A second-year MBA student at a top-five business school recently wrote to me for advice about career choice and whether he should go into finance or management consulting. His ultimate goal, he said, was “to make enough money to teach when I’m older.” The discussion with this student reminded about an article that the Nobel economist Robert Schiller wrote on ProjectSyndicate a while back. In his piece, Schiller wondered if the high percentage of graduates of elite schools who takes jobs on Wall St. hurts society in some way?

images-1Schiller made his argument not by questioning the choice the graduates are making (how can he as an economist?); rather, he questioned the social cost/benefit of the career they are choosing.

Noted Schiller:

According to a study by Thomas Philippon and Ariell Reshef, much of the increase in financial activity has taken place in the more speculative fields, at the expense of traditional finance. From 1950 to 2006, credit intermediation (lending, including traditional banking) declined relative to “other finance” (including securities, commodities, venture capital, private equity, hedge funds, trusts, and other investment activities like investment banking). Moreover, wages in “other finance” skyrocketed relative to those in credit intermediation.

“We surely,” he adds, “need some people in trading and speculation. But how do we know whether we have too many?” The reason this question is important, according to Schiller, is that many of the activities of “other finance” are really pure rent-seeking, wherein someone finds a way to make money without adding any value (think of someone who charges a fee to cross their backyard to get to a nice beach).

Here, Schiller made an interesting pivot: from arguing whether young people should choose Career X to wondering whether a lot of the activity of Career X is rent-seeking and thus bad for society. This is a syllogistic argument, of course that goes something like this:

Major Premise: A lot of finance is non-value added and therefore bad for society

Minor Premise: A lot of smart young people go into finance

Conclusion: Therefore, a lot of smart young people make a career choice that is bad for society

So does his argument hold water, as they say? Personally, I think so, though I find no logical fault in the choice these young people are making, since they are simply acting as rational agents in today’s labor market. I agree with Schiller because a lot of finance is non-value added — something about which I have written many times before. Were these best and brightest choosing a career that, however much it may dismay philosophers and artists, benefited a capitalist society, then at least they would be making a socially beneficial choice. However, and I know this from personal experience, so much of Wall Street today is speculative, non-capitalist activity which society would be better off minimizing.

The question we need to ask, then, is not why top graduates are making this choice but why they are not making other, more productive choices, and here we get to the heart of the social discussion that needs to take place. Is it society as a whole that does not value scientists and engineers enough to pay a wage that would attract more of the “best and brightest,” or is it that these jobs in and of themselves simply cannot compete with jobs in finance? In other words, pace the pay, is there something else intrinsic in a job on Wall Street that attracts really smart people with or without the great salaries? I think the answer is that there is, and this is a topic that has come under increasing scrutiny because of boos such as William Deresiewicz’s Excellent Sheep: The Miseducation of the American Elite and the Way to a Meaningful Life. Deresiewicz, who has spend most of of his life studying and teaching at Ivy League universities, is adamant that these institutions have lost their way and no longer train en elite fit to lead any country.

Not everyone, of course, agrees that the Ivy League is pointless (certainly not the increasing number of applicants), and recent piece by Alexander Nazaryan in Newsweek questions whether the pessimistic view of elite graduates so common today in intellectual circles is right:

I can’t believe that all those exceedingly intelligent graduates of Princeton have been duped into working for McKinsey and Google. Some may like the corporate life. Some may need the money. Some may just do it for a couple of years, then go teach middle school in Cleveland. Yes, as Deresiewicz points out, a good number of the men who ruined our economy have an MBA from Harvard. But such guilt by association is simply too simplistic; there are plenty of bastards, I suspect, with creative writing degrees.

I am sure there are “plenty of bastards” with all kinds of degrees, but the question that Schiller posed remains a valid one. Are finance, consulting, etc. the best places for our best students to make a career? If not, then what can society do to help them make a more productive choice? Is this really a serious issue or just intellectuals whining about people choosing money-related majors over “meaningful” ones?

I am not sure about the answer to Schiller’s challenge, but, as a private equity partner, my advice to the soon-to-be elite MBA was easy: do what you say you love. There is no point in making money, if you’re miserable on Wall St. Sooner or later, you have to be true to who you are and make peace with that reality. If that reality is trading at Goldman, then go trade at Goldman. If that reality is teaching at an inner city school, then go teach. It sounds simple, and it is, but I know that’s not the same as easy.

Read more:

http://www.project-syndicate.org/commentary/the-rent-seeking-problem-in-contemporary-finance-by-robert-j–shiller#dXVXwtvGYuiBI7Cq.99

http://www.newsweek.com/american-horror-ivy-league-edition-263448

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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