Ryan Avent of The Economist cites research by Steven Kaplan and Joshua Rauh to make a point about the allocation of talent. I’m a great admirer of Kaplan in particular, and I find the Kaplan and Rauh take convincing:

We argue that the evidence is more consistent with theories of skill-biased technological change, superstars, greater scale, and their interaction than withthe other theories. With the large improvements in information technologyand the substantial increase in value of the securities markets over the last twenty-five years, asset managers, investment bankers, lawyers, and top executivesnow apply their talent to much larger pools of assets.

Avent offers his two cents:

Without getting too deep into the discussion, it’s worth considering the incentive effects of ridiculous income levels on talent allocation. In a superstar world where earnings are particularly outlandish for people like hedge fund managers, young people may be encouraged to pursue such careers even if the odds of success are relatively low (just as young people may devote themselves to dreams of celebrity or athletic stardom despite low odds of success). From a societal perspective, it may be a bad idea for talent to overallocate itself toward these ends, rather than toward occupations in which a good but not stratospheric income is more likely. Just a thought.

I definitely see his point. But let’s tweak this language slightly:

In a superstar world where enormous power and prestige is concentrated in the hands of presidents and other high officials, young people may be encouraged to pursue such careers even if the odds of success are relatively low (just as young people may devote themselves to dreams of celebrity or athletic stardom despite low odds of success). From a societal perspective, it may be a bad idea for talent to overallocate itself toward these ends, rather than toward occupations in which a good but not stratospheric income is more likely. Just a thought.

Reducing the concentration of power in the federal government and reducing government expenditures at all levels might lead to a virtuous circle in which the lower spending burden begets a lower tax burden, and public-spirited young people will choose careers in social enterprise, for-profit as well as non-profit, rather than government. We have at least some reason to believe that social enterprise is a more effective tool for tackling deep-seated social problems than a slow-moving, inefficient public sector, particularly in domains that require the use of “soft skills.”

I’d also submit that the supposed overallocation of talent towards the financial sector might not be as egregious a problem as the overallocation of talent towards celebrity and athletic stardom. Avent glosses over the possibility that we should intervene more aggressively in this space. I’d suggest that the number of young people who focus on cultivating their charm and attractiveness or, alternately, their athletic prowess to the exclusion of cultivating other skills is far greater than the number of young people who devote themselves to careers in high finance. One could argue that the latter overallocation is a more pressing problem all the same, as it relates to the most particularly bright students. But that doesn’t sound right to me. Indeed, I’d suggest that the stakes are lower in the case of the would-be financiers, who are, after all, still generating tax revenue, keeping their noses clean, etc., as a general rule.

While there is a case for creating a regulatory regime designed to dampen overinvestment in erotic capital, I sense that this wouldn’t be very wise.