Wednesday, August 08, 2007

Masters of the Universe II

Three further thoughts on the Barksy interview below:

1. When you have “the most profitable industry in the history of mankind” enjoying a “quirk” in regulation, you simply have to ask questions about influences on the political process.

2. Market wages do not necessarily reflect the true, long-term "usefulness" of work (except under very strong assumptions). Many professions pay more than others because they deviate from a perfect market, not the reverse: medicine is a good example. Taxes which are used to pay for workers (firemen, nurses, scientists) who are under-valued by the market can then be seen as rightly rewarding productive work by using the excess rewards which accrue to those in over-valued sectors. (The fact that estimates of the extent to which different kinds of work are over- and under-valued are both very rough and highly politicized does not invalidate this general defence of taxation.)

3. The labour market distortions induced by extremely high wages in the finance sector are worrying. Put simply: is it really efficient to have legions of bright young physicists and engineers (usually trained at great public expense) slugging it out in the City in the hope of a becoming lucky young millionaires instead of doing research on, say, sustainable energy, or designing genuinely innovative new products?

3 comments:

Erik said...

Sach,

I haven't been a regular reader, so what are your views on whether hedge fund managers are overpaid?

Given my experiences being recruited for hedge funds this year, I would hardly consider their pool of workers to be the best and the brightest. More like the greediest and most character-deficient.

Erik

The Compulsive Theorist said...

In short: I think they're grossly overpaid. A more recent post has a link to an article by Martin Wolf in the Financial Times - a much more finance-friendly venue than this blog! - which you might enjoy reading.

I should add the only sense in which I understand notions of over- and under-paid are in relation to incentives and the importance of the work. If doctors salaries dropped to the point where the best and brightest didn't want to go to medical school, I'd want them higher: I would benefit by getting better treatment. If they were already in the asymptotic regime for incentives, I wouldn't want them any higher, because that would impose a cost on the rest of us for no benefit.

So from that point of view, I can't imagine that a world in which hedge fund managers were never paid more than $5m a year would be any worse! On the incentive side, it's hard to imagine anyone deciding not to go into something because it would never pay more than $5m a year - and I'd imagine anyone who is so unmotivated by the work itself - as opposed to the compensation - to react to changes at that level could not possibly be the best person for the job.

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