Megafund chiefs make $500 million a year?

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Leon Black made $550 million. Steve Schwarzman made $450 million. Is this real life? Even the CEO of JPM and GS who are managing companies with trillion dollar assets and 100,000 employees are in the low double digits, and these mofos are making triple digits?

http://dealbook.nytimes.com/2014/03/03/apollo-chief-earned-546-3-million-in-2013/

Also, David Rubenstein told HBS students recently: "The days of getting fabulously rich in private equity may be a little bit behind us."Lol. Just what were they making in 2007 I would like to know.

God bless America. God bless capitalism.

Comments (78)

 
Mar 9, 2014 - 3:06pm

And I know that part of it comes from the fact that many of these funds have been able to exit their investments and make big distributions this year, but still...to think I am still making close to minimum wage in my on campus gig at school haha...

 
Mar 9, 2014 - 5:20pm

I think it's from stock they own, is that even possible to pull that much cash in a year?? ^_^ still a ton of money though.

"Hold on a sec...you mean they made all this money without doing IB --> PE --> HBS --> PE --> God? How is this possible?!?!?!!??" - TheKing
 
Best Response
Mar 9, 2014 - 4:52pm

I don't really get how you can be upset that a guy who build a fund from nothing to a fund that manages more than $100 billion in assets makes a lot of money off the stock he owns in the company he built. There is a world of difference to Blankfein and Dimon who, after all, are "just" employees.

 
Mar 9, 2014 - 6:07pm

w1420:

Leon Black made $550 million. Steve Schwarzman made $450 million. Is this real life? Even the CEO of JPM and GS who are managing companies with trillion dollar assets and 100,000 employees are in the low double digits, and these mofos are making triple digits?

Meh.

http://www.forbes.com/pictures/mdg45eejfh/1-george-soros/

"I do not think that there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes almost everything, even nature."
 
Mar 9, 2014 - 6:15pm

This isn't newsworthy, this is how their business works. And it's how their business has always worked. The money that was made in 2013 was exceptional for some of the longer-biased hedge funds (Glenview, anyone?) and really anyone with carry and public equity exposure.

See: Paulson, John

I hate victims who respect their executioners
 
Mar 9, 2014 - 8:25pm

BlackHat:

This isn't newsworthy, this is how their business works. And it's how their business has always worked. The money that was made in 2013 was exceptional for some of the longer-biased hedge funds (Glenview, anyone?) and really anyone with carry and public equity exposure.

See: Paulson, John


Somehow I never thought of the top PE guys in the same way as HF guys. I knew of course that people like Icahn, Soros, Paulson can make billions in a year, but this seemed normal for hedge funds because their positions are volatile and move pretty quickly, delivering large returns in a short period to a small group of people.

I just didnt think of the bosses of large publicly traded private equity corporations being compensated in the same way. I thought of them more as 'management', overlooking perhaps, that it would make sense for them to be pretty heavily invested in their own funds. Guess you learn something new everyday.

 
Mar 9, 2014 - 10:47pm

w1420:

Somehow I never thought of the top PE guys in the same way as HF guys. I knew of course that people like Icahn, Soros, Paulson can make billions in a year, but this seemed normal for hedge funds because their positions are volatile and move pretty quickly, delivering large returns in a short period to a small group of people.

I just didnt think of the bosses of large publicly traded private equity corporations being compensated in the same way. I thought of them more as 'management', overlooking perhaps, that it would make sense for them to be pretty heavily invested in their own funds. Guess you learn something new everyday.

The distinction you're missing is that they're owners, not management. They're not getting paid that money for working for the public company, it's coming from their share of distributions made to shareholders. Even though there's a public float, the founders at these places still own pretty big equity stakes

 
Mar 10, 2014 - 11:33am

I've never understood the fascination with how much HF moguls make. Soros' $4bn "income" is merely a reflection of 22% return on the ~$29bn of Soros' money that the firm manages. It's not fee income, it's returns on his existing wealth. Classifying this as "crazy paydays" is misleading, at best.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Mar 10, 2014 - 3:06pm

These are very misleading stats, they didn't make $450 million because they work in private equity, they made $450 million because they own an incredibly profitable company. I.e., that wasn't their compensation as CEO, that was their share of the profits of a company for which they are one of the primary shareholders. You're comparing what a corporate officer makes as his compensation and what a shareholder makes as profit generated from the business he owns.

