A simple theory of why so many smart young people go into finance, law, and consulting

The age structure of achievement is being ratcheted upward, due to specialization and the growth of knowledge.  Mathematicians used to prove theorems at age 20, now it happens at age 30, because there is so much to learn along the way.  If you are a smart 22-year-old, just out of Harvard, you probably cannot walk into a widget factory and quickly design a better machine.  (Note that in “immature” economic sectors, such as social networks circa 2006, young people can and do make immediate significant contributions and indeed they dominated the sector.)  Yet you and your parents expect you to earn a high income — now — and to affiliate with other smart, highly educated people, maybe even marry one of them.  It won’t work to move to Dayton and spend four years studying widget machines.

You will seek out jobs which reward a high “G factor,” or high general intelligence.  That means finance, law, and consulting.  You are productive fairly quickly, you make good contacts with other smart people, and you can demonstrate that you are smart, for future employment prospects.

The rest of the world is increasingly specialized, so the returns to your general intelligence, as a complementary factor, are growing too, in spite of your lack of widget knowledge.  “Hey you, think about what you are doing!  Are you sure?  How about this?” often sounds bogus to outsiders but every now and then it pays off and generates a high expected marginal product.

Both supply and demand sustain this Smithian equilibrium.

There are other factors of relevance, as explained over a very good session last night; the people there comprised about half of my Twitter feed.


Here's a simpler theory which is basically the same as your complicated exposition: people will take the jobs that pay the best. Employers will pay high wages to people who can earn them large sums of money.

A more interesting point is that these jobs tens to be implicit taxes on society, not productivity or wealth enhancing endeavors. Essentially you have a layer of highly educated, technologically savvy people skimming from society and creating complex legal, financial and technology structures to guarantee the situation is self sustaining. The returns to these endeavors have risen exponentially with technological leverage.

I would add software development to your list of occupations.

I wouldn't say law and consulting tend towards "skimming from society". If they were not providing valuable services to their clients, they would not get paid. Sure, there are litigators who divide up pies, but on the transactional side it is all about properly allocating risk, reducing the cost of future disputes, etc. Business transactional attorneys grow the pie.


Yes, perfect markets don't exist. Market inefficiencies are everywhere. Finance and law are basically giant principle agent and asymetric information games where smart people with inside info exploit dumber people with less info.

If you have two Big Cos doing a deal, they both have lawyers who 1) try to exploit the other guy who has less info and 2) defend themselves from being exploited.

Small companies can't afford big time legal advice, but that's part of the risk they take to play. I remember once doing a deal with Disney. They spent so much on lawyers to do a deal that was only valued at a few thousand dollars. I fought back on some of the terms, but my overall stance was that if any of the protective provisions kicked, it wouldn't be worth their time to come collect.

You obviously have a very limited understanding of what lawyers do

Please enlighten us o great genius.

+1 For Cliff.

I'd add that litigators resolve complex disputes with a lot at stake. Obviously the system isn't perfect, but a perfect system _would_still_ spend a lot of money resolving complex disputes with a lot at stake.

A great deal of legal employment (not necessarily fees) is defensive, non-litigated measures such as contracts, filing for patents etc. Think of the legal docs behind an acquisition. Even a simple software license can run dozens of pages.

That said, I'm sure a lot of that is driven by compliance requirements.

Seriously. +1, Cliff

They ensure the prisioneer's dilema bonus for not cooperating is bigger. Thus, they'll help their clients not cooperating, and reduce the overall wealth. But their clients will get more wealth than they'd get without hiring them.

Maybe laywers have a constructive role on society (judges definitively do), but they have plenty of destructive roles too. Also, I don't know if the mere existence of people specialized on knowing the Law is compatible with Democracy... Finance does have a constructive role, that is way, way smaller than the size of financial industry.

It's not clear to me what your first paragraph means. Your second paragraph is very vague.

A better way to put it is that we have a stable system in which a quite small number of big businesses dominate the economy. Each economically meaningful firm, big or small, needs a certain, pretty stable, number of people to handle firm level tasks like finance, tax strategy, "save the company" litigation, strategic level management, and has a certain percentage of its resources that it can devote to those tasks. In a big business, that sum of money available for those small number of tasks is immense and the philosophy of not skimping on those missing critical tasks and instead getting the very best people (on paper anyway) to do the job whatever it costs is embedded deeply in the culture. The tasks really aren't that different from someone doing them in a medium sized business with 100 low wage employees as it is in a big busines with 10,000 high wage employees, but the funds available are greater. Since most of the excess compensation in those jobs comes from being part of the right team and not actually having all that much more superior work product, the system is set up to maintain a steady stream of hot shots rather than to lateral hire more people. The culture of being in big business and thinking like other big business people matters more than technical competence, since a cohesive culture is key when you've got perhaps a thousand senior managers who have to coordinate their efforts with modest supervision.

Put more simply, there are just so many plum jobs in which one person is in control of the most productive resources on the planet, and these plum jobs are inherently created in small numbers our big business dominated economy. Somebody has to get them. The somebodies that do reap immense rewards from their good fortune to get those plum jobs that has little or nothing to do with their superior personal ability relative to an alternative occupant of the same job.

Highing the cream of the crop also co-opts the people who are best positioned to mount an insurgency from outside the Big Business inner circle if they are shut out. This fits with the observation that these big business institutions are very pedigree conscious more than IQ conscious. Which makes sense in that the best way for someone with good grades and test scores is to have taken initiative to do something extracurricular that took personal initative and leadership (or to have rich or powerful connections). The equally bright people at state flagship college didn't have that and didn't get in. Now, if your goal is to co-opt potential insurgents, hiring that group of people makes a lot of sense, because smart people without initiative, leadership and connections are likely to be perfectly happy working for you in upper middle management and professional capacities doing operational work and "commodity" legal work that doesn't enjoy the same economies of scale.


Though while this certainly explains the existance of these firms and jobs, it doesn't really explain why they've grown so much. For instance, in finance I can understand why people are paid to do tons of money to run IPOs, even though its nothing special having worked on them. But so many new products and services have been added (for instance, I worked as a deriviatives quant, which didn't exist decades ago) and its not clear to me that these services are value added to the economy.

