One might be led to ask, how many is enough, and how we might go about encouraging our best and brightest into careers that serve others instead of rent-seeking. Two generations ago, many became doctors, engineers and teachers.
- What changes in public policy will reduce the returns now funneled so generously to the rent-seekers, leaving more for the folks who labor in the productive sectors of the economy?
- Why do we pay so little attention to rent-seeking?
- Why is rent-seeking taught to our MBAs, but the impacts of rent-seeking not taught to our liberal arts, social sciences, political science, public policy students?
- D'ya think that the rent-seekers might really really like it this way??
Shiller: Too Many Graduating Seniors Go Into Finance
Too many of the our brightest people may be choosing careers in finance,
undertaking economically and socially useless — and even harmful —
activities, Robert Shiller, a Yale University economics professor,
writes in an article for Project Syndicate.
A survey of elite U.S. universities showed that 25 percent of Harvard graduating seniors, 24 percent of Yale graduating seniors and 46 percent of Princeton graduating seniors were going into financial services in 2006, notes Shiller, co-creator of the Case-Shiller home price index.
While those proportions have fallen more recently, he explains that might only be a temporary effect of the financial crisis.
And more are going into speculative fields like investment banking rather than traditional finance such as lending, he says, citing a study by Thomas Philippon of the Stern School of Business, New York University and Ariell Reshef of the University of Virginia.
We need some traders and speculators, Shiller concedes, as they provide some useful service — sorting through information about businesses and trying to judge their real worth.
"But these people's activities also impose costs on the rest of us," he explains. Much of their speculation and deal making is "pure rent-seeking."
"In other words, it is wasteful activity that achieves nothing more than enabling the collection of rents on items that might otherwise be free."
Those working in speculative finance fields are like a feudal lord installing a chain across a river to charge fees on passing boats, he argues. Making no improvements to the river, the lord does nothing productive and helps no one but himself. Few people will use the river if enough lords put chains across it to collect fees.
Those working in speculative fields, he says, "skim the best business deals, creating a 'negative externality' on those who are not party to them."
For example, they can reject bad assets, such as subprime mortgage securities, offloading them to less knowledgeable investors.
The repeal of the Glass-Steagall Act, which blocked commercial banks from investment banking, allowed bankers to act more and more like those feudal lords collecting fees.
"In fact, the main advantages of the original Glass-Steagall Act," he says, "may have been more sociological than technical, changing the business culture and environment in subtle ways. By keeping the deal-making business separate, banks may have focused more on their traditional core business."
A paper by economists at Columbia University and Princeton published on the Social Science Research Network website showed that over-the-counter (OTC) traders allowed informed dealers to extract excessive rents and to undermine organized exchanges by "cream-skimming" the best deals.
"The informational rents in OTC markets in turn attract too much talent to the financial industry, which would be more efficiently deployed as real-sector entrepreneurs," the paper asserts.
Plus, OTC dealers' rents tend to increase "as there are more informed dealers, because the greater cream-skimming by dealers worsens the terms entrepreneurs can get for their assets on the organized exchange, and therefore their bargaining power on OTC markets."