Asymmetrical Information

Complementary infrastructure. (And, given the state of traffic, I'm not sure that roads are one of the complementary infrastructures that have made us more productive. But then I could also just be being snarky here.) Recall that productivity has been increasing in the US as technology has become cheaper and more pervasive. I would argue that (most) Americans in the 1960s were as well-nourished as we overfed Americans are today, yet there is little evidence that they were more productive than we.

I would include companies in the list of complementary infrastructure. It's genuinely very hard to figure out how to organize groups of people well; its hard to figure out what people can do some tasks well. Building effective organizations takes time.

Tom

What we need is education VOUCHERS. A voucher system would give a chance to the poor who are currently stuck in lousy schools.

Two points from the literature:
1) Heckman made a name for himself by arguing for human capital over signalling through using the natural experiment of GEDs, which are basically counterfeit high school diplomas. As HC theory predicts, GED holders make much less money than bona fide high school graduates.
2) Kremer's O-Ring theory of economic development holds that it's complementary infrastructure. The basic idea is that if any one thing fails (electrical blackout, crooked custons officer, etc) then the entire production chain crashes, minimizing the productivity of a worker who, in isolation, is highly competent.

Is it possible that education has nothing to do with the production values of labor? Perhaps the incentives are on the rewards side or simply the competition side.

There are very little barriers to entry in most American businesses (the highest rate of entrepenuership, right?) So as competition rises productiveness has to rise simply to keep ahead.

From the skills side the story could be much the same. There are few job protections that guarantee increases (and indeed, no restrictions on what those increases can be) so workers compete to get the largest increases.

I have long thought that education is 100% disconnected from happens in the real world. After you get that initial job no one looks at the papers any more unless you are in a very scientific discipline (or academia).

I think a large part of the advantage lies in the informal institutions of rich countries. If you arrive 15 minutes late to a meeting in a rich country, you are much more liable to get a second of disapproving silence, then if you arrive one hour late in a developping country.

The small habits you pick up throughout your education are also immensenly important, but formal education has limited impact on those.

Abstract reasoning.

Actually, I think Jane Galt is wrong - and that more years of education for more people makes a big difference. C'mon it makes a BIG difference, obviously. Let's not be so cynical.

The core of what education does that is beneficial in modern sociaties is to increase the ability of abstract systematic reasoning.

But all countries systems of formal education have become very inefficient as they grew to mass systems. Adding years to education works, but it can't go much further than it has already gone (twenty-something full-time years of schooling for many of the population) - