5 ms·

The rich are simply not smart enough to intelligently allocate their capital. Things like rent extraction schemes (formulaic investment patterns) and bubbles (i

by api 13y ago

The rich are simply not smart enough to intelligently allocate their capital. Things like rent extraction schemes (formulaic investment patterns) and bubbles (indicative of simple herd behavior) dominate because they are easy, dumb ways to make more money off existing money. You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. But they do understand finance itself, as well as big dumb markets like real estate. These schemes are dumb because they contain the seeds of their own destruction. Rent extraction eventually kills the golden goose or provokes a populist revolt, while bubbles are basically casino gambling. The libertarian anti-tax/anti-government revolution was largely predicated on the idea that private capital would be so much smarter and more agile than state capital. What we're seeing is that this isn't the case. Private capital is every bit as stupid as the state; Goldman Sachs is not that different from a Soviet planning bureau.

nickthemagicman 13y ago
I love your comment. I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition.
- api 13y ago
  A more general statement can be made: A central problem in all modern economies -- whether socialistically or capitalistically organized -- is the accumulation of monolithic stores of wealth exceeding the cognitive capacity of small groups of human beings to intelligently allocate it. We might call this the "big dumb money problem." As the original article points out, it's a bigger problem than merely one of waste. Big dumb money often operates in ways that are actively harmful.
  - logfromblammo 13y ago
    Combine the big dumb money problem with the agency problem, and you will see that no one capable of allocating a huge pile of capital intelligently could ever be trusted to do it. The logical thing to do is to allocate as much as possible to yourself as quickly as possible, before someone else can come along and do exactly the same thing. The financial sector really needs an ever-aware watchdog standing behind it at all times, pointing a big, scary gun at its skull. When the only consequence to taking everything you can get is having more than you can use, guess what happens. The only alternative is to decentralize completely, which no nation on the planet will attempt, because they benefit from living at the center of the money web almost as much as the banks.
  - dkuntz2 13y ago
    Perhaps banks could implement a negative interest rate. Money you don't use goes to science (or something equally "good" for humanity)?
    - skylan_q 13y ago
      a negative interest rate Guess what drives consumption and consumerism. :)
      - dkuntz2 13y ago
        Perhaps. The whole system would need some redoing as well, such as providing everyone with basic necessities. Part of the negative interest could be used to help provide those.
    - breischl 13y ago
      Yeah, but then nobody would ever deposit money in the bank. Much more clever to call it something seemingly unrelated, like "inflation".
    - twic 13y ago
      This is called "tax".
- JonFish85 13y ago
  You mean like tech has taken over and democratized San Francisco?
- deleted 13y ago
  [deleted]
- michaelochurch 13y ago
  I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition. VC is way worse than Wall Street. I wouldn't trust the Valley to manage a bag of rock salt. Finance is a lot less classist and racist and sexist, by far, than VC-funded tech because it actually respects high-level talent. Once you prove that you're smart, people will take you seriously as, at the least, a quant or quant trader. Those may not be high-status roles (compared to banking and old-style, guts-and-glory, trading) but if you're good in them, you can make more than enough money to have a good life. The VC-funded world, for all its pretenses to the contrary, doesn't really value talent beyond about 2-3 standard deviations because it has no way of recognizing it. There are really smart people in the Valley, but not in king-making roles. That is why mediocrities like Evan Spiegel and Lucas Duplan get their early backers and snowball into serious entities. You just have to be good at social proof arbitrage.
  - api 13y ago
    "social proof arbitrage." There is a lot of win in that phrase.
jbellis 13y ago
No, the libertarian political philosophy is that incentives matter, so that if companies can make easy money by getting the government to play favorites (primarily by regulating smaller competitors out of the market, as well as straightforward politically connected loans), they will. The solution is therefore to make it so the government can't play favorites.
- api 13y ago
  What you describe is another problem: a high degree of naiveté among libertarians when it comes to the connection between economic power and political power. Large concentrations of economic power almost always proceed to purchase political influence and subvert the free market. It's usually far more profitable to do that than to play by free market rules.
  - jbellis 13y ago
    Libertarians would say that it's the traditional liberal response (try to make it hard to purchase influence) that is naive: you've only been trying for a hundred years, and it hasn't worked yet.
    - scarmig 13y ago
      Classical liberals, Rawlsian liberals, and libertarians all face the same public choice issues: they're not something any side can simply wave a wand at and make go away. The annoying part comes when either side pretends like the other side faces them as a unique challenge and the other isn't subject to it. (Traditional Burkean conservatism, on the other hand, doesn't face that issue in the same way: it accepts that government is inherently corruptible as part of the human condition and rejects the idea of a rationalist State.)
    - jbooth 13y ago
      Making it hardER is certainly possible. Get rid of the Citizens' United decision, enforce some rules on lobbying and campaign finance, re-institute the split between savings banks and investment banks, as a matter of fact break up a few of them so that the influence is less concentrated. We had things working that way a few short decades ago and while it wasn't a golden age, it wasn't as much of a gilded age as today either. Life is shades of gray. You're never going to have a government small enough or an economy small enough that it's not worth it to play dirty, outside of complete anarchy which it turns out is significantly dirtier. What you can do is limit the damage.
loceng 13y ago
The "rich" were smart enough to find a way to be able to pool resources, or "lucky" enough to have been born into a situation. The problem is we need to be investing in everyone, equally, until they prove they can use resources better than others and then allot them more resources. The first trick is doing it in a way that is fair, and the second trick is doing this while in transition from the old systems.
enoch_r 13y ago
If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Great--now let's test that hypothesis! Studies have consistently shown there is very little or no autocorrelation between excess returns--that is, someone who beats the market in year n is essentially no more likely to beat the market in year n+1 than anyone else. This is very different than a field like programming or basketball, where someone who performs well one year will probably perform well the next year. To me, this is absurdly good evidence that the market is not "stupid," even when I think it is. Worse, arguments like this don't merely say that the market is stupid and could be beaten--they use the author's personal views on the stupidity of particular market movements to make that claim. In other words, to accept this argument, I need to believe that you are one of the (maybe) few people on the planet who can consistently beat the market. I don't believe that.
- grey-area 13y ago
  If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Markets behaving irrationally/stupidly != Markets behaving predictably So I disagree that if markets are stupid (irrational is a better word, but stupid would do) other people in the know could take advantage of them. Just because a given person cannot predict the movements of the market, that doesn't mean the market encodes some special unknown information or is in some aggregate sense smarter or more informed than that person. If the market moves essentially randomly in the short term, the most informed person would not have much chance of beating it. The market doesn't need to be clever to beat you, on the contrary, often it beats people by persisting in stupidity for much longer than they thought possible, or longer than they have time for, until they give in and invest, and then perhaps soon after it reverts to something resembling rational for a short while. That's not to mention the many ways in which our stock markets and other markets are rigged and stacked by insiders (insider trading, market manipulation, LIBOR, forex etc). So your contention that you'd need to be incredibly talented to 'beat the market' as you put it isn't very convincing - there is another explanation for the studies you cite - almost no-one is able to consistently beat the market, except by luck. I suspect (though it is just supposition), that markets are the average of all the uninformed and panicky humans who make them up, and that in those crowds of investors and speculators you'll find a madding mill of people all looking for the main chance which oscillates in a chaotic manner, not a huge collective wisdom which outshines everyone on the planet.
hershel 13y ago
>> You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. Isn't this the role of of venture capitalists to understand those things(with regards to science and tech), and they build specific expertise to understand those things(including hiring top notch entrepreneurs )? But venture returns are not that great(average 7% annual) which explains the little money invested in them(less than $15 billion in 2013).
Dewie 13y ago
This might be slightly relevant here: http://arxiv.org/pdf/1002.2284.pdf http://arxiv.org/pdf/1002.2284.pdf