That is to say that I understand why an investment bank and its employees capture a higher value of an IPO then their services really dictate, its ok because overall the IPO is value creating and sometimes you've got to lose a little along the way to grease the wheel.

However, many of the new "financial innovations" seem like they are net value destroyers for society. That's how I felt as a derivatives quant. So when your net value creation is negative its a very different thing for people to get rich off it. Moreover, it seems like many of these "innovations" in finance are pushed past government and regulators for the express purpose of banking professionals making money off destructive products. They throw out a bunch of crap on efficient markets as moral cover, but anyone with half a brain and some industry experience knows the real world is way different then the Adam Smith world (actually, not all that different, considering Smith knew most markets aren't perfect markets and perfect markets required all sorts of assumptions).

The world is filled with modern day physiocrats. There are so many people today that are so quick to easily divide up certain jobs, firms and sectors as "value producing" and others as "value transferring." People blindly assume (often with little more than reading a few articles on a topic) that they easily know better about what's worthwhile than the market participants actually spending resources on those things. The arrogance is simply astounding.

Yes not all voluntary market participants are necessarily optimal. Of course people make mistakes. But if you as an armchair commentator think you can easily make better market decisions than billion dollar corporations highly specialized in their field... then I don't know what to tell you. Clearly your head won't fit through the door.

Perhaps this comes from a traders perspective, but people with money are fools all the time. Once you actually work at these organizations full of supposedly brilliant people and realize how the world actually works, and then profit of its inconsistencies, you can't go back to some vague just world theory.

Tragedy of commons is well known concept. Sum of individual decisions can be far from optimal in ways that are obvious to observers.

As far as I know, beyond the top tier of the profession (biglaw, market rate is 160k), the law profession's salaries are rather pathetic these days. The wages themselves does not explain why so many people flocked to law rather than other fields.

The average wages don't but I suspect that most people entering the field assumed they would be the ones making 160k+. Might also be that the less capable people in law school never sat down and did the math and figured that they would be committing financial suicide, or maybe they couldn't do the math, which is why they are in law school...

Ha, I remember doing precisely this math. I weighed going to B-School against starting a company. I knew I wanted to start a company someday and couldn't justify waiting two years plus several more to pay off the debt.

It's very much unchecked hopefulness. One would think they would do a quick google search before they went to law school.

The jobs makert is one of imperfect information. Worse yet, students choosing a career have much less information than the usual person looking for a job.

It takes some time for the teenagers to discover that the jobs they see on TV don't generate that much of income anymore.

Also, what adult would ever let a teenager decide their future career.
This is basically what happens now.

Well, that 160k market rate is for a first-year associate

Yeah, entering law expecting 160k working 80 hour weeks would be a very bad decision. You go there because you expect that pay will go up, because you expect to transition to something with a better lifestyle, or because you aren't very smart and you made a horrible mistake.

Also worth recalling the business model which involves hiring the cream of the crop from the top law schools, and then forcing 80%-90% out of the jobs in the first five to seven years, from which they go on to join or found small and medium sized law firms, become in house counsel for clients, or find new careers (e.g. in finance). Consulting has a very similar business model.

Basically, the big consulting and big law firms are paying $1,000,000 a head over six years (which they can usually get back with billings) in order to buy what amounts to an option (think stock option) to make the ones that they want into partners. They get a preview of the best talent within a rich lode that is nevertheless full of people who don't have what they really want, and can make a bit of a profit in the meantime without having to share enterprise level profits with them - as long as they can bill those folks for more than they pay them plus overhead and a little margin (by working them insane numbers of billable hours which they are willing to do since they are young and single and amibitious) everything's good. If you have them working 2000 billable hours a year (which translates into about 75-80 hour weeks of total on the job time), you only have to bill them out at about $150 per hour to cover salaries and overhead and the rest is profit.

Law salaries have become increasingly bimodal over the last couple decades. There are more top jobs at big firms than there used to be in absolute numbrers and percentage terms, but the gap between these jobs and the next tier is huge. Within big law, moreover, there is a fissioning between superlawyers that make immense amounts and simply ordinary solid big firm lawyers who are on the good side of the bimodal distribution but aren't running away from everyone else.

Pretty much. I would add that a the most value-added sectors of law and consulting are probably the ones that pay the least--public defenders, etc. Finance seems almost totally parasitic.

"people will take the jobs that pay the best"

Yeah No kidding- wow Tyler I'm so amazed at your in depth analysis here, ever consider that people just want to make a lot of money? Or people don't want to live in shitholes like Dayton, Ohio? If you're good enough to go to Harvard why would you be some engineer or scientist when you could earn orders of magnitude more in finance?

In fairness, the real question Tyler is answering is "why can these fields outbid everybody else?"

CBBB doesn't deal in fairness.

No he wasn't really answering that at all

Because they get the new money first. Say hello to Cantillon effects.

Uh, is he?

What I read above sounded more like "people will prefer high status high pay jobs".

People respond to incentives? Who knew?

For what it's worth, I left engineering for consulting because I had skills I wasn't using in engineering that I wanted to exercise. I think it's an oversimplification to say that it's because consulting is more G-loaded, but that's the basic idea.

We get called in to work on diverse problems for which it's not cost-effective to retain skills locally to address. I.e., it would cost the client an unreasonable amount of money to keep me on staff for the rare occasion that they need my skills. It's more cost-effective to pay my billing rate when they desperately need the help, even though they might not like it. It's also true that it would be hard to develop and retain my skills if I only ever got to work on the problems of one client.

This rings true to me. I'm 27, still in graduate school (a STEM field: Applied Plasma Physics and Fusion Energy) and it's sometimes hard not to be jealous of my friends from high school and undergraduate that are currently rapidly working their way up the ladder at law/banking/consulting firms, buying houses, thinking about having children, not worrying about where the money for the car repair will come from...

Of course, I love my "job" (I think of it more like a job than school, since I'm expected to be in the tokamak control room during regular business hours, and I am paid a salary); it's far more intellectually stimulating than it would be to consult for some company on whether they should enter a new business market, or what the price of natural gas in North America is going to do. Plus I get to feel like I'm helping to save the world someday. But the Wall St / McKinsey temptation is there.

