Friday, March 25, 2011


Matt Yglesias links to a study by the Kaufman Foundation and excerpts this passage, also his emphasis:
The financial sector, which includes lending, stock brokerage, complex securities and insurance, among many other services, derives enormous profits from collateralized debt obligations. These new products require such sophisticated engineering that the industry now focuses its recruiting on new master’s- and doctoral-level graduates of science, engineering, math and physics, and pays them starting wages that are five times or more what they would have earned had they remained in their own fields.

“Because these new hires are often the very individuals who otherwise would have comprised the most robust pool of prospective founders of high-growth companies, the financial services industry’s steady rise has had a cannibalizing effect on entrepreneurship in the U.S. economy,” said Paul Kedrosky, Kauffman Foundation senior fellow and one of the paper’s authors. “Excessive financialization exacerbated and distorted the flow of capital in the economy, potentially suppressing entrepreneurship by drawing away entrepreneurial talent.”

Unfortunately, the link Matt provided didn't seem to be working when FLG clicked on it, but FLG is extremely skeptical.  The argument here is that engineering graduates have the technical skills to found technology start-ups.  Banks sucked up some of this talent, thus depleting this pool.  Thus, banks are evil fuckers.

FLG sees a couple of problems.  First, it's not like banks hoovered up every engineering and math graduate over the last 10-20 years.  Only a small portion of math, science, and engineering majors went into banking.  Second, FLG saw an interview with Matt Damon once, it might have been on Inside the Actors' Studio, where he said that whenever somebody asks him if they should be an actor, he always says "No."  Not because he's trying to be mean, but because you'll only be successful if you really want it.  And if you really want it, then it doesn't matter what he says anyway.  FLG thinks this is sort of like entrepreneurship.  Every successful entrepreneur FLG has ever heard of was driven to found a business. Often they fell in love with some idea they had.  Or maybe they like the idea of building a business from scratch.  Whatever that drive was, like Damon's theory about being an actor, it didn't matter if somebody said "No."  FLG thinks, in this light, the banks hiring quants a bit of a red herring.  The people who want a steady paycheck would be drawn to Wall Street.  The people who have a great business idea?  Not so much.  The Kaufman study assumes all engineering and math grads, since they have technical skills, are potential entrepreneurs.  But in reality, they're not.  The ones who want to found their own company aren't going to be swayed.

But FLG, be honest, this has to have some effect.  Okay.  FLG agrees.  At the margin, this may sway some people.  But think of it this way.  If you have some business idea that you think is worth billions, then making hundreds of thousands or millions isn't necessarily appealing.


Galatea said...

But plenty of entrepreneurs start a business without an idea that they think is worth billions - what they have, as you describe in your own experience, is an idea that they like, or they think will support them, or they think will be fun to execute. Not the same thing.

So smart kids, who realize their dream idea won't be the next Facebook, tend to come up against the need for funding. At this point they could take a risk, take out a loan, apply for grants, sail out there and maybe fall flat on their faces right out of school... or they could take this cushy 80k/year job right now, and maybe do that startup thing once they've got a little savings.

I think the correlation here is that the potential entrepreneurs are the ones most motivated to accumulate capital, and therefore the ones most likely to take the finance work in the meantime.

Whereas the graduates who went to school in order to be scientists, engineers, and mathematicians, are going to go be these things, and financial sector offers of just scads of money aren't as attractive. What would they do with it? (Answer: MORE SCIENCE.)

David said...

1)For the seriously lucrative jobs, Wall Street firms mostly tend to focus on Ivy League graduates. So their hiring of quantitatively-talented people leaves the vast reservoir of engineering/science/grads from excellent but lower-status colleges largely untouched.

2)The idea that entrepreneurs need to be scientific/technological experts is overstated. Some are, some aren't. For example, GoTryItOn, a social-networking business for fashion advice, was founded by Marissa Evans, who got her BS degree in Human Development (whatever that is, but doesn't sound very technical) before getting an MBA.

3)A much more serious issue is the cultural prejudice against manufacturing, which is undoubtedly steering many talented people away from this field.

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