January 11, 2010
As Americans worry about our nation’s competitive edge, observers note that there’s a crisis in recruitment for the fundamental and applied sciences that are the foundation of a country’s technical prowess. Science graduates are demanding that potential employers “show me the money.” Lawrence Krauss observes in New Scientist,
…young people interested in a productive career [have had] two choices: take a technically demanding route and become an engineer or scientist, guaranteed to earn a respectable middle-class income, or go into the financial world, where the long hours are taxing but the intellectual demands much lighter, and the potential pay-off far greater. In the market-driven First World, is it any wonder that hard-working students are choosing the latter route?
This position contrasts with that of bright, young people in the Third World, where it is clear that the path to prosperity is a scientific or technical education. I recently lectured at the Indian Institute of Technology in Kharagpur, where only one out of every 121 applicants is admitted – a smaller percentage than at Harvard. Enrollment virtually guarantees a job as an engineer at a multinational corporation, with the possibility of starting up your own company a little further down the road.
And there’s the rub. Investment bankers and venture capitalists manage and help create wealth by building on ideas, but ultimately it is to developments in science and engineering that about half the growth in US GDP per capita over the last half-century can be attributed, according to the National Academy of Sciences’ report Rising Above the Gathering Storm, published last year.
Where then will we find ourselves a generation from now? In a world that is increasingly technological and increasingly “flat” – free of barriers to trade or capital flows – how long can a country thrive on managing wealth rather than creating it?
(See also this recent study.)
And then there are those who argue that the problem isn’t what these budding young scientists aren’t doing, it’s what they are– those who blame these Wall Street “rocket scientists” for the financial crisis through which still we struggle. For example, Sebastian Smith in PhysOrg suggests that
…there’s a reason Wall Street resembles a rocket experiment gone wrong: rocket scientists helped make it happen. Known as quants, these are the mathematicians and physicists who devised the financial instruments and computer programs fueling stock markets’ spectacular rise and collapse.
And while in good times they became financial rock stars, quants — short for quantitative analysts — are now being cast as villains of an industry that abandoned its values.
“They thought they could make it easier to make money, one New York investment manager, speaking on condition of anonymity, told AFP. “They thought you don’t need to do your homework anymore.”
Calvin Trillin put it more directly (and more humorously) in The New York Times, quoting “a man sitting three or four stools away from me in a sparsely populated Midtown bar”:
“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street”…
“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”
“But you still haven’t told me how that brought on the financial crisis.”
“Did you ever hear the word ‘derivatives’?” he said. “Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn’t have done the math.”
“Why do I get the feeling that there’s one more step in this scenario?” I said.
“Because there is,” he said. “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.”
But in fact, Trillin’s drinking buddy notwithstanding, the tradition of brilliant mathematicians and physicists “going over” to Mammon is centuries old. Indeed, arguably the greatest scientific mind of all time, Isaac Newton, capped his extraordinary career with stints as Warden, then Master of the Mint.
It was a job that Newton took deadly seriously. At the time of his first appointment in 1696, the British currency had been so seriously debased by clipping and counterfeiting during the Nine Years’ War that all English silver coinage was recalled. Newton’s extraordinary knowledge of chemistry and math saw him– and the English Mint– through the crisis. Building on that success, Newton oversaw the recoinage in Scotland, which resulted in single currency for the UK; then spent the rest of his life– he kept the Master’s post until his death in 1727– protecting the coin of the realm from the bogus and the bent. (For a taste of his zeal, see Thomas Levenson’s terrific Newton and the Counterfeiter: The Unknown Detective Career of the World’s Greatest Scientist.)
So mathematicians and scientists have worked with– and for– money since the Enlightenment. But one huge difference does jump out: The rocket scientists of today are (to quote Trillin) ” securitizing things that didn’t even exist in the first place”– pushing the limits of money and value. From the specious (CDOs) to the nefarious (front-running), the best minds of our time have devoted themselves to finding ways to conjure return out of (what turns out all too often to be) thin air… and as we all know, if it seems too good to be true, it is.
Conversely, Newton devoted himself to protecting the economy by policing the currency that fueled it; he devoted himself to assuring that the system was stable, trustworthy.
So while our society could surely do with a renaissance of interest in actually practicing science and technology, the fact that many whiz kids want to enter finance isn’t in itself a problem. The problem, as Newton’s example reminds us, is how those prodigies want to use their gifts.
Filed in Competition and Industry Structure, Economic, Entrepreneuring, Information Industry, Scenario Planning, Social, Technological
Tags: Calvin Trillin, CDO, competitiveness, engineering, Financial Crisis, financial engineering, front-running, Isaac Newton, Master of the Mint, mathematics, Rocket scientists, science, Sebastian Smith, technology, Thomas Levenson, Wall Street, Warden of the Mint