by api 13y ago

nickthemagicman 13y ago

I love your comment. I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition.

api 13y ago
A more general statement can be made: A central problem in all modern economies -- whether socialistically or capitalistically organized -- is the accumulation of monolithic stores of wealth exceeding the cognitive capacity of small groups of human beings to intelligently allocate it. We might call this the "big dumb money problem." As the original article points out, it's a bigger problem than merely one of waste. Big dumb money often operates in ways that are actively harmful.
- logfromblammo 13y ago
  Combine the big dumb money problem with the agency problem, and you will see that no one capable of allocating a huge pile of capital intelligently could ever be trusted to do it. The logical thing to do is to allocate as much as possible to yourself as quickly as possible, before someone else can come along and do exactly the same thing. The financial sector really needs an ever-aware watchdog standing behind it at all times, pointing a big, scary gun at its skull. When the only consequence to taking everything you can get is having more than you can use, guess what happens. The only alternative is to decentralize completely, which no nation on the planet will attempt, because they benefit from living at the center of the money web almost as much as the banks.
- dkuntz2 13y ago
  Perhaps banks could implement a negative interest rate. Money you don't use goes to science (or something equally "good" for humanity)?
  - skylan_q 13y ago
    a negative interest rate Guess what drives consumption and consumerism. :)
    - dkuntz2 13y ago
      Perhaps. The whole system would need some redoing as well, such as providing everyone with basic necessities. Part of the negative interest could be used to help provide those.
  - breischl 13y ago
    Yeah, but then nobody would ever deposit money in the bank. Much more clever to call it something seemingly unrelated, like "inflation".
  - twic 13y ago
    This is called "tax".
JonFish85 13y ago
You mean like tech has taken over and democratized San Francisco?
deleted 13y ago
[deleted]
michaelochurch 13y ago
I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition. VC is way worse than Wall Street. I wouldn't trust the Valley to manage a bag of rock salt. Finance is a lot less classist and racist and sexist, by far, than VC-funded tech because it actually respects high-level talent. Once you prove that you're smart, people will take you seriously as, at the least, a quant or quant trader. Those may not be high-status roles (compared to banking and old-style, guts-and-glory, trading) but if you're good in them, you can make more than enough money to have a good life. The VC-funded world, for all its pretenses to the contrary, doesn't really value talent beyond about 2-3 standard deviations because it has no way of recognizing it. There are really smart people in the Valley, but not in king-making roles. That is why mediocrities like Evan Spiegel and Lucas Duplan get their early backers and snowball into serious entities. You just have to be good at social proof arbitrage.
- api 13y ago
  "social proof arbitrage." There is a lot of win in that phrase.

