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> Unless you are [...] breaking the law [...] [y]ou are providing a good or service to the economy and are rewarded appropriately. Not necessarily. You are pro

by gjm11 13y ago

> Unless you are [...] breaking the law [...] [y]ou are providing a good or service to the economy and are rewarded appropriately. Not necessarily. You are providing a good or service to someone but it isn't necessarily doing any good to "the economy". An example: You are a successful hedge fund manager. You and your team of quants have a bunch of ingenious strategies for predicting the stock market, spotting arbitrage opportunities in derivative prices, etc. You successfully help your investors to get rich, for which they pay you very handsomely. But, for the most part, what you're enabling them to do is get rich at the expense of other market participants. If you weren't doing your job, the net value of the equities and derivatives markets would be pretty much exactly the same; it's just that it would be parcelled up a little differently. For the avoidance of doubt, I don't think there's anything wrong with any of that. Our hypothetical hedge fund manager isn't doing any net harm to speak of either. (There might be a bit of net good, through increasing liquidity and helping the market do its information-aggregating thing, and a bit of net good-or-harm depending on exactly who the fund's investors are.) The point is just that what a hedge fund manager is being rewarded for is making a particular set of people rich in what's largely a zero-sum game, not doing any net good overall. Another example: You study baseball or American football and get very good at identifying undervalued players. You offer your service to a major team. They get some bargains, win a lot of games, and pay you a big pile of money. All very well, and again for the avoidance of doubt I don't think there's anything wrong with this -- but you've benefited one set of people at others' expense. The overall quality of play hasn't changed (the pool of players is the same and you haven't done anything to make them play better), you've just enabled one team to get a bigger slice of the same pie. Note that none of this requires artificial barriers to entry, or crime, or even anything unethical. It's just that what you get paid for is benefiting the people who pay you and often the easiest way to do that is by moving value to them from elsewhere, rather than creating it anew.

holograham 13y ago
Everyone loves to cite Hedge Funds. I am no hedge fund expert but you mention a few benefits that they do provide...liquidity and information aggregating (which has derivatives such as market signalling) are very much benefits to society. What good is a stock to anyone if there isnt a liquid market to sell into (and yes the buyer should make money on that transaction). A personal hunch is that some hedge funds are breaking some laws but largely the hedge fund industry provides a net benefit to the economy. The stock market and futures markets are NOT zero sum games. They provide capital, incentive structures, and a host of other benefits to both businesses AND everyday people (like you who has a retirement fund with lots of assets that pass through hedge funds). Businesses can (and do) grow and appreciate your assets (and hedge fund assets), etc etc. Your second example is dead wrong. Identifying undervalued resources is an enormous efficiency gain in a market. They lower their cost structure while keeping quality high. It ensures that top athletes salaries are in check because they truly need to be twice as good (or 10x as good) to be paid millions of dollars. Which makes game tickets, jerseys, etc affordable to more fans who in turn buy more tickets, fan paraphernalia, etc. Yes indeed the pool of players is set (at all of humanity) but the wealth generated from quality entertainment is not capped (or capped at the leisure money of a market). Those sports leagues are always looking to expand their market and keeping costs low is one major strategy to that.
- gjm11 13y ago
  I agree that liquidity and information aggregation are benefits to society. I just don't think that they're what a hedge fund is getting paid for, and don't see any particular reason to think that the pay of hedge fund managers is (or should be) justified by those benefits. I didn't say, didn't mean, and don't think, that the stock or futures markets are zero-sum games. I think that some things that happen in those markets are very close to zero-sum. And, for the avoidance of doubt, I am not objecting to the existence of hedge funds nor to (most of?) what they do. It is unclear to me how the activities of our hypothetical sports talent-spotter actually have the beneficial effect you describe. If she works for team A (and not for team B) then what happens isn't necessarily that A gets equally good players by spending less; more likely A has a fixed budget and gets better players, while B spends the same as before and gets worse players (because more of the good ones are now being taken by A). The overall quality of play stays about the same -- the teams, collectively, have the same players. The overall spending stays about the same -- each team has whatever budget it has. It's just that A is now doing better relative to B. I'm sure there is a bit of overall benefit. For instance, the talent-spotter's activity slightly drives up the relative compensation of the better players, which means more correlation between pay and performance, which might eventually mean slightly better selection of who gets into professional sports in the first place, which would actually lead to better play overall. And perhaps making A do better relative to B means that in future A will have more budget and B less, and maybe that benefits everyone somehow. But this all seems like second-order stuff, and again it isn't what the talent-spotter is being paid for.
nickff 13y ago
>"If you weren't doing your job, the net value of the equities and derivatives markets would be pretty much exactly the same; it's just that it would be parcelled up a little differently." This claim really does require a citation, because it is quite significant, and is not necessarily true. Bethany McLean (author of "All the Devils are Here" and "The Smartest Guys in the Room") once made a great point about people shorting stocks; she said that they are the only ones looking for bubbles, excesses, and other problems in the stock market and asset pricing in general, their vigilance helps to pop the bubbles sooner than they would otherwise, thus reducing the impact of the tumult or recession which may follow.[1] I think this is a valid point, and you should take this kind of action into account when judging these market participants; their motives may not be beneficent, but they are still fulfilling a necessary task. [1] http://www.c-span.org/video/?296214-1/qa-bethany-mclean- http://www.c-span.org/video/?296214-1/qa-bethany-mclean-

