Thursday, June 28, 2012

Finance and the allocation of human capital

How finance sucks human capital from more productive activities. FT Alphaville:
... a bloated financial sector can also suck in more than its share of talent, hampering the development of other sectors.8
That last sentence is a smack in the face, isn’t it? FT Alphaville was dying to know what Footnote 8 would contain.
Here it is:
8 See S Cecchetti and E Kharroubi, “Reassessing the impact of finance on growth”, BIS, January 2012, mimeo
So we looked it up. From the introduction:
… in our examination of industry-level data, we find that industries that are in competition for resources with finance are particularly damaged by financial booms. Specifically, we show that manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms.
At first, these results may seem surprising. After all, a more developed financial system is supposed to reduce transaction costs, raising investment directly, as well as improve the distribution of capital and risk across the economy. 1 These two channels, through the level and composition of investment, are the mechanisms by which financial development improves growth. 2 But the financial industry competes for resources with the rest of the economy. It requires not only physical capital, in the form of buildings, computers and the like, but highly skilled workers as well. Finance literally bids rocket scientists away from the satellite industry. The result is that erstwhile scientists, people who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers.
See also my earlier post A reallocation of human capital (pre-financial crisis).


Albert Magnus said...

Just anecdotal, but we through a hiring process for a physicist at my non-finance related company and we got about 20 extremely qualified applicants. There are also lots of physicists still doing lots of post-docs at the lab I used to work at. Not sure we are shortage of quality physicist capital.

Of course, if you are one of those people that think R&D is driven by the top 0.1%, then I imagine the effect is important.

MtMoru said...

"Finance literally bids rocket scientists away from the satellite
industry. The result is that erstwhile scientists, people who in
another age dreamt of curing cancer or flying to Mars, today dream of
becoming hedge fund managers."

Economists excel at ad hoc theorizing but not at science.

What % of science and engineering PhDs go into finance? How many openings are there? What % from HYPS etc.? GS recently had only 35k employees worldwide. How many hires is that each year.

How many gas stations are there in the US? Cecchetti and Kharroubi have no idea. No ad hoc theorizing will do.

Andrew said...

People spend their time doing lots of things. Is making up silly financial contracts any more or less important than flying to Mars? This is about human values, not the allocation of human capital.

David Coughlin said...

As I am constantly scouring the want-ads. I have seen in the last two years at UltraMegaBigSpaceManufacturer exactly 1 job for which a master's degree was a minimum and a Ph.D. was expected. Across all the divisions on UltraMegaBigConglomerate, that number may be as big as five in two years. Times four for the extent of UltraMegaBigIndustry, and we are just talking about the margins of the job market. If we consider that we are looking for researchers to invent new technologies, then I see it even less. The hardest parts are economic. You are probably never going to have a product that you sell more than 1000, and as was noted in other correspondence, ideas are just the start. There is a mountain of industrial product qualification [from, eg, DO-254 to AS9100] that *has* to be climbed if you are going to put it in your catalog. This makes for a nice picture: Finance literally bids rocket scientists away from the satellite industry but I need more details to think anything else but "So".

That said, I'm entirely comfortable thinking that there will some scientist on Wall Street who will make it big, fast and exit and still have their scientific curiosity. That's a person who is going to think without being boggled, "What can I do with a trillion dollars and the next forty productive years of my life?" Then they are going to hit the government up for that money, and the government will give it to that person because as a successful finance pro they will have the panache to pull it off. And then we'll head for the moon off for what's next

efalken said...

Why isn't it probable that someone in finance, who implicitly allocates capital to their most valued use, is not benefiting society more than the latest cancer researcher or climate scientist? Public based spending on science is highly affected by politics, and so I don't see it as more productive than the former. Remember, after the mortgage crisis, government sponsored FHA changed its behavior. Private capital allocators change their behavior in good ways, government rarely does.

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