jbellis 13y ago

No, the libertarian political philosophy is that incentives matter, so that if companies can make easy money by getting the government to play favorites (primarily by regulating smaller competitors out of the market, as well as straightforward politically connected loans), they will. The solution is therefore to make it so the government can't play favorites.

api 13y ago
What you describe is another problem: a high degree of naiveté among libertarians when it comes to the connection between economic power and political power. Large concentrations of economic power almost always proceed to purchase political influence and subvert the free market. It's usually far more profitable to do that than to play by free market rules.
- jbellis 13y ago
  Libertarians would say that it's the traditional liberal response (try to make it hard to purchase influence) that is naive: you've only been trying for a hundred years, and it hasn't worked yet.
  - scarmig 13y ago
    Classical liberals, Rawlsian liberals, and libertarians all face the same public choice issues: they're not something any side can simply wave a wand at and make go away. The annoying part comes when either side pretends like the other side faces them as a unique challenge and the other isn't subject to it. (Traditional Burkean conservatism, on the other hand, doesn't face that issue in the same way: it accepts that government is inherently corruptible as part of the human condition and rejects the idea of a rationalist State.)
  - jbooth 13y ago
    Making it hardER is certainly possible. Get rid of the Citizens' United decision, enforce some rules on lobbying and campaign finance, re-institute the split between savings banks and investment banks, as a matter of fact break up a few of them so that the influence is less concentrated. We had things working that way a few short decades ago and while it wasn't a golden age, it wasn't as much of a gilded age as today either. Life is shades of gray. You're never going to have a government small enough or an economy small enough that it's not worth it to play dirty, outside of complete anarchy which it turns out is significantly dirtier. What you can do is limit the damage.

loceng 13y ago

The "rich" were smart enough to find a way to be able to pool resources, or "lucky" enough to have been born into a situation. The problem is we need to be investing in everyone, equally, until they prove they can use resources better than others and then allot them more resources. The first trick is doing it in a way that is fair, and the second trick is doing this while in transition from the old systems.

enoch_r 13y ago

If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Great--now let's test that hypothesis! Studies have consistently shown there is very little or no autocorrelation between excess returns--that is, someone who beats the market in year n is essentially no more likely to beat the market in year n+1 than anyone else. This is very different than a field like programming or basketball, where someone who performs well one year will probably perform well the next year. To me, this is absurdly good evidence that the market is not "stupid," even when I think it is. Worse, arguments like this don't merely say that the market is stupid and could be beaten--they use the author's personal views on the stupidity of particular market movements to make that claim. In other words, to accept this argument, I need to believe that you are one of the (maybe) few people on the planet who can consistently beat the market. I don't believe that.

grey-area 13y ago
If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Markets behaving irrationally/stupidly != Markets behaving predictably So I disagree that if markets are stupid (irrational is a better word, but stupid would do) other people in the know could take advantage of them. Just because a given person cannot predict the movements of the market, that doesn't mean the market encodes some special unknown information or is in some aggregate sense smarter or more informed than that person. If the market moves essentially randomly in the short term, the most informed person would not have much chance of beating it. The market doesn't need to be clever to beat you, on the contrary, often it beats people by persisting in stupidity for much longer than they thought possible, or longer than they have time for, until they give in and invest, and then perhaps soon after it reverts to something resembling rational for a short while. That's not to mention the many ways in which our stock markets and other markets are rigged and stacked by insiders (insider trading, market manipulation, LIBOR, forex etc). So your contention that you'd need to be incredibly talented to 'beat the market' as you put it isn't very convincing - there is another explanation for the studies you cite - almost no-one is able to consistently beat the market, except by luck. I suspect (though it is just supposition), that markets are the average of all the uninformed and panicky humans who make them up, and that in those crowds of investors and speculators you'll find a madding mill of people all looking for the main chance which oscillates in a chaotic manner, not a huge collective wisdom which outshines everyone on the planet.

hershel 13y ago

>> You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. Isn't this the role of of venture capitalists to understand those things(with regards to science and tech), and they build specific expertise to understand those things(including hiring top notch entrepreneurs )? But venture returns are not that great(average 7% annual) which explains the little money invested in them(less than $15 billion in 2013).

Dewie 13y ago

This might be slightly relevant here: http://arxiv.org/pdf/1002.2284.pdf http://arxiv.org/pdf/1002.2284.pdf