allot :). Also what about the "rising tides lift all boats" mantra?
I think Robin doesn't know the characteristics of some of these "elites". Some of them is definetly not very nice or very "worthy".
That's not really Robin's vision, after all life would be similar as now, just virtual. (Virtual offices, robot bodies). This is more like the "Vile Ofspring" idea of Charles Stross, everybody is in a modification arms race to keep competing in the "Economics 2.0". Robin's "utopia" is purely Darwininian in contrast.
I've just one quote to all of this 'rich people work so very hard' ...
"When a man tells you that he got rich through hard work, ask him whose."-Don Marquis
“His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,”
From my perspective as an American, this particular overlord doesn't sound very worthy to me.
show me the lever or mechanism that creates any value.
Do you have any supporting data or arguments for your strong assertion about hedge funds?
No one would write an article saying that things are going relatively well,even though much data she sites says they are. She also plays down the fact that the rich pay a vast percentage of income taxes and their businesses pay a lot of taxes. Theses taxes pay for the public infrastructure and entitlements that many of us enjoy. We also get to buy the goodies these rich people produce. Yet the sky is falling. People are unequal. Yawn.
Someone's got to be blind not to see that the reason wealth has concentrated at the top is the decline of labor unions. So, if envy is what it takes for workers to take back the wealth they create, let's have more envy.