Comparing them to Jamie Diamond and Lloyd is completely nonsensical. That's like comparing the guy who owns a contracting firm and saying how does he make $40 million a year when people like Jamie Diamond who's firm has trillions of dollars in assets makes about half that.

While executive compensation is something thats up for debate, distribution of shareholder profits are simply mathematics.

Lastly, the days of getting rich in PE, per Rubenstein, are most likely behind us because the industry isn't nanscent like it used to be and its highly unlikely another KKR will be created. Keep in mind the guys that you're naming, there literally less than 2 handfuls of them and they made their place int he PE world decades ago, so yeah they're still making a fortune, but that's by virtue of the fact that they carved out a meaningful place in the PE world 20-30 years ago.

Array
 
Mar 10, 2014 - 5:41pm

I'm all for people making lots of money, but i think it needs to align with how much value they are creating. In the case of the top tier PE/HF guys, there is clearly a mismatch between value creation and total income. Let's face it there are a lot of ppl that can do what they do, and much of their income is the result of inertia/marketing schemes or perverse incentives, as opposed to actual value created by having that particular individual making investment decisions. Luck matters. Timing matters. Skill only sorta matters.

 
Mar 10, 2014 - 7:55pm

I'm all for people making lots of money, but i think it needs to align with how much value they are creating.

The carried interest mechanism is exactly that. You create $10 million of value above what the broader market can generate and the GP gets 20% of that. Are you aware of a PE/HF GP compensation structure that is anything but?

In the case of the top tier PE/HF guys, there is clearly a mismatch between value creation and total income.

Care to provide an example?

Luck matters. Timing matters. Skill only sorta matters.

I find it very hard to believe that you work in finance, especially in an investing/Asset Management capacity, other than dumb beta.

If you ever came across a guy in the PE/HF world that is making 8-figures plus, he would easily be the smartest person you'll likely ever meet by a long shot.

If it's so easy, why aren't you doing it? I'm sure its because your moral compass is telling you that such income is excessive and unnecessary.

Array
 
Mar 10, 2014 - 10:41pm

We can have a long discussion of what is (and is not) alpha, if you want... But the important thing is most of these guys are getting paid huge sums despite the fact that they are massively underperforming the market. Take a look at Ambani's link: all of those guys took home $400mm - $2b and the vast majority underperformed by 1,000-1,500bps. That doesn't give me a lot faith in their value creation.

I should say, I am not an efficient mkts guy and I do believe in alpha. Some investors even have persistent alpha, although it is extremely rare. But to say that the PM who makes a well timed investment somehow "created" all the value associated with the return is ludicrous.

Let's take a typical PE investment. GP does his research, takes a control position, aggressively pushes an agenda of cost cuts and levering up the biz. 20% of the workforce gets slashed and the co.gets efficient. 6 years later, PE sells at a 200% return. So who "created" that value. Was it the managers inside the co. who had to make hard decisions about where to cut? The employees who stepped up to do more with less? The consultants who managed to changes? Tax guys? Lawyers? Debt capital providers? Or was it the PE investor who made a well timed investment? I just think that value should be shared according to the actual contributions.

And thanks for busting my finance chops... "Jamie Diamond" lol.

 
Mar 22, 2014 - 4:53pm

Marcus_Halberstram:

If you ever came across a guy in the PE/HF world that is making 8-figures plus, he would easily be the smartest person you'll likely ever meet by a long shot.

In spirit, I agree 100% with this comment (meaning, in general this is accurate) but I've been surprised by the number of guys I've met, particularly at large asset managers or multi-manager HFs, that by virtue of tenure (my assumption) have somehow gotten in a position to manage enormous amounts of capital and more or less hug the index... and aren't in the least bit creative or impressive. But they'd still blow the doors off most people intellectually, despite being enormously cookie-cutter. I don't see the same thing nearly as often in the HF space, but that's probably just a function of the incentive structures. Nobody following consensus and buying into high-level stories that kind of make sense is getting promoted to a position where they're making that kind of money in the HF world.

