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Wednesday, February 16, 2011

“23 Things They Don’t Tell You About Capitalism” by Ha-Joon Chang

This book was recommended by a friend that generally has views that are quite left of mine. Nevertheless it is an interesting read. I disagree with most of Chang’s conclusions but concur with much of his take on investments in education. Chang believes in Capitalism but is down on “free-market capitalism”. He generally advocates bigger government and governments that direct more of the productive capacity of the government. That having been said, his views on education are very much in the minority and contrary to other big-government advocates.

When has a politician stood up and said: “We are investing too much in education, especially silly studies in Greek History, Music and Modern Art at our colleges and universities.”? Never. Instead, speech after speech is along the lines of Obama’s latest State of the Union address: “Of course, the education race doesn't end with a high school diploma. To compete, higher education must be within the reach of every American.”…” if we raise expectations for every child, and give them the best possible chance at an education, from the day they are born until the last job they take — we will reach the goal that I set two years ago: By the end of the decade, America will once again have the highest proportion of college graduates in the world.”

But Chang disagrees with this notion: “There is remarkably little evidence showing the more education leads to greater national prosperity. Much of the knowledge gained in education is actually not relevant for productivity enhancement, even though it enables people to lead a more fulfilling and independent life. Also, the view that the rise of the knowledge economy has critically increased the importance of education is misleading.” And I would question how effective it really is at helping people live more fulfilling lives, especially for the amount spent.

“With increasing de-industrialization and mechanization, the knowledge requirements may even have fallen for most jobs in the rich countries.”

Chang points out that it is taken for granted that: “More educated people are more productive - as evidenced by the higher salaries they get. So it is a matter of mathematical logic that an economy with more educated people will be more productive.”

Chang notes that: “In 1960, Taiwan had a literacy rate of only 54%, while Philippine’s was 72%. Despite its lower education level, Taiwan has since then notched up one of the best economic growth performances in human history. In 1960, the Philippines had almost double the per capita income of Taiwan ($200 vs $122), but today Taiwan’s per capita income is around ten times that of the Philippines ($18,000 vs. $1,800)” This is where I think Chang draws conclusions from limited observations. Obviously there are so many factors that determine the economic performance of a country and education is just one of them. The Philippines was a US territory until the end of World War II. Since independence in 1946, the country has not had a very stable democracy and had to deal with Ferdinand Marcos’s corrupt dictatorship from 1972- 1986. After the return to democracy in 1986, progress was hampered by national debt, government corruption, coup attempts, a persistent communist insurgency and an Islamic separatist movement.

Chang cites Lant Pritchett, a Harvard economist who worked at the World Bank for a long time. “Pritchett analyzed the data from dozens of rich and developing countries during the 1960-87 period and conducted an extensive review of similar studies in order to establish whether education positively influenced growth. His conclusion is that there is very little evidence to support the view that increased education leads to higher economics growth.” In Pritchett’s paper he says: “possibly education does raise productivity, and there is demand for this more productive educated labor, but demand for educated labor comes from individually remunerative but socially wasteful or counterproductive activities - a bloated bureaucracy, for example, or overmanned state enterprises in countries where the government is the employer of last resort - so that while individuals' wages go up with education, output stagnates, or even falls.”

Chang asks: “Why is there so little evidence to support what seems to be such an obvious proposition that more education should make a country richer? It is because, to put it simply, education is not as important in raising the productivity of an economy as we believe. To begin with, not all education is even meant to raise productivity. There are many subjects that have no impact, even indirectly, on most workers’sproductivity - literature, history, philosophy and music, for example”

“To begin with, with the continuous rise in manufacturing productivity, a greater proportion of the workforce in rich countries now require much less education - stacking shelves in supermarkets, frying burgers in fast food restaurants and cleaning offices. Insofar as the proportion of people in such professions increases, we may actually do with an increasingly less, not more, educated work labor force, if we are only interested in the productivity effects of education. Moreover, with economic development, a higher proportion of knowledge becomes embodied in machines.”

“A large part of this is due to the simple fact that mechanization is the most important way to increase productivity.”

“Now, it may be argued that, even though economic development may not necessarily require the average worker to be more educated, it needs more educated people at the higher end. After all, as I have pointed out above, the ability to generate more productive knowledge than others is what makes a country richer than others. Thus seen, it may be argued, it is the quality of universities, rather than that of primary schools, that determines a nation’s prosperity.” Perhaps this is the case in the fields of science and engineering, but doubling our expenditures in literature, music and history is unlikely to increase our productivity. So we need to consider very specifically what kind of college investments that government should subsidize if we care about increasing our wealth.

