However, Maxine suspects that the longest term and most severe damage from the finance casino will not be from government deficits required to shore up too-big-to-fail banks and insurers. It will be from two powerful, long-standing price distortions that have distorted the composition of our labor force and the mix of human capital within it. The first distortion is the past diversion of some our best technical and mathematical minds away from physics, engineering, biology, chemistry, and, yes, even economics, to financial modeling, risk analysis, and all the other marvelous tools of speculation and gaming. Over the last 20 years or so, the financial sector has been diverting our future scientists and mathematicians into creating new derivatives aimed at managing risk (ha!) and into developing creative investment instruments aimed at obscuring risk.
On the other hand, Mike the Mad Biologist asks, Do We Need More Scientists, or More Jobs for Scientists?:
Like many other things in life, you get what you pay for (if you’re lucky). As long as financial ‘engineering’ is more lucrative than actual engineering (and other disciplines)–both in terms of pre- and post-tax salary–and has better job security, many students, particularly when too many graduate with tens of thousands of dollars of student loan debt, will choose to do something other than science.
Until we create more science-related opportunities, in the private, public, and non-profit sectors, we are just creating an over-qualified, underpaid workforce.
Well, it doesn’t look like financial engineering is going away anytime soon. In fact, I’m not sure that the finance sector of the economy is going to shrink as much as we thought it might last year. But that aside, what’s the point of funneling more math and physics graduates into math and physics instead of finance if they can’t put bread on the table? Or is the issue narrower, specifically the difficulty of getting an academic job? Or perhaps the major dynamic is that science & engineering professions are just really bad at capturing the value they generate for the society as a whole? (though this might be more of a feature than a bug in some ways, as the positive externalities might be what drives productivity gains society-wide)