23 Things They Don't Tell You about Capitalism

by Ha-Joon Chang

  Education, education, education

  ‘Education, education, education’ – this is how the former British Prime Minister Tony Blair summed up his prospective government’s top three policy priorities during the 1997 election campaign, which brought his ‘New’ Labour party to power after nearly two decades in the wilderness.

  The subsequent success or otherwise of New Labour’s education policy may be disputed, but what is indisputable is that the comment perfectly captured Mr Blair’s exceptional ability to say the right thing at the right time (that is, before he lost his head over Iraq). Many a politician before Mr Blair had talked about and pushed for better education, but he was speaking at a time when, having witnessed the rise of the knowledge economy since the 1980s, the whole world was becoming convinced that education was the key to economic prosperity. If education had been important for economic success in the days of smoke-stack industries, more and more people were becoming convinced, it would be the be-all and end-all in the information age, when brains, and not brawn, are the main source of wealth.

  The argument seems straightforward. 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. The fact that poorer countries have a lower stock of educated people – or ‘human capital’ in some economists’ jargon – also proves the point. The average duration of schooling is around nine years in OECD countries, while it is not even three in Sub-Saharan African countries. Also well known are the exceptionally high educational achievements of the ‘miracle’ economies in East Asia – such as Japan, South Korea, Taiwan, Hong Kong and Singapore. Their educational achievements are manifested not just in quantitative terms such as high literacy rates or enrolment rates at various levels of education. The quality of their education is very high as well. They rank right at the top of the league in internationally standardized tests such as the Trends in International Mathematics and Science Study (TIMSS) for fourth and eighth graders, and the Program for International Student Assessment (PISA), which measures fifteen-year-olds’ ability to apply maths knowledge to real-world problems. Need we say more?

  We don’t need no education . . .

  Self-evident though the importance of education in raising an economy’s productivity may seem, there is actually a lot of evidence that questions this piece of conventional wisdom.

  Let’s first take the case of the East Asian miracle economies, in whose development education is supposed to have played a critical role. In 1960, Taiwan had a literacy rate of only 54 per cent, while the Philippines’ was 72 per cent. Despite its lower education level, Taiwan has since then notched up one of the best economic growth performances in human history, while the Philippines has done rather poorly. 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). In the same year, Korea had a 71 per cent literacy rate – comparable to that of the Philippines but still well below Argentina’s 91 per cent. Despite the significantly lower literacy rate, Korea has since grown much faster than Argentina. Korea’s per capita income was just over one-fifth that of Argentina’s in 1960 ($82 vs. $378). Today it is three times higher (around $21,000 vs. around $7,000).

  Obviously, there are many more things than education that determine a country’s economic growth performance. But these examples undermine the common myth that education was the key to the East Asian miracle. The East Asian economies did not have unusually high educational achievement at the start of their economic miracles, while countries like the Philippines and Argentina did very poorly despite having significantly better-educated populations.

  At the other end of the spectrum, the experience of Sub-Saharan Africa also shows that investing more in education is no guarantee of better economic performance. Between 1980 and 2004, literacy rates in Sub-Saharan African countries rose quite substantially from 40 per cent to 61 per cent.1 Despite such rises, per capita income in the region actually fell by 0.3 per cent per year during this period. If education is so important for economic development, as most of us believe, something like this should not happen.

  The apparent lack of positive effects of education on growth is not found only in the extreme cases that I have chosen – East Asia at one end and Sub-Saharan Africa at the other. It is a more general phenomenon. In a widely cited 2004 article, ‘Where has all the education gone?’, Lant Pritchett, a Harvard economist who worked at the World Bank for a long time, analysed 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 influences growth.2 His conclusion is that there is very little evidence to support the view that increased education leads to higher economic growth.

  Don’t know much about history, don’t know much biology

  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’ productivity – literature, history, philosophy and music, for example (see Thing 3). From a strictly economic point of view, teaching these subjects is a waste of time. We teach our children those subjects because we believe that they will eventually enrich their lives and also make them good citizens. Even though this justification for educational spending is increasingly under attack in an age in which everything is supposed to justify its existence in terms of its contribution to productivity growth, it remains a very important – in my view, the most important – reason to invest in education.