(Bonus fact: at the height of the quantitative finance salary bubble, in 2006–2007, fully 1/3 of graduates from my Ph.D program were heading to Wall St. to become quants of some sort.)

Yep. I'm one of those 23-year-olds who headed into finance, rather than graduate work or a tech-heavy 'societally useful' job. If it helps, the grass is greener on the other side. I envy you. I'd love to call it quits and pursue passions in technology or economics. But, the money, social status, and daily challenge is far too good to easily give up. Especially in New York. still, I dream of it often.

My bonus fact: when I was looking for jobs initially, it was much much easier to find a job on wall st. than elsewhere. Wall st/consulting recruited heavily, came to our school, listed on our jobs pages, etc. My idealism had/has few outlets.

Fuck off

You know, I think CBBB is right wing plant. I'm a left winger and after passing over CBBBs trollery enough I'm almost ready to vote Republican.

The last fact rings very true. I just graduated college and myself and a lot of my peers are in consulting/finance. The biggest reason for most? 22 year-olds don't know what they want to do with their life and if someone comes to their campus and offers them a lot of money to do generic "smart person things" they'll take that offer because other paths involve a lot more uncertainty.

You really think that people who work in finance have high social status? I'd say most people look down on Wall Street and think people in finance are greedy, shallow, cowardly, villians . You must be an extremely naive and shallow person to think that finance has high social status after the whole industry had to be bailed out. Far from having high social status you are really the lowest of the lowest leeches on society. As Rolling Stone put it: "The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." I'd say that pretty much sums up your industry. And don't say I am a socialist or playing the politics of envy etc. It is the bankers who are the socialists when they privatize profits and socialize losses. Wake up and get a clue while you are still young enough to get your life back and be proud of what you do for a living.

While I appreciate that you are very, very angry, I suggest you try an experiment. Go into a bar. Approach a girl as you normally would. When you get around to talking about what you do, say "portfolio manager at a hedge fund" and then change the topic. Do the same with another bar and another girl and substitute "landscaper." It would be a more fair test if you have the right look for each job. See if you still have the same assessment of status. Also bear in mind that the population is heterogeneous, and not everyone shares your bile.

I agree with you there - that's why it's a big joke that Tyler just can't figure out why all these people want to go into finance/consulting. I also have to say I'm not really a big fan of these people like FooFighter who get these finance jobs and then whine about how "it was the only option after school - I wish I could do something more useful but it was all there was" BOOO HOOOO

Yeah, that's what I meant by status, didn't mean to come off as pompous. All I meant is my grandmother has heard of where I work and tells her friends.

Oh yeah, CBBB, you don't know me.

I know enough from your comment that you shouldn't be complaining about anything at any time

Finch, it's not just me who is angry. You'll find that most people get angry when their tax dollars are spent on bailing out people who have poor business skills. So if a dumb blonde in a bar is impressed by someone with poor business skills and lots of money I wouldn't call that having high status. I'd call that having money, and money will always attract certain kinds of women no matter how that money was gained.

Yeah, that's not true.

I find people who say that don't know the industry, or any of the people that work in it. That's fine, you're entitled to your opinion. I personally think everyone who works in your industry is an asshole.

Chicks fuck bankers. Your parents brag on you if you in IB.

NB: the job can be awkward at extended family holiday gatherings, or with in-laws.

Law is popular because it's easy: no math, no science, no computers. Just right for a high-I.Q. technophobe. Of course, what has happened is that so many liberal arts graduates have flocked to the field that except for one from the top handful of law schools, a law degree is less useful than used toilet paper.

I'm not sure that this is really it.

I think a better explanation is the wage structure over a lifetime. It seems that people earn much less in their 20-30's than in their 50-60's. However, if you want to get a house, start a family and pay of your student loans, then you need most of your money at the beginning of your life, and future salary prospects are not that important. Having children in your late thirties and forties means that by the time they are grown up and graduated university you are in your sixties and into your declining years. If your sons take up your hobbies of climbing or kayaking or anything, you will not really be able to do these activities with them. If you are in your fifties you are much physically fitter and stronger.

All round there is a very strong incentive to get married youngish and have children youngish, if you think about these things, and that will drive demand for careers that are well paid from the start, regardless of future salary prospects. I think as we spend longer in education, the demand for careers that are will paid from the start will continue to climb.

Its clear that this is mostly caused by the increasing returns of experience and education in the job market. A lawyer of twenty years experience is just better than a lawyer of five years experience almost irrespective of their intelligence factors. The same applies even more strongly, I suspect, in engineering. I doubt this is true in low skilled, or semi skilled jobs. I would like to know if it is true for professions like teaching. I suspect in teaching you probably need 5 to ten years to learn basically everything you will every learn about teaching, and then you stop improving, but teacher performance data is hard to come by.

Governments could do more to offset this by doing more to transfer wealth from one stage of life to another. Obviously a strongly progressive income tax is part of this. Tax rates could vary by age, for example. I think it would be a very interesting thing to study the transfer of wealth via governments by age group. I suspect that the elderly receive the largest proportion of government money, while paying the least tax (excluding children). Both through direct payments, and also indirectly through the NHS. Obviously, things like the student loans replacing free eduction represent a large transfer away from youth and towards the elderly.

How are you arriving at your conclusions vis-a-vis experience for lawyers and engineers? In my opinion the first year or two you learn a ton, but if you continue doing the same type of work the new learning then slows to a trickle. I know within a year or two of my first job as a lawyer I was putting out a better work product than (some) attorneys with 30 years of experience. Another guy from my high school was doing appellate briefs right out of law school for cases where the attorneys at the lower levels were 20 and 30 years older than him.

If you do exactly the same type of work then yes it will slow to a trickle. Speaking for engineering, in order to get enough breadth of experience, you will be learning pretty solidly for 10 years. And in many fields you need to be learning a fair bit just to keep up with the state of play.

However (civil) engineering may be a special case, where project lengths and uniqueness are such that you don't actually repeat the same work very often at all. In fact my work generally involves learning as a major component of any project

Part of the problem of the long length of education for STEM is due to our terrible education system. It's not hard to identify 1st and 2nd graders with high capacity for math and logic, and start tracking them early to learn algebra, calculus, computer programming, etc at early ages. Many of these smart kids could have obtained the math and science background in elementary school instead of high school.

"Tax rates could vary by age, for example." They already do, but more due to the effect of tax preferences and like much of the tax code, more willy-nilly.

Examples: I paid no income taxes on work I did in grad school, because it was "required for my degree". IRA/401(k) are not taxed when you earn them, but later when you take them out. Deductible mortgage interest is paid in the first years of a 30 year mortgage more than in the last years.

Banking, law, and consulting are all careers where the vast majority of the employees leave after a few years, and that very few stay to become partners, managing directors, etc. The norm in law is for someone to work in a big law firm for 2-4 years to make lots of money (which they spend on a hedonistic lifestyle and save minimally), before they are forced out and claim that they are just leaving to "do what they really want to do" (i.e., something that does not require a law degree at all). Could it be that young people today have high discount rates and prefer to earn a large amount of money in a short period of time to spend on current gratification, as opposed to spreading out their lifetime earnings?
Compare that with the great obsession by the young for other high-payoff short-duration careers, such as professional sports and reality TV stars.

The norm is law is a long period of unemployment and/or small law positions that pay well under 50k. These biglaw jobs are the vast majority of the profession.



"vast minority"? ;)

True, but I think the discussion is in reference to the smart (high G factor) people who graduate from the likes of Harvard and who have the choice of high-income law/consulting/finance/other career options.

+1 for understanding the original post.

I did an internship in an oil company. The average age of people was around 50. Loads of bureaucracy and inertia; lots of mediocre people around. Incentive for reward was low. It was a point of pride that top management had been bred in-house and had 30-year careers within the company.

The smartest interns were bored to death and decided this wasn't where they wanted to work; they ended up in finance and consulting.

Lot of traditional sectors have become too boring for a young ambitious man. Finance and consulting merely offer a way out.

This is a pretty awful attitude. Putting fast-moving, high-risk-high-reward-seeking people in positions of authority in an oil company gets you the Deepwater Horizon disaster.

Does it actually? Is that what caused it?

More often plain incompetence and indifference.

It also seems fairly intuitive that smart people go into finance (or consulting, which can and often leads to finance) because the financial industry is so heavily subsidized either through artificially low interest rates or direct bailouts (which of course incourage the potential for risk taking and extrememly large returns). Smart people are understandably incentivized to attach themselves to industries that have the cards stacked in their favor. They know that the payoff is in running the casino rather than in gambling, in other words. I would be surprised if the percentage of high G factor people entering law has increased as dramatically as the financial sector, but if so, it may say less about the legal field than it does about the decline of the value attached to practicing medicine, which used to be the "other" traditionally esteemed profession.

Yeah, I don't think this is it. Large corporations just do not seem to hire many young college graduates any more. I don't know if it is the demise of middle management or what, but there just is not a lot of hiring of younger folks. This is true not only in the United States, but all across the developed world.

I graduated or entered the workforce in 1992, and I've noticed this too. I've gone through job searches after graduating from college and business school, and am going through one now, and I've noticed fewer positions at large corporations with each round.

It seems to be that companies just need middle management less, but the older middle managers are kept around even if somewhat superfluous, maybe because they know the industry, maybe in the hopes that they quietly go and retire on their own instead of the company having to force them to. But when they go the company doesn't hire a replacement.

Medicine takes too long. Why wait until you are 30 to start making real money?

Hope you get a good specialty, otherwise you're stuck earning 200k in Manhattan as a rheumatologist. Which I admit, is not bad, but it's not especially great considering the effort, forgone wages, alternative wages and investment.

I think you're giving too much credit to job-seekers. It's more a matter of responding to incentives. The interesting question is whether or not the ability of those industries to bid up prices for human capital is justified.

Hitting the nail on the head. You have to look at the labour demand side; job-seekers are merely responding to the array of industry salaries offered.

Many jobs in finance, consulting, and law have a high imprimatur component. A Fortune 500 company contemplating a merger or entry into a new business line needs the imprimatur of Goldman Sachs/McKinsey/Skadden Arps to protect the board and top management. The big banks/law firms/consultants earn excess returns from providing the required imprimatur, some of which they spend upstream on "raw material imprimaturs" in the form of young Ivy League graduates. Ivy League graduates are lured into finance/law/consulting because of the wage premiums they earn from selling their own imprimaturs.

Yup. No one ever got fired for hiring Cravath. What other professions are as obnoxious as lawyers in displaying their credentials? You can literally search by law school attended at almost all law firms webpages.

Yeah this seems like a pretty important point. "Cover Your Ass" is a powerful motivator.

There are far too many smart people in law school. I look around in class and see a national tragedy.

Seriously, where do you propose they all go? I had a hard time as a STEM degree holder finding something fulfilling to do post-college. Even those lauded tech firms such as google and facebook ultimately only sell ad revenue.

I couldn't imagine finding something fulfillling as a liberal arts major, leaving alone for a second pay, prestige, job location, etc.

There's few places anymore where a bachelors degree offers a chance to change things.

I don't think it's irrational on their part. It's a smart move given present incentives.

Passing the bar should be all that is required to practice law, not a JD. That would help.

But I guess as long as BigLaw offers huge salaries, that will be a potential path for liberal arts majors to take, which makes it more likely they'll get a liberal arts degree in the first place. And I'm not sure what would cause those salaries to go down. As NNM said above, companies hire top law firms with fancy-degreed associates because then it's hard to fault the manager if something goes wrong with the deal.

In some states, there are special apprenticeship programs that allow one to take the bar and practice as a lawyer. Washington is one of them, and I think New York is too.

I know! I feel like I need a PhD. to start doing baller stuff in STEM.

Well personally, I faced the same issue as you, and I'm either ending up in graduate school to become a Proper Scientist (even if it means working in industry, blech, which does hire many scientists in my field of Computer Science) or ending up in the startup world (where you change the world or your company goes under).

