Has the free market been over-pricing wages of Wall Street professionals for more than half a century?
Finance is an important element of the global economy, and involves the investment of cash and other assets, usually with some type of risk, with the chance of returns that exceed that initial investment. Most large national and global firms engage in finance on some level, regardless of their primary business, and this cycle of investments and payouts is the central engine of most modern economies, most notably seen in stock and bond markets.
Answer and Explanation:
This is an interesting question that gets at the heart of criticisms about the "free market" idea of organizing an economy. When we consider how the free market organizes itself, we tend to use words like "optimal" and "efficient." But what do we mean by that? What is the free market optimizing?
In most cases, it's optimizing income and earnings. There's nothing inherently wrong with this, but what it means is that this profit will come at the cost of other types of positive economic action and growth. When we think about Wall Street executives, we sometimes think of sleazy men in suits who are simply middle men, lining their pockets with the hard work of "real" companies. But this is a mistake. In our current regime, the economy is driven by finance and investment. Companies that have yet to make a profit for themselves are valued at IPOs in the billions. This investment does make money for people, however, and these profits go to shareholders. What's important to realize is that the movers and shakers of the American economy, whose collective actions make up the so-called invisible hand of the free market, are obviously interested in maximizing their own returns on investment. Because of this, they need shrewd, intelligent, experienced investors to handle their assets and maximize their portfolio income.
Because investment and finance is the heart of our economy, this means that the people who manage these things will be in top demand and the best investors will require the best compensation. This is the market pricing Wall Street professionals at a reasonable value for what they provide, which is returns to the people whose investments, in turn, propel the US and global economies. We could argue that this economic regime is not helpful for the majority of US citizens, or that the single-minded focus on financial returns is destroying durable growth-based business, but it's important to understand that the market is not necessarily over-pricing these professionals just because it's not what we think the economy needs. The free market is based on real people making real decisions, usually in their own self-interest, and for now finance is the name of the game.
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from Corporate Finance: Help & ReviewChapter 8 / Lesson 7