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.
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 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 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.