I think the reason many people go into these fields is because they hire lots of younger people straight from college and graduate school. The reason they are able to do this is because they are fairly large fields with enormous turnover. In large law firms, healthy associate attrition is about 20% per year. Ordinary companies just do not do this to any large extent.

To put this into perspective, when I got out of college during the prior jobless recovery I struggled to find any job. I applied with a lot of companies and got nothing. I applied for low-level retail positions and got nothing. In the end, I did standardized test tutoring for mostly low pay. I found it ironic that doing well on a test that was supposed to be important to one's future success only qualified me to teach others how to do well on the test. Success? Not so much.

In the end, I went back to school to get one of those jobs at a large law firm. It seems odd to me that people are now willing to pay me a lot now during an even worse period for employment where before they were not willing to hire me at any price to stock shelves at Barnes & Noble. I suspect that this has something to do with the fact that, when I vist corporate clients, there will be perhaps 15 people in a conference room, none of whom is below the age of 45. Most of corporate America seems to have written off young, freshly-minted college graduates.

"Most of corporate America seems to have written off young, freshly-minted college graduates."

Maybe that's because the senior people dislike the attitude of the youngsters to demand it all, and now.

Maybe they prefer to work with people who care about the medium- and long term success of the company, not just focus on the current quarter's results.

As for quarterly results, the modern holy grail, this is in my opinion pivotal for the deterioration of conservative values and sustainability.

Their heads are filled with per-conceived notions and stereotypes about what newly minted college graduates are like? Possibly. But I've noticed much more that they don't hire newly minted college graduates because they are the ones focused on short term results, and are unwilling to lose money ramping up a newly minted college graduate.

I feel as though it used to be the case that companies would hire new BAs and spend a few years making them into productive workers. Unfortunately, today's managers, who benefited from these policies, are unwilling to pay it forward.

TL;DR: Baby Boomers are responsible.

FWIW, the last four years or so have been among the worst in modern history for new law graduates and young associate attorneys.

As far as simple theories go, this strikes me as a very good one, and not just because it matches what I've been thinking.

I went to a top law school after college, deciding that I didn't want to be a physician (it seemed too long a road for too little payout) or a finance guy (too focused purely on making a lot of money and too jockey/competitive). I would gather that less than half of the people in my class aspired to spend their careers at a top law firm in new york, making millions. Most wanted to do some sort of policy/public service work, or do something business oriented but didn't necessarily have the credentials or interest to work on wall street (which is new york focused and specific school focused). I think one of the reasons smart young people go into these fields is optionality as well as money. With Goldman Sachs or Mckinsey or Wachtell Lipton on your resume, no one is ever going to question your choices and you have a fairly secure path to a high earning secure life. My friends who are engineers (with the exception of the two or three who started at Facebook in 06) or went into non-finance business jobs are way way behind me in salary and in options at this point, to the point that few of them are likely ever to catch up.

+1 on optionality.

Optionality is an important point. I think it's both a cause and a fortunate byproduct—i.e. there's a virtuous cycle.

You learn relatively little in finance/consulting/law that is directly applicable to "what you really want to do in life" (at least relative to doing what you really want to do right out of college), but the fact that you are one of the favored few who can put those big names on your resume means that you will be looked favorably upon when you leave the industry. You get to join the elite Club of People Who Have Optionality in Life.

Optionality can also be thought of as a part of the wage premium.

This post bothers me because it mixes together different hypotheses. It is not a simple theory. Tyler usually feels no shame in complicated theories, so why call this one simple?

Let me try to disentangle the different factors that Tyler mentions. First there is money. Are these the best paid jobs? Why? Why are they so productive? Why does the widget factory spend so much on management consulting, rather than directly hiring the MBA or Harvard grad? In fact, I think the widget factory offers more money for the MBA. But the consulting firm, as Tyler says, offers contacts and a better resume line. (Though if that resume just leads to the widget factory, what was the point?) If the young person is already married, the parents might prefer Dayton because houses are so cheap and the couple can go straight to children.

Finance and consulting seem to me to go together and to be very different from law. The first two are often short-term jobs before a traditional management job, while law is more of a career. People often jump ship to corporate law, which sometimes means strategy, but usually means law.

The comparison to inventors and mathematicians seem strange to me. Harvard never produced a lot of engineers and still produces a lot of mathematicians (or at least grad students); these are not the jobs being displaced. I know a Penn engineer who did spend four years in "Dayton."

Consulting and deal-oriented finance are tremendous learning opportunities. If you work for one big firm, you learn how that firms does things. If you work for McKinsey, you learn how many firms do things, both successfully and unsuccessfully.

It's like learning everything you wish they'd taught you in school, but you get paid.

And in consulting, it's not just many firms and industries, but many problems in different functions - new product development, post-merger integration, M&A due diligence, organic growth strategy, salesforce effectiveness, org design, etc.

"Finance and consulting seem to me to go together and to be very different from law."

They are different from law "generally" but "Big Law" is predominantly driven by finance. Behind almost every large law firm is a major commercial bank or major players in the securities industry. Also, hand in hand with finance, consulting and big law are the big accounting firms that audit and provide tax and consulting services for big businesses.

Re Big Law: true. Depends on the firm of course, but often you'll feel like you're really employed by banks rather than the firm you're working for, since much of your day-to-day contact with professionals can be outside of the firm with your bank client and other related third parties.

ALSO: The Big Four provides these services for banks (obviously) and law firms.

Comments good on this one. I especially like KLO (turnover) and Lawyer (options). Everyone talks about the
"cover your ass" aspect.

Ultimately we have an equilibrium in which going to a prestigious firm after a degree from a prestigious university provides additional resume padding when a bright, ambitious young adult is not sure about what to do with their lives. It gives them a level of security, makes the parents happy, strengthens elite ties and helps build new ones. What happens after that is typically not very useful to society.

I still don't understand why McKinsey is apparently useful or why lawyers get paid as much as they do. Medicine and technology are fields in which out-sized rewards are perhaps desirable. Not sure about law and consulting. Finance is debatable - take the (implicit) subsidies out and see how the chips fall.

