Jeremy Bentham—he's an Englishman from the 18th-century—wrote a long treatise called Defence of Usury. In that, he took a philosophical rational view of the attack on usury, and asked if we're really better off if we capped interest rates and didn't allow people to borrow and so forth.
Lam: What was it like going into the financial industry, say, 1,000 years ago, versus today?
Goetzmann: 1,000 years ago was the period in Europe when the economy was really lighting up after the turn of the millennium. Between 1,000 and 1,200 years ago, I would say it was the beginning of the “bourgeoisization”—where people of the merchant class that used financial tools garnered a lot more respect and actually began to take control of cities in the Italian city-states and southern France. That was a period that, in some ways, was quite admirable because rule wasn't based on descent.
In China, if you go back 1,000 years ago, you get to the Song dynasty which was this amazing period in financial innovation that embodies a couple of contrasts. On the one hand, there were very clever financial innovations, such as paper money and the creation of long-distance money transfers through paper instruments. But also, the development of a financial bureaucracy. The government took over things like the tea and horse trade, and nationalized a lot of financial operations and sharply constrained the profit that merchants would make.
So just in the moment when merchants in Europe were getting the upper hand, and running the cities themselves, in China there was a constant, grabbing hand that saw the profits that merchant could make out of trade and said, “Why doesn't the government get that? Why should the merchants get that profit?”
Lam: Were people working in finance always relatively well compensated throughout history?
Goetzmann: Not necessarily. There have always been a lot of people hopeful of making money through financial operations, but there are a lot of failures as well as successes. But maybe what you're asking is this: What about at the very top?
We've got this huge inequality spread that's occurred now, and there's been a fair amount of documentation that there’s been a dramatic trend up until the last few years. From what I've seen, that inequality really is a phenomenon of the late 20th and early 21st centuries—the ratio between what a head of a bank makes and what a teller makes. I wouldn't say that the situation we see now, where we have people making billions of dollars through arbitrage and hedge funds, I'm not sure that's something that's occurred in the past, partially because now we have such deep and complex capital markets. It’s not something that attracted as much human capital as it did before.
I would say that the stakes in the financial markets are so much higher than they were before. So if you think about not the ratio between the highest-paid and the lowest-paid in an organization but the ratio between the compensation of the highest hedge-fund managers compared to the scale of investment opportunities in the world—those things may very well have remained stable through time. The ocean is getting bigger, so the top fisherman are collecting more.