America is the greatest entrepreneurial nation in the world. But there are really two kinds of entrepreneurs here – product entrepreneurs and financial entrepreneurs –and only one of them truly builds the economy. Product entrepreneurs find new ways of satisfying customers. Financial entrepreneurs find new ways of … well, making money off money.

Problem is, financial entrepreneurship is becoming more and more dominant in the economy. Thirty years ago, finance was the handmaiden of American industry. Now industry is run by finance. For every budding Steve Jobs or Bill Gates there are now thousands of aspiring private equity or hedge fund managers. That’s because this is where the big bucks are. Which means, it’s where some of our most talented young people are going.

The problem isn’t just the brain drain. It’s what the brains are being used for. Competition in the real economy generates better products. But competition in the financial economy is often a zero-sum contest. For every investor or speculator who wins, there’s another who loses. Capital markets may be more efficient, but the added efficiencies are often minuscule – beating the competition to a profitable investment by a tenth of a second, or coming up with ever fancier derivatives, collateralized loan obligations, mortgage-backed securities. The results are ever more complicated, harder to value, and may prove diastrously fragile when the markets turn down.

Financial entrepreneurship is also forcing managers in the real economy to become ever more short-sighted, glued to the quarterly reports. Private equity moguls say they’re freeing corporations from the quarterlies but the deals they do weigh down companies with so much debt they have to focus on short-term cash flow to survive. Often they have to cut long-term investment – research, employee development, and basic innovations – in order to pump up profits so they can dump the company back on the stock market at a big profit.

What’s the answer? At the very least, stop giving tax financial entrepreneurs huge tax advantages over product entrepreneurs. Treat their compensation as income, not capital gains. And tax their partnerships that go public at the same rate public corporations are taxed.