McKinsey is useful because the people who work there spend all their time working on the 1% of your job that is the most difficult. So they get very good at that 1%. When the CEO encounters a problem in that 1%, it's more sensible for him to pay $600 an hour to get experienced people to deal with it than to give it to the usual crew of screw-ups he employs. There are other advantages. Sometimes outsiders can say things insiders can't, for example.

The flip side is that the 1% is different in different companies, which means most non-specialised management consultants are tackling the most difficult 1% of the business with rather limited knowledge of the other 99%. So often the CEO is paying clever people $600 an hour to ask stupid questions which everyone in the company and industry already knows the answer to (of course, sometimes everyone in the company and the industry is wrong about that answer, but even in those cases I wouldn't bank on McKinsey finding the right one)

Fortunately, the CEO and his fellow board members usually have an idea of what solution to the 1% problem they'd like to pursue, which is good for the consultants which can rubber-stamp their proposals and improve their chances of repeat business without having to tax their stratospheric IQs too hard, and good for the board because a bunch of objective business experts endorsed their plans. Even the sloppiest management consultants are useful when it comes to protecting management from those pesky shareholders.

As a consultant, I know I know a great deal more about what I'm consulting on than the people I'm consulting for. They know it too. They pay a fortune and they wouldn't do it unless they had to. This isn't to say they aren't smart, it's just that it would be inefficient to keep me on staff for the rare occasions when they need me, and I couldn't develop or maintain my skill set at most clients because I wouldn't get enough practice.

Maybe it's different with other firms and specialties. I can't speak for everyone.

"So often the CEO is paying clever people $600 an hour to ask stupid questions which everyone in the company and industry already knows the answer " - very true. This is still a valuable thing if the CEO actually listens to them rather than ignoring the advice of his VP of research, operations, engineering or whoever.

Also, these jobs are not very highly loaded on g (quant work in finance might be an exception). Instead they require being bright, but clearly less so than being a college professor or a programmer at Google. On top of that they require a mix of ambition, hard work and personal salesmanship. Put together this seems well aligned with the ability to get into an elite business or law school.

Consulting is fairly g loaded (anyone who's been to a tier business school knows that the consultants are among the brightest people there, sharing the top with the top finance guys) - your average college professor would not stand a chance to get hired by one of the top three firms, ever.

We are bringing in a consultant to approve something we already agree we are doing, just to say a consultant approved it. They won't actually be doing any work we haven't already done.

My consulting experience was mixed. There were a few of these "rubber stamp" projects, but not many. There also wasn't nearly as much of the "hardest 1%" type work as I expected going in.

The bulk of the work was things that many companies needed to do, but each as a one-off project. No point in building up internal capabilty, but you can hire consultants who have experience. In return, the consultants have a 'product' they can sell and execute effectively. Related to this were 'knowledge transfer' type projects, where we would help buisnesses catch up to industry leading best practice. But those best practices were usually developed not by consultants but by the leading firms.

Overall, I think consulting is a lot more useful than critics give it credit for, but not nearly as cutting edge as its proponents claim.

Do we need to look further than this for the roots of the financial crisis?

Yes. Next question.

The gist of Tyler's post seems to be, those bright people who go into finance are the ones which follow very-short term incentives, mostly monetary. I think we can dare to consider the connection to the financial crisis.

As someone who scored in the 99.5 percentile on his LSAT and has practiced law long enough to be recognized by SuperLawyers, Martindale, etc., I can honestly say having a high "G" is irrelevant to the success in the law. Your social network and book of business are vastly more important if you're on the corporate side. If you're a trial lawyer, being a captivating figure in a courtroom and being able to connect with a jury and their prejudices are vastly more important.

Lawyering doesn't require the kind of brains you need to become a quant in the finance world or to be a number-crunching consultant.

What day-to-day lawyering does require is endless toil and an infinite capacity to endure boredom.

This is true in the early years. And even that is changing now that so much of the drudgery is outsourced to non-associates.

It's still a life of pain, mind you.

Actually doing a good job requires some brains (in IP anyway). Being successful, not necessarily.

Trial lawyers spend only a tiny percentage of their time doing trials.

Regarding the value (or lack thereof) that financial and law professionals create, consider that much of the focus is on providing some structure to future outcomes in their clients' lives. Providing protection of property rights, via high-quality contracts, or providing an efficient saving mechanism, via high-quality securities, is worth quite a lot to people who endeavor to plan for the future.

Of course, such transactions require trust between a client and his lawyer and financial advisers.

Alternative explanation: Finance, law and consulting are attractive because we shelter established capital which economically and culturally centralizes society.

FINANCE: Comparatively, we are now awash in capital. Big banks use capital and leverage to extract 40% (?) of economic profit. This capital is willing to pay huge sums for marginal value, especially since losses are socialized. It is a law of big numbers.

LAW: The rate of production of more laws is increasing. So is its complexity. Therefore a lawyer has job security in addition to its honorable reputation. More nuanced demand drives more supply, especially since intelligent but 'citified' folks do not wish to work in factory management, plumbing, etc. BTW, those industries are increasingly outlawed or delayed by laws. Not surprisingly, most blue collar strategy involves offshoring rather than employing 'intelligent' management and engineers.

CONSULTING: Big business is now heavily subsidized and commands increasing brand elasticity at least partly at the expense of innovation and small business. Example: Government will subsidize eBay or Home Depot using Joe (Small) retailer's tax money. Especially pharmaceuticals spending billions will pay outsized wages for any marginal improvement. Consulting is all about the Fortune 50.

Exploding education costs exacerbate this centralization trend; students need an ROI on their outsized investment.

Mr. Cowan's foundational argument is that specialization requires increasing 'eduation.' This is arguably incorrect if one agrees that increasingly complex products and services requires intricate networks of firms and specialties who could dispense this knowledge more efficiently at far less cost. But our large firms want to see the educational paper, making education a circularly reinforcing bubble which by now is helping bankrupt us. See Hausmann and Hidalgo's example of Thailand and Ghana: http://www.economist.com/blogs/freeexchange/2011/10/buidling-blocks-economic-growth

SUMMARY: We have created the rising age structure with regulation, government controlled education, tax and subsidy structures, all of which are statist, protect established capital, and significantly raise the cost of living. Smart folks flee to any profession that supports that capital to escape the unprotected low end. One could argue that in a severe depression, the whole artificially induced pyramid will collapse despite government money printing and that that was what 2007 was really all about, and the prevention of that realignment is what prolongs stagnation (Olson 1984, Tainter 1990).

