Wednesday, April 25, 2018

QUORA: How do investment bankers justify earning 7 figures?

The sub-text to the question included the following:
I guess my point would be, is there any sense of guilt from receiving a disproportionately large monetary compensation from society or do investment bankers truly believe that market forces determine fair compensation. Or do investment bankers not think about why they should get compensated and it is just a money grab. I'm trying to wrap my head around why we reward financial engineers more than actual engineers and if this is a good thing or not.

I left this answer, edited for clarity:

The answer is in the question: They earned it.

To earn money is to net a gain through one’s own productive efforts and in voluntary trade with others. “Society” doesn’t compensate. “Society” is not an entity that thinks and analyzes and then “decides.” Society is an abstraction. Only the individuals that make up society decide, each through his own choices on his trading decisions. How much one earns is a reflection of the cumulative value his work creates for others, as determined by the individual[s] who voluntarily trade with him. This principle applies equally to all productive individuals at all economic levels, from landscapers to investment bankers.

Who “decides” how much to compensate investment bankers? Anyone who trades with them. How should investment bankers justify their compensations? By saying simply, “I earned it.” No one should ever feel guilty for what they earn, in any field, no matter how much that is—so long as he actually earned it, rather than merely appropriated it by fraud or deception or force.

Why do financial engineers make so much more than so-called “actual” engineers? Perhaps it’s because the job of investment bankers—the raising and successful allocation of capital—is so much more valuable, or perhaps because good investment bankers are much rarer than engineers. Whatever the reason, the only way that fair compensation can be arrived at longer term is through the cumulative choices of individual traders operating within a free market (which is why we should strive for a fully free market rather than the mixed economy—part free market and part unfree (government controlled) market—that we have now).

Related Reading:

In Pursuit of Wealth: The Moral Case for Finance—Yaron Brook and Don Watkins

Atlas Shrugged—Ayn Rand

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