Economic utility vs monetary compensation

Here’s something I’ve been wondering about for a while: Are economic utility and monetary profits well correlated? I have the impression they really aren’t, often in surprising ways.

A casino is a prime example of this. There is no tangible product being produced! Essentially, customers in a casino are playing a zero sum game that is rigged to favour the casino owner. Thus, the only purpose this serves is to concentrate wealth into the casino owner’s pocket. This is the nasty result of customers naively trying to make money out of nothing, which of course is impossible- it must come at someone else’s expense. Thus, money is being traded around, everyone’s relative slice of the pie is changing, but the key element is missing: there’s no concrete output! No food, no infrastructure, nothing that brings value to society and increases people’s standard of living.

Another example is a business that functions through buying goods at a certain price, then selling those same products at a higher price, thus turning in a monetary profit while doing nothing more than acting as a trading middleman.

Eg/ Alan sells a camera to Bob for 50$. Bob then sells that camera to John for 75$. Had Alan simply sold his camera directly to John, then Bob would’ve earned nothing. Thus, Bob is turning a 50% profit just by facilitating a trade. While this isn’t completely useless, it could easily be categorized as “non-productive labour”. Bob would’ve contributed a lot more economic utility to society had he build a bike and turned a 50% profit, for instance.

To take this argument a little further, a bank’s entire enterprise can be seen as being one giant trading middleman. Let’s suppose this time that Sarah deposits 5000$ into the bank. The bank then decides to loan 2500$ of Sarah’s money to Alice, who’s looking to pay for a car. Once the loan’s repaid the bank makes a profit in the form of interest, let’s say 1000$. But what’s objectionable here is that had Sarah loaned the money directly to Alice, Sarah would’ve made 1000$ in profits, not the bank! Something is clearly off here. Sarah’s deposit is basically considered an investment in the bank, yet she’s not receiving any return on that investment! It would seem fair that Sarah gets most of the return, while the bank still takes a share for having done things like checking Alice’s credit history and coming up with an agreed collateral (probably the car) that is legally enforced.

Nonetheless, a bank’s loans can provide positive, neutral or negative economic utility depending on what the borrower does with the loan. The car loan is at least sensible since the increased transportation ability will allow Alice to reach work more quickly, thus increasing her production efficiency. However, if someone takes a loan in order to buy toys, the loan actually ends up being parasitic in nature. Granted, the toy could make the consumer happier and therefore more productive, but this factor is largely negligible. The point remains, a bank profits equally whether a loan is used productively or whether it’s used completely irresponsibly.

I recently worked out a spreadsheet that looked at how mortgages vary based on a few simple variables: Cost of house, fixed interest rate and monthly payment (which essentially decides the length of the mortgage). What I was amazed to find is that even at our supposedly low 2011 market interest rates of 4-5%, it is quite possible to form a mortgage that ends up costing the borrower more than twice the cost of the house he bought. That’s an obscenely large profit for the bank, especially when most of the initial monthly payments are going directly towards paying off interest (ie the banks don’t have to wait very long to get most of the yield on their return). This would only make sense if the new homeowner’s economic utility is increasing proportionally. Evidently, this isn’t the case. Whether someone is living in an apartment or in a house has very little bearing on their work productivity.

Come to think of it, that leads to another oddity of sorts. Since rent can be charged indefinitely, a property owner can profit forever from this. This implies a rented property has virtually infinite value, whereas a house’s is decidedly finite. Should the rented property not become owned by the person paying rent after some large amount has been paid? Something seems wrong when a property owner can make a living off charging rent and doing nothing else. For instance, if I owned 5 apartments and charged 1200$/month for each, I’d be making 6000$/month, or 72k/year (!) whilst sitting on an armchair the entire time. Sure, the property might’ve cost a fortune to buy, but once I manage to break even, I can ride the gravy train for the remainder of my life. Imagine what would happen if someone inherited all these properties! There’s definitely a lack of economic utility involved when I can manage to live off a passive income stream that involves nothing more than letting others use my property.

In fact, it becomes quite astonishing how many jobs provide next to no economic utility. An enormous portion of the service industry is guilty of this: A person ripping movie tickets in a movie theatre could make the same minimum wage as a factory worker, who’s contributing to the production of countless items. Or equally as upsetting, a cashier makes the same wage whether 90% of his/her day is spent in idle time, or whether the store is constantly busy. Actually, this is true of any job with a fixed pay structure, but that’s an argument for another day.

What happens when a programmer designs a computer program that manages to double the productivity of 9000 industry workers? Should the programmer make 9000 times the wage of an industry worker? If industry workers make 40k/year, the programmer would be deserving 360 million/yr for his economic output! What about a below average financial investor who gets more people to lose money in portfolio plans than he gets people to gain? His economic utility may very well be negative, as he’s slowing down efficient trade, yet his salary won’t be affected so long as he’s competent enough not to get fired.

What about teachers? Without them, an educated workforce would be impossible. Once again let’s make some basic assumptions:

-Professor Jones teaches 2000 students per year (probably teaches in an auditorium)
-College graduates make 20% more money than high school graduates
-High school graduates make 35k/year on average
-It takes 4 years to graduate college

Based on this increase in economic efficiency alone, a college professor should make:

(2000*35000*0.20)/4 = 3.5 million dollars

Wow. Even if teachers were paid 1/10th of this amount (consider factors like independently motivated students, cost of student loans, etc), they would still make 350k, which is a far cry from what they make now.

I think if just about every profession were examined in such ways, the inequality between economic utility and monetary compensation would be outrageous (either far too little recognition or far too much).