Update: There was a lot of response to this post. I’m going to write an update based upon the response I recieved.
Which of these two is doing more good for the world? Alice is a surgeon who earns $250,000 a year, occaisionally donating work at a free clinic. Bob is a hedge fund manager who makes several million dollars a year helping people even richer than himself to make more money. A week ago I would have answered that the doctor, without question, is making the world a better place, to an extent much greater than the analyst is. I will say now, with certainty, that it is most definitely Bob, the hedge fund manager, who is doing more to make the world a better place. Read on!
How do you really quantify the extent to which someone helps the world? Let’s suppse we give everybody a happiness index; a number between 0 and 100. If Alice does something good for Bob, and Bob is happier as a result, Alice will have changed bob’s happiness index. The total good Alice does for the world is the sum of all the changes she exerts on other people’s happiness indices.
How could Alice be changing people’s happiness indices? Let’s assume that she can perform surgey on 10 people a day, and that these surgeries are life changing; so amazing that they increase someone’s happiness index by 100. That means every year, Alice causes a net change of 365,000 hapiness units every year.
How could Bob be changing people’s happiness indices? Obviously, he’s making the wealthy people happier by earning them more money. The thing is, that’s not really important to the analysis. Hedge Fund managers and other people in financial positions earn their money by exploiting inefficiences in the market. It sounds complicated, probably because it is.
An example should help make things more clear. Suppose Bob thinks a hurricaine is going to hit Houston. In order to keep his fund profitable, he’s going to try to get rid of assets related to houston. This action on the part of the fund manager creates a small effect on the way other people look at houston. The falling stock prices of houston-based companies might pursuade other buisnesses to look elsewhere to finish contracts. They might factor into the models retailers use when decided how much invetory to order, and as a result of Bob’s decisions, the stocks might not be shelved quite as full. A new college graduate looking for work might see the falling stock prices and decide to work elsewhere. None of these other decision makers are aware that Bob thinks a hurricaine is going to hit Houston. All they see is that the price of stocks in houston related companies have gone down.
If the hurricaine does hit Houston, then all of the other people who made decisions as a result of Bob’s decision are better off. Buisnesses that contracted work out to houston-based companies will now have to wait much longer and pay higher costs to get their work done. Retailers will not have lost as much money because their shelves will have been less full upon being overturned by the gale winds. That new college grad who decided to work elsewhere won’t really be effected by the Hurricaine at all. All of these changes will, for the most part be slight. In effect, when Bob decides what funds to buy and what funds to sell, he’s making small decisions about the most efficient allocation of resources. When Bob sees that Houston’s going to get hit by a hurricaine and moves his funds elsewhere, he’s moving resources away from somewhere they ought not be allocated. That decision by Bob can save a small amount of money for many different people. These savings will be reflected by lower prices and higher wages. Becuase the economy is so interconnected, it is probably safe to assume that Bob is helping everyone in the country, and even quite a few people out of it. To make things more fair for Alice, suppose Bob increases the happiness index of 100 million people, less than a third of the country, by an average of one tenth of a happiness unit. That means bob has contributed 10 million happiness units to the country. It would take alice almost thirty years to add this much happiness to the world.
It took me a lot of thinking to come to this conclusion. I suspect that most people would choose Alice over Bob, largely because, like me, they have no idea how the world of finance works. To them, it’s just a way for rich people to get richer. But the fact is, with so many people in the world, helping everybody out a tiny amount does a lot more good than helping a few people a whole bunch.
I can’t imagine someone saying that they wanted to go into finance because they wanted to make the world a better place, but I think that in light of the math it’s impossible to deny that financial analysts and fund managers do a lot more for the world than doctors, teachers and engineers. I’m not saying that the world would be fine without doctors or teachers or engineers. The world needs people to work in every profession, and eliminating one would certaintly make things worse. The good done by financial analysts, however, is very different from most other careers. You definitely notice when a doctor saves your life, or a teacher inspires in you a love of a subject. When the cost of gas is slightly lower and you save a couple of dollars every year, however, you probably don’t even notice. Helping many people a little bit at a time turns out to be a really thankless job, unless you count the millions of dollars a year in pay. Somehow, I think they sleep well at night.
