Krugman on "Unproductive Finance"
In the last couple of weeks, Paul Krugman’s blog has been a target-rich environment. In the next few days, I’ll have one or two more posts on recent Krugman posts, but one this morning caught me eye.
I’ll quote almost the whole short post, title “Unproductive Finance.” Krugman writes:
More than half a century ago, in his classic paper on the economics of speculation, Paul Samuelson noted the perverse rewards to knowing stuff just slightly before everyone else. He asked readers to imagine someone who, somehow, consistently received crucial information one second before everyone else. As he pointed out, the social value of that extra second would be minimal; but the private rewards could be huge.
Today, Kevin Drum points us to a real-world example quite close to Samuelson’s thought experiment. It turns out that Thomson-Reuters pays the University of Michigan a million dollars a year to provide selected clients with the results of the latest survey of consumer confidence 5 minutes before the rest of the world sees them-and to provide super-special clients with this information 2 seconds before the rest.
This is a trivial example; still, what we see here, as Drum notes, are real resources being devoted to the socially useless task of getting an economic number slightly before the hoi polloi.
On the first paragraph, I have no objection. Krugman states Samuelson’s classic accurately and Samuelson made an excellent point.
The second and third paragraphs are the problem. The key issue here is whether the Thomson-Reuters case is an instance of what Samuelson talked about. The basic idea is that the resources spent on getting information early are wasted. But are they?
There are three possibilities, but before getting to them, let me point something out. Remember that someone needs an incentive to get the information that the University of Michigan gathers. If the information on consumer sentiment is worth getting–and neither Krugman nor Kevin Drum, whom he cites, argues that it’s not–then the University of Michigan needs to make money from gathering it.
Now to the three possibilities:
1. If the payments made by Thomson-Reuters and others who get the information earlier are needed to give U. of M. the appropriate incentives to gather quality information, then the payments are not wasted.
2. If the payments made by Thomson-Reuters and others who get the information earlier are not needed to give U. of M. the appropriate incentives to gather quality information, then the payments are producer surplus to the U. of M. and there is no social loss from the payments–it’s just a transfer.
3. If in case #2 above, the producer surplus is used for low-value uses at U. of M.–this is both a non-profit university and a government university, after all–then there is a waste.
So only in case 3 above is it “unproductive finance.” I’m pretty sure Krugman isn’t going with case 3.