Thinking about incentives

Incentives are fascinating. When, if at all, should we revisit the incentives around us?

To preface, this isn't anything concrete, but just a collection of thoughts after one of those Wikipedia rabbit hole binges.

I had read Peter Thiel's Zero to One a few weeks back and was inspired to consume even more related content. When you go down an internet rabbit hole you might pick up a nugget or two or you could end up doomscrolling. Anyway, I was immediately drawn to a quote he made in 2013 at Yale University, "We wanted flying cars, instead we got 140 characters." The qoute hit me and with some fairly elementary mental gymnastic later, let's just say the dynamics behind the assertion is complex, but let's entertain it.

How could we get to this futuristic future? Are the incentives and institutions around "moonshots" for a lack of a better word, easily and readily available? Unfortunately, I may have jumped the gun with the question.

We have bigger problems if the most admired profession in the United States according to a Lego survey is becoming a Youtube star.

But, who am I to judge? In all seriousness, kids are kids. When I was a kid I wanted to be a doctor, lawyer and firefighter; I think in that order. Here I am, neither of those, but a "professional" in the software space.

I digress.

Back to the topic at hand - where's our flying cars and fusion power and light sabers?

A paper in 2017 titled "Finance and Misallocation of Scientific, Engineering and Mathematical Talent" finds the share of STEM talents grew signficantly faster in finance than in other STEM sectors. The authors find a persistant wage premium for STEM graduates working in finance compared to other STEM sectors.

What's going on? Is there a brain drain going on from STEM talent flowing into finance? According to the paper? Absolutely.

What is sort of some consequences of this?

Here's a critique. In an article by the Washington Post in 2014 aptly titled, "A black hole for our best and brightest", the article also cites a different paper by Harvard University and the University of Chicago stating that every dollar a worker earns in a research field spills over to make the economy $5 better off. Similarly, every dollar a worker earns in finance, makes the economy 60 cents worse off.

As the article continues, the finance industry makes up under 8% of the economy (GDP). BLS' employment by major industry lists financial activities at approximately 5.6% of total employment or roughly ~8.7M people.

Philippon (a French economist at NYU's Stern School of Business) in the article asserts the optimal size of the financial sector should be about ~2% less.

On to some scuffed napkin math. Let's assume 5.6% aggregate workers make up 8% of GDP in finance and if employment numbers shifted down in proportion to ~6% of GDP instead, we're looking at about 4.2% of people employed in finance instead. In real numbers, that would translate to ~6.6M employed in finance rather than ~8.7M and could imply ~2.13M folks being available to allocate to other industries/sectors. There's a lot of assumptions here, but let's continue.

Let's assume those ~2.13M folks went into academia/science where each dollar earned spills over to make the economy $5 better off (positive externality). It would then be reasonable to presume we'd likely be better off should this have happened,. But, Collin would we be any closer to flying cars? Who knows. That's anyone's guess. However, Reid Hoffman tweeted about a little something something 8 years after Thiel's quote, so there's that. 🤷

What good is an optimistic take if we can't assume the reallocation of talent would have yielded flying car or any other number of scientific breakthroughs for these moonshots? Hope and aspirations are noble and worth believing in. It is definitely enticing to think about. Come on, you have to wonder with all that extra brain power, could progress on one or several fronts could have happened.

Wishful thinking? Perhaps.

Anyway, there's another problem. Where does the money come from? The private sector? Is this taboo to talk about?

If we take a step back and put our "investor" hat on and imagined ourselves as a rational investor presented with where to allocate capital, where would this capital go? Would you place your money on moonshots with potentially a low probability or at best, an uncertain probability of success (implying commercial ROI) and longer time horizon or would you allocate capital to a software company that sounds promising with much lower risk and a shorter time horizon? I'd argue the majority of us would fall into the latter bucket. The analysis begs the question, where could the investments and incentives come for these endeavors then. I believe that's a policy question and if I'm being honest, I imagine meaningful progress here has to involve the state. It wouldn't be the first time technological advancement made strides commercially. GPS and memory foam are two that come to mind immediately.

I don't imagine this is thought experiment is deviates much from the real world as the vast majority of venture capital is not dispersed or allocated to high-risk moonshots. Wall Street Journal has graphic illustrating venture capital allocation up to 2018 here showing capital going into software by a substantial margin. That doesn't mean there isn't any venture money flowing into moonshots and "crazy ideas," but they are certainly in the minority.

Would this imply public and private partnerships? It alludes to it, but I'm not a policy expert; just someone who may have spent too much time on Wikipedia that one day.

Before concluding, I came across incentive design. Let that be a topic for another time.