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Comment by soup10 | Hacker News Reader

"Those who work in banking, venture capital, and other financial firms are in charge of allocating the economy’s investment resources. They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task."

The simple flaw with this idea is that wall street is squarely focused on making more money. Not making society better. Not allocating capital effectively. Not even on creating wealth(which is distinct from money). The single guiding equation for all deals and transactions is "how can we make as much money as possible with as little risk as possible and also stay out of jail".

That wall street occasionally invests in companies that actually do create wealth and allocate capital to the betterment of society is more a case of broken clock sometimes being right.

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>on making more money. Not making society better. Not allocating capital effectively.

The simple flaw in your argument is that you assume that these things are usually mutually exclusive. In fact, it is typically the opposite; they usually are one in the same. The things that are "best" for society also tend to make the most money. People pay for things because they want (or need [2])them, because it makes their lives better [1]. To extend this to investments, smart investments are investments to companies who will eventually make money, because their products are worth buying.

Investing money is an incredibly rewarding but very risky activity. Smart investments will make upwards of 100x ROI, bad ones will lose every penny. Having smart investors is an imperative to maximizing the usefulness of money. Just look at Solyndra ;)

1. since people are having trouble understanding how to interpret this sentence let me clarify. "Better" is completely subjective. For the purpose of making buying decisions, "better" is whatever the person making this buying decision defines as "better" for them. All in all the point of "better" not really being "better" is irrelevant (as it the distinction between want and need). If you want to make the argument that investors are investing in companies that actually make our lives worse, then the solution is typically banning those companies and products directly, not banning investments to those companies.

2. thanks to /u/revscat (yes I know this is not reddit)

To me, the problem with this argument is that there is, in fact, no connection between what is best for society and what is profitable. In theory, there should be, but it isn't an intrinsic thing, it's created deliberately and must be maintained.

When you have the money, you make the rules. That sums up the problem. Markets are not magical creatures, they exist within the context of social rules and norms. Selling human beings was once seen as rather profitable. Then society decided that selling human beings was wrong, even though it was profitable. You clearly understand this, we banned slavery, we didn't just ban investing in slavery-related businesses.

What I think you are missing is that there are a ton of things that are between "good for society" and something along the lines of slavery that is clearly a bad thing. The problem with these middle "bads" is that they aren't bad enough to be universally and energetically rejected.

This means that there is plenty of room for people with money to get these things made legal, or kept legal, and it is these things that often seem to be more profitable than other, more socially beneficial, activities (possibly because fewer people are morally willing and able to do them). I think of this sort of thing as "meta-competition" because it is competition among those with money to most efficiently turn their money into influence and power that can be used to allow them to make even more money.

As long as money can be converted to power, you can't assume, as you have done, that whatever is legal is socially beneficial (or at least not socially destructive).

> Then society decided that selling human beings was wrong, even though it was profitable.

More interestingly, society decided that slavery was wrong after it became unprofitable. The same goes for child labor.

"More interestingly, society decided that slavery was wrong after it became unprofitable."

Someone should really inform the human traffickers.

Free market economies routinely bury slave based ones. If slavery was more profitable, it would be the other way around.

Modern human trafficking is prevalent in industries that are themselves illegal, so there isn't free market competition.

The problem with slave labor is considerable expense is necessary to guard them, and the slaves not only do as little as possible but they will actively sabotage the work.

We, collectively as a species, managed to find a path in which slavery was no longer necessary - for the first time in human history.

Yes, the cost was huge - that's why stupid things like the Fugitive Slave Law and the Dred Scott Decision happened, leading to the failure of Whiggish Moderation and, well, you know the rest...

Not so much. See "Time On the Cross". Very profitable, cotton slave plantationing was - it was the feedstock to the massive growth in British textiles, the Silicon Valley of its day.

What drove slavery into the ... juggernaut it became was more that financial panics in the US ( and also even more globally ) destroyed so much cash value that slaves were all that was left of value when the tide went out.

