Kauffman and C. Wright Mills on Financialized Meritocracy and the Spectre of Uselessness.

I think we need to move the debate forward on the financial industry, specifically its relationship to other sectors and the draw it has for our most talented people.

The Kauffman Foundation has a new report out by Paul Kedrosky and Dane Stangler, The Cannibalization of Entrepreneurship in America: Expanding Financial Sector Depleting Pool of Potential High-Growth Company Founders

The financial services industry used to consider it a point of pride to hire hungry and eager young high school and college graduates, planning to train them on the job in sales, trading, research, and investment banking. While that practice continues, even if in smaller numbers, the difference now is that most of the industry’s profits come from the creation, sales, and trading of complex products, like the collateralized debt obligations (CDOs) that played a central role in the recent financial crisis. These new products require significant financial engineering, often entailing the recruitment of master’s- and doctoral-level new graduates of science, engineering, math, and physics programs. Their talents have made them well-suited to the design of these complex instruments, in return for which they often make starting salaries five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits.

Too many of our meritocratic elites are going into finance, when they should be going into entrepreneurial and real-economy activities. I agree with the whole paper and encourage you to read it; since I agree with it I’m going to push against it a bit harder because there’s two elements of this conversation that are missing.

A lot of these discussions pivots on two points: (1) financial elites make a lot of money, they make “five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits” and (2) an argument that there are a variety of sectors and this is a matter of sectoral allocation. Too many in finance, not enough in the real-economy. There are butchers and bakers and we have too many bakers when butchers are better for the long-term.

The first suffers from a narrow view of what constitutes the benefits of working in the financial industry and the second from the role of the financial industry in a neoliberalized economy.

Let’s bring in C. Wright Mills, specifically his 1951 book White Collar: The American Middle Classes. In the post-War economy, there were these brand new things like a meritocratic upper-middle-class elite doing intellectually based work. What would they look for in their jobs? (my bold)

In the early nineteenth century, although there are no exact figures, probably four-fifths of the occupied population were self-employed enterprisers: by 1870, only about one-third, and in 1940, only about one-fifth, were still in this old middle class. Many of the remaining four-fifths of the people who now earn a living do so by working for the 2 or 3 per cent of the population who now own 40 or 50 per cent of the private property in the United States. Among these workers are the members of the new middle class, white-collar people on salary. For them, as for wage-workers, America has become a nation of employees for whom independent property is out of range. Labor markets, not control of property, determine their chances to receive income, exercise power, enjoy prestige, learn and use skills. (p. 63)

Yes, people in finance make a lot more money than if they didn’t go into finance, but salary is only one thing meritocrats look for. There’s the ability to exercise power, enjoy prestige, and learn and use skills. (Thanks to John Paul Rollert for the Mills reference. Here he is on what Adam Smith would think of the Wall Street bonuses; great stuff.)

Prestige

Prestige is the obvious thing. Up until the crisis the idea that financial sector work was one of the most glamorous and prestigious fields is so obvious it almost doesn’t bear mentioning, but it is incredibly important. It’s important for the graduating classes, who are swamped in competition for banking spots as yet another step on the meritocratic treadmill. It’s important because even if you leave, the resume with a prestigious i-banking spot listed on it will open up all kinds of doors.

And the prestige goes to the self-vision of our elite educational institutions. Here’s then President of Harvard Larry Summer’s final commencement speech to Harvard’s graduating class of 2006. What opportunities are out there for Harvard graduates?

The world that today’s Harvard’s graduates are entering is a profoundly different one than the world administrators like me, the faculty, and all but the most recent alumni of Harvard entered.

It is a world where opportunities have never been greater for those who know how to teach children to read, or those who know how to distribute financial risk; never greater for those who understand the cell and the pixel; never greater for those who can master, and navigate between, legal codes, faith traditions, computer platforms, political viewpoints.

Slicing up bonds to juke the ratings agencies is right up there next to teaching kids to read in the list of boundless opportunities.

It’s worth noting that the financial industry takes hits to prestige worse than other hits post-TARP. They are still mad about Obama’s “fat cat bankers” line. Why? Because the prestige is part of why they are doing this.

Power

Power is equally important, though harder to discuss. The Kauffman paper itself uses a three part definition of financialization:

a. The growth in and increasing complexity of intermediating activities, very largely of a speculative kind, between savers and the users of capital in the real economy.

b. The increasingly strident assertion of owners’ property rights as transcending all other forms of social accountability for business corporations.

c. Increasing efforts on the government’s part to promote an “equity culture” in the belief that it will enhance the ability of its own nationals to compete internationally.

(This is from Ronald Dore’s definition.) They focus on (a) as the necessary mechanism to shift high-human capital value resources away from competing sectors without focusing on (b). If capital owners are the owners of the real economy, working in finance gives you a power over the economy far greater than any other sector. All other forms of social accountability, regulatory, altruistic, whatever, don’t matter. The only thing left over is how the financial elite will drive the economy.

This is why I find the “we have too many people in finance and not enough in not-finance” a bit thin; we need to re-conceptualize it as a “the financial industry is way too powerful and the real economy and workers are too weak, economically and politically.” It shouldn’t surprise us that the best and brightest gravitate towards power; power is an attractive thing to have over the world’s largest economy.

The Spectre of Uselessness

I’m also interested in the “learn and use skills” part. Part of the very conscious attraction of consulting jobs for our elite is that it allows them to learn and use skills that aren’t tied to the individual fortunes of any one industry, industries that could disappear within a decade in our globalized, insecure world.

Richard Sennett argues that one of the characteristics of a modern, meritocratic order is the “spectre of uselessness.” The idea that one’s Bildung, the combination of motivation, education, skills and training, will become useless for the economy haunts meritocrats, leading to a pervasive fear of being left behind. Barbara Ehrenreich’s Fear of Falling is also excellent on this in the context of the United States’ middle-class.

There’s a case to be made, ironically, that this spectre hang less for the high-stress high-churn world of the financial industry. Since their talents are tied to the elements that bind the global economy – the allocation of capital- they won’t necessarily become useless in the same way if they tied their training down to a specific place – be it mechanical engineer, chemistry, or hospitality studies. (I know, tell that to unemployed mortgage bundlers; but we are talking about the elite here.) Any discussion with those working in the financial sector either express a path up or a path out – and the path out is a safety net that most Americans can’t expect.

I think, as we look to the post-crisis world, we need to examine the draw of finance as the draw of power, a disproportionate power that our financial elites are able to exercise, and figure out the unfortunate ways we encourage this and ways we can challenge it and hold it in check.

This entry was posted in Uncategorized. Bookmark the permalink.

13 Responses to Kauffman and C. Wright Mills on Financialized Meritocracy and the Spectre of Uselessness.

  1. laudyms says:

    The bottom line of “uselessness” is that these so-called elite neither make or do anything to benefit the human community, only tap dancing as fast as they can to keep the Ponzi scheme afloat. Not my idea of a life.

  2. Frank says:

    Great post. I had one quick question, maybe other commenters can answer, about this statement: “the resume with a prestigious i-banking spot listed on it will open up all kinds of doors.” What doors, exactly? I had always thought the elite finance plan was to save $10 or $20 million by age 40 and then either move up or coast off the interest for the rest of one’s life. (One of my acquaintances at a major bank holding company, a bridge fanatic, basically plans to join the professional bridge circuit once he hits 38.) Where are the landing pads for these folks? What is their value outside the I-bank or hedge fund–knowing people in the I-bank or hedge fund world who won’t “rip the face off” their new employers (to use Frank Partnoy’s poetic phrasing in FIASCO)?

    • laudyms says:

      ….and what planet do they plan to retire to? The corporations/banksters they’re enabling are bent on destroying this one.

    • Mike Easterly says:

      James Kwak had a good post about this at the Baseline Scenario, based (I think) upon his experience at McKinsey.

      In essence, his argument was this: Ivy League grads are very uncertain about what they want to do with their lives. They’re still young enough that it’s not too late to pursue any option, and they’ve had few experiences that have led them to believe that they’re incapable of any job. (My addendum: Grade inflation, along with a sense of entitlement, has taken care of that.)

      So the i-banks and the management consultants come to them with a tailor-made proposal: You only have to do this for two years (there’s the expectation that you’ll get an MBA then), and it’ll look good on your resume. Problem solved! The gnawing question of career choice is delayed for the moment, and they’re going to get paid a lot of money. As far as I can tell, Teach for America works on the same principle, except for the money.

      Many Ivy League students have spent their lives building up their resumes. It’s what they know best. I-banks and consulting firms offer to continue this process for another two years. They’ve tapped into the mindset of these young people: achievement for achievement’s sake.

  3. Frank says:

    More substantively: I don’t think we can underestimate the power of self-reinforcing inequality to create cascading pressures on people of every income level to grab more. Many of the most visible winners are in the finance sector. Consider this exchange between Rajat Gupta’s protege and Raj Rajaratnam:

    http://articles.economictimes.indiatimes.com/2011-03-27/news/29194764_1_rajaratnam-rajat-gupta-fund-billionaire

    “Rajaratnam speculates on Gupta’s motive in joining KKR: “My analysis of the situation is he’s enamoured with Kravis, and I think he wants to be in that circle. That’s a billionaire circle, right? Goldman is like the hundreds of millions circle, right? And I think here he sees the opportunity to make $100 million over the next five years or 10 years without doing a lot of work.””

    “”At some point, what I worry about is that there can be this massive implosion in him,” Kumar adds, to which Rajaratnam responds: “He didn’t seem comfortable. He seemed like he was tormented, right?” So what was this insecurity that Gupta went through, this inner turmoil that Rajaratnam terms as “torment”?””

    You get the picture: the massive hedgie paydays make the CEOs edgy, and their big paydays make the other C-level people jealous, who are in turn envied by the law firm partners and doctors, etc., etc. That’s why you get docs making a million a year rushing to form specialty hospitals so they can get a bigger piece of the action. They’re all looking at the 400 persons who own more wealth than half the country, and saying, “why not me?” (for that figure, see http://www.politifact.com/wisconsin/statements/2011/mar/10/michael-moore/michael-moore-says-400-americans-have-more-wealth-/)

    Just to make my point a bit more: consider the studies this month on a) the “surprising litany of anxieties” of people with fortunes in excess of $25 million, and b) that among “1,000 households surveyed [that] had an average of $3.5 million in investable assets,” “about 42 percent said they don’t feel wealthy, saying they would need about $7.5 million to feel rich.” Why this insecurity? The finance sector (and the liquid modernity and liquidating sensibility it brings with it, in Karen Ho’s terms) has set up a series of trading platforms that constantly menace investments & other “stores of value” with the specter of collapse. Nothing’s safe: the big & smart money may decide on a dime tomorrow to desert gold, the dollar, muni bonds, stocks–you name it.

    In this world of utter instability, the only fixed point has been social welfare, Medicare, and Medicaid. And it should be no surprise that the guys who want to join the “billionaire’s club” have all these sources of security in their sites, too. Without assurances of SS & Medicare, Americans may well *have* to save more…perhaps in the manner of the forced savings of Chinese workers. The model is clear: make over the US in China’s image, with a fusion of political/economic/military power at the top, and a very hard-working and scared populace below.

  4. ezra abrams says:

    my former neighbor was an internationally famous scientist who worked on gravity (or something like that, that only 5 or six people in the whole world understand).
    He once told me that his best PhD student was offered a job on wall str. The student said no; they doubled the salary; the student said no; they doubled the salary again….

    • Mike Easterly says:

      I agree with this argument in certain, narrow cases (the quants), but over time I’ve become skeptical of this idea of “the best minds of my generation lost to finance.”

      I can’t find it now, but I remember an article in the WSJ that said for most recruits, the i-banks weren’t looking for academic achievements so much as aggressiveness. (I think the article described the model as “members of the lacrosse team.”) They’re going to the Ivies for the prestige. If Karen Ho’s Liquidated is to be believed, you don’t have to major in any particular subject to get a job at an i-bank, so long as you graduated from Harvard or Princeton. (Students of other schools have to come up with something extra, but we’re still talking about Ivies here.)