Chang states: “Let us take the striking example of Switzerland. The country is one of the top few richest and most industrialized countries in the world, but it has, surprisingly, the lowest - actually by far the lowest - university enrollment rate in the rich world; until the early 1990s, only around one-third of the average for other rich countries. Until as late as 1996, the Swiss university enrolment rate was still less than half the OECD average (16 percent vs. 34 per cent).”

“Higher education, of course, imparts certain productivity-related knowledge to its recipients, but another important function of it is to establish each individual’s ranking in the hierarchy of employability. In many lines of work, what counts is general intelligence, discipline and the ability to organize oneself, rather than specialist knowledge, much of which you can, and have to, actually pick up on-the-job.” But how well does our US college system really develop discipline and organization skills? With degree deflation and a move to treat the college student like a “customer”, there has been a trend for faculty to go along to get along - in other words, don’t make the tests and the assisgnments too difficult because then the college student will not give the professor good evaluations that are required to keep one’s job. And the more pleasant we make the resort-like setting and create an environment where everyone passes, how much of a real ranking system have we created? Does graduating from a cushy college where virtually everyone graduates really demonstrate much self-discipline?

Chang notes: “By hiring you as a university graduate, your employer is then hiring you for those general qualities, not for your specialist knowledge, which is often irrelevant to the job you will be performing.” As Caroline Bird said: “It may well be that college attracts large numbers of those who are predisposed to change and learn – and that they would score high on all the test whether they go to college or not. If this is so, if college selects rather than creates ability, the diploma has become what Christopher Jencks of Harvard calls “a hell of an expensive aptitude test.”

Chang goes further: “Once the proportion of people going to university goes over a critical threshold, people have to go to university in order to get a decent job. When, say 50% of the population goes to university, not going to university is implicitly declaring that you are in the bottom half of the ability distribution, which is not the greatest way to start your job search. So, people go to university, fully knowing that they will ‘waste time’ studying things that they will never need for their work.” Actually I don’t know that our 18 year olds really know what they are going to learn in college. They simply know that everyone says they need to go, that their parents and society are subsidizing that path but no other one and they haven’t really considered any alternatives. Finally why would an 18 year old want to start a tough job rather than lazing around a beautiful campus in search of beautiful coeds?

And because of our discrimination laws, company hiring practices need to show relevance to the job being filled. So employers generally don’t use SAT and GMAT scores in hiring because they can’t show definitively the connection between higher test scores on these tests and the requirement for their work. If the employer uses test scores that have not been shown not to not discriminate based on cultural and racial backgrounds (I do not know how to express this accurately without a double negative), they can put themselves at risk of lawsuits. But the college degree is now accepted as a valid delineator for whom one hires. So employers indirectly achieve the same SAT score aptitude test but at a very expensive price.

But beyond basic IQ and technical know-how, how many employers really look at the self-discipline demonstrated in college. Things like, how much the individual paid for the experience himself, how much the graduate worked during college, how many units per semester did she take, how many classes did the candidate drop, are all factors that are generally ignored by those hiring recent college grads.

Chang states that: “Given that Switzerland was until the mid 1990s able to maintain one of the highest national productivities in the world with a university enrollment of 10-15 per cent, we could say that enrolment rates much higher than that are really unnecessary.”

“In the case of rich countries, their obsession with higher education has to be tamed. This obsession has led to unhealthy degree inflation and the consequent over-investment of huge scale in higher education in many countries.”

In summary we think:

1. There are a myriad of factors that determine a country’s economic success. Just a few of the non-education factors are the type of economy, government debt, birth rates, political stability, innovation, investments made in the past, access to natural resources, and cultural work ethic. The right investment in education (by government and the individual) can clearly help the individual. But the wrong kind of education investments will do little to make a country more competitive.
2. There are different lag times for different factors. For example a huge hurricane or earthquake or a terrorist attack can put the economy behind almost instantly but additional expenditures in pre-school education will probably not pay off for 20+ years.
3. College diplomas are now a sorting system for employment opportunities and it is a very expensive and sometimes ineffective way to sort.
4. It matters what education we invest in. College education that leads to more productivity in a country will have a bigger payback on broad-based prosperity than those investments that are for the general interest and the “enlightenment” of students.
5. Greater expenditures on education do not necessarily lead to an increase in practical know-how or greater prosperity.

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