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Mises and Hayek also argued that because this knowledge is structurally dispersed, contextual and tacit, it cannot be aggregated by government planners and regulators (nor, it’s worth noting, by private actors).

So one problem facing regulators is that they lack the knowledge necessary to know what people value and how much, so in deciding what to regulate and how, they are acting on incomplete and often erroneous information.  By trying to override the market, they are substituting a less informationally-rich system for a more rich one.

about 75% of antitrust cases are initiated not by the government but by private firms unhappy with how their competition has behaved.  Private actors constantly engage in lobbying and rent-seeking for regulations that will benefit them and/or harm their competition.

For me, as an economist, the argument against a great deal of regulation is precisely that it harms the least well off it is trying to help and provides unwarranted privileges for those who need them least. 

 Economic systems are inherent unstable, dynamically evolving things.   In studying them, we are always studying a moving target.  To my mind, that makes equilibrium models less generally applicable than is often held to be the case.

First, I think the danger of governmental regulation goes beyond the mere possibility of "capture" of the regulatory apparatus by the powerful. The threat is not just this, but that once the authority to regulate is well-established, the state can use this and other economic tools to "buy off" various constitutencies until the opposition to state authority becomes too weak to prevent a very dangerous concentration of power.

Second, there is also a purely moral, but non-consequentialist, argument against regulation.

That suggests that human institutions - complexity of parts notwithstanding - often exhibit various aggregate patterns of behavior that correlate with measurable variables, and that can be understood and predicted with reasonable degrees of confidence, and thus that the outcomes of various kinds of higher-level global interventions can similarly be predicted with some accuracy.

There is no fundamental theoretical difference between states and other large human organizations that would for some reason result in the inability of states to successfully regulate significant fields of aggregate economic behavior as a result of micro-level calculation problems.

This is not a critique of market economics; it is simply a description of them. If we want a world with cheap (if uncomfortable) air travel and amazing smartphones, then bless the market. (Although it doesn’t hurt to remember that the smartphone, like the Internet that it surfs, depends in ways direct and indirect on government seeding.) If we want a world with productions of “Così Fan Tutte” and radiation treatments for clerical workers who get breast cancer, then submitting ourselves solely to the market is not the way to get them.

In these debates, it is the mixed-up liberal who is the actual pragmatist, seeing what works, while the free marketers are the slaves of a beautifully utopian line of thought.

Lots of things are unprofitable if you narrowly consider outlays and income—including most of our roadways. To say that the post office runs at a loss is to say that it subsidizes a system of conveyance and communication. This in turn makes possible trillions of dollars’ worth of enterprise. (The magazine business, for instance.) Nobody asks whether the Interstate Highway System is profitable, but if you did you’d have to point to its vast maintenance costs, which are in the billions, and mostly paid for by state and federal taxes. At the same time, of course, the system contributes substantially to national productivity. The right unit of consideration isn’t the road; it’s everyone who uses it, and how we benefit from its existence—its “externalities.” The same goes for public-transportation systems that alleviate the residential pressures on the big city, reduce traffic congestion, bring in employees, and enable a substantial amount of “value creation”—but none of that will ever show up on the balance sheets. Running at a loss represents the subvention of public goods.

These examples illustrate a broader point: some of the good things in life are degraded if turned into commodities. So to decide where the market belongs, and where it should be kept at a distance, we have to decide how to value the goods in question—health, education, family life, nature, art, civic duties, and so on. These are moral and political questions, not merely economic ones. To resolve them, we have to debate, case by case, the moral meaning of these goods, and the proper way of valuing them.

The difference is this: A market economy is a tool—a valuable and effective tool—for organizing productive activity. A market society is a way of life in which market values seep into every aspect of human endeavor. It’s a place where social relations are made over in the image of the market.

This nonjudgmental stance toward values lies at the heart of market reasoning, and explains much of its appeal. But our reluctance to engage in moral and spiritual argument, together with our embrace of markets, has exacted a heavy price: it has drained public discourse of moral and civic energy, and contributed to the technocratic, managerial politics afflicting many societies today.

