Thursday, 10 September 2009

Internet gains vs Wall Street innovations

This is the title of a very interesting article written by Prof Prabhudev Konana of the University of Texas at Austin. Click here to read his article.

He compares two massive streams of innovations in the last two decades – the internet and the financial sector. The Internet has revolutionalised our way of life, created jobs and wealth for a lot of people and , in general, has created unprecedented social good. Financial innovation has created lots of wealth and done good, but it has done bad as well. Prof Konana wonders whether the rewards for financial innovation have been disproportionate and whether our systems for rewarding innovation are appropriate.

Thought provoking article ( the Professor has written it for the average reader and not a scholar – so its refreshingly devoid of 25 letter words that business professors often inflict on us, mortals). It nicely captures one of the dilemmas I have been musing on – is the reward system for the financial sector “right” ? On the one hand, these financial innovations have enabled many liquid markets to emerge, enabled access to capital for business which otherwise would have been impossible, given tools for people to spread and manage risk, and brought efficiency to markets and businesses that have been unprecedented. On the other hand, huge sums of money can be made (or lost) on just timing or luck without an attendant economic benefit – in fact often to the accompaniment of economic destruction.

I am having great difficulty reconciling with the idea that a society can bestow the highest wealth on just being at the right place at the right time. The concept of “easy money” as opposed to one “earned through hard work” is sitting uneasily in my “socialist heart”. I am a subscriber to Narayana Murthy's view that you should be a capitalist in your mind and a socialist at heart !

There are of course many sides to this argument and a blog post is not the equivalent of a research thesis. This blog is a muse on business; so I can take the liberty of wondering aloud and perhaps stimulating you to do so too. As Prof Konana asks – should the contributions of Prof Berners-Lee and John Paulson be even on the same page ??


Srivats said...

Epdeenga daily correcta ezudhareenga :P

athivas said...

I feel prejudiced about this disparity in usage of internet. Either, it should be made available to all, or it should not be used (atleast for earning reasons) to any!This is unfair!

athivas said...

You are a living book of business,Ramesh!(appendices, references, bibliographies included) :)

kiwibloke said...

I guess the Internet innovators have disproved the theory that a better mousetrap makes you richer - coming to think of it, I guess the theory the more egalitarian/ widely usable a product(Innovation) is the less money you make seems true for most (exceptions being the likes of Gates, Jobs, Brins/Pages, Dhams of the world) To support this harebrained theory, most of the financial products are enigma wrapped in mystery, supposedly understood by a few GOMBAs (Grossly overpaid MBAs). Ergo! the IT geek makes less money than the financial dude!

PS: You see a spring in my step, 'cos I'm in the nearest landmass to the land of the long white cloud. In Sydney/Melbourne across the ditch from In Zid

Adesh Sidhu said...

It was a nice read. Thanks for sharing this article.

mahesh said...

Great Article and comparison Ramesh. Thanks for the wonderful posts that you write every day. The first thing I intuitively do every morning is to open your blog and pray there is a new article.

I fully agree "Investment Bankers" are overpaid GOMBAs.

There was actually a debate some time back in America just before the start of the dot com era where people were questioning hefty salaries paid to Corporate Heads while obscene amount paid to NBA stars was never questioned. The reasoning that the study came out was that what the sport stars do in the arena is in the public to see and appreciate/ criticize where as what corporate guys did in the board room was not seen by the masses.

There was also a joke that 50 striking Lehman Brothers caused a major disruption outside Lehman office!! reason - they all parked their Red Ferraris at the entrance of Lehman and no one could get in !!!

Ramesh said...

@srivats - etho fluke sir. ungalukku correcta pattutuda ? Delighted !

@Savitha - Oh thanks for your very kind words. Yes the pricing model in internet is evolving - the freebie model is not sustainable.

@kiwi - great thought - the more egalitarian the invention, the less money you make out of it. Come to think of it, its very true. The Oz air seems to have charged you !!

@Adesh - Thanks mate

@mahesh - Hey - thanks for the nice words. Good thought about the contrast with NBA stars, although I believe sports stars are grossly overpaid too.

thethoughtfultrain said...

Prof Bermers Lee has made it possible for people world over to get wealthy and in a way helped the world economy positively. Mr Paulson helped just a few and destroyed thousand others. An objective thinker probably can see how is it is "Creative destructive". But people with a heart and soul know what price has been paid for the Paulson's deed. It is unfair and I definitely do not wish to see Bremers-Lee's contribution on the same page as Paulsons "creative" destruction.

Ramesh said...

@thoughtful train - Absolutely agree. Very interesting point made by Kiwi - the more egalitarian the invention , the less money you make of it.

Srivats said...

srivats - etho fluke sir. ungalukku correcta pattutuda ? Delighted !

Hello neenga chinna payyan solradhukkaaga dhaaney enna sirnnu gareengaaa :) adha konjam maathi sri nnu sollunga

Ramesh said...

@Srivats - Sir/Sri onnuthan sir (oops Sri) :)

Srivats said...


ramesh sri nnu kupuduppa :P

CMK said...

Aren't all inventions supposed to be tools and it depends how one uses them?

I recently read that some large organisations make use of superior technology to make more money (what is new). These organisations use some super computers which help them do the number crunching quicker which helps in making that much faster decisions while playing the market. Maybe these gizmos help them to be in the right place at the right time!!!

The authorities (as it happens in the movies) have caught up on this late - but, I believe, are yet undecided as what is to be done to level the field.

Ramesh said...

@CMK - you are right CMK - it all depends on how inventions are used. Take the case of atomic research that Einstein did - you could produce a bomb or you could produce nuclear energy.

Yes, I too heard about some investment banks having computers that can execute that nanosecond faster and hence have a competitive advantage ! What has the world come to !!

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