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People should have basic economic literacy to go with this. They should understand that profit-motivated investment is responsible for the vast majority of the

People should have basic economic literacy to go with this. They should understand that profit-motivated investment is responsible for the vast majority of the capital that makes up industry. They should understand that money, and its ability to relay information on scarcity through prices, is how large numbers of disparate actors in highly complex economies are able to coordinate so effectively.

anm89 6y ago
It's a shame this is being downvoted because that was the first thing I thought when I read this. Just as people rail against many pieces of industrialization without understanding the details of how they are used or where it came from, it's astonishing to me how many people I know with college degrees that could not give the simplest definition of what a bank is besides the place they deposit their money, basic details about how a government could finance a policy it has made into law, what a central bank is or what a stock or bond is. But many of they seem to hold incredibly strong opinions about how problematic these things are none the less. Literally yesterday, I had a friend tell me hedge funds are bad, their explanation being: "no one should own 6 yachts". I asked them if they could give to me any definition at all of what a hedge fund was and they had to admit that no they couldn't. To them, a hedge fund is the category of businesses where people with 6 yachts work. And the thing is there are plenty of reasons to dislike specific hedge funds and banks, although as a concept they are beneficial and necessary, but people have such strong opinions about those things being bad without having the most basic conceptions of what they are and it really makes them worse citizens in terms of their ability to advocate for better policy.
- rland 6y ago
  OK, I'll pick up where your friend left off. Hedge funds generate liquidity in the market. They do this by placing bets on investments they judge to be sound, using capital they acquire from courting wealthy people and big funds. Some of them place bets on the velocity of such bets themselves (derivatives), or bets within a very short time (high frequency trading). They don't deserve 6 yachts, they're rewarded way too much, not taxed enough, not regulated enough, and when they conspire to purposefully, royally screw everyone (08, any pension crisis, any big city civil court docket) they don't rot in jail like they deserve, but are rather rewarded by bank bailouts, university appointments, and golden severance packages. As a concept they're beneficial and necessary, but every individual one is over-compensated, under-regulated, and under-taxed. For just a gut check on this, let's see a hedge fund manager that takes away less in a year than the median wage of the industry or area they invest in. Or even within an order of magnitude.
  - anm89 6y ago
    My argument would be something like: I don't care how much people are compensated if they made it fair and square. Nothing in the financial markets has been fair or square for a very long time, at least since the 2008 bail outs. I'm all for them having 600 yachts if they earned it if they also lose their shirts when it goes wrong. We have just set it up so they get a yacht if they win, and maybe a smaller yacht if they lose, and people are understandably angry about this. But, it's a hard problem, because we have made our entire financial system a maze of smoke and mirrors and quite honestly I don't think anybody really knows how to unwind it, and the whole thing would come crashing down calamitously if we just forced it to happen. Blindly railing against the system is particularly unproductive in my opinion though and I think some number of social justice minded people take pride in not understanding it.
  - CryptoPunk 6y ago
    By what criteria are you judging that they are over-compensated? The judgment seems entirely arbitrary and emotionally motivated. Assuming a free market, if they're earning huge amounts, it means they're unlocking subtantial new efficiency gains, which has significant positive externalities. The large profits in turn are inviting additional time and capital to be deployed into the investment activity that hedge funds engage in, to further exploit this profit opportunity, and thereby, raise the efficiency of the economy. One argument I could buy is that they are capturing more value than they should because regulations are limiting the competition they face. https://www.brookings.edu/research/make-elites-compete-why-the-1-earn-so-much-and-what-to-do-about-it/ https://www.brookings.edu/research/make-elites-compete-why-t... >>The law has also inflated the compensation of hedge fund workers—roughly $500,000 on average—by restricting competition. Mutual funds—which charge tiny fees by comparison—are currently barred from using hedge fund strategies because they have non-rich investors. If the law was changed to allow mutual funds to offer hedge fund portfolios, hundreds of billions of dollars would be transferred annually from super-rich hedge fund managers and investment bankers to ordinary investors, and even low-income workers with retirement plans. A House committee recently approved a bill that would slightly ease the accredited investor rule. Even if it became law, the bill would be a modest step—but at least one in the right direction.
- sjy 6y ago
  I think you should be more charitable to your friend. “No one should own 6 yachts” is a defensible moral principle. Not everyone accepts it, and there is good evidence that certain ways of preventing people from owning 6 yachts result in worse outcomes for everyone. But “hedge funds are beneficial and necessary” is not a scientific fact; most heterodox economists would reject it.
  - anm89 6y ago
    And thinking people should be allowed to own 6 yachts is a defensible moral principle. My discussion wasn't about moral defensible principles. Everyone thinks their principles are morally defensible, that's not unique to you. The number of people in hedge funds who own 6 yachts could probably be counted on one hand. The whole point was that she had no idea what she was talking about and admitted as much. Nothing in economics is a scientific fact. Supply and demand isn't a scientific fact. Gravity isnt a scientific fact. So again, no idea what you are on about. This is why I make an effort to speak up on economics literacy stuff. It brings out the least informed people but with the strongest opinions.
clairity 6y ago
capital isn't the scoreboard of unalloyed goodness, and concentrated capital is bad because it's precision and accuracy at sniffing out the best allocation of resources is poor (loses the independence and diversity of information needed to find the best options). moreover, price signals have been distorted to represent only the interests of (concentrated) capital holders, because everything we collectively value isn't completely or even adequately represented in price. how we price isn't necessarily how we value.
- anm89 6y ago
  Nice straw man you are attacking there. He never said "capital is a scoreboard of unalloyed goodness". He said it's a coordination mechanism which, I'll give you a 100$ if you can find a economics professor who disagrees. "concentrated capital is bad". It must be nice to see the world in black and white and hold the solution to how everyone should do things. An orphanage is a concentration of capital. A hospital is a concentration of capital, often a truly massive one in a major city. Sounds pretty evil to me. But seriously, this is cartoonishly naive.