“Statutes, passed by the government, allow for the creation of corporations, and anyone wishing to form one must fill out the necessary government paperwork and utilize the apparatus of the state in numerous ways. Thus, the corporate entity is by definition a government-created obstruction to the free marketplace, so the entire concept should be appalling to libertarians,”

Governments don’t “intrude” on free markets; governments organize and maintain them. Markets aren’t “free” of rules; the rules define them.

Atheists are skeptics, but atheist libertarians evidently check their skepticism at the door when it comes to corporate power and the self-regulatory willingness of corporations to act in the interests of the common good.

Corporations pollute, lie, steal, oppress, manipulate and deceive, all in the name of maximizing profit. Corporations have no interest for the common good.

In the 1970s, consumer protection advocate Ralph Nader became famous for helping protect car owners from the unsafe practices of the auto industry. Corporate America, in turn, went out of its way in a coordinated effort, led by U.S. Supreme Court Justice Lewis Powell, to destroy Nader.

Today America is the most income unequal among all developed nations, and we find ourselves here today not because of government regulation or interference, but a lack thereof.

The unilateral control that Wall Street and mega-corporations have over economic policy is now extreme, and our corporate overlords have seen to the greatest transfer of wealth from the middle class to the rich in U.S. history, while corporations contribute their lowest share of total federal tax revenue ever.

In crude political form, this Whiggish inclination toward progress was encapsulated in the functionalist view retailed by Norman Angell around the turn of the last century, which held that countries that traded with each other would develop economic self-interests too intertwined to justify war.

If markets had come to play a more prominent part in the industrial West, it was not because markets had just been invented. It was because social and political systems had evolved in which powerful elites were willing to tolerate institutions that diffused economic power and weakened the state at the expense of private enterprise. This was the core meaning of liberalism in its original formulation.

The Crash of 1929, the subsequent economic slump and, particularly, the duration of the Depression took most contemporaries completely by surprise. Indeed, the uniquely severe catastrophe of the 1930s is so unusual that modern analysts should be cautious in drawing lessons from it.

Conventional wisdom tends to treat President Hoover as a clueless advocate of laissez faire who refused to stimulate the economy in the dramatic downturn. Franklin Roosevelt, on the other hand, was the heroic leader who both saved the day and transformed the American economy through his promotion of the New Deal. Conventional wisdom is still very much with us.

Hoover did not advocate “do-nothing” policies.

Roosevelt’s interventions were neither as thorough nor as systematically revolutionary as they have often been portrayed.

Above all, FDR’s worst policies were animated by a desire to repress business, by distrust of competition and a general disdain for the market. Those were, of course, precisely the qualities that made his policies extremely popular. FDR’s economic policies scored mixed successes at best, but his political strategy succeeded by any measure long before U.S. entry into World War II, and subsequent generations have not ceased to conflate the former with the latter.

So thoroughly has the West taken for granted the triumph of the more abstract liberal nation-state that its denizens must remind themselves how fragile its origins were and how little emotional loyalty it has commanded.

Even in America, where visceral support for individualism and self-reliance remains strong, this has always been so. In good times, economic systems are supported by inertia and utilitarian compromise that appeal to the broad center. In hard times abstract convictions tend to melt away. The American preference for the free market is neither as common nor as “American” as many suppose.

Seen as a reversion to older habits, the odd mix of regulation, make-work, intervention, protectionism, nationalism and (as in Germany and elsewhere) anti-Semitism that characterized the Western policy response to the Depression suddenly seems less like an incoherent flaying in all directions and more like elements of a uniform retrenchment in social relations.

It seems odd that humans in their day-to-day interactions think of buying or selling as the most natural of activities, recreating markets unprompted in the most dismal of circumstances. Yet there is something about the ideology of a market system, or of any generally decentralized order, that seems inconceivable to most people.

Economists have a hard time dealing with nationalism.

A severe economic crisis implicates the entire system of political economy, regardless of how narrow the source of that crisis may be. Thus those with long-simmering fears and resentments—as well as those with more venal or ideological motives—see crisis as an opportunity to strike out at the system.

Anti-market movements, whether pushed by Populists or Progressives in the United States or the various forms of socialism in Europe, took for granted that vigorous political action was the only way to impose order and bring social harmony to an unfettered market economy. But the specific remedies and the zeal with which reformers sought to repudiate the past belie ideological origins more than technocratic ones.