I recommend the horribly-titled "A Nation of Deadbeats". It's narrative history, but wow its a good story. And at the same time, I bet financialization is completely critical to having the sort of standard of living we have now.

Child labor only became an issue when adult labor began to be idled.

> The things that are "best" for society also tend to make the most money. People pay for things because they want them, because it makes their lives better

The things that make the most money are the things most desired by the people with the most money to spend. That group of people can only be equated with "Society" if that group of people does in fact form the majority of the society. That's why a large middle class is so important, and why growing differences in income are so threatening.

The things that make the most money are the things that money has built the best marketing for.

People pay for things they want out of the choices they are aware of.

"Analysts" - politicians, Joe College, HN posters - tend to use an overly simplified economic model, based primarily on the "Turn Lemons into Lemonade" 3rd-grade economics primer they read as a child.

Certainly - and that's not even entering the argument that what people desire and what is good for them (us) are not the same thing; especially in the long term (which imho is the only sane way to consider whether something is good or bad for society).

"Things that are 'best' for society also tend to make the most money."

You can make an awful lot of money in the short term doing things that are horrible for society. Look at natural gas extraction by fracking - are we saying that polluting the water table, the air and ground in an is best?

Or look at the defense industry. The make a lot of money too. Is taking our great intelligence and devoting it to weapons and destruction best for society?

Best might be best for a small group, but is rarely best for society.

> Look at natural gas extraction by fracking - are we saying that polluting the water table, the air and ground in an is best?

Yes, it's better than the alternatives. Cleaner and less CO2 than coal, cheaper than solar/wind/nuclear. It has never polluted the water table. For North American energy, what's better?

> Or look at the defense industry. Since the power WWII superpower era, death and destruction has gone way down. Overwhelming force and vastly superior weapons are making large scale wars a thing of the past. We are actually living in the most peaceful time of human history, from a bodycount perspective.

I agree too much money is spent on defense, but thats a political problem not a banking/investment problem.

Your argument is that it's cheaper than solar, wind, and nuclear, and that makes it better?

Isn't that the opposite of things that are best for society making the most money, which was your original point? Wouldn't society be benefited almost infinitely more if it could harness an almost infinite supply of energy?

It has never polluted the water table? Oh really?

http://www.usatoday.com/story/money/business/2014/01/05/some...

That's the first hit on a google search.

I live in western PA. I follow this issue closely. I care about my and my families health.

Your article simple says there are reports of pollution. Pollution != polluting the water table. All fossil fuel extraction creates pollution.

Hundreds of studies of been done, both public and private about fracking's risk of getting close to the water table. It's never proven to be true. The only study that suggests its possible is the Duke study, but it doesn't prove that it has happened.

This is a hot button issue around here. The water is monitored closely, there are no fracking chemicals showing up in the water tables.

Or hoarding assets such as housing. That's why the baby boomers are all rich in the UK, while anyone under 30 hasn't a hope in hell of buying a house by themselves. The restrictive planning policies exaggerate the situation.

> People pay for things because they want them, because it makes their lives better.

More often than not, people pay for things because they must. Food is not optional, nor is clothing, shelter, or health care. For the majority of American population gasoline, auto insurance, and related transportation expenses are similarly non-optional. Similarly electricity and water. For much of the population you can add in child support or day care.

There is not much money, if any, left over for discretionary spending.

The point is that you seem to believe that all spending is voluntary. This is flatly not true, and smacks of willful ideological naïveté.

The distinction between want and need and likewise between discretionary spending and mandatory spending is completely irrelevant to the point I was making. I'm not even sure how to respond.

The point is that many people are wasting money on gasoline because they're forced to by the way infrastructure currently works, since you need a car to drive to work and you need to drive to work if you want to eat. Not because they actually prefer spending money on gasoline and hate public transit, say, and this is their vote for "I love cars and buying gasoline". Most individuals have very constrained choices, and the emergent effects of those choices are not in any necessary sense optimal for society. Jumping out of their short-term local optimum ("driving to work is better than losing my job, so I gotta drive") to other preferences ("it'd be nice if I could get to work without owning a car") is often non-trivial and requires large-scale coordination (such as through political or cultural change). On the other hand, they might love driving! But the mere fact that they spend money to drive to work doesn't prove it.