The cynical view from main street: Harvard and the like turn out lots of non-STEM smart people, basically smart people too lazy to finish STEM. It's really smart to take the finance job, since every ending is "deluxe apartment in the sky". You pull that trading lever every day -- with inside information you get super rich, without it you consistently underperform low-cost index funds, but still, it's fine! Of course there are plenty of wall street success stories, maybe you can convince people you can insure the uninsurable with massive CDS's, or maybe you can buy servers local to the stock exchange and pay for those few milliseconds of inside information, but those are all niches. Trading firms need Harvard grads for marketing reasons, to convince savers not to put their cash in indexes -- look how smart this guy is! It obviously would be really smart to have him invest your money!

Someone has to actually allocate capital; if everyone indexed we'd have no price discovery. There's plenty of abuse in finance, but no need to paint with such a broad brush. Investing (real, honest fundamentals analysis) has its place.

We would definitely still have price discovery: that's called venture capital. Stock-market trading represents only two things: price discovery on blue-chip income streams (aka dividend-payers) and sheer gambling (the rest). Indexing lets you decide what sort of bell curve you'd like your gambling strategy to have.

Believe it or not, many smart people actually like the humanities or social sciences more than STEM, for reasons unrelated to laziness. The view that college is just a way to maximize your future earnings is very middle-class, and many from more august backgrounds have other goals in mind.

the rise of china/india shows that betting on stem is a fools game -- too much competition. by contrast, no non-native is going to have the social knowledge/ties necessary for certain occupations (and the bar has the benefit of a monopoly limited to locals).

The view from STEM Street: law, finance and management consulting make lots of money both over the short-term and the long-term. You can springboard from 5 years at a management consultancy or investment bank into practically anything. Spending those same 5 years on a PhD in a STEM field increasingly offers _no_ career rewards whatsoever versus those other options -- except possibly the ability to go into investment banking at the end! Those of us who want to be scientists really just want to because we can't make ourselves happy doing anything _else_, not because we necessarily expect long, fruitful, or lucrative careers doing science.

Why does this happen? Simple: law and finance are rent-seeking fields that generate little value while capturing lots, while (academic or government-sponsored) science is a huge value-generator FOR THE SOCIETAL COMMONS with barely any capture mechanisms. The result is that law and finance can bill huge sums to very rich people, while scientists have to beg for government funding to do what could always potentially be the most important work of the age.

Someone needs to say this: you finance people are not that intelligent, really! I'm pretty sure all the standardized tests and cognitive skill assessments show that students of business / finance are less talented than students of science, engineering, and humanities, that you work less in school, and you graduate with fewer acquired cognitive skills. Quick stroking your egos!

So many people go into finance because the wages are high. They're high long-term and short-term. I'd rather you discuss why the wages are high -- is it ultimately rooted in preferred tax status of capital gains? -- increasing importance of resource allocation in an increasingly specialized economy? -- reduced competition due to increased reliance on insider networks to get top jobs? I don't know. What I do know is you guys aren't so smart, and what smart people are drawn to the field, it's because of the money, not some inversion of that.

business / finance are less talented than students of science, engineering, and humanities

Well this is true for sure - I've seen what happens in those business classes and it's just nonsense - memorize the jargon from the textbook and regurgitate. But businesses LOVE to hire them, maybe because they're all robots I don't know. Still most of the people who get top finance jobs are not business majors, they're from the Ivy League which tend not to have undergraduate business programs.

Hmm, you claim that other people are lazier and less intelligent than you, yet you either can't find your source for that claim or you don't feel like going to the effort.

Hmmm...why would established businesses love to hire a bunch of conformists and yes men...?

Gives cover to the CEO to do what he wants to do any way and builds rationalization that the board can accept.

Yeah, my question was purely rhetorical. Corporations love conformists and yes-men.

This is true.

But much of the value in human capital in big business is ability to keep clients happy, ability to work together, willingness for hard work (with much motivation beyond financial incentives) and exposure to risk.

I wouldn't say the market is inefficient for talent here, either. Scientists, logicians, and engineers are drawn to finance at an increasingly high rate. But the guy who sits in the back office doing nothing but number crunching gets to a glass ceiling pretty quickly.

Wages aren't quite as high as you think either. A fresh MFE graduate (no phD) can expect ~$80-90k base salary. Bonuses aren't that high unless at a trading desk(very few of these).

"The rest of the world is increasingly specialized, so the returns to your general intelligence, as a complementary factor, are growing too, in spite of your lack of widget knowledge. “Hey you, think about what you are doing! Are you sure? How about this?” often sounds bogus to outsiders but every now and then it pays off and generates a high expected marginal product."

This hits the nail on the head. Year ago now I took a web-oriented programming language (perl.) One of my classmates was a pretty high-end specialist in electrical engineering and advanced math (not sure what his degrees were but I'm pretty sure he had at least one PhD.) Anyway, he was working -- in his field but basically at hourly rates -- for a couple of right out of college guys who knew basically nothing about either electrical engineering or advanced math but did have an evidently very-successful vision for optimally putting videos of cats on the (pre-broadband) internet.

So yeah, instead of the older days where the specialists hired generally-educated clerks we're seeing a lot of generally-educated might-have-been-clerks hiring specialists.

This isn't even necessarily new. It's just that business processes have increased, and capital requirements decreased, to the point where the old aphorism "Straight A students are the engineers, B students are the middle managers, and C- and D students are the bosses" can be a start-up model and not just an old-money, Bush-family-style one.


Is that true? Funding isn't stupid. If you're academic record sucks, you better have something else to convince VC's and angels with.

It's just an aphorism about specialization. The young men were very smart. They just didn't invest in high grades in STEM -- they instead focused on creative uses of subcontractors who did. My classmate almost certainly had a higher GPA than they did. He likely had a higher GPA than almost anybody! But he wound up working for them instead of the other way around. Which, I think, was Tyler's point.