by gjm11 13y ago

holograham 13y ago

Everyone loves to cite Hedge Funds. I am no hedge fund expert but you mention a few benefits that they do provide...liquidity and information aggregating (which has derivatives such as market signalling) are very much benefits to society. What good is a stock to anyone if there isnt a liquid market to sell into (and yes the buyer should make money on that transaction). A personal hunch is that some hedge funds are breaking some laws but largely the hedge fund industry provides a net benefit to the economy. The stock market and futures markets are NOT zero sum games. They provide capital, incentive structures, and a host of other benefits to both businesses AND everyday people (like you who has a retirement fund with lots of assets that pass through hedge funds). Businesses can (and do) grow and appreciate your assets (and hedge fund assets), etc etc. Your second example is dead wrong. Identifying undervalued resources is an enormous efficiency gain in a market. They lower their cost structure while keeping quality high. It ensures that top athletes salaries are in check because they truly need to be twice as good (or 10x as good) to be paid millions of dollars. Which makes game tickets, jerseys, etc affordable to more fans who in turn buy more tickets, fan paraphernalia, etc. Yes indeed the pool of players is set (at all of humanity) but the wealth generated from quality entertainment is not capped (or capped at the leisure money of a market). Those sports leagues are always looking to expand their market and keeping costs low is one major strategy to that.

gjm11 13y ago
I agree that liquidity and information aggregation are benefits to society. I just don't think that they're what a hedge fund is getting paid for, and don't see any particular reason to think that the pay of hedge fund managers is (or should be) justified by those benefits. I didn't say, didn't mean, and don't think, that the stock or futures markets are zero-sum games. I think that some things that happen in those markets are very close to zero-sum. And, for the avoidance of doubt, I am not objecting to the existence of hedge funds nor to (most of?) what they do. It is unclear to me how the activities of our hypothetical sports talent-spotter actually have the beneficial effect you describe. If she works for team A (and not for team B) then what happens isn't necessarily that A gets equally good players by spending less; more likely A has a fixed budget and gets better players, while B spends the same as before and gets worse players (because more of the good ones are now being taken by A). The overall quality of play stays about the same -- the teams, collectively, have the same players. The overall spending stays about the same -- each team has whatever budget it has. It's just that A is now doing better relative to B. I'm sure there is a bit of overall benefit. For instance, the talent-spotter's activity slightly drives up the relative compensation of the better players, which means more correlation between pay and performance, which might eventually mean slightly better selection of who gets into professional sports in the first place, which would actually lead to better play overall. And perhaps making A do better relative to B means that in future A will have more budget and B less, and maybe that benefits everyone somehow. But this all seems like second-order stuff, and again it isn't what the talent-spotter is being paid for.

nickff 13y ago

>"If you weren't doing your job, the net value of the equities and derivatives markets would be pretty much exactly the same; it's just that it would be parcelled up a little differently." This claim really does require a citation, because it is quite significant, and is not necessarily true. Bethany McLean (author of "All the Devils are Here" and "The Smartest Guys in the Room") once made a great point about people shorting stocks; she said that they are the only ones looking for bubbles, excesses, and other problems in the stock market and asset pricing in general, their vigilance helps to pop the bubbles sooner than they would otherwise, thus reducing the impact of the tumult or recession which may follow.[1] I think this is a valid point, and you should take this kind of action into account when judging these market participants; their motives may not be beneficent, but they are still fulfilling a necessary task. [1] http://www.c-span.org/video/?296214-1/qa-bethany-mclean- http://www.c-span.org/video/?296214-1/qa-bethany-mclean-