I hate victims who respect their executioners
 
Mar 11, 2014 - 2:56pm

RLC1:

If the market doesn't think that Leon Black should be able to earn 2/20 anymore, the market will let him know. End of discussion

"Hold on a sec...you mean they made all this money without doing IB --> PE --> HBS --> PE --> God? How is this possible?!?!?!!??" - TheKing
 
Mar 13, 2014 - 7:40pm

Across CalPERS megafund investments (with and without the crisis era '06 vintage):

-----------------------w/'06-------w/o '06
Advent-----------------36.3--------41.5
Apollo-----------------17.5--------18.5
Blackstone-------------20.1--------24.6
Carlyle----------------18.8--------21.0
CVC-------------------24.9--------24.9
H&F--------------------25.1--------25.1
KKR--------------------13.8--------15.0
Permira----------------46.0--------65.6
Silver Lake------------17.3--------17.3
TPG--------------------12.1--------13.7
Mean-----------------23.2-----26.7
Median---------------19.5-----22.8

Looking at the main US ones, point taken. On the whole though, with the large-cap European guys in as well, not a bad performance.

Array
 
Mar 14, 2014 - 10:18am

Marcus_Halberstram:

Across CalPERS megafund investments (with and without the crisis era '06 vintage):

-----------------------w/'06-------w/o '06

Advent-----------------36.3--------41.5

Apollo-----------------17.5--------18.5

Blackstone-------------20.1--------24.6

Carlyle----------------18.8--------21.0

CVC-------------------24.9--------24.9

H&F--------------------25.1--------25.1

KKR--------------------13.8--------15.0

Permira----------------46.0--------65.6

Silver Lake------------17.3--------17.3

TPG--------------------12.1--------13.7

Mean-----------------23.2-----26.7

Median---------------19.5-----22.8

Looking at the main US ones, point taken. On the whole though, with the large-cap European guys in as well, not a bad performance.

Which funds are you looking at for this? I'm on the Calpers website and I'm not getting numbers anywhere near that. Blackstone - 17%
Advent - 31%
h&f - 19%

 
Mar 14, 2014 - 2:38am

These numbers still look high vs just averaging all the calpers funds on their website, do they provide the average on their website? Point was anyhow around the word consistently, there's a retarded amount of variance around these returns with some funds down and others returning 50pc irr (although this 50 usually isn't over full 5years). Recent fund performance (let's define as anything 1990plus) is just not that good and that's not just 2007, which should be included in any returns analyst give you have somewhat of a structural industry problem of doing most deals at top of the market as financing and investor funds are most readily available.

I also think saying s&p generates 8pc return and or generates 20pc that's huge value creation isn't right as you would have to take s&p bought with similar amount of debt or using options as PE uses plus then add a huge premium for the 10yr lockup

 
Mar 14, 2014 - 2:44pm

Debates about whether certain alternative investment vehicles generate alpha are so inane.

The market value of labor and services is a catallactic phenomenon, not a matter of intellectual debate among spectators. I can assure you that millions of economic actors with counteracting incentives produce a far more rigorous valuation of services than do a bunch of random WSO-ers looking at percentages and bickering about proper benchmarking, risk adjustments and fund perimeters for adjudicating "actual alpha".

CalPERS has a great deal more information off of which to dictate their investment allocations, employs much more sophisticated professionals to manage those allocations, and has a direct monetary incentive to minimize unnecessary fees. Employees at KKR keep abreast to the market rates for their labor both intra- and extra-industry, using which they negotiate their salary, benefits, cash bonus, carry, co-invest, etc. to their advantage, which is a strong force against unjustifiably high wages for senior individuals and opposes the desire of shareholders to translate fees into dividends rather than compensation. On the other hand, this also directs employees to maximize the fees charged to CalPERS (which is linked closely to fund returns); thus increasing the carry pool and, likely, their compensation. The shareholders of KKR hope to minimize wages and maximize fees.

Expand your horizon to the entire private equity industry and you're talking about thousands upon thousands of independent economic agents. The chances of any individual being able to sustain unjustifiably high wages or dividend income is essentially nil.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Mar 23, 2014 - 1:10pm

setarcos:

I think overall the market varies between a 'rational' and 'irrational' state, why else would there be bubbles and busts? Or alternatively I'd argue that the market is efficient in a state of equilibrium, however the market would only ever being in equilibrium transiently.