He had mastered the politics of trust.

Roosevelt deserves credit for largely resisting these ideological enthusiasms. On balance, he dealt with the crisis pragmatically and forthrightly.

If FDR had left out the high-flying rhetoric and only pursued an attenuated New Deal—namely the financial policies that economists now agree truly helped us out of the Depression—would he be as celebrated a figure as he is today? Not likely.

The end of World War II furnishes still more evidence that political images leave a wider trace in historical memory than actual policies.

Thanks to Truman we were once again moving in the direction of a competitive, open-access market economy. Had there been a lingering recession and a continuation of older, harmful regulations into the 1946–48 period, Truman, not his predecessor, would have been blamed. Yet Truman’s stellar reputation today owes nothing to his economic achievements, which most of those who today praise his foreign policy acumen know nothing about.

In any event, we would do well to bear in mind how important, yet also how unnatural, the modern system of impersonal finance and trade really is. If we would preserve that system as a basis for our prosperity, we must recognize that many of the regulatory solutions we apply to our current crisis may themselves induce responses that can generate new crises. History suggests, too, that fears of the market and the political pressures it generates will wax and wane as crises deepen or ease. Patience and prudence are, therefore, the best watchwords for government amid the many trials and errors we will surely endure in the months, and perhaps years, ahead.

large-scale systems based on anonymous exchange were a recent phenomenon.

Faucets are ways through which game currency is injected into the game. This generally involve players receiving currency from the game system itself, as opposed to other players.

Sinks are ways through which game currency is removed from the game. This generally involve players paying currency into the game system itself, as opposed to other players.

The establishment by Blizzard of a real money auction house (“RMAH”) alongside a virtual gold auction house in the game provided players with an incentive to both farm the game for real world profits and to pursue arbitrage opportunities. The RMAH was also created, at least in part, to disincentivize players from patronizing third party markets outside the game.

Although its anonymity may make it subject to skepticism, several weeks after the game’s debut a source claimed that there were at least 1,000 bots active 24/7 in the Diablo 3 game world, allegedly “harvesting” (producing) 4 million virtual gold per hour.[4]

The RMAH had minimum and maximum dollar amounts for in-game gold transactions: $0.25 minimum, $250 maximum. Market participants were also limited to dealing in increments of a certain size, called a “stack.” The “stack” was initially set to 100K gold. But as gold prices fell owing to rapidly building supply, the stack size was changed in August 2012 to 1 million. This practice, known as redenomination, is a fairly standard (if cosmetic) method of addressing inflation, but was viewed by some players as tacit devaluation.

To be clear, at the time at which the redenomination was introduced, gold was still trading above the floor rate. But being artificial, caps and floors not only prevent markets from clearing, but give black markets a target to undercut, to say nothing of offering players an opportunity to avoid the 15 percent fee — another intended gold sink — levied upon transactions within the auction house.

By early 2013, the gold price had fallen to the exchange floor set by the game managers — $0.25/million — and players began to show signs of concern.

Hyperinflation is the economist’s equivalent of an astrophysicist’s quasar cluster or a marine biologist’s dolphin “stampede”: a rare exhibition of a unique set of circumstances which arise infrequently and are closely studied when they materialize.

when holders of money expect the supply of money to increase — particularly without any sense of timing, bounds, or other guidance

monetary demand in the present drops in favor of surrendering money for vendibles.

If historical cases of hyperinflation — real, and now virtual — have one thing in common, it is the instinct among its victims to blame the symptoms rather than the disease.

While RMAH prices for virtual gold rallied occasionally, the prevailing direction of black market prices for virtual gold was inexorably lower as third party sellers undercut the in-game gold floor.

Several competing definitions for hyperinflation exist, with the strictest — an increase of 50 percent in one month — defined by economist Philip Cagan in his 1956 book The Monetary Dynamics of Hyperinflation.

On May 7th 8th, 2013, Blizzard rolled out Patch 1.0.8, which contained the seeds of the last, hyperbolic surge of gold superabundance.

In just a few hours, the already gold-swamped economy saw trillions more created: a mammoth deluge of, by then, worthless virtual gold chasing finite goods, driving prices upward in leaps and bounds.

