Luigi Zingales Occupies Wall Street

May 6, 2015
Posted by Jay Livingston

Just one of those coincidences. Yesterday, the Times had a story about the enormous sums that hedge funders took home last year.

Last year, the hedge fund industry had returns of only 3 percent on average. . . But the top 25 managers still managed to earn $11.62 billion in compensation in 2014

Kenneth C. Griffin of Citadel. . . $1.3 billion. . .. James H. Simons of Renaissance Technologies was second with $1.2 billion, and Raymond Dalio of Bridgewater Associates was third with $1.1 billion. William A. Ackman of Pershing Square Capital was a close fourth, earning $950 million in 2014.

I know it sounds like a lot, but 2014 was an off year. That $11.62 billion was barely half what the top 25 hauled in the year before. I guess there’ll be some belt tightening.

The point though is that in an efficient market system like ours, people get what they are worth to the economy, don’t they?

“Does Finance Benefit Society?” That is the title of a paper or talk by Luigi Zingales, an economist who has had posts at Harvard and Chicago’s Booth School of Business. The paper is from January, but by coincidence it was discovered to me (hat tip: Dan Hirschman) the same day as the hedge fund story.

Here is the short version of Zingales’s answer to the question:

At the current state of knowledge there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society.

Zingales is no flaming radical. The right-wing website The Daily Caller says he is “an advocate of free market economics and limited government.” The trouble is that the hedge funders and bankers keep messing up those free market models with their rent-seeking and fraud.  (A table at the end of the paper summarizes cases of fines paid to the US Government 2012-2014. And those are just the ones where someone got caught.)

A couple of other quotes on the same theme:

If political power is disproportionately in the hands of large donors – as it is increasingly the case in the United States – why is the negative public perception of finance a problem? Rich financiers can easily buy their political protection. In fact, this is precisely the problem.

Many financial activities tend to have a private return that is much higher than the (perceived) social return.

Furthermore, I am not aware of any evidence that the creation and growth of the junk bond market, the option and futures market, or the development of over-the-counter derivatives are positively correlated with economic growth.

A pdf of the paper is here.

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