Saturday, April 11, 2015

A Tiny Addition to Mullainathan on Rent-Seeking in Finance

Sendhil Mullainathan has a nice piece in the Upshot on the mixed feelings he has about the popularity of financial careers among undergraduates at elite universities, especially among economics majors. I feel the same way, and as far as I can tell from my Facebook feed full of econ grad students and junior professors, Mullainathan's piece hit a chord in at least some precincts of the field.

But I want to add one thing to Mullainathan's list of the ways in which the finance industry makes money without serving the public interest, or in fact through actively harming it. And that is by financing payouts to shareholders. JW Mason's paper on this is a must-read. As Mason put it, finance was once a way of getting money into firms. Now it's a way of getting money out, into the hands of shareholders, who are overwhelmingly the already-wealthy. The more time I spend on inequality, the more important I think this dynamic is and the more obvious it becomes that this is the opposite of a functioning free market.

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