Why smart people should build things?

What propels the American economy? Is it companies on the Fortune 500 list? Banks? Megacorporations? The answer, according to Andrew Yang’s book Smart People Should Build Things, is found in the entrepreneurial and start-up mentality. As a result, it’s unsurprising that young American graduates from excellent universities seek positions in professional services like law firms and consultancies, which may not be beneficial to the national economy.

Every student must make a decision on their future career at some time near the end of their study. They think to themselves, “Where should I begin?” And, more importantly, what should my first employment entail? These questions frequently lead students to only one conclusion at elite universities such as those in the Ivy League. In reality, many students who graduate from prominent institutions seek employment in prestigious professional service firms. Management consultancies, banks, and the legal profession are all locations where they can find work.

When we look at the figures, we can see that on average, 40% of Princeton grads go into finance or consulting, with nearly 13% continuing their education in law school each year. In a similar line, 29% of Harvard’s 2011 graduating class went into finance or consulting, while 19% applied to law school.

What is it that attracts students from prestigious universities to work for professional service firms? In a nutshell, it’s largely about the big salary potential and the demanding work environment. Furthermore, students from prestigious colleges are well-suited to the formal application processes that must be completed in order to gain a position at these companies.

It’s not dissimilar to the application processes for the prestigious universities where they received their education: to get accepted, students must pass difficult and very selective admission processes at practically all of these universities.

Finally, students have an impact on one another’s professional choices. Young students are frequently insecure about their future prospects and look to others for guidance. That is, they continue to pursue the same occupations year after year. As one student said: “It seems like everybody around you is doing banking interviews all the time. This has an effect on you after a while.”

Students aren’t the only ones who influence one another’s job choices. Major professional service firms have a vested interest in recruiting and hence have a significant role in influencing students’ decisions. For starters, professional service firms compete for the top pupils and spend a significant amount of money on recruitment. In reality, each year, hundreds of institutions compete for talent in a virtual weapons competition.

Goldman Sachs, for example, has its own area in Columbia University’s career services office, and it is claimed that the firm spends $50,000 on each recruit. If we extrapolate this figure to the total recruitment costs of professional service firms, we’re looking at tens or perhaps hundreds of millions of dollars every year.

Because there are a finite number of pupils and hence a finite amount of accessible talent, businesses must pay heavily to secure their next generation of employees. Furthermore, the prospects for personal and professional growth at famous firms make them more appealing to students.

They make this plain in their marketing: work with us for two years and you’ll have learned all you need to succeed in any area. More specifically, they claim that if you work as a management consultant for a while, you will gain the fundamental skills needed to eventually work as a lobbyist or an investment banker.

But how do you hone these abilities? The blue-chip organizations claim to train you how to deliver “high-quality work,” which is one of the main value propositions for professional service corporations. Every model, report, or presentation, for example, must be very sophisticated and error-free, and these talents can be easily transferred to any other function. Professional service organizations appear to be a good beginning point for students who are unsure about their career path: their recruits learn fundamental skills and then move to their desired sector later.

You have precise assumptions about the work, the culture, the expectations, and so on when you apply for a job. Have you ever discovered, however, that these notions are entirely disconnected from the reality of your work? Professional service firms are no different: not everyone is a suitable fit.

Often you’ll have to work extremely hard, travel extensively and work in intense environments that people find difficult to cope with. It’s no wonder that the attrition rate at a top consulting company can exceed 30 percent per year.

As a result, people must become accustomed to watching their coworkers and friends come and go. This might be damaging to their health and cause stress and dissatisfaction. Furthermore, transitioning from a large to a small company is not as simple as we might believe. Even if these individuals discover a more appealing job offer with a smaller firm, they are still enslaved by golden handcuffs.

Leaving their prior jobs usually entails a lower wage, which necessitates considerable lifestyle changes, as evidenced by our trips, automobiles, and even relationships. And the perceived risk of changing career paths increases with each year spent in the same position.

In addition, small and medium-sized businesses require different skill sets than bigger professional services. Most small businesses want to demonstrate that you can complete tasks. This method is very different from the analytic and theoretical approach used by professional service firms. Furthermore, most small to medium-sized businesses require only one financial expert, not twelve, and hiring a banker or consultant makes sense only when a firm has grown to a certain level.

Finally, rather than reaching out to the banking, consulting, or legal industries, start-ups frequently hire from their personal networks or from other start-ups, making it that much more difficult to exit once you’re in.

So far, we’ve looked at professional service organizations from the standpoint of an individual. But what impact do they have on entire economies? Is it beneficial to have a large number of highly specialized consultants? Certainly not. In fact, evidence suggests that a strong economy is reliant on other factors.

In fact, it is start-ups, not professional service firms, that propel national economic growth. This was clearly proven in a study by the Kauffman Foundation, which found that from 1997 to 2005, new enterprises accounted for all net job creation in the United States.

Furthermore, companies with fewer than 500 employees in the United States have thirteen times more patents per employee than larger companies. Larger enterprises, such as those in the financial industry, on the other hand, have fewer evident economic benefits.

Trading, for example, accounted for 63 percent of Goldman Sachs’ revenue in 2010. However, share trading does not always contribute value to the economy: one party profits while the other loses, meaning that a large portion of their revenue was obtained at the expense of other sectors of the economy.

Innovations, on the other hand, are far more important to a country’s economic progress. As a result, the American economy appears to be moving in the wrong direction. Take a look at the numbers for yourself. In 1982, enterprises that had been in operation for less than five years accounted for roughly half of all businesses in the United States. By 2011, it had reduced to just over a third of the population. In 2008, for the first time in US history, businesses employing 500 or more employees employed the majority of workers.

These advances have far-reaching consequences for everyone: Due to the marginalization of the most productive areas of the economy, Bloomberg Businessweek projects a surplus of 176,000 unemployed or underemployed law school graduates by 2020.

Check out my related post: What does every angel investor wants you to know?

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