STUDY: The Societal Cost Of A Growing Financial Industry

When an aspiring rocket scientist abandons ship to join a hedge fund, how much does it actually cost society?

In its annual report, the Bank of International Settlements points to a recent study that attempts to measure the societal cost of a growing financial sector. The study found that the financial industry — which continues to lure top college graduates — hampers productivity and growth in manufacturing sectors that are R&D-intensive, especially when finance booms.

The conventional wisdom is that a robust financial system fueled by young geniuses distributes capital and improves overall economic growth, but according to the study:

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. […]

While they are booming, these industries draw in resources at a phenomenal rate. It is only when they crash, after the bust, that we realize the extent of the over-investment that occurred. Too many companies were formed, with too much capital invested and too many people employed. Importantly, after the fact, we can see that many of these resources should have gone elsewhere.

That many top grads from elite universities eschew science and engineering for Wall Street is well known. Even after the crisis, finance remained the most popular career path for 2011 Harvard graduates. And at Princeton, an astonishing 35.9 percent of 2011’s class were coaxed by the large salaries that finance offers.

But when the financial sector grows, essential industries that are also skilled-labor-intensive — computing, aircraft, engineering, and the like — are disproportionately harmed by the Wall Street brain drain and the competition for financial resources.

Steven Perlberg

(HT: FT Alphaville)