anm89 6y ago

It's a shame this is being downvoted because that was the first thing I thought when I read this. Just as people rail against many pieces of industrialization without understanding the details of how they are used or where it came from, it's astonishing to me how many people I know with college degrees that could not give the simplest definition of what a bank is besides the place they deposit their money, basic details about how a government could finance a policy it has made into law, what a central bank is or what a stock or bond is. But many of they seem to hold incredibly strong opinions about how problematic these things are none the less. Literally yesterday, I had a friend tell me hedge funds are bad, their explanation being: "no one should own 6 yachts". I asked them if they could give to me any definition at all of what a hedge fund was and they had to admit that no they couldn't. To them, a hedge fund is the category of businesses where people with 6 yachts work. And the thing is there are plenty of reasons to dislike specific hedge funds and banks, although as a concept they are beneficial and necessary, but people have such strong opinions about those things being bad without having the most basic conceptions of what they are and it really makes them worse citizens in terms of their ability to advocate for better policy.

rland 6y ago
OK, I'll pick up where your friend left off. Hedge funds generate liquidity in the market. They do this by placing bets on investments they judge to be sound, using capital they acquire from courting wealthy people and big funds. Some of them place bets on the velocity of such bets themselves (derivatives), or bets within a very short time (high frequency trading). They don't deserve 6 yachts, they're rewarded way too much, not taxed enough, not regulated enough, and when they conspire to purposefully, royally screw everyone (08, any pension crisis, any big city civil court docket) they don't rot in jail like they deserve, but are rather rewarded by bank bailouts, university appointments, and golden severance packages. As a concept they're beneficial and necessary, but every individual one is over-compensated, under-regulated, and under-taxed. For just a gut check on this, let's see a hedge fund manager that takes away less in a year than the median wage of the industry or area they invest in. Or even within an order of magnitude.
- anm89 6y ago
  My argument would be something like: I don't care how much people are compensated if they made it fair and square. Nothing in the financial markets has been fair or square for a very long time, at least since the 2008 bail outs. I'm all for them having 600 yachts if they earned it if they also lose their shirts when it goes wrong. We have just set it up so they get a yacht if they win, and maybe a smaller yacht if they lose, and people are understandably angry about this. But, it's a hard problem, because we have made our entire financial system a maze of smoke and mirrors and quite honestly I don't think anybody really knows how to unwind it, and the whole thing would come crashing down calamitously if we just forced it to happen. Blindly railing against the system is particularly unproductive in my opinion though and I think some number of social justice minded people take pride in not understanding it.
- CryptoPunk 6y ago
  By what criteria are you judging that they are over-compensated? The judgment seems entirely arbitrary and emotionally motivated. Assuming a free market, if they're earning huge amounts, it means they're unlocking subtantial new efficiency gains, which has significant positive externalities. The large profits in turn are inviting additional time and capital to be deployed into the investment activity that hedge funds engage in, to further exploit this profit opportunity, and thereby, raise the efficiency of the economy. One argument I could buy is that they are capturing more value than they should because regulations are limiting the competition they face. https://www.brookings.edu/research/make-elites-compete-why-the-1-earn-so-much-and-what-to-do-about-it/ https://www.brookings.edu/research/make-elites-compete-why-t... >>The law has also inflated the compensation of hedge fund workers—roughly $500,000 on average—by restricting competition. Mutual funds—which charge tiny fees by comparison—are currently barred from using hedge fund strategies because they have non-rich investors. If the law was changed to allow mutual funds to offer hedge fund portfolios, hundreds of billions of dollars would be transferred annually from super-rich hedge fund managers and investment bankers to ordinary investors, and even low-income workers with retirement plans. A House committee recently approved a bill that would slightly ease the accredited investor rule. Even if it became law, the bill would be a modest step—but at least one in the right direction.
sjy 6y ago
I think you should be more charitable to your friend. “No one should own 6 yachts” is a defensible moral principle. Not everyone accepts it, and there is good evidence that certain ways of preventing people from owning 6 yachts result in worse outcomes for everyone. But “hedge funds are beneficial and necessary” is not a scientific fact; most heterodox economists would reject it.
- anm89 6y ago
  And thinking people should be allowed to own 6 yachts is a defensible moral principle. My discussion wasn't about moral defensible principles. Everyone thinks their principles are morally defensible, that's not unique to you. The number of people in hedge funds who own 6 yachts could probably be counted on one hand. The whole point was that she had no idea what she was talking about and admitted as much. Nothing in economics is a scientific fact. Supply and demand isn't a scientific fact. Gravity isnt a scientific fact. So again, no idea what you are on about. This is why I make an effort to speak up on economics literacy stuff. It brings out the least informed people but with the strongest opinions.

clairity 6y ago

capital isn't the scoreboard of unalloyed goodness, and concentrated capital is bad because it's precision and accuracy at sniffing out the best allocation of resources is poor (loses the independence and diversity of information needed to find the best options). moreover, price signals have been distorted to represent only the interests of (concentrated) capital holders, because everything we collectively value isn't completely or even adequately represented in price. how we price isn't necessarily how we value.

anm89 6y ago
Nice straw man you are attacking there. He never said "capital is a scoreboard of unalloyed goodness". He said it's a coordination mechanism which, I'll give you a 100$ if you can find a economics professor who disagrees. "concentrated capital is bad". It must be nice to see the world in black and white and hold the solution to how everyone should do things. An orphanage is a concentration of capital. A hospital is a concentration of capital, often a truly massive one in a major city. Sounds pretty evil to me. But seriously, this is cartoonishly naive.