  Moreover, even subjects like mathematics or sciences, which are supposed to be important for raising productivity, are not relevant for most workers – investment bankers do not need biology or fashion designers mathematics in order to be good at what they do. Even for those jobs for which these subjects are relevant, much of what you learn at school or even university is often not directly relevant for practical work. For example, the link between what a production line worker in a car factory learned in school physics and his productivity is rather tenuous. The importance of apprenticeship and on-the-job training in many professions testifies to the limited relevance of school education for worker productivity. So, even the supposedly productivity-oriented parts of education are not as relevant for raising productivity as we think.

  Cross-country statistical analyses have failed to find any relationship between a country’s maths scores and its economic performance.3 But let me give you more concrete examples. In the mathematical part of the 2007 TIMSS, US fourth-graders were behind not only the famously mathematical children of the East Asian countries but also their counterparts from countries such as Kazakhstan, Latvia, Russia and Lithuania.4 Children in all other rich European economies included in the test, except England and the Netherlands, scored lower than the US children.5 Eighth-graders from Norway, the richest country in the world (in terms of per capita income at market exchange rate – see Thing 10), were behind their counterparts not only in all other rich countries but also in much poorer countries, including Lithuania, Czech Republic, Slovenia, Armenia and Serbia (it is interesting to note that all these countries are former socialist countries).6 Eighth-graders from Israel, a country famous for its educational zeal and exceptional performance in high-end research, scored behind Norway, falling behind Bulgaria as well. Similar stories were observed in science tests.

  How about the knowledge economy?

  Even if education’s impact on growth has been meagre so far, you may wonder whether the recent rise of the knowledge economy may have changed all that. With ideas becoming the main source of wealth, it may be argued
, education will from now on become much more important in determining a country’s prosperity.

  Against this, I must first of all point out that the knowledge economy is nothing new. We have always lived in one in the sense that it has always been a country’s command over knowledge (or lack of it) that made it rich (or poor). China was the richest country in the world during the first millennium because it possessed technical knowledge that others did not – paper, movable type, gunpowder and the compass being the most famous, but by no means the only, examples. Britain became the world’s economic hegemon in the nineteenth century because it came to lead the world in technological innovation. When Germany became as poor as Peru and Mexico right after the Second World War, no one suggested that it should be reclassified as a developing country, because people knew that it still had command over technological, organizational and institutional knowledge that had made it one of the most formidable industrial powers before the war. In that sense, the importance (or otherwise) of education has not changed in the recent period.

  Of course, the knowledge stock that the humanity collectively commands today is much bigger than in the past, but that does not mean that everyone, or even the majority of the people, has to be better educated than in the past. If anything, the amount of productivity-related knowledge that an average worker needs to possess has fallen for many jobs, especially in rich countries. This may sound absurd, but let me explain.

  To begin with, with the continuous rise in manufacturing productivity, a greater proportion of the workforce in rich countries now works in low-skilled service jobs that do not require much education – stacking shelves in supermarkets, frying burgers in fast food restaurants and cleaning offices (see Things 3 and 9). Insofar as the proportion of people in such professions increases, we may actually do with an increasingly less, not more, educated labour 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. This means that the economy-wide productivity increases despite individual workers having less understanding of what they do than their counterparts in the past. For the most striking example, these days most shop assistants in rich countries do not even need to know how to add – a skill that their counterparts in earlier times definitely needed – as bar-code machines do that for them. For another example, blacksmiths in poor countries probably know more about the nature of metals in relation to tool-making than do most employees of Bosch or Black & Decker. For yet another example, those who work at the small electronics shops littering the streets of poor countries can fix many more things than can individual workers at Samsung or Sony.