Of course this observation merely hinges on your arbitrary delineation of what is a "rational" or "irrational" state, which makes it no more helpful than directly arguing you personally believe PE/HF chief compensation is inflated. Since I am more inclined to treat the price arrived at by market catallaxy as "rational" (after all, it integrates many thousands more actors with much more economically aligned incentives than do WSO opinions), I think it's safe to go with that determination.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Mar 25, 2014 - 4:53am

NorthSider:

setarcos:

I think overall the market varies between a 'rational' and 'irrational' state, why else would there be bubbles and busts? Or alternatively I'd argue that the market is efficient in a state of equilibrium, however the market would only ever being in equilibrium transiently.

Of course this observation merely hinges on your arbitrary delineation of what is a "rational" or "irrational" state, which makes it no more helpful than directly arguing you personally believe PE/HF chief compensation is inflated. Since I am more inclined to treat the price arrived at by market catallaxy as "rational" (after all, it integrates many thousands more actors with much more economically aligned incentives than do WSO opinions), I think it's safe to go with that determination.

I think that it's erroneous and costly that you dismiss the importance between a distinction of irrational and rational states on the basis of it being somehow an 'arbitrary delineation'. That, quite frankly, is ridiculous, especially considering you follow such a dismissal by your own arbitrary adoption of catallaxy as 'rational'. How is that decision not contradictory to your previous statement? It completely ignores fundamental systematic features of irrationality in markets (unless you are discounting the entire body of work from Behavioural finance and economics). I'm merely suggesting that such a market may be susceptible to higher bouts of irrationality at certain crisis, or euphoric points.

 
Mar 25, 2014 - 10:56pm

"I like red better than blue, blue better than yellow, yellow better than green, and green better than red."

People actually demonstrate this logically inconsistent behavior. I don't know why it's controversial to say that people aren't perfectly rational. If you were married you would know for certain that people aren't always 100% rational.

 
Mar 31, 2014 - 2:32pm

@northsider

if you say that "human action, by definition is rational" then there's no way to argue.

but in the way ppl normally think about "rational" I would disagree.

if someone gets drunk and after talking to his friend decides to pour his life savings into a random microcap stock on a whim (because in his impaired state he believes that would maximize his future wealth), i'd say that's being irrational. people make dumb impulsive decisions all the time.

consider the example of a mentally retarded person investing in the markets. you can say he's being "rational" because he's trying his best to make money even when making dumb decisions.

but often when ppl speak of "rationality"in the markets I think it's with respect to (what they believe is) a more informed viewpoint.

as in, it would be irrational for me to make the same decisions as a mentally retarded person, so I will refer to his actions as irrational.

 
Mar 31, 2014 - 5:30pm

cauchymonkey:

@NorthSider

if you say that "human action, by definition is rational" then there's no way to argue.

but in the way ppl normally think about "rational" I would disagree.

But is an exercise in pure vanity to label one particular judgment of value "rational" and dismiss all others as "irrational", since there is no aprioristic reason to prefer your values to mine.

if someone gets drunk and after talking to his friend decides to pour his life savings into a random microcap stock on a whim (because in his impaired state he believes that would maximize his future wealth), i'd say that's being irrational. people make dumb impulsive decisions all the time.

consider the example of a mentally retarded person investing in the markets. you can say he's being "rational" because he's trying his best to make money even when making dumb decisions.

but often when ppl speak of "rationality"in the markets I think it's with respect to (what they believe is) a more informed viewpoint.

as in, it would be irrational for me to make the same decisions as a mentally retarded person, so I will refer to his actions as irrational.

By labeling your judgment re: the value of securities as "more informed", you exercise nothing more than self-aggrandizement. There can be no apodictic law of value other than the level arrived at by catallaxy. You are free to advance arguments about why one should, for instance, pay you $50,000 to purchase your car (horsepower, fuel economy, rarity, design, etc.), but if there are no willing buyers at your suggested price, your analysis is moot. Value is judged by the free actions of independent agents, not your models of human behavior.

When you label these individuals "irrational", you mean merely that their value judgments do not accord with your preferred model of economic behavior. Yet, to the extent that mentally impaired individuals are economic actors, it would be foolish not to integrate their perspective in any reasonable model of market prices. Dismissing such action as "irrational", as it were, would by your definition make your model of value "less rational".

Crucially, recognize that if you actually meant mentally impaired individuals acted irrationally (i.e. without reason), their actions would be random ex hypothesi and would cancel out in long-run pricing.