If you're interested in complex-systems theory, you can try out implementing various simple simulations yourself. It's actually pretty hard to come up with one, even with hilariously optimistic assumptions, where each agent individually optimizing actually leads to a globally optimal outcome! It's even pretty hard to come up with one that works in any reasonable sense at all: you quickly get swamped by system-endogenous effects and all sorts of weird oscillations and attractors that have nothing to do with the utility function. Fun times living in emergent-effects-land!

Sounds really interesting! Do you have any pointers on how to get up to speed on these topics?

> The distinction between want and need and likewise between discretionary spending and mandatory spending is completely irrelevant...

...when you don't have the mental apparatus necessary to perceive it. BTW, I'm not referring to intelligence.

It is difficult to get a person to understand something, when their ideology depends upon their not understanding it!

(With apologies to Upton Sinclair)

1. "rational" self-interest

2. (magic happens)

3. the greater good

What I've noticed is that two categories of people believe in such schemes: libertarians, and primary school children.

This doesn't happen in a vaccuum. You need the law, too. The Anarchist version of Libertarianism is mostly speculative fiction, although it can be good spec. fic. David Friedman's one of the best people I've ever read.

The "magic" is called "consumer surplus" and it's one of the few defensible things in macroeconomics. It's quite real.

The paradox is that explicitly trying to do things for the greater good very often backfires - although not always.

But as a "control law" - in the sense of running a distributed, massive system - self-interest produces measurably better results than Soviet-style central planning. This rests on information-theoretic foundations and it's early days yet. We're pathetic at macroeconomics, and it's a lot captured by both whim of the moment.

Of course, now we have a lot of hybrids, some that work much better than free markets, some that don't. That's quite new, assuming nothing bad happens to them.

> People pay for things because they want them, because it makes their lives better.

Nope. I could really want a cigarette, bottle of alcohol, or a large cheese burger with 2 patties, doesn't mean it would make my life better. In fact, it's likely to make my life worse. So, really there isn't a flaw in grandparent post's argument, the things 'best' for society really don't tend to make the most money.

Give me one example of a successful company that is bad for society and I'll give you 100 that are good.

p.s. not actually, I should be working.

p.p.s see my note on my above comment for a proper response to this.

Warren Buffet likes to argue that he does not make risky investments. With that in mind and under the light of how profits are made by the financial sector, it is pretty clear that when they make risky investments it is mostly with the client's money. The rest is just friction, like a toll booth.

This is the key point. The wealthiest people on Wall Street are glorified middlemen gambling with somebody else's money and skimming cream off the top.

> People pay for things because they want them

Stop right there. With jobs moving abroad and wage that is not going up, how would people pay for things they want.

And that's as it should be. State-allocated capital without a private finance sector has failed miserably, like in terms of millions of people starving, everywhere it's been tried.

There's a middle ground here. "Well-regulated market". Communists don't understand the market part (see Great Leap Forward) and Libertarians are idolators who think the market will automatically settle into the best thing for society if only we didn't have a government (see Somalia).

That's a wild overstatement. There have certainly been massive socialist famines, but there's also been massive capitalist ones (see: colonies of the UK in the 19th century). And socialist famines don't happen everywhere socialism is instituted (people did not starve en masse in East Germany), and in many of the places where famine actually did occur, it's probably better to view it as a success of central planning (in the limited sense that mass death was a purposeful, desired outcome, not something coming about because of economic incompetence).

Amartya Sen has done a lot of research on this: the big factor that determines whether famines happen or not is less planning than it is democratic political structure.

There's a spectrum, obviously, but the post I was responding to, as phrased, seemed to be oversimplifying and basically arguing against letting the invisible hand, defined as a bunch of selfish a-holes creating market forces, work at all. (The poster clarified downthread that that's not what they meant, don't want to misrepresent them here.)

