It’s not about values, it’s about incentives

One of the paradoxes I tried to highlight in my recent review of finance books was that it was paradoxical to claim simultaneously that capital markets were becoming more efficient even as the financial sector hoovered up an ever greater share of profits and skilled human capital. So I’m pretty sympathetic to the argument that market incentives in the United States are too heavily skewed towards a career of high finance.  

Skewed incentives, however, are not the same thing as skewed values. Unfortunately, the New York Times stable of columnists is blurring the distinction. For Exhibit A, let’s look at this segment of Tom Friedman’s column from the weekend: 

We had a values breakdown — a national epidemic of get-rich-quickism and something-for-nothingism. Wall Street may have been dealing the dope, but our lawmakers encouraged it. And far too many of us were happy to buy the dot-com and subprime crack for quick prosperity highs.

Ask yourself: What made our Greatest Generation great? First, the problems they faced were huge, merciless and inescapable: the Depression, Nazism and Soviet Communism. Second, the Greatest Generation’s leaders were never afraid to ask Americans to sacrifice. Third, that generation was ready to sacrifice, and pull together, for the good of the country. And fourth, because they were ready to do hard things, they earned global leadership the only way you can, by saying: “Follow me.”

Contrast that with the Baby Boomer Generation. Our big problems are unfolding incrementally — the decline in U.S. education, competitiveness and infrastructure, as well as oil addiction and climate change. Our generation’s leaders never dare utter the word “sacrifice.” All solutions must be painless. Which drug would you like? A stimulus from Democrats or a tax cut from Republicans? A national energy policy? Too hard. For a decade we sent our best minds not to make computer chips in Silicon Valley but to make poker chips on Wall Street, while telling ourselves we could have the American dream — a home — without saving and investing, for nothing down and nothing to pay for two years. Our leadership message to the world (except for our brave soldiers): “After you.”

For Exhibit B, here’s David Brooks from Friday:

After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place.

The shift is evident at all levels of society. First, the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.

It would be embarrassing or at least countercultural for an Ivy League grad to go to Akron and work for a small manufacturing company. By contrast, in 2007, 58 percent of male Harvard graduates and 43 percent of female graduates went into finance and consulting….

[T]he value shifts are real. Up and down society, people are moving away from commercial, productive activities and toward pleasant, enlightened but less productive ones. 

OK, I’m calling a Vizzini foul on the word "values" here. 

A broad spectrum of American saved less over the past decade because they were responding rationally to massive asset appreciation. High-skilled Americans went into finance because it paid remarkably well. Americans didn’t do these things because they suddenly got lazy. Indeed, the opposite was true, if U.S. labor productivity figures are any guide. And while much calumny has been heaped upon Wall Street in the past few years, is anyone actually accusing bankers of either not working hard enough or not putting in enough hours?

Americans haven’t suddenly gotten contemptuous of either saving or manufacturing. They were responding to the price signals that the market communicated to them.

This is great news, by the way. Changing values is really, really hard. Shifting material incentives is not exactly easy, but it’s much more doable than fomenting a values shift.

I suspect that ranting writing only about incentives and not about values makes better copy. That said, I’d prefer it if the most influential op-ed columnists in the land correctly diagnosed what ails the American political economy rather than saying "distemper" or "an imbalance of humors."