Unsurprisingly, then, your argument from fringe examples (supposed mentally impaired investors throwing around their "life savings" on a whim) adds dubious value to a discussion regarding market-clearing compensation for private equity fund managers. Call me aggressive, but I find it safe to assume the impact of drunken pension fund managers agreeing (disproportionately!) to uncharacteristically high performance fees is negligible.

Note, however, that if your extreme counter-factual were relevant - that is, if the impact of drunken pension fund managers is persistent - the market-clearing price of private equity compensation is not only a more accurate model of human action (and thus more relevant than your self-ascribed "rational" judgment), but it is also more reasonable! After all, either the pension fund constituents prefer the drunken decisions of their managers (why else would they continue to employ them?) or would-be private equity managers are unwilling to offer incremental fund management at current market prices (why else would these "inflated" fees not have been arbitraged away?). Regardless, your supposed model of "rational" prices would be wholly irrelevant.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Mar 31, 2014 - 9:38pm

I used an extreme example to illustrate that it's not obvious that u can just say market prices are "rational"

"Crucially, recognize that if you actually meant mentally impaired individuals acted irrationally (i.e. without reason), their actions would be random ex hypothesi and would cancel out in long-run pricing."

I don't see why this is true. Mentally impaired people don't necessary act "randomly" nor would their acts cancel themselves out. They don't act "without reason" they act according to THEIR reason (which could be flawed).

Suppose a bunch of mentally impaired market participants can't do division.

Using addition and subtraction they might act similarly in trying to value securities but from the perspective of someone who knows division, their actions would be irrational.

"When you label these individuals "irrational", you mean merely that their value judgments do not accord with your preferred model of economic behavior."

Not really? Suppose some individuals want to make as much money as possible by buying securities. I also want to make more money by buying securities. We have the same value judgment here.

However, if the way they try to achieve their goal is flawed (say they use astrology or something or sell/buy based on purely gut emotion and impulse), then from my perspective, I could say they are being irrational.

 
Mar 31, 2014 - 9:54pm

Cauchy & others: I think you're all using a lay definition of rational.

Northsider is using the definition from the economic axiom. It's self-evident (or incontrovertible or whatever) precisely because it's an axiom.

I think you guys are all arguing past each other, but to be precise...

When you say "it's not obvious that u can just say market prices are 'rational'... if the way they try to achieve their goal is flawed"

You're really saying that their actions fail to conform with rational choice (axiomatic sense) based on your utility function (or your estimation of their utility function). Maybe your estimation of their utility function is based on their claimed utility function. Then again, their claimed utility function can diverge from their actual utility function (e.g. guy values feeling of investing, negatively values effort in investing but claims to value effort in investing).

Hopefully helpful

 
Apr 1, 2014 - 2:12am

DullCarrot:

Cauchy & others: I think you're all using a lay definition of rational.

Northsider is using the definition from the economic axiom. It's self-evident (or incontrovertible or whatever) precisely because it's an axiom.

I think you guys are all arguing past each other, but to be precise...

When you say "it's not obvious that u can just say market prices are 'rational'... if the way they try to achieve their goal is flawed"

You're really saying that their actions fail to conform with rational choice (axiomatic sense) based on your utility function (or your estimation of their utility function). Maybe your estimation of their utility function is based on their claimed utility function. Then again, their claimed utility function can diverge from their actual utility function (e.g. guy values feeling of investing, negatively values effort in investing but claims to value effort in investing).

Hopefully helpful

+1

A great explanation. Especially by drawing the distinction between claimed values and observed values. We know that the monk espouses the value of celibacy, but when we observe him having sex we are surely not confounded re: the catalyst of his behavior.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Mar 31, 2014 - 11:25pm

i guess i dont understand the value of defining rationality as "doing anything that has a reason." Then since supposedly everybody does something for some reason everyone's rational. Seems like when u define rationality that way it becomes an pointless concept.

i can easily imagine two people having the same utility function but one person trying to maximize it in a dumb way...i think it's reasonable in lay terms to call that irrational behavior.

like imagine somebody in the present day who's a farmer (farmer1) and his utility is based on how much crop he harvests. he has a superstition that if he does a rain dance all day it'll help him get more rain.

farmer2 has the same utility based on crop harvest but realizes doing rain dances are a waste of time and spends his time more productively.

