Attack of the useless people

Recently, a friend of mine raised the possibility that to many smart Americans are going into finance instead of more "productive" occupations like science and engineering. Not so, I answered. First of all, finance isn't necessarily useless - channeling money to those who need it is a crucial part of economic and technological progress. The Soviet Union had plenty of scientists and plenty of inventions, and somehow it didn't lead to the enrichment of the people. Second of all, I asked, where's the evidence? How do we know that too many people are going into finance?

But after reading this article in The Economist, I'm starting to believe that my friend is right. Because there appears to be a very clear answer to my second point - a "smoking gun" that proves that there are too many financiers. That is the fact that most managed funds underperform the market. Everyone knows about the huge fees fund managers receive, but how many people know that they are getting paid to fail again and again? People would be better off sticking their money in an index fund, but they don't; they keep giving it to the fund managers, who promptly throw it down the toilet and collect a fee to do it.

That's called "free money." And to lots of smart people in America, free money looks like a damn good proposition. And every time a smart person leaves engineering or science (or even a more efficient area of finance) to take free money as a market-underperforming fund manager, America loses a little bit of productivity. As long as fund managers are getting paid to fail, we do indeed have too many people in finance.