Blizzard quickly closed the in-game auction houses and audited transactions which took place during the blowout, banning players who took advantage of the bug and donating the proceeds of certain sales to charity. The gold stack size was also moved back from 10M to 1M.

Remembering that game economies are private and players are voluntary members, there’s no explicit mandate to ensure rigid inflation control as one often sees (however rarely pursued) in public economies.

More critically, though, whether structured as auctions or exchanges, markets must be allowed to operate freely, without caps, floors, or other artificialities. Unrestricted (real) cash auctions would for the most part preempt and obviate black markets. [24]

Christensen said he thinks the venture capital world needs to be disrupted because it is focused too much on making big killings on big investments at a time when there are plenty of good smaller investments to be made on companies that will be disruptive.

“Venture capital is always wanting to go up market. It’s like the Rime of the Ancient Mariner. 'Water, water everywhere and not a drop to drink.' People in private equity complain that they have so much capital and so few places to invest. But you have lots of entrepreneurs trying to raise money at the low end and find that they can’t get funding because of this mismatch. I think that there is an opportunity there.”

“For 300 years, higher education was not disruptable because there was no technological core. If San Jose State wants to become a globally known research institution, they have to emulate UC Berkeley and Cal Tech. They can’t disrupt,” he said on Wednesday.

“Fifteen years from now more than half of the universities will be in bankruptcy, including the state schools. In the end, I am excited to see that happen.”

2. Many used some data, but they unfortunately used silly data strategies/metrics.

A lot of people get fired for this. Sadly not right away, because it takes time to realize how spectacular of a waste of money getting to real-time data was.

Real-time data is very expensive.

It is also very expensive from a decision-making perspective

even in the best case scenario of the proverbial pigs flying, they'll obsess about tactical things.

That is a cheaper systems/platform/data strategy.

That is also a way to get people to sync the data analysis (not data puking, sorry I meant data reporting) with the speed at which the company actually makes decisions (data > analyst > manager > director > VP > question back to manager > yells at the analyst > back to director> VP = 6 days).

The difference between a KPI and a metric is that the former has a direct line of sight to your bottom-line, while the latter is helpful in diagnosing tactical challenges.

Along the way you also learn how not to stink. Bounce rate goes from 70% to a manageable 30%. Takes three months.

From the time people land on your site it might take another 12 – 25 pages for them to buy or submit a lead. Focus on all that stuff. The tough stuff. Then you'll make money.

it does not take a very long time for your Senior Management to figure out how lame the Likes metric is and that it drives 1. Zero value on Facebook and 2. Zero squared economic value or cost savings to the business.

Here's one… We are looking at two consumer product brands, the tiny company Innocent Drinks and the Goliath called Tide Detergent.

Even with 10x the number of Likes on Facebook the giant called Tide has 4x fewer people talking about their brand when compared to the David called Innocent.

In a massively large company they've carved out an identity uniquely their own. They refuse to be corrupted by Coca Cola's own Facebook strategy of constant self-pimping and product ads masquerading as "updates." As a result pound for pound Innocent's fan engagement on its page is multiple time better than Coca Cola's - even if the latter has many more likes.

Not going to happen.

as all decent SEOs will tell you, is that search results are no longer standardized. Rather they are personalized. I might even say, hyper-personalized. Regardless of if you are logged in or not.

Universal search for example means that personalized results will not only look for information from web pages, they also look for YouTube/Vimoe videos, social listings, images of course, and so on and so forth.

So check your keyword ranking if it pleases you.

But don't make it your KPI.

Friends don't let friends use CPC as a KPI. Unless said friends want the friend fired.

Content consumption is a horrible metric. It incentivises sub optimal behavior in your employees/agencies.

If you are a news site, you can get millions of page views

And it will probably get you transient traffic.

And what about business impact from all these one night stands ?

Then measure the metric closest to that. Hopefully some ideas above will help get you promoted.

My hypothesis is that TV/Radio/Magazines have created this bad habit. We can measure so little, almost next to nothing, that we've brought our immensely shaky GRP metric from TV to digital. Here it's called impressions. Don't buy impressions.

If you are willing to go to clicks, do one better and measure Visits. At least they showed up on your mobile/desktop site.

Impressions suck. Profit rocks.

