While people in the capital markets or selling to it lament the “It’ll never be the same” nature of recent events, there is an emerging meme that says that this is perhaps a good thing.
Fareed Zakaria in a recent column in the Newsweek titled There is a Silver Lining:
Wall Street will also need to change. Paul Volcker has long argued that the recent spate of financial innovation was nothing of the kind: it simply shuffled around existing resources while contributing few real benefits to the economy. Such activity will now be reduced significantly.
A friend of mine is an ex-entrepreneur and now a successful executive. After his MBA many years ago, he joined a management consulting firm. He considered a career in finance, but didn’t pursue it. His reason as he told me was that a finance job is not “satisfying because it doesn’t produce any tangible value”. I was at that time selling Infosys’s services to Wall Street and was totally enamored with the world of finance. I put my friend’s opinion about finance down to “sour grapes” and didn’t give it another thought.
But when Paul Volcker, one of the most respected former Fed Chairmen, says what he says above, it makes you think.
Further on in the column, Zakaria quotes Boykin Curry and says,
…As a result, most of our top math Ph.D.s were being pulled into nonproductive financial engineering instead of biotech research and fuel technology…” The crisis will stop the misallocation of human and financial resources and redirect them in more-productive ways. If some of the smart people now on Wall Street end up building better models of energy usage and efficiency, that would be a net gain for the economy.
For the longest time, captains of the tech industry have lamented the fact that fewer and fewer American graduates were choosing a career in science and engineering. American school curriculum and teaching was not equipping students with the right skills in math and science that would allow them to pursue such careers, they would say. I have never completely agreed with this line of argument.
There is only a certain fraction of the population that has the aptitude and the interest to pursue post-graduate studies and/or a career in science or engineering. There may be some elasticity in what that fraction is, I’ll admit, and better teaching and curricula might expand that marginally. But by and large, at least in the US, that fraction won’t change by much. There are people who are better suited for, or are more interested in other vocations. You can make a decent living doing almost anything here, and that is a good thing. People can follow their dreams and do what they love.
The set of students who have the aptitude and the interest in science or engineering, have many options available to them. Of all these options, the highest paying jobs are in finance, law, medicine, consulting and perhaps a few others. Why would someone want to go into science or engineering careers if they could get into one of these high paying jobs?
It’s easy to see how the market is diverting human capital to where it will earn the most. It is harder to say if this is not in the long-term benefit of the economy and society at large. You can probably say with reasonable confidence that a smart graduate joining a clean tech company has a better chance of doing good for society than if they became a trial lawyer. But you can’t really say that all high-tech innovation is better than any financial innovation. That would be too much of a blanket statement. And what’s the point in arriving at that conclusion anyway. It’s not like we want the government to intervene in employment markets to make high-tech jobs more attractive.
The reason why there aren’t enough students going into science and engineering is because there are too many other higher paying jobs. At the top of the heap are finance jobs – high paying jobs whose numbers have been growing rapidly. As their numbers come down, I expect that will help more students choose science and engineering. And with some help from the next President, with rising investments in clean tech, who knows, these students may some day contribute to saving the planet.
Next – tort reform to take care of trial lawyers!
photo: David Paul Ohmer
6 am pacific 
Basab – I agree with you that economic remuneration is a large lure that draws talent into a career in finance though I sometimes wonder if that is the only one. Take Derman for example. If his job at Bell Labs was anywhere close to intellectually satisfying, he possibly wouldn’t have crossed over to the other side of the Hudson. And engineers moving over to Wall Street have actually embellished the world of quantitative modeling (Apparently the problem of yield curve smoothing saw the cubic spline solution when a group of Civil Engineers noticed that the problem was no different from that of stitching together cantilever bridges!).
The reduction of finance jobs (and a cooling of compensation) will rightly benefit the real sector. For a country like India (where I come from) this is important as it must create competitive advantages in the real economy to move away from depending on invisibles to balance capital flows.
I also hope that the bright mechanical engineering graduate will now be meaningfully employed in building fuel efficient cars rather that writing second grade C-on-UNIX code at Indian IT companies to maintain moribund mainframes of Wall Street Banks.
Subrata
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I still see thousands of finance related jobs posted on employment sites.
http://www.linkedin.com (networking)
http://www.indeed.com (aggregated listings)
http://www.realmatch.com (matches you to jobs)
good luck to those searching for jobs.
