Physicists or engineers with doctorates can choose to develop complex mathematical models of market movements for investment banks or hedge funds, where they are known colloquially as “rocket scientists.” Or they can use their talents to design, say, real rockets.
Cecchetti and Kharroubi find evidence that it is indeed research-intensive firms that suffer the most when finance is booming. These companies find it harder to recruit skilled graduates when financial firms can pay higher salaries and this is not just about the so-called “quants.” In the years before the 2008 financial crisis, more than a third of Harvard MBAs, and a similar proportion of graduates of the London School of Economics, went to work for financial firms. (Some might cynically say that keeping MBAs and economists out of real businesses is a blessing, but it is doubtful that is true.)
The authors find another intriguing effect, too. Periods of rapid growth in lending are often associated with construction booms, partly because real-estate assets are relatively easy to post as collateral for loans. However, the rate of productivity growth in construction is low and the value of many credit-fueled projects subsequently turns out to be low or negative.
So, should Britons look forward with enthusiasm to the future sketched by Carney?
Aspiring derivatives traders certainly will be more confident of their career prospects and other parts of the economy that provide services to the financial sector — Porsche dealers, for example — will be similarly encouraged.
If finance continues to take a disproportionate number of the best and the brightest, there could be little British manufacturing left by 2050, and even fewer high-tech firms than today. Anyone concerned about economic imbalances, and about excessive reliance on a volatile financial sector, will certainly hope that this aspect of the Bank of England’s “forward guidance” proves as unreliable as its forecasts of unemployment have been.
Howard Davies is a professor at Sciences Po in Paris. He has previously served as chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics.
Copyright: Project Syndicate