03 June 2015

Education Myth vs. Education Reality - When Knowledge Work Boosts Your Economy

I remember a conversation with a man who grew up in the Soviet Union. This was a time when the Soviets had the best chess players and a military-science program that rivaled our own, in spite of their having a smaller economy. The real problem in the USSR was not the quality of education, he said. That was as rigorous as education anywhere. The problem was, there was no capital. If you are a wizard at chemistry but don't have a lab to work in, it is tough to translate your knowledge into value.

Russian programmers are among the most valued on Wall Street. Apparently their code is more elegant and runs more quickly. The reason for this is that they didn't learn programmer with unlimited time on the computer. They had to write out their programs on paper before sitting down to the computer in order to complete programs in the limited time they had.

The problem in the Soviet Union and now Russia was and is access to capital. Without sufficient capital, it is hard to make real gains from education. Chemistry without labs or computer science without computers is more of an intellectual exercise than a boost to the economy.

Which brings us to Ricardo Hausmann's The Education Myth. Here is an excerpt:

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer.

In the Fourth Economy, I argue that capital is a limit to economic progress before knowledge work is. Why? In the simplest example, if you still have to shovel coal by hand, it doesn't matter that you know engineering principles for designing a steam shovel. Your productivity will be a product of your back muscles, not your design insights. At one point of development, capital is clearly the limit to progress. You need machines that can do the work of people doing manual work. After this point is reached, knowledge work becomes the new limit. Once workers can drop their shovels, they can begin to create value through knowledge work that results in a redesign of the steam shovel or even re-think the source of energy.

Oddly, education can offer diminished value at two stages of economic development. When a country still hasn't got the computers or labs for its computer science and chemistry majors to work in. That is, when a country still faces the limit of capital. Or when a country has moved beyond the limit of knowledge work and now faces the limit of entrepreneurship. Countries like Tunisia find themselves in the first category. Countries like the US find themselves in the second. And yet, as Hausmann points out, education is held up as a panacea for economic progress.

Education and capital have been offered as solutions to economic stagnation for a good reason. They've been at the heart of massive gains in productivity and GDP. Kneading and baking dough has also been at the heart of great bread but it has to be done in the right order.

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