in this case i'd say farmer1 is being irrational compared to farmer2. i feel like this is how most people use it in real life and it's a useful word when used this way.

now if someone wants to argue that farmer1 is rational becuz...according to his complex function doing rain dances adds more utility or gives him emotional comfort or whatever then fine...but using that argument to say everyone is "rational" seems pointless.

especially when it comes to markets, if people act "irrationally" in the sense i am using, it can drive security prices way out of fair value. when people mistook tweeter for twitter on ipoday and the stock went up 14x i dont think that stock price was "rational"

 
Apr 1, 2014 - 2:06am

cauchymonkey:

i guess i dont understand the value of defining rationality as "doing anything that has a reason." Then since supposedly everybody does something for some reason everyone's rational. Seems like when u define rationality that way it becomes an pointless concept.

Nothing could be further from the truth! The observation that human action is rational justifies praxeology in the first place! No conversation about human action could continue if we did not agree on elementary principles, viz.:

P1) man is eager to substitute a more satisfactory state of affairs for a less satisfactory (to remove some uneasiness)
P2) man has the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness (connection of cause and effect)
P3) human action is rational (based on reason)

It is these observations that permit us to understand behavior at all. Naturally, it would make no sense to discuss the actions of hypothetical farmers, drunken pension fund managers, etc. if we did not first accept the aforementioned principles, for otherwise there could be no information gleaned from behavior (action as manifest chaos). For effect, let's look at your own example:

especially when it comes to markets, if people act "irrationally" in the sense i am using, it can drive security prices way out of fair value. when people mistook tweeter for twitter on ipoday and the stock went up 14x i dont think that stock price was "rational"

Of course it is only because you accept the principle "human behavior is rational" that you offer explanatory notes like "because people mistook Tweeter for Twitter, the stock price of Tweeter increased fourteen-fold". If human action were not necessarily rational, this explanation would be without merit, for the price of Tweeter could have increased for no reason at all (chaos). Since you agree that human action is rational, you can intuit that there must be a reason why Tweeter's stock price climbed fourteen-fold today.

You then carry this analysis one step deeper by constructing some rough model for market behavior, viz., i) investors' rational action is aimed at the end of increasing wealth and ii) investors value securities based on "intrinsic value" (let's not digress into a debate about valuation). It is by offering this system of values that you arrive at the judgment "investors' behavior in reaction to the Twitter IPO was misguided, since the 'intrinsic value' of Tweeter is not affected by the IPO of Twitter". If human action were not rational, no such determination would be valid, since the increase in Tweeter's stock price would have been the product of pure chaos (action without reason) and nothing could be further deduced from that fluctuation.

i can easily imagine two people having the same utility function but one person trying to maximize it in a dumb way...i think it's reasonable in lay terms to call that irrational behavior.

Note your implied distinction between means and ends. In fact you have actually assumed herein that human action is rational! You assume that the desired end of both acting men is the same (they both seek to remove the same uneasiness), and then observe that the means of one man (let's call him #1) is "less dumb" than the other's (#2) insofar as #1 better achieves the desired end (tighter connection between cause and effect).

Of course this value judgment takes rationality for granted! For if human action could be irrational, then no such observation ("dumbness of action") could be made validly. We could make no deductions about the actions of #1 or #2, since their actions were effected without reason. Rationality, therefore, serves as the link between chosen means and desired ends.

like imagine somebody in the present day who's a farmer (farmer1) and his utility is based on how much crop he harvests. he has a superstition that if he does a rain dance all day it'll help him get more rain.

farmer2 has the same utility based on crop harvest but realizes doing rain dances are a waste of time and spends his time more productively.

in this case i'd say farmer1 is being irrational compared to farmer2. i feel like this is how most people use it in real life and it's a useful word when used this way.

But by such crudely defined terms, Farmer 1 would surely believe (erroneously, I suppose) that Farmer 2 was acting "irrationally" and vice versa. You merely agree with the construction of Farmer 2's reasoning and have thus anointed that behavior "rational". In fact, you agree that Farmer 1 is acting rationally, which has permitted you to judge the merit of his means to achieving the same ends as Farmer 2. Once again, without first accepting this principle, you could render no judgment about the means of either Farmer, since they would have employed different means for no reason at all.

