Societal Utility and Proximity Effects

Warning! This post is an idle ramble from a Saturday morning and is not even remotely funny.

Recent news of Goldman Sachs $550m settlement with the SEC generates a range of reactions. From normal people, it seems like a lot of money, but as one commentator said, that is less than Goldman's annual charitable giving. Presumably, Goldman can cover this without breaking a sweat.

Jessica reiterated the common lament (in our circles) that it would be amazing to an academic to see something like the money flowing in financial circles. I have worked with telescopes that were seen as hugely complex and expensive. Total cost: under $100m with a decade of work. Obviously society isn't putting as much value in a telescope as in a bank.

And honestly, I'm not sure it should. The financial industry does some useful stuff, after all. The current recession was started by banks getting cold feet and slowing interbank lending. The end of 2008 showed pretty clearly how banks are the financial lubricant for the economy.

The argument could be made that bankers and academics make different amounts of money according to their utility to society. Naturally they are paid by different mechanisms (private and public), but somehow --- through politics, markets, labor movement --- the system perhaps organizes itself to provide maximal societal benefit. It seems like it could work this way, at least in a democratic and capitalist society.

But it is worth asking question: are the relative benefits in, say, financial and academic industries proportional to their societal benefit?

While one could assume this, it is harder to show. Presumably, someone has tried to do this by adding up the value in patents, technologies, etc.. Still, there are some corners of research (like what I do) that are so far from financial payoff that it is pretty hard to quantify its utility. Most people in government circles tend to justify paying for people like me by saying that it is training for a useful career doing something else!

Then again, there are proximity effects. I could imagine that bankers are overpaid in terms of societal benefit based on their proximity to the flow of money. The basic idea as I see it is as follows:

The benefits (pay) to an industry can only be made to the extent that its utility is recognized.

Naturally a banker recognizes the benefit of their trade, so they are compensated properly. But how well compensated is an academic in some potentially-useful field that nobody knows about? Not so well.

Politics is a system strongly affected by the proximity effect. Decisions are made in central places, just by necessity of how people interact. These places accrete more people with an interest in affecting decisions. As a result, anyone far from the centers of power are more likely to be forgotten. Hence: representative government. This is a way distilling the interests of far-flung places into a person that can interact in proximity to others decision makers.

But I wonder: is there an equivalent to representative government in how societies decide how to compensate academic and practical industries? I guess it lies somewhere in how politics and markets interact.