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Basab – I guess if we extend this logically, a similar reallocation of resources might be happening in India – where IT stands accused of luring away the cream of the science and engineering talent. I have never fully agreed with those doing the accusing (including a scientist of some eminence). While only some of the work that IT companies do is true “innovation”, not too many other engineering firms or academic institutions are fountains of innovations either.
But as financial services as a whole slows down, IT behemoths (who rely on this sector for upto 35-40% of their revenues) will have to slow hiring as well – making more talent available to other sectors. The IT hiring boom – like the financial services boom – wasn’t a bad thing. And, the slowdown isn’t a bad thing either if non-IT firms spot the opportunity and scoop up good talent. It’s a different thing, of course, if it turns out that there aren’t that many human capital intensive jobs to absorb the surplus.
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Subrata, Bharat,
The situation in India over the last decade where all engineers wanted to join the IT industry is not a bad parallel. But I think (perhaps hope would be a better word) the impact on the Indian IT services industry will be temporary. They have other industries where they can grow and make up.
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I agree that IT industry in India is creating the same resource crunch for other industries and specially the research oriented ones. And I also agree that Indian IT industry may not be as impacted by the global slowdown and even if they get impacted, the impact would be temporary.
But having said that research and other such areas that demand an intellectual inclination need to be made little more lucrative, or be made insulated from the waves like financial sector in US or IT in India. Not sure how to do that, but its a good food for thought.
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I really liked the introspection part. But it was good when it lasted. Here is one more, which is somewhat scary. But are they not mostly the people who have their eyes and ears really open?
http://www.rgemonitor.com/blog/roubini/253933/revisiting_my_february_paper_the_risk_of_a_systemic_financial_meltdown_the_12_steps_to_financial_disasterand_some_new_policy_recommendations_to_avoid_the_meltdown
On Indian IT services:
I am in IT and I think the cyclone is coming. And it remains calm before that. So far it has been blind driving in last 1 month for Indian IT. Here is my take:
– BPO market will see the boom. It has already started with TCS/Citi deal and they will do well. Above all, it is not their (rich folks) core area so dumping it is not a problem for them. It will save money for them.
– Telecom market will not be badly hit. It will go on. There will be investments and people will go for it. And in Asian market, telephone is the cheapest one and it has tremendous potential go. Companies who are focussed on Asian market will have the bounty.
– BFI market – We all know that the so called “Tier-1” companies account for 30% to 40% of their revenue. And it has already been hit. And in the coming months, it will be badly hit also. I find it hard to believe the brave talks of industry titans, get ready – as Basab has put it – keep your options open or get very very good at it. The later you can hardly have in IT services how much harder you try. The kind of work do not make you a Nobel prize winner!
– IT prduct business – it will grow. It is cost unbeatable so far. And product business if pursued dilligently in India can do really wonders for Indian IT. This week one tier-1 IT services reported 40% growth yoy in product business though <20% in IT services. But so far, I have not seen IT services companies really going into product business. It is very very hard, requires dedicated and highly motivated staff and above all inherently risky.
– Govt. centric business – it is driven by common man like you and me. This segment is bound to grow. Asian countries can do a lot in terms of IT spending govt. sector. In India, railways have been a good example (though sometimes the site sucks – developed another tier-1 company!) and heavy corruption still drives day to day life. However, govt is there in almost all the countries and if IT can be pitched in properly, a good source of long term capital is here.
– Recruitment – will be hit. It has already been hit and projections are slowly coming down. Again the “Tier-1” companies used to recruit just anybody, so it is time to tighten the belt. It has already started – only when the deal is through bring on people on board. Otherwise, it is no secret that the utilization rate in IT services is 60%-70% at most. However, for most youngsters, IT will still be the job route to pursue!
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But the science vs engineering problem will still remain. Our brightest minds should go into pure science, not into software engineering.
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I agree with you that economic remuneration is a large lure that draws talent into a career in finance though I sometimes wonder if that is the only one. Take Derman for example. If his job at Bell Labs was anywhere close to intellectually satisfying, he possibly wouldn't have crossed over to the other side of the Hudson. And engineers moving over to Wall Street have actually embellished the world of quantitative modeling (Apparently the problem of yield curve smoothing saw the cubic spline solution when a group of Civil Engineers noticed that the problem was no different from that of stitching together cantilever bridges.
I also hope that the bright mechanical engineering graduate will now be meaningfully employed in building fuel efficient cars rather that writing second grade C-on-UNIX code at Indian IT companies to maintain moribund mainframes of Wall Street Banks
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