Yesterday, the New York Times had a story about the enormous sums that hedge funders took home last year.
Last year, the hedge fund industry had returns of only 3 percent on average… But the top 25 managers still managed to earn $11.62 billion in compensation in 2014.
Kenneth C. Griffin of Citadel… $1.3 billion… James H. Simons of Renaissance Technologies was second with $1.2 billion, and Raymond Dalio of Bridgewater Associates was third with $1.1 billion. William A. Ackman of Pershing Square Capital was a close fourth, earning $950 million in 2014.
I know it sounds like a lot, but 2014 was an off year. That $11.62 billion was barely half what the top 25 hauled in the year before. I guess there’ll be some belt tightening.
The point though is that in an efficient market system like ours, people get what they are worth to the economy, don’t they?
“Does Finance Benefit Society?” is the title of a paper by Luigi Zingales, an economist who has had posts at Harvard and Chicago’s Booth School of Business. Here is the short version of his answer to the question:
At the current state of knowledge there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society.
Zingales is no flaming radical. The right-wing website The Daily Caller says he is “an advocate of free market economics and limited government.” The trouble is that the hedge funders and bankers keep messing up those free market models with their rent-seeking and fraud. (A table at the end of the paper summarizes cases of fines paid to the U.S. Government 2012-2014. And those are just the ones where someone got caught.)
A couple of other quotes on the same theme:
If political power is disproportionately in the hands of large donors – as it is increasingly the case in the United States – why is the negative public perception of finance a problem? Rich financiers can easily buy their political protection. In fact, this is precisely the problem.
Many financial activities tend to have a private return that is much higher than the (perceived) social return.
Furthermore, I am not aware of any evidence that the creation and growth of the junk bond market, the option and futures market, or the development of over-the-counter derivatives are positively correlated with economic growth.
A pdf of the paper is here.
Originally posted at Montclair SocioBlog and Pacific Standard.
Jay Livingston is the chair of the Sociology Department at Montclair State University. You can follow him at Montclair SocioBlog or on Twitter.
Comments 11
kieron George — May 11, 2015
That's why we should strive for perfect competition not a free market.
msobel — May 11, 2015
Compare and contrast the Defense Industry. Be specific.
Biggus Disqus — May 11, 2015
Is it time to dust off and sharpen the guillotines yet? Or should we leave them rusty and dull for more of a punitive/deterrent effect?
Bill R — May 11, 2015
Does the finance industry benefit society?
Yes, it provides capital to those who would create.
Is is a bit out of control?
Probably, and regulation should always be reviewed and modified as appropriate.
Is our market system are people supposed to be paid "what they're worth to the economy"?
I have a wonderful bridge that connects Brooklyn and Manhattan you might want to buy...
Thad Jackson — May 20, 2015
Wow, either Livingston did not read Zingales' address with an appreciation for the speaker's precise language or he is deliberately characterizing Zingales' comments. The reason sociologists (all but the very few these days) are held in such low esteem is their penchant for lying, or bending the facts--you're not all that stupid, are you? Do you really think that the presidential address at the AFA argued that finance isn't beneficial? If so, I would like to welcome you to America and encourage you to continue learning English as you commence your scholarship. The entire address is an argument for finance's benefit, and an address of the gap in perception between academics and, well, folks like Livingston, I suppose. Regarding your first quote: Consider the importance of the word "all" to the meaning of the sentence, and reconsider your total misrepresentation of another scholar's work. And hedge fund managers' total compensation is compared to fund rate of return, which are different measures, and do not factor in risk and a host of other factors that you ignore. Holy shit! You graduated from Harvard? And hold a chair at Montclair? I just read about ten posts in which you careen into matters economic and/or quantitative. Please stop. You are making a fool of yourself and misleading your students. I respect your balls and your fire throwing, but as a scholar you have a responsibility that supersedes your desire to write whatever passes through your head. Stick with sociology, or anything other than finance/econ, please. It's embarrassing. If you're that interested, then trust me when i tell you that econ/finance is vastly more interesting when you understand it a little. Take some MOOCs or start lunching with someone from the economics department and let them suggest some readings. I'm not just being an asshole, you can truly benefit from objectively considering this advice. Good luck.
Alex — August 3, 2021
I am more than convinced that the financial industry brings many benefits to society. But there is one snag in this phrase that many will disagree with. And this is that the benefit does not go to the lazy and short-sighted, but only to the smart and far-sighted. For example, at one time, while still in college, I invested a small amount with a person from an investment company Aetrust, and after 8 years, I began to earn good commissions from that transaction.
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