But suppose there had also been an entrepreneurial Farmer 3, who had, unbeknownst to you and Farmer 2, developed a technology whereby freezing his crops caused them to produce more prolific harvests. As he placed his crops into a freezer, his action would to Farmer 2 and you no doubt accord with your crude definition of "irrational". Yet his means would ultimately prove better at achieving the desired end than your preferred method; thus it would be, by your definition, "more rational" despite your objections. We can therefore determine that because human knowledge is incomplete, it is useless to ascribe to your definition of "rationality" - we can never know what behavior is truly "rational", since in every case its definition would be contingent on the set of values and beliefs of the observer.

Your definition is muddled. It's not quite clear what you mean by labeling Farmer 1's behavior as "irrational" other than that his behavior doesn't comply with what you believe to be the preferred means of producing the same ends. However, in the case of Farmer 3, your belief turned out to fail the test of JTB knowledge. It was thus vain of you to label Farmer 3's behavior "irrational", since you in fact possessed an incomplete idea of "rationality".

Because no one has a complete idea of "rationality" as you've seemingly defined it, it is much cleaner to accept the axiomatic framework I have offered. We can be clear in our assumption that each of Farmers 1, 2 and 3 act according to reason, assert further that we believe they all aim at the same end (prolific harvests) and make empirical observations about the success of their chosen means. In a market, Farmer 1 incurs a great cost for his misguided beliefs and would be rightly incentivized to adopt Farmer 2's method (increasing the price of, say, Farmer 2's pesticides). But it would be equally clear that despite the anointment of being "rational", Farmer 2 also incurred a cost by not adopting Framer 3's method.

Within this context, we begin to see how market catallaxy conveys information through prices by leading rational agents towards those means which most effectively produce their desired ends. Praxeology, then, teaches us that prudent policy allows each Farmer to freely pursue their chosen means rather than preemptively anointing one with the label of "rational". The interaction of such disagreements re: preferred means is the catalyst of exchange, which in turn increases total wealth in an economy.

It is perhaps worth noting that praxeology can make no statement about which ends a man "ought" to pursue. As I have stated earlier, there is no aprioristic reason why a man "ought" to seek prolific harvests rather than performing rain dances should the latter bring him more satisfaction (i.e. remove more unease). This is the content of ethics, and there is no sense in passing judgments in the context of this discussion. Even as you assert Farmer 1's method is less preferable, you surely also agree that it is best that you not be given the power to coerce Farmer 1, for in so doing, you would also have coerced Farmer 3 and produced a sub-optimal outcome even as assessed by your own values. It is best that we allow all men to judge for themselves the proper course of action, trusting that no one is justified in substituting their own values for those of the acting man.

now if someone wants to argue that farmer1 is rational becuz...according to his complex function doing rain dances adds more utility or gives him emotional comfort or whatever then fine...but using that argument to say everyone is "rational" seems pointless.

Hopefully now you agree that it is, far from being pointless, the cleanest and most practical conception of human action.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Apr 2, 2014 - 12:03am

Sounds like a bunch of people practicing for the debate team. This thread has nothing to do with its title anymore.

I hate victims who respect their executioners
 
Apr 2, 2014 - 11:30am

Tax proposal:

**If you define your income by an hourly rate (e.g. "I just got a raise to $12/hr") - 10% tax rate
**If you define your income by a salary/bonus (e.g. "My salary went up to 100, but my bonus was only 60%") - 25% tax rate
**If you define your income by returns (e.g. "we finished with a 22% IRR on this deal, but the total portfolio was up only 18%") - 50% tax rate
No deductions.

Totally unenforceable, and yet no worse than the current tax policy.

 
Apr 2, 2014 - 12:07pm

jankynoname:

Tax proposal:

**If you define your income by an hourly rate (e.g. "I just got a raise to $12/hr") - 10% tax rate

**If you define your income by a salary/bonus (e.g. "My salary went up to 100, but my bonus was only 60%") - 25% tax rate

**If you define your income by returns (e.g. "we finished with a 22% IRR on this deal, but the total portfolio was up only 18%") - 50% tax rate

No deductions.

Totally unenforceable, and yet no worse than the current tax policy.

