Why Morgan Stanley hires from Harvard.
What is this thing called “merit”? And what role did it play during the recent but hopefully bygone age of elite college dominance, runaway financialization, and the rise of competitive blame-shifting? This is the puzzle proffered by Nicholas Lemann in his 1999 book The Big Test: The Secret History of the American Meritocracy: Why should competition for slots at a tiny number of selective colleges play a substantial role in how young people come to fill lucrative private sector jobs?
The American meritocracy was created in the mid-20th century by academic administrators such as war gas chemist and sometime Harvard President James Conant not to staff Wall Street but to find the best and the brightest to fill vital government and scientific positions.
We can think about how merit selection can and should work for these few and demanding positions by riffing on the 1943 Warner Brothers propaganda short The Rear Gunner. The small and folksy Burgess Meredith was the star, while the tall, slim, and handsome Ronald Reagan was in a supporting role.
The short lays out the following scenario: suppose we have a limited number of bombers. For the crucial role of rear gunner, we want the best person who is not suitable for an even more vital job. To be a rear gunner and hit moving aircraft with an aimed weapon from a moving platform, you need stamina, courage, excellent marksmanship, and the ability to rapidly perform and execute complicated physical calculations. You also have to be able to fit in the tail gun. One look and we realize that Meredith’s short and scrappy country-boy bird hunter was a far better fit for the rear gunner position than the suave, elegant, but too-tall character played by Ronald Reagan.
When we talk about a defined job in public or military service, you can understand why you’d seek out the best person for the job. Yet the private sector doesn’t have defined jobs or a limited number of jobs. Why should a firm not just hire anyone who will net it more money? Why should private sector firms, motivated to seek out profit rather than prestige, be interested in paper credentials and meritocratic competition?
If you read the history of the big investment banks like Morgan Stanley or Brown Brothers Harriman, they generally grew by buying out smaller investment banks—and frequently obtained the money-making talent of their partners. But why did Morgan Stanley in more recent decades hire inexperienced youngsters from Harvard, and not the people who have already shown they can make money working at smaller, less prestigious firms?
In fact, making money is not the overriding management principle of large financial firms. Rather, as all of us should have learned from the 2008 financial crisis and the ensuing bailouts, these firms survive and thrive because of what has been called the “socialization of risk” and the “privatization of reward.”
There are two not very interesting nor productive ways to make money: one (à la Bernie Madoff and Sam Bankman-Fried) is to steal it. The other is to gamble (or more politely, “speculate” or “invest”) with other people‘s money, pocket the payoffs (privatization of reward), and let others take the losses (socialization of risk).
This second method—paying yourself big bonuses for your acumen when the getting is good and securing government bailouts when it isn’t—puts a big premium on claiming credit and blame shifting: you need to explain why taxpayers should bail out your firm and not, for example, those customers or clients whose money your firm has lost.
Every year for the last several decades, selective American colleges have run their admissions processes as an international interview and essay competition in precisely such credit claiming and blame-shifting. The winners are those who most persuasively make the case that the credit for their achievements belongs to themselves and that any blame for their failures or the difficulties they have overcome belongs to our supposedly racist and hateful society. The winners are then rewarded with admissions slots in those few prestigious and selective American colleges.
Such “winners” show promise in the no-longer-so-new Big Finance game of pocketing your wins—and shifting your firm’s losses to the American taxpayer and to the productive sectors of the economy.
So what is the “merit” that our too-big-to-fail financial institutions find in elite college graduates? In today’s plutocracy, the most valued skill isn’t creating value—it’s shifting the cost of failure onto someone else. And that, my friends, is why Morgan Stanley hires from Harvard.
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