Finance and the Purpose in Life

It is no secret that Main Street suspects that Wall Street high finance provides little meaningful contribution to society. Recent history suggests to a non-financial person that finance may in fact be taking rather than contributing. This opinion is expressed everywhere from Oliver Stone’s original “Wall Street” to the more recent Greg Smith’s “Why I am Leaving Goldman Sachs”. Even people in the finance industry have this nagging feeling about the purpose of life, as Matt Levine pointed out in his comment on Greg Smith’s article:

Smith is hardly the first banker to worry about whether his work makes the world a better place. Working at an investment bank involves trading off those negatives – stress, hours and a nagging sense of unfulfilled purpose – against the positive aspects of the job, which can be loosely summarized as “huge paychecks.”

I agree, selling clients overpriced products does not seem to contribute to the feeling of fulfilled purpose, but I completely disagree about the view that finance as a field does not make a meaningful contribution to society. Finance is lifeblood of business – most technological breakthroughs and innovations that we all take for granted would not have happened without adequate financial resources. Think of Columbus’s voyage, railroads, television, modern cellular networks – all of these have (arguably) made our lives better and/or more productive wouldn’t have happened without massive upfront financial investments. Who determines these investments? The people who work in the field of finance, that’s who. Collectively, these people make decisions that direct investment capital to its most productive use, that is, in making stuff we like and use. The withdrawal of capital also disciplines wasteful ventures by pulling the plug on (most) bad ideas.

This might not be a perspective of a guy like Greg Smith, but he is just a tiny part in a gigantic financial machine. At the very top of this machine there are people like Warren Buffett, George Soros, and Bill Gross. They have enormous influence in shifting money from less to more productive uses anywhere in the world. My own research shows that hedge funds are pretty good in placing large bets on future economic developments. The big financial machine does not get everything right all the time, especially in the short term, but I wouldn’t bet against it in the long term – in the end it gets things right. Mr. Smith’s actions contributed to the overall efficiency of this machine, de facto channeling capital to those who can better assess its value.

I think that everybody working in the field of finance (myself included) should be pretty happy (or at least content) with their purpose, as they do contribute to the operation and overall efficiency of the machine that does make the world a better place.