I'd just start paying everyone an hourly rate with a bonus equal to our return for the year lol

I hate victims who respect their executioners
 
Apr 2, 2014 - 1:18pm

jankynoname:

Tax proposal:

**If you define your income by an hourly rate (e.g. "I just got a raise to $12/hr") - 10% tax rate

**If you define your income by a salary/bonus (e.g. "My salary went up to 100, but my bonus was only 60%") - 25% tax rate

**If you define your income by returns (e.g. "we finished with a 22% IRR on this deal, but the total portfolio was up only 18%") - 50% tax rate

No deductions.

Totally unenforceable, and yet no worse than the current tax policy.

On the contrary, this is perhaps one of the only imaginable tax policies that would be decidedly worse than our current system...

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Apr 5, 2014 - 4:29pm

GoingConcern:
Read carefully. Not no incentive, but much lesser gain. Instead of making 20 mn it would be 12 mn. Instead of making 110 mn it would be 30 mn. Changing the parameters of a game doesn't mean people stop playing.

I mean, this same logic would apply to any rate up to 100%, for all income levels. Intuitively, we know that the idea this would not deter labor is absurd.

More importantly, you're operating under the misguided assumption that the government would be better at spending the $80mm it taxed from the man making $110mm than the man himself would. Since we likewise understand that individuals are generally more efficient in spending their own money on themselves than they are at spending other people's money on people other than themselves, we can conclude more resources would be wasted via this taxation, in addition to the reduced incentives to invest.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Apr 5, 2014 - 5:09pm

NorthSider:

More importantly, you're operating under the misguided assumption that the government would be better at spending the $80mm it taxed from the man making $110mm than the man himself would. Since we likewise understand that individuals are generally more efficient in spending their own money on themselves than they are at spending other people's money on people other than themselves, we can conclude more resources would be wasted via this taxation, in addition to the reduced incentives to invest.

Maybe...I acknowledge that in real life governments are inefficient and full of corrupt politicians. But from a social/philosophical standpoint I am also not in favor of extreme wealth concentration and an ever growing wealth divide between the classes.

 
Apr 5, 2014 - 6:10pm

Going Concern:

Maybe...I acknowledge that in real life governments are inefficient and full of corrupt politicians. But from a social/philosophical standpoint I am also not in favor of extreme wealth concentration and an ever growing wealth divide between the classes.

Wealth equality cannot be the goal of prudent policy because it is not intrinsically desirable. Tomorrow, the U.S. could retroactively tax all wealth, say, in excess of $1mm at a 100% effective rate and redistribute everything to the least wealthy. The U.S. would immediately become more equal with respect to wealth, yet we both understand that such a policy would be gravely misguided.

Even the most egalitarian economy is not desirable if the median wealth represents poverty. The only prudent aim as a matter of policy is maximizing prosperity. And it is unwise to believe that redistribution is a path to prosperity. As a society, we ought to allocate resources as efficiently as possible, since it is the path that leads to a maximization of wealth.

And the idea of "concentrated wealth" is misleading. In a world of fungible currency and fractional reserve banking, wealth is never hoarded, it is either either consumed, lent or invested. Bill Gates doesn't "have" $75bn; he has $75bn in investments, which represent jobs, innovation and capital development. The U.S. would most certainly not be better off were it to seize Gates' wealth and arbitrarily dispense it according to the whims of some government official.

Redistribution doesn't create wealth, it merely makes some people poorer and others richer - the stock of goods and services (which is the real measure of prosperity) remains the same. The way that we have become more prosperous in the 21st century than we were in the 20th or 19th is via value-Accretive exchange. Had we just traded money among people, never increasing the stock of goods and serves, we would exist at the same standard of living as our predecessors, just with a different set of relatively rich and relatively poor citizens.

That might be more equal, but I think you will agree that it would not be more desirable.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Apr 8, 2014 - 12:20pm

http://www.ritholtz.com/blog/2014/04/the-new-gilded-age/

There ya go... I disagree with a lot of the "prosperity" narrative above. I don't think maximizing prosperity or GDP should be the goal here. I think the idea is to maximize average welfare, and reduce the left tail of the distribution to a reasonable level. It is true that governments are notoriously inefficient at spending money but at least they spend it. That creates a positive feedback loop in the economy which is infinitely better than keeping it in some bank that will just leave it in the form of excess reserves at the Fed to collect the risk free 25bps. I'm not a policy maker, but I think the gist of the answer needs to be something like 'tax rates gotta go up'.

 
Apr 8, 2014 - 12:38pm
"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
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