Kauffman Study Argues That Supercharged Financial Sector Reduces Entrepreneurship

It’s easy to assume that middle class wage stagnation reflects the owners of capital reaping a larger share of returns, in classic class war style. But that doesn’t actually seem to be happening. Instead we’re seeing the immiseration of capital as well. The returns have largely gone specifically to people working in the financial services industry rather than to “the bosses” as such. This is an anomalous kind of situation, and to many people it seems intuitively like a troubling one. The Kauffman Foundation, which I think you can generally characterize as right of center, has produced a study saying we should indeed be trouble, and super-finance is starving the economy of entrepreneurship:

The financial sector, which includes lending, stock brokerage, complex securities and insurance, among many other services, derives enormous profits from collateralized debt obligations. These new products require such sophisticated engineering that the industry now focuses its recruiting on new master’s- and doctoral-level graduates of science, engineering, math and physics, and pays them starting wages that are five times or more what they would have earned had they remained in their own fields.

“Because these new hires are often the very individuals who otherwise would have comprised the most robust pool of prospective founders of high-growth companies, the financial services industry’s steady rise has had a cannibalizing effect on entrepreneurship in the U.S. economy,” said Paul Kedrosky, Kauffman Foundation senior fellow and one of the paper’s authors. “Excessive financialization exacerbated and distorted the flow of capital in the economy, potentially suppressing entrepreneurship by drawing away entrepreneurial talent.”

Certainly my observation when I was in college is that almost everyone who had the mentality “I’d like to make a lot of money in life” was planning to instantiate that plan by working in the financial services sector. Supposedly this flow of talent should produce a more optimal flow of financial capital, but there’s ample reason to think that the objective incentives point toward applying your talent to finding more clever ways of gaming the system.