FINANCIAL WIZARDRY….Brad DeLong asks a question today that’s also perplexed me for quite a while:

I wound up being quite unhappy with my “fear of finance” piece, because it completely ducked one of the most important questions: why the extraordinarily outsized pay packets of the high financiers? Why doesn’t competition — which sorta works elsewhere in the economy — cause us to see greatly reduced earnings? We understand, we think, why celebrities get paid so much — a combination of increasing returns in distribution, being the genuinely best in the world, and being well-known for your well-known-ness. But why financiers?

What is it that blocks effective entry and competition, exactly?

If Brad doesn’t know the answer, I don’t feel so bad for not knowing either. But it’s a good question. Why is that, say, in stock trading, the traditional fee structure got wiped out years ago in favor of hundreds of discount brokers, but the same hasn’t happened in other areas? Sure, M&A (to take one example) is a business that requires a lot more smarts and a lot more connections than humdrum stock brokering, and because of that there are a limited number of firms that can do it effectively. But “limited number” is still enough that there ought to be a fair amount of competition on price. So why are M&A fees still so uniformly stratospheric? Where’s the market failure?

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