Goldman Sachs is giving out $16 billion in bonuses this year. Why do investment bankers and other Wall Street workers make such massive amounts of money? Well Arnold Kling, who sometimes teaches economics at GMU, has the most stupid explanation ever proposed for this phenomenon:
One would expect more people to go into investment banking and compete away those rents.
The market solution to income inequality would be more investment bankers. Why aren't there more investment bankers?
I am pretty sure that all of my daughters could master finance if they wanted to. Both economic theory and my wife are telling them that they should major in accounting, but none of them will do so. I may be naive, but I suspect that there are a lot of people who could raise their incomes by going into investment banking. They are not prevented from doing so, but they choose other careers as a matter of taste.
This leads to the hypothesis that wealth is becoming more concentrated because fewer people are focused on achieving enormous wealth. My daughters, by not competing, enable the people with investment banking jobs to earn high rents.
In short, the distribution of wealth represents differences in taste. Many people prefer jobs with less income and more of other characteristics.
How the hell can this guy manage to get a PhD in Economics from M.I.T., write a book about economics, and not have even the slightest clue about why there aren't more investment bankers?
No, it's not because people find finance boring. For every millionaire investment banker, there are dozens of finance/accounting/business major wannabes whos biggest wet dream is to join the ranks of the millionaire set. That's why, according to Princeton Review, "business" is the number one most popular college major.
The Wall Street industry makes huge amounts of money because they engage in cartel-like behavior to limit competition and limit the number of people coming into the industry. It's impossible to get a job in the best Wall Street career tracks unless you have stellar grades from a top graduate business school like Harvard (Wharton and Columbia are also good) and/or you have some sort of inside connections. And without a job in the right career track, you can never acquire the knowledge capital necessary to compete in the industry.
Why do investment bankers have to work 90 hour weeks? I suspect that one reason is to limit the number of investment bankers. Hiring twice as many people to work 45 hours per week would create twice as many people with the knowledge capital needed to compete in the industry. Also, perhaps the hazing approach creates a camraderie within the industry that bonds everyone together and prevents firms from engaging in competitive behaviors which, in the long run, would hurt everyone's profits.
Wall Street is a heavily regulated industry, and Wall Street executives donate millions of dollars to campaign funds of politicians. I'm sure if you look deeply into things, one would find that many of the government regulations exist not to protect the public but to protect the profits of the industry insiders. For example, the whole way that new offerings are sold to the public is an anachronism. Why not just list all the new offering on the internet, and let people bid on them via an automated market? Why do investment bankers need to extract a 7% shakedown fee for what technology could easily do for free? Why don't some firms compete on price and offer a lower fee? Because there's obviously an anti-competitive gentleman's agreement not to do that.
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Read my followup long essay: Investment banking vs. stucco.