If the simple A/B (test/control) experiment demonstrates that delivering display banner ad impressions to the test group delivers increased revenue, buy impressions to your heart's content. I'll only recommend that you repeat the experiment once a quarter.

You can buy impressions if you can prove via a simple controlled experiment that when we show impressions we got more engagement/sales and when we don't show impressions we did not get more engagement/sales.

This is not a metric, this is more of a what data you'll use to target your advertising issue.

Our primary method of buying advertising and marketing is: "I would like to reach 90 year old grandmas that love knitting, what tv channel should I advertise on." Or they might say: "I would like to reach 18 to 24 year olds with college education who supported Barack Obama for president." And example of demographic and psychographic segments.

We use that on very thin ice data, we bought advertising. That was our lot in life.

Intent beats demographics and psychographics. Always.

Search has a ton of strong intent. It does not matter if you are a grandma or a 18 year old. If you are on Baidu and you search for the HTC One, you are expressing strong intent. Second, content consumption has intent built in. If I'm reading lots of articles about how to get pregnant, you could show me an ad related to that

The first intent is strong, the second one is weaker.

But there’s a problem, the architect points out. She reminds you that your city requires you to provide off-street parking on the property for each of the apartments you build. 

access ramps to the underground garage will subtract six apartments, and your general contractor estimates that excavating will cost $55,000 per parking space — almost as much as the $60,000 you’ve budgeted to build each apartment.

You contemplate whether to dig a second subterranean level in the garage, but the deeper you go, the contractor explains, the more expensive it gets.

You’re now considering a building with 30 apartments, plus 19 spaces behind. That’s only 0.6 parking spaces apiece, so you’ll still be in trouble with the city. To get one space per apartment, you’ll need to drop down to 25 apartments or fewer and raise the rent again.

The whole situation is aggravating, because the area surrounding your building has vast, untapped reservoirs of parking: surface lots at grocery stores and movie theaters, underground spaces at shopping complexes and office buildings, and idle spots at nearby apartments.

You could even rent a group of overnight spaces at a nearby garage and sublet them to tenants, but such innovative solutions are not a legal substitute for on-site parking in your city.

You’re stuck with no good options: a long and risky waiver application, underground parking with extremely high rents, or a half-sized building with high rent and slots out back.

 Parking quotas drive up construction costs. (“But supply and demand, not cost, set prices,” I hear my Econ 101 professor Hirschel Kasper pointing out.

There’s no way you can legally build your no-parking $800-a-month apartments, nor can anyone else, anywhere in town. The whole apartment market will be missing its bottom end.

Todd Litman of the Victoria Transport Policy Institute has modeled a typical affordable housing development and concluded that including one parking space per dwelling raises the cost of each rental unit by 12.5 percent

Parking quotas constrain the supply of dwelling units, particularly of modest, economical ones, which causes their price to rise.

Parking quotas often make it prohibitively expensive to adapt buildings for other uses. Developers cannot convert vacant warehouses into lofts, or aging office blocks into condos, unless they somehow shoehorn floors of parking into the historic structures.

By suppressing the number of apartments on each city lot (see Nos. 2 and 3), quotas force housing demand to spread outward across the landscape.

 Parking quotas shift the cost of storing vehicles from those vehicles’ owners into the rent of non-owners. By flooding the market for parking, quotas make it impossible to recoup the full cost of parking by charging its users.

This effect does not raise the rent on average beyond what effects 1, 2, and 3 do, but it does shift the cost of storing vehicles from car owners to non-owners. Even tenants who do not use parking pay for it.

The cost of parking, furthermore, exceeds its market price almost everywhere in King County, so even tenants who do not own cars end up paying for parking through their rent.

In 1961, Oakland introduced a quota of one space per new apartment. Immediately, as housing economist Brian Bertha has documented (see page 143), the construction cost per apartment jumped by 18 percent and typical apartment buildings shrank: The number of units per new building fell by 30 percent. Developers built fewer, larger apartments, and the rent rose.

A newer proof comes from urban planning professor Michael Manville of Cornell University. He described in the Journal of the American Planning Association what happened in downtown Los Angeles after 1999 when the city enacted an adaptive reuse ordinance (ARO).