I don't disagree with your conclusion about political structure, but if we're talking about pure collective planning with no reliance on private allocation of capital, that's never actually been done with a democratic political structure anyplace larger than a kibbutz. Democratic socialism, IMO, is much closer to well-regulated capitalism than it is to communism.

Obviously? This was your assertion:

State-allocated capital without a private finance sector has failed miserably

It is completely wrong. It is a lie. You weren't obviously talking about a spectrum, you were talking crap.

Can you show me any success stories of absolute communist states with no private sector? Just one, maybe? Who's lying?

The spectrum comment referred to the socialism/communism terminology, with socialism generally seen as involving a heavily-regulated free market and large public sector, as opposed to communism where the private sector is outlawed. A spectrum.

Can you show me any success stories of absolute capitalist states with no market regulation? Just one, maybe?

Of course not. My whole point was about middle ground, a "well-regulated market".

I believe it is necessary at this point to emphasize that this is a discussion between real people, where logic is a bit fuzzy, and metaphor is sometimes employed. It is not a computer code that would fail to compile if even one detail was not true in a literal fashion.

Central planning in Russia was really incompetent and food shortages in Russia (not Ukraina) while Stalin was in power were often result of incompetence. In short, they used the fields in a wrong way.

Incompetence is a matter of degree, as is famine. I'd be the last to say that Soviet economic competence was close to ideal. Indeed, it was significantly worse than even Tsarist economic management.

But food shortages aren't the same as famines, and in the famines (assuming we're talking about the famines of the early 30s), economic incompetence wasn't the primary driving factor, although this may be simply a case where we simply have different definitions of incompetence. Stalin explicitly wanted millions of Ukrainians to die as collective punishment for not being sufficiently red, and it's fair to say that he thought it was better to have a dead peasant than a peasant not part of a collective farm, where they and all their activities could be made easily legible to the Soviet State and placed under bodily control.

Those millions of deaths racked up could have been avoided if Stalin had wanted to, even within the rubric of central planning. It's really not even a matter of the famine being something that could've been "averted": the famine wasn't a natural occurrence but something engineered.

Central planning, particularly central planning under a dictatorship, being highly conducive to psychopaths killing millions of people is something I'd agree with, but it needs explicit argumentation.

Most of the self-proclaimed libertarians I have spoken to typically resort to 'No True Scotsmans' whenever you bring up a counter to their utopia. I say "utopia" because to them, a libertarian future was an insulated fantasy in which they controlled how everyone behaves.

A significant private finance sector present in the 1920s in the US did nothing to prevent the great depression, where millions of people starved.

And we passed a bunch of regulations afterwards which reduced the possibility of that happening again.

Regulations which, I believe, have largely been repealed.

It's all a heck of a lot richer story than that. If she's not just a curse word by now, Amity Schlae's (sp?) book on the Depression isn't bad at all.

I dunno; all the bright-line false alternative stuff doesn't work. Economic history is still interesting.

I believe it turns out that the regulation that got repealed probably would not have mattered much other than possibly setting up transparent exchanges for derivatives, and that seem speculative as well. YMMV, IMO, all that.

The future looks "bright" and full of "hope".

A good argument can be made that it's the 1914 takeover of money creation by the government that led do the financial collapse in 1930.

I'm not advocating more government programs or central planning. I think it's more of a cultural issue and balancing social responsibility with profits.

Is China a well regulated market? Or are they communists who don't understand markets?

China's a big place, a lot of people, several sets of rules depending on where you are and I don't even know which decade you're asking about.

IM-uneducated-O their national decision makers currently do a better job than ours on economic policy (they actually invest in infrastructure and aren't in bankers' pockets on the plus side, a bit too cozy with leading industrial firms on the minus side), while local government there tends to be very corrupt by our standards.

So maybe state-allocated capital doesn't always lead to mass famine?

Are you just trolling? My comment made multiple references to the private sector that currently exists in China.

You're aware that there's a healthy private sector in China currently, right? The name "Deng Xiaopeng" ringing any bells? They've had grains futures markets for 25 years now. Not state-allocated capital for food. Seems kinda implausible that you just missed that one.

