Wednesday, November 26, 2014

Teaching Economic Dynamism

NEW YORK – Business leaders often argue that the widening education gap – the disparity between what young people learn and the skills that the job market demands – is a leading contributor to high unemployment and slow growth in many countries. For their part, governments seem convinced that the best way to close the gap is to increase the number of students pursuing degrees in the so-called “STEM” subjects (science, technology, engineering, and mathematics). Are they right?

The short answer is no. Indeed, the two main arguments underpinning claims that inadequate education is to blame for poor economic performance are weak, at best.

The first argument is that the lack of appropriately skilled workers is preventing companies from investing in more advanced equipment. But that is not how economic development usually works. Instead, firms begin to invest, and either workers respond to the possibility of higher wages by acquiring (at their own cost) the required skills, or firms provide their current and future employees with the relevant training.

The second argument is that it is increasingly difficult for the United States and other advanced countries to match the gains that developing countries have achieved by investing heavily in upgraded equipment, targeted higher education, and skills training. But, again, this contradicts traditional trade dynamics, in which one country’s success does not imply hardship for another.

In theory, of course, a simultaneous shift in several countries toward STEM-focused secondary and higher education – with large concomitant productivity gains – could diminish the competitiveness of an economy that made no such effort. But this scenario is highly unlikely, at least in the foreseeable future.

In fact, the proliferation of highly specialized universities in Europe has failed to buttress economic growth or employment. And the conversion of comprehensive universities into specialized institutes for science and technology in the Soviet Union and communist China did nothing to avert economic disaster in those economies. (China’s top universities now offer two-year programs that emulate the structure of American liberal arts colleges.)

But the case for STEM education is even more fundamentally flawed, because it treats an economy as an equation. According to this logic, job creation is a matter of slotting humans into identifiable opportunities, and economic growth is a matter of increasing the stock of human or physical capital, while exploiting scientific advances. This is a dark view of modern economies, and a depressing blueprint for the future.

To lay the foundation for a future based on ideas and invention, businesses and governments should consider how new products and methods emerged in some of history’s most innovative economies: the United Kingdom and the US as early as 1820, and Germany and France later in the nineteenth century. In these economies, innovation was powered not by global scientific progress, but by the population’s dynamism – their desire, capacity, and latitude to create – and willingness to allow the financial sector to steer them away from unpromising pursuits.

The fact that innovative ideas have arisen largely from the dynamism of people belies the conclusion that all economies require widespread STEM-focused education. Though a larger STEM base can benefit some economies, most advanced countries already have sufficient capacity in these fields to apply foreign technologies and engineer their own.

What economies need instead is a boost in dynamism. The problem is that the historically most innovative economies have lost much of their former dynamism, despite retaining an edge in social media and some high-technology sectors. And others – for example, Spain and the Netherlands – were never particularly dynamic. Meanwhile, the emerging economies that are supposed to be filling the gap – notably, China – are still falling short of the levels of innovation required to offset the declining benefits of technology transfer.

In other words, economies today lack the spirit of innovation. Labor markets do not need only more technical expertise; they require an increasing number of soft skills, like the ability to think imaginatively, develop creative solutions to complex challenges, and adapt to changing circumstances and new constraints.

That is what young people need from education. Specifically, students must be exposed to – and learn to appreciate – the modern values associated with individualism, which emerged toward the end of the Renaissance and continued to gain traction through the early twentieth century. Just as these values fueled dynamism in the past, they can reinvigorate economies today.

A necessary first step is to restore the humanities in high school and university curricula. Exposure to literature, philosophy, and history will inspire young people to seek a life of richness – one that includes making creative, innovative contributions to society. Indeed, studying the “canon” will do more than provide young people with a set of narrow skills; it will shape their perceptions, ambitions, and capabilities in new and invigorating ways. In my book Mass Flourishing, I cite some key figures who articulate and inspire modern values.

The humanities describe the ascent of the modern world. Countries worldwide can use the humanities to develop or revive the economies that drove this ascent, while helping individuals to lead more productive and fulfilling lives.

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    1. CommentedJack Schmidt

      Dr. Phelps believes that humanities courses teach individualism and creativity. It has been decades since that was true. Humanities courses now indoctrinate students with group identity and membership. Before promoting humanities courses Dr. Phelps needs to restore them to their original teachings.

    2. CommentedJoshua Ioji Konov

      This article took my breath away with the short-mindedness of a trickle-down philosophy that generally has been shown faulty for the last 10-15, particularly in the EU, whereas single economic tools such as education or capital have been considered as magic tools toward economic growth?
      What China has done to maintain high growth has not been just improved education or even capitalization but a whole a lo of factors and economic policies, mostly of which could be considered unorthodox, and very little to do with neoliberal technocratic approaches, I am just amazed of how ideology has influenced the wrong economics most particularly in Europe????!