Quickly, the deregulation of parking yielded more than 6,000 new apartments and condominiums, some of them in previously dilapidated historic office buildings that dated from the Art Deco era.

When parking requirements are removed, developers provide more housing and less parking, and also … developers provide different types of housing: housing in older buildings, in previously disinvested areas, and housing marketed toward non-drivers. This latter category of housing tends to sell for less than housing with parking spaces.

Minimum parking requirements do not jack the rent up much in the kinds of pricey buildings where the developer would have installed an abundance of parking anyway.

What’s more, half of the parking spaces developers provided to tenants were at neighboring or nearby properties. In fact, at 16 of the 57 ARO buildings, all the parking was off-site. These developers did what you wanted to do for your 50-unit building: They secured tenant parking not by pouring concrete but by sipping coffee with the owners of nearby garages.

Too often, conservatives dupe themselves. They wrap themselves in closed information systems based upon pretend information. In this closed information system, banks can collapse without injuring the rest of the economy, tax cuts always pay for themselves and Congressional earmarks cause the federal budget deficit. Even the market collapse has not shaken some conservatives out of their closed information system. It enfolded them more closely within it. This is how to understand the Glenn Beck phenomenon.

Meanwhile, Republican officeholders who want to explain why they acted to prevent the collapse of the U.S. banking system can get no hearing from voters seized with certainty that a bank collapse would have done no harm to ordinary people.

the intellectual right accords a deference to the wants and wishes of the financial industry that is seldom accorded to agriculture, manufacturing, transport or retailing.

But it’s not always true that what’s good for Goldman Sachs is good for the economy, or vice versa. Nor is what “the markets” want the same as what free-market economics require.

During the recession of 1981-82, Democratic politicians demanded that a Republican president set a balanced budget as his top priority. Ronald Reagan disregarded this advice. He held firm to his tax cuts: once the economy returned to prosperity, there would be time then to deal with the deficit. Today, the positions are reversed.

eading voices in the Republican Party have convinced themselves that the country is on the verge of hyperinflation — a Weimar moment, says Glenn Beck. But if fiscal stimulus leads to socialism, and quantitative easing leads to Nazism, what on earth are we supposed to do? Cut the budget? But we won’t do that either! On Sean Hannity’s radio show, the Republican House leader John Boehner announced just before the election that one of his first priorities would be the repeal of the Obama Medicare cuts.

Social Security, unemployment insurance and other benefits were designed as anti-Depression defenses, “automatic stabilizers” as economists called them.

Those who denounce unemployment insurance as an invitation to idleness in an economy where there are at least five job seekers for every available job are not just hardening their hearts against distress. They are rejecting the teachings of Milton Friedman, who emphasized the value of automatic stabilizers fully as much as John Maynard Keynes ever did.

Non-Tea Party Americans may marvel that any group can think of itself as egalitarian when its main political goals are to cut off government assistance to the poorest and reduce taxes for the richest.

The U.S. political system is not a parliamentary system. Power is usually divided. The system is sustained by habits of cooperation, accepted limits on the use of power, implicit restraints on the use of rhetoric.

First, the inequality of personal well-being is sharply down over the past hundred years and perhaps over the past twenty years as well.

by broad historical standards, what I share with Bill Gates is far more significant than what I don’t share with him.

Compare these circumstances to those of 1911, a century ago. Even in the wealthier countries, the average person had little formal education, worked six days a week or more, often at hard physical labor, never took vacations, and could not access most of the world’s culture.

when average people read about or see income inequality, they don’t feel the moral outrage that radiates from the more passionate egalitarian quarters of society. Instead, they think their lives are pretty good and that they either earned through hard work or lucked into a healthy share of the American dream.

There’s a great deal of hostility toward various government bailouts, but the idea of “undeserving” recipients is the key factor in those feelings. Resentment against Wall Street gamesters hasn’t spilled over much into resentment against the wealthy more generally.

their constituents bear no animus toward rich people, only toward undeservedly rich people.

in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise.