  A large part of this is due to the simple fact that mechanization is the most important way to increase productivity. But an influential Marxist school of thought argues that capitalists deliberately ‘de-skill’ their workers by using the most mechanized production technologies possible, even if they are not the most economical, in order to make the workers more easily replaceable and thus easier to control.7 Whatever the exact cause of the mechanization process, the upshot is that more technologically developed economies may actually need fewer educated people.

  The Swiss paradox

  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.

  However, even in this supposedly knowledge-driven era, the relationship between higher education and prosperity is not straightforward. Let us take the striking example of Switzerland. The country is one of the top few richest and most industrialized countries in the world (see Things 9 and 10), but it has, surprisingly, the lowest – actually by far the lowest – university enrolment 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 per cent vs. 34 per cent).8 Since then, Switzerland increased its rate considerably, bringing it up to 47 per cent by 2007, according to UNESCO data. However, the Swiss rate still remains the lowest in the rich world and is way below what we find in the most university-heavy countries, such as Finland (94 per cent), the US (82 per cent) and Denmark (80 per cent). It is, interestingly, also far lower than that of many considerably poorer economies, such as Korea (96 per cent), Greece (91 per cent), Lithuania (76 per cent) and Argentina (68 per cent).

  How is it possible that Switzerland has stayed at the very top of the international productivity league despite providing much less higher education than not just its main competitors but also many economies that are much poorer?

  One possible explanation is that universities in different countries have different qualities. So, if Korean or Lithuanian universities are not as good as Swiss universities, it may be possible for Switzerland to be richer than Korea or Lithuania, even if a much lower proportion of the Swiss have university education than do the Koreans or the Lithuanians. However, this argument loses much of its force when we compare Switzerland with Finland or the US. We cannot in all seriousness suggest that Swiss universities are so much better than Finnish or American ones that Switzerland can get away with university enrolment rates half theirs.

  The main explanation for the ‘Swiss paradox’ should be found, once again, in the low productivity content of education. However, in the case of higher education, the non-productivity component is not so much about teaching people subjects that will help them with things such as personal fulfilment, good citizenship and national identity, as in the case of primary and secondary education. It is about what economists call the ‘sorting’ function.

  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.9 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. So, even if what you learn in a university as a history major or a chemist may not be relevant to your work as a prospective manager in an insurance company or as a government official in the Department of Transport, the fact that you have graduated from a university tells your potential employers that you are likely to be smarter, more self-disciplined and better organized than those who have not. 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.

  Now, with the increasing emphasis on higher education in the recent period, an unhealthy dynamic has been established for higher education in many high-income and upper-middle-income countries that can afford to expand universities (Switzerland has not been immune to this, as figures above suggest). 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 per cent 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. With everyone wanting to go to university, the demand for higher education increases, which then leads to the supply of more university places, which raises university enrolment rate further, increasing the pressure to go to university even more. Over time, this leads to a process of degree inflation. Now that ‘everyone’ has a university degree, you have to do a master’s, or even a PhD, in order to stand out, even if
the productivity content of those further degrees may be minimal for your future jobs.

  Given that Switzerland was until the mid 1990s able to maintain one of the highest national productivities in the world with a university enrolment of 10–15 per cent, we could say that enrolment rates much higher than that are really unnecessary. Even if we accept that skills requirement has risen so much with the rise of the knowledge economy that the 40-plus per cent enrolment rate that Switzerland now has is the minimum (which I seriously doubt), this still means that at least half of university education in countries such as the US, Korea and Finland is ‘wasted’ in the essentially zero-sum game of sorting. The higher education system in these countries has become like a theatre in which some people decided to stand to get a better view, prompting others behind them to stand. Once enough people stand, everyone has to stand, which means that no one is getting a better view, while everyone has become more uncomfortable.

  Education vs. enterprise

  If not just basic education but also higher education does not matter so much in determining a nation’s prosperity, we must seriously rethink the role of education in our economy.

  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. I am not against countries having a very high – or even 100 per cent – university enrolment rate for other reasons, but they should not delude themselves into believing that it would have a significant productivity effect.