Monday, October 13, 2008

The Smart Money Bets on the House

In agreement with Fahreed Zakaria, Matt Yglesias sees the financial meltdown and its inevitable wave of "creative destruction" as an opportunity for keenly analytical types to shift their talents to more concretely-productive areas of the economy like science and engineering:

[I]n principle taking a large proportion of quantitatively skilled people and having them apply their technical chops to the financial markets could be a good thing if doing so ushered in an exciting new era of genuinely superior financial wizardry. But instead, Keynes observation that “The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll” seems just as true today as it was two or eight decades ago.
It's a nice thought, but I don't see the mechanism that gets us from here to there. Yglesias and Zakaria speak of the situation as though we have a planned economy under which sober minds will draw lessons from the recent collapses of speculative bubbles and direct young people to take up more practical pursuits, and the young people will accept the lessons and respond accordingly. But we don't live in that world. Gambling instincts or none, the "game of professional investment" can be expected to continue to attract large numbers of smart people because that's where the money is. They will see their task as identifying the next bubble in order to begin inflating it, and I see no reason to expect this search to fail -- there's always another bubble.

A person with any talent for turning large piles of money into very large piles of money by means of ingenuous parlor tricks (a.k.a. novel financial instruments) will always find someone willing to pay him handsomely to do so, irrespective of whether the work contributes anything of enduring or practical use.

The invisible hand has done what it does, and has long since wrought that mere things shall be made in other lands beyond the USA's shores. Here, we shall continue doubling down and tending to piles of money as the ancients labored over prized cows or beehives: hoping our incantations, schemes, rules of thumb, and inspired guesses can actually replace an understanding of the principles of reproduction.

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