      That tells me that what the i-banks really want is not expertise, but to be able to say, “Look, client, I have a Harvard, two Princetons, and a Wharton on my team. You can’t go wrong, because they’ve been certified by academic-industrial complex as being super-smart!” Whether they truly are the best for the job is a different issue. The way Wall Street works, with its burnout and frequent downsizings, discourages the accumulation of experience. I wonder what would have happened if more finance executives had lived through the banking crisis of the late 1980s and early 1990s. A little more wisdom and humility, and a lost less “smarts,” might have gone a long way.

  5. Frustrated Scientist says:

    If you want to know why so many theoretical physicists end up on Wall Street- its because they hire. When I finished my phd, at a top program, I spent literally years trying to get a job actually doing science. I bounced from temporary contract to temporary contract, making 35k and spending a fair chunk of it on moving costs when the contracts expired. In general, I applied to 100 or so jobs to get two or three interviews, to get one temporary contract offer.

    One day I decided maybe it was time to branch out. I applied to three banks, got three interviews, and got three job offers. All of them offered benefits. All of them were more stable than the 2 year contract jobs I had been doing.

    Even still, if someone offered me a stable job with benefits(not a temporary contract that leave me unemployed in two years) where I could make 60k a year to do science I would take it.

    Going into science as a first world citizen is pretty much the dumbest thing you can do. The lure of finance for myself, and others I know, isn’t the prestige, the power, etc. In fact, working in finance makes most of the scientists feel ashamed, and like sell-outs. The lure is basic stability, and a middle class life style.

    • Mike Easterly says:

      What about private industry? I keep hearing all of these policy people say, “We’ve got to get more students in STEM (Science, Technology, Engineering, Math) so this country can be competitive.” Are they throwing people into a buzzsaw?

      • Frustrated Scientist says:

        They are absolutely throwing people into a buzzsaw. Nothing burns human capital like science. A handful of science phds have great industry prospects (generally those that specialized in semi-conductor related research, and optics right now), most don’t.

        As a bit of anecdote, I would say 15-20% of the physics phds I know are now working “STEM” related jobs. The rest do not have jobs that require a phd in physics. Nearly half are in insurance or finance (which I am not counting as stem). The rest are scattered across random fields (one manages a bar, one got a law degree, etc). Every single one of them would take a pay cut for a stable job (industrial or academic) doing science.

      • Random mathematician says:

        Another piece of anecdata in support of ‘Frustrated Scientist’. I went through the PhD program at one of the ‘big five’ American schools in mathematics, and have had a similar experience. In a sense, so have the others in my program, though in fact most have ended up in finance by now.

        It is easy to get 1-2 year, $35,000/year research positions, and even easier to get a job as a quant; it is very hard to get a ‘real’ job outside of finance. This seems true even among quite strong students – those with postdocs at places like MIT get more permanent positions, but even places 1-2 rungs down the ladder from there don’t seem to get many placements.

        On the other hand, actual engineers seem to do quite well! It is only those of us in the ‘STM’ fields who have difficulty.

  6. John Morrison says:

    The power and prestige issue reminded me of the first exercise in “The TeXbook” by Donald Knuth: “After you have mastered the material in this book, what will you be: a TeXpert, or a TeXnician?”

    His answer: “A TeXnician (underpaid); sometimes also called TeXhacker.”

  7. LosGatosCA says:

    It amazes me that things are seen as so complicated.

    Investment banks and consulting companies need one of three things from their individual staff members:
    1. Contacts worth having (Ivy League)
    2. Balls to make deals (aggressiveness) including skills to sell them
    3. Very selective skills in areas that are trendy at any given time, irrespective of whether they create any thing of value other than supporting the actors with the #2 skills. Lately those were quants for creating worthless derivatives marketed by the people with balls to stupid people impressed by the resumes of the investment bankers.

    These people are skimming, diverting real income to themselves that they have no claim on other than the fact that other people don’t assert themselves to resist the skimming. Regulators, shareholders, taxpayers, customers.

    At least in the last Gilded Age, railroads were built, oil fields were developed, steel companies created, infrastructure was paid for that scaled America up. In this one, it’s just like a classical oligarchy where power centers move through the various dimensions using money to buy influence, using influence to create wealth, using whatever is necessary to convince people that the preservation of their elite advantages are necessary to the national interests.

    It’s not a new game, it’s not particular to America, the investment banking issues are symptoms of more systemic rot, not its cause.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s