I'd suggest reading a newspaper sometime. Maybe a history book or two.

Ahh I see. So your definition of the famine-inducing kind of state capital allocation is so narrow as to only include those instances where famine actually occurred. State allocated capital is totally fine then, so long as some of (undetermined amount?) a country's economic allocation of capital is governed by market forces?

No idea why I'm feeding you. Here's my quote, from above, which you could easily read yourself: 'State-allocated capital without a private finance sector has failed miserably'.

I didn't claim that the existence of any state spending at all causes famine. That would be ridiculous to claim. Does US highway spending mean that we're undergoing a famine RIGHT NOW? I mean, the human race would be extinct if that claim held true, given that governments have generally existed most places.

What's your angle, here? What on earth are you trying to prove? To who?

I don't think the OP was arguing for a system "without a private finance sector". He was just arguing for a "middle ground" where effective regulation could cut the excessive of the private finance sector.

I would say the flaw is more fundamental.

...which companies and industries will shrink and which will grow.

If there's no demand for the product or service, where is the business and financial model?

The financiers don't determine what will turn a profit. They only predict what will return a profit. A market that signals growth and large profits will attract more investment. Investing in a market that doesn't return a profit is something financiers try to avoid. The market shapes the investors decisions, and the decisions shape the market.

This isn't a complaint about markets and investors, it has nothing to do with the companies or how any financiers determine the destinies of those companies.

Its about the unbearable amount of money they extract for the service they provide.

Individual advantage versus group advantage. ("Competition" versus "cooperation".)

It may not have a single, "simple" solution, but it is always worth keeping in mind -- necessarily so, I would argue.

Recently, we've had an extreme emphasis, in much of our (U.S., "Western") rhetoric, on the individual and competition.

However, such emphasis, in the extreme, does not scale too well.

One might argue that we are failing at scale, for some fundamental reasons.

    "Those who work in banking, venture capital, and other financial firms are 
    in charge of allocating the economy’s investment resources. They decide, in 
    a decentralized and competitive way, which companies and industries will 
    shrink and which will grow. It makes sense that a nation would allocate many 
    of its most talented and thus highly compensated individuals to the task."

This quote also stuck out to me to for two reason:

(1) First, yes, it's true that these individuals collectively allocate the capital in our nation (and other nations), but at no point has anyone made a convincing case that this is the optimal (i.e. global maxima) for the overall good of society. There are myriad alternative ways in which society could organize itself to better allocate capital. What evidence out there actually supports the status quo as the best way, especially considering that we've never really given support to any plausible/promising alternatives.

(2) Second, it matters not if you are the "most talented" individuals for the task if you don't act impeccably ethically. The only thing worse them incompetent people with good intentions are competent people with ill intentions. Wall Street if full of the latter, ensuring that their talents are going towards doing a remarkably good job at extracting rent from any of society's productivity gains.

The incentives for the financial sector are broken

"Bloated and inefficient, the financial sector is focused on hooking up bankers with large bonuses rather than matching savings with investment."

> That wall street occasionally invests in companies that actually do create wealth and allocate capital to the betterment of society is more a case of broken clock sometimes being right.

I don't think the two goals—greed and making society better—are necessarily orthogonal, as you seem to be asserting. The incentive structure just isn't set up correctly.

I agree completely. The justification of market liquidity and accurate resource allocation are in fact false. As this article clearly articulates. Rent is the primary justification for their involvement in the market. And again as the article accurately articulates. The Rent is Too Damn High!

(not to mention the brain drain on the labor markets, and the corrupting influence on politics, and the speculative instabilities, etc.)

The stay out of jail part isn't even part of the equation these days is it? Considering how many people are in jail for almost destroying the world a few years ago, I'll go out on a limb and say the chances of that are effectively zero.

There was outright fraud in some cases but, for the most part, the credit crisis was a systemic failure. It would be impossible to pin it on a few individuals.

I'm not advocating pinning it on a few individuals but rather a whole bunch of individuals. Compare the convictions for the recent fubar to the S&L crisis.

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