The high status of the wealthy in America, or for that matter the high status of celebrities, seems to bother our intellectual class most. That class composes a very small group, however

Income inequality has been rising in the United States, especially at the very top.

income growth at the very top

greater inequality throughout the distribution

When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.1

Caution is in order, but the overall trend seems robust. Similar broad patterns are indicated by different sources, such as studies of executive compensation. Anecdotal observation suggests extreme and unprecedented returns earned by investment bankers, fired CEOs, J.K. Rowling and Tiger Woods.

But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.

The broader change in income distribution, the one occurring beneath the very top earners, can be deconstructed in a manner that makes nearly all of it look harmless. For instance, there is usually greater inequality of income among both older people and the more highly educated, if only because there is more time and more room for fortunes to vary.

Economist Thomas Lemieux at the University of British Columbia estimates that these demographic effects explain three-quarters of the observed rise in income inequality for men, and even more for women.2

Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years.3 Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all.

And so we come again to the gains of the top earners, clearly the big story told by the data.

If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

It’s not obvious what causes the percentage of threshold earners to rise or fall, but it seems reasonable to suppose that the more single-occupancy households there are, the more threshold earners there will be, since a major incentive for earning money is to use it to take care of other people with whom one lives.

The funny thing is this: For years, many cultural critics in and of the United States have been telling us that Americans should behave more like threshold earners. We should be less harried, more interested in nurturing friendships, and more interested in the non-commercial sphere of life. That may well be good advice.

Their data do not comprise the entire U.S. population, but from partial financial records they find a very strong role for the financial sector in driving the trend toward income concentration at the top.

The authors also relate that they shared their estimates with a former U.S. Secretary of the Treasury, one who also has a Wall Street background. He thought their estimates of earnings in the financial sector were, if anything, understated.

Finance aside, there isn’t much of a story of market failure here, even if we don’t find the results aesthetically appealing.

When it comes to professional athletes and celebrities, there isn’t much of a mystery as to what has happened.

We may or may not wish to tax the wealthy, including wealthy celebrities, at higher rates, but there is no need to “cure” the structural causes of higher celebrity incomes.

Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs. To this mix we can add the fact that many money managers are investing other people’s money.

And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton.

They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors.

In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good.

But more immediate and more important, it means that banks take far too many risks and go way out on a limb, often in correlated fashion. When their bets turn sour, as they did in 2007–09, everyone else pays the price.

The more one studies financial theory, the more one realizes how many different ways there are to construct a “going short on volatility” investment position.

In some cases, traders may not even know they are going short on volatility. They just do what they have seen others do. Their peers who try such strategies very often have Jaguars and homes in the Hamptons. What’s not to like?

If you’re wondering, right before the Great Depression of the 1930s, bank profits and finance-related earnings were also especially high.8

The moving-first phenomenon sums to a “winner-take-all” market. Only some relatively small number of traders, sometimes just one trader, can be first. Those who are first will make far more than those who are fourth or fifth.

Since gains are concentrated among the early winners, and the closeness of the runner-ups doesn’t so much matter for income distribution, asset-market trading thus encourages the ongoing concentration of wealth. Many investors make lots of mistakes and lose their money, but each year brings a new bunch of projects that can turn the early investors and traders into very wealthy individuals.

Still, every now and then Goldman will go bust, or would go bust if not for government bailouts. But the odds are in any given year that it won’t because of the advantages it and other big banks have.

In any given year, this practice may seem tolerable—didn’t the bank earn the money fair and square by a series of fairly normal looking trades?

It remains to be seen whether the new financial regulation bill signed into law this past summer will help.

The bill does have positive features.

What about controlling bank risk-taking directly with tight government oversight? That is not practical. There are more ways for banks to take risks than even knowledgeable regulators can possibly control

It’s also not clear how well regulators can identify risky assets.

It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem.

Once a financial crisis arrives, politicians will seek to limit the damage, and that means they will bail out major financial institutions.

One worry is that banks are currently undercapitalized and will seek out or create a new bubble within the next few years, again pursuing the upside risk without so much equity to lose.

A second perspective is that banks are sufficiently chastened for the time being but that economic turmoil in Europe and China has not yet played itself out, so perhaps we still have seen only the early stages of what will prove to be an even bigger international financial crisis.

A third view is perhaps most likely. We probably don’t have any solution to the hazards created by our financial sector, not because plutocrats are preventing our political system from adopting appropriate remedies, but because we don’t know what those remedies are.