23 Things They Don't Tell You About Capitalism

itself is problematic, as knowledge has always been the main source of wealth. Moreover, with increasing de- industrialization and mechanization, the knowledge requirements may even have fallen for most jobs in the rich countries. Even when it comes to higher education, which is supposed to matter more in the knowledge economy, there is no simple relationship between it and economic growth. What really matters in the determination of national prosperity is not the educational levels of individuals but the nation’s ability to organize individuals into enterprises with high productivity.

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 nothave 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 fellby 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 meantto 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