The answer is that these fields provide a robust and secure system of juicy economic rents.

“Economic rent” as defined by Ricardo is woefully inadequate — and is probably better defined as “the sum of all externalities”, which can, within the environment of a parasitic Federal Reserve Banking system, best be estimated by what neo-classical economists talk of as “modern portfolio theory” and its “risk free interest rate” usually approximated by short term Treasury instruments, although public choice theory has a lot to offer in this regard as well (indeed it subsumes the Fed).

Quick question about this theory: if you're so smart, why are you primarily optimizing over your immediate after-college income? And what distinguishes these smart people from those spending the ten years in grad school, post-doc, and asst prof research to make the better widget? Worse optimization? Less greed?

Do you think people choosing law, finance, and consulting are favoring immediate after-college income over long-term income _relative_to_people_who_enter_academia_? Do I understand the comment correctly?

I think people entering the former group (when considering the elites, not the potential future real-estate lawyer) are going to make more money in the short- and long-term than those entering the latter group. They need to weigh this against having to work a lot harder, and perhaps polish some skills academia doesn't require, like working with people and complex problems.

I struggle to see how this doesn't apply to other professions.

In all proffesions you can become ever more specialised, requiring perhaps 10-20 years experience to be a 'master' of your specialisation. Surely this is the case for law as well? Not sure about finance.

At the same time, there are roles within the professions that dont require mastery of one particular specialisation. These roles generally are better paid, and are probably just as intellectually taxing. Tying ideas from different specialisations together could be a general way of describing it.

And in my experience (civil engineering), intelligence is recognised and rewarded from virtually year 1.

Which basically leaves pay to be the major differentiator. Medicine attracts an outsized number of high intelligence people too, which has as specialised sub-discplines as any other profession.

I don't like all this law and finance bashing. Law and finance are simply the two most important fields in our economy. Without lawyers, who will protect our rights? Without financiers, who will keep watch of our money? Is there anything more important than rights and money? That's why they get paid.

Is this a trollpost?

Nobody is arguing that these things are important. you're echoing the idea of Finch from above:
"Obviously the system isn’t perfect, but a perfect system _would_still_ spend a lot of money resolving complex disputes with a lot at stake."

But it doesn't necessarily have to cost this much. People are pointing out the misuses and mis-allocation of human capital, as well as real resources that go along with it.

The lawyers who protect our rights aren't the ones making the big bucks. And, the financiers are arguably deciding who gets to use capital, but they aren't "keeping watch of our money" (that would be government regulators who also don't make the big bucks). Indeed, a great many world economies put the "safe money" and payment system duties associated with keeping watch of our money in the hands of their postal services, leaving banks exclusively in the busines of handling risky borrowing and lending arrangements closer to our investment banks.

The age structure of everything is being ratcheted upward. There's a parallel theory here somewhere for the not-so-high achieving.

Just like a super-smart 22 year old straight out of Harvard doesn't want to "pay dues" and wait till age 30 for some increasingly elusive long-term success, a not-quite-so-smart 18 year old straight out of high school doesn't really want to wait either.

Time was, you could graduate from high school, land a job at the factory or steel mill, get married and have a couple of kids already by age 22. People could start their adult lives much sooner back then. Today, there's nothing but a sort of enforced adolescence till late-twenties or beyond, forced financial dependence and piling on of undischargeable student loan debt, in pursuit of a career that might simply turn out to be a mirage.

Even without the prospect of a high-paying alternative, like the Wall Street or consulting jobs of the overachievers within their age cohort -- or indeed even without any prospects at all -- many still take a look at the deal they're being offered by society, and turn it down.

The truly smart kids know that it's the lawyers and bankers who'll be sending the science, engineering and manufacturing jobs to China and India. Better to spend your productive years being the lay-off-er, rather than the lay-off-ee.

This is dead on, but slightly incomplete. For what it's worth, I am a college senior at a top public university and I recently accepted an offer to work in Management Consulting after I graduate.

The one component of my (and I suspect most) decision to enter consulting that you did not include was the desire to remain a generalist. It is not just that I want to earn returns on my intelligence without taking the time to specialize, but also that I do not want to specialize. At least not yet.

The truth about consulting and finance is that in many, if not most, cases, 20-somethings use them as springboards in to some other career. Beyond signaling to future employers, consulting and finance provide survey level exposure to the mechanics of the business world. I am going in to consulting because I want to specialize someday, but I have yet to figure out what I would like to specialize in.

Law is a little more specialized, but I think the same argument basically holds. Someone who wishes to have a career in the law can go to law school without specializing in some segment of the law. They can even go to work a for a firm without a sense of what they will specialize in.

Back when I was deciding between grad school and law school after a science undergraduate degree (first class honors with a scholarship for graduate school) I concluded that I would make more money as a second rate lawyer than I would as a scientist. I think I was right to choose law. A classmate who was smarter than me went on to get a Ph.D from a really good school and then became a computer programmer because he could not find an academic position.

If we want more smart people to go into science and engineering we have to pay them more.

Because the current incentives are fucked up.

If we set tax policy to reward entrepreneurs first and foremost - that is what some of the "best and brightest" will go do. Right now we penalize the 2% of SMB owners who generate 50% of the SMB profits aggressively.

Many others who go into law and finance, are not that bright, and they will go into it anyway, and they will just earn less.

Brilliant! Just should mention the partially rent-seeking nature of law and finance industry...

Interesting topic! As a former strategy consultant, I can definitely relate to many of the motivations described here.

Although, I think the reputation of consultancies as the dream job is definitely changing, and will continue to do so.

The main driver of this shift is the fact that most consultant jobs lack an implementation aspect. You don't really build things. You think and pontificate and strategize, but you don't *do*.

The lack of implementation has two consequences:
1) Less students will gravitate towards strategy-only jobs, because today's culture wants to create things. This is the era of conspicuous production and start-ups.
2) Without experience in actually implementing, I think former strategy consultants may have trouble working finding work. Strategy alone is not enough of a skill. Therefore, consulting as a signal of competency will wane.

So, while I totally agree with the above motivations, I think these reasons will change over the next 5 years.

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