Allocating talent productively

A retiring hedge fund manager, interviewed by the New York Times‘ Joe Nocera, reflects that his business

was part of this huge trend toward the celebration of wealth. Hedge fund managers overearned. It just became too easy. There has been a massive misallocation of human resources. I have so many smart guys here who were making seven figures. And I think it is a fair question to ask: what would they have been doing in 1948 — going into the foreign service? If Obama does anything, the best thing he could do is change a generation’s values.

The point is right on. A significant portion (though not all) of the activity that’s yielded huge incomes in finance over the past several decades has been, in effect, little more than high-stakes gambling — betting on which way asset valuations will move, devising new instruments and techniques for doing so and for collecting fees on the transactions, and convincing investors to pony up more and more money to fund such bets. Even setting aside the danger this can pose to the real economy, it would be good if less of our collective intelligence and effort were dedicated to these sorts of pursuits.

Yet while changing values is a worthwhile aim, I doubt it’ll do the trick. What’s needed is to shift the incentives, via regulation and/or taxes.

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