    3. CommentedNathan Weatherdon

      I totally agree with the suggestion of what education should offer. Education should not try to guess what will be required in the job market. Sure, it should educate citizens, but it is a very practical affair as well. Firms and employees can generally work out what will be needed, although a more conducive environment to matching offer and supply in training, whether on or off the job, could be helpful. For example, some labour surveys are used to compile information from employers on the top skills they find lacking. In many countries, it is a lack of foreign language skills and specific areas missing in IT. What is it in the USA? Top 3 skills lacking, as per employers, in 10 major employment sectors, for example.

    4. CommentedNathan Weatherdon

      It is true that either employees invest in skills, drawn by higher wages for certain skill sets, or that employers help to train their employees.

      So many specific skill sets turn over these days that it's difficult for employees to know where to invest. Yet, turnover is so easy that business don't train.

      So you have hundreds of thousands of positions which "cannot" be filled and millions of people who are 100% able to do those jobs would those business invest mere weeks in training to get someone started.

      The economist in me says "offer more tax incentives or subsidies", but I think the matter is really one of business culture where businesses increasingly expect that someone will show up and be a productive asset from the second hour of work. That is not realistic, and is, in my opinion, significantly constraining the ability of the economy to make constructive and profitable use of advancing technologies.

      This is nothing new, but also comes from the perspective of someone who has done occasional continuous training initiatives and applies for a dozen or two jobs per week or months for years now, while working as a consultant/freelancer.

    5. CommentedYing Lowrey

      Professor Phelps is one of the most admired economists in China. His Mass Flourishing became a bible for people who are looking for solutions to the stubborn massive unemployment and economic depression, as well as for the guidance of how to build a nation with the sustainable economic development and continued social progress. Professor Phelps is right! To reboots the economic vitality, we need to find back the DYNAMISM that once made the long lasting prosperity in the West. Now we can see this belated dynamism arousing in China. For example, tenths of millions of sellers are enabled to do business, and hundreds of millions of people are motivated to invest on Alibaba’s internet or mobile platform. Along with the developed citizens, people from the remote regions or impoverished areas can use business as an expression of their will, capacity and aspiration to innovate. Chinese people can enjoy their pleasure from unleashing repressed entrepreneurship, share their dignity as economic men (they do not have to beg for job or wait for charity), and embrace the mass flourishing that is coming tomorrow. There is a saying in China now: beautiful mountains and clean waters in the West, but it is boring; polluted environment and doubtful food in China, but it is exciting! So please follow Professor Phelps footsteps and pay a visit to China, you would witness the power of Mass Flourishing!

    6. CommentedRobert Wolff

      The feeling of Individualism has directly how much reward you get for exceptional effort. Having been an innovative engineer since the mid-60's I can tell you that innovation flourishes when tons of money flows into it. It is the reward that draws the best and brightest, not philosophy or ideology.

      The only way to create more individualistic dynamism in any area is to invest in it heavily so that the rewards are high. Right now the only high reward profession is finance, which produces nothing, but provides high bonuses and salaries for those who can exploit the money system.

      The unfortunate state we are in now is that innovation does not pay. That is all based on the current priorities of investors and the financial industry.


    7. CommentedTom Shillock

      It seems to me that lack of dynamism / productive innovation in America (at least) is partly a function of increasing firm size and non-enforcement of anti-trust law. Larger firms typically have larger sunk costs (intellectually as well as materially) and established interests that in the short term are inversely proportional to change / risk that is more than an incremental value added to their existing products and technologies.

      Under free market representative democracy, firms that can buy laws and regulations to meet their interests reduce economic dynamism.

      Anyone who has worked in even a medium sized firm, even in the highly competitive high tech industry, knows that individualism is punished not rewarded. As the Japanese say, the nail that sticks up gets hammered down. The "soft skills" that are rewarded are Machiavellian. If anything, the higher one rises in a firm the more those skills are apparent and the less competent people are, as the popularity of Dilbert cartoons attests.

      Cost cutting is the preeminent technique of CEOs not innovation. The doubling of the global workforce since 1990 has facilitated tremendous reduction in labor costs. Naturally, firms in developed countries are making excuses for discriminating against their nationals and avoiding taxes that help fund public education of any kind, STEM or humanities. Claims of CEOs and their publists like the Business Roundtable or Conference Board, should not be taken at face value. Instead, we firts need to the interests that are being served by their propaganda.

    8. CommentedAndrzej Góralczyk

      It is really amusing that an economic crisis is caused by the inability to extrude form the people more tan it was possible up to now.

    9. CommentedSharon Curran

      Sir, good article but all you are doing is arguing schools should teach students how to think. That was their main purpose overwhelmed for the past little while by the idea the institution should produce verifiable results (i.e. standardized test results) and productive consumers. As though buying something is more important than just being able to think. We're in a situation now where rich and poor are merely differentiated by the quality of their garbage and nothing else. A dynamic economy is a result of thinking people, critics and philosophizers, Scientist and Artists. I believe in that, but I would suggest very few expect anything more measurable than a dollar in a pocket.

    10. CommentedGunnar Eriksson

      Thank You Sir for pointing out these forgotten basics for development.
      Restoring public investment in research financed by a new welth tax on idle and speculative capital should also be needed.
      There are today torrents of rent seeking capital ,but for a new or small company needing financing there is no money at hand.