Blog Post Script- Wadhwa, Friends and Finance

Even though I'm a few days late pointing this article out, I really enjoyed reading Vivek Wadhwa's recent post on TechCrunch entitled "Friends Don't Let Friends Get Into Finance."  I felt like it was a perfect post script to a post I wrote a few months ago- "The Flow of Money is the Other Root of All Kinds of Evil."  Here is a telling quote from Vivek's post:

An analysis of MIT’s graduate-employment data shows that the financial sector increased its hiring from 18 percent of its graduates in 2003 to 25 percent in 2006. So not only are the investment banks siphoning off hundreds of billions of dollars from our economy with financial gimmicks like CDOs; they are using our best engineering graduates to help them do it. This is the talent that our country has invested so much resource in producing. 

When most sectors of the economy grow, new companies are created. The authors found, however, that the finance sector is not driving firm formation; it is cannibalizing entrepreneurship in the U.S. economy by offering wage and skill premiums to individuals who might otherwise have started companies. It is also causing far greater volatility among publicly traded firms and a reduction in the quality of businesses started.

Kind of reminds me of another quote, this one from Gilles Deleuze:

As for markets, they are conquered sometimes by specialization, sometimes by colonization, sometimes by lowering the costs of production. But in the present situation, capitalism is no longer involved in production, which it often relegates to the Third World, even for the complex forms of textiles, metallurgy, or oil production. It's a capitalism of higher-order production. It no longer buys raw materials and no longer sells the finished products: it buys the finished products or assembles parts. What it wants to sell is services but what it wants to buy is stocks. This is no longer a capitalism for production but for the product, which is to say, for being sold or marketed... 

The conquests of the market are made by grabbing control and no longer by disciplinary training, by fixing the exchange rate much more than by lowering costs, by transformation of the product more than by specialization of production. Corruption thereby gains a new power. 

- "Postscript on the Societies of Control", 1990 (Emphasis mine)

Finance is a necessary part of the Capitalist engine.  However, as Deleuze pointed out twenty years ago, Capitalism of today no longer pursues goals according to a model that most people were taught in economics class- it increasingly subverts those goals in the name of control.  Potential entrepreneurs that are instead working finance are not creating new products, they are simply 'transforming the (financial) product' so that it can be 'sold or marketed'.  As an ironic twist, these financial 'services', initially meant to provide firms and individuals access to capital, instead bring untold volatility to the market and thus make it harder for actual production to occur.

You can follow Vivek Wadhwa on Twitter via his handle, @vwadhwa - his most recent forays into the blogosphere centered on the importance of a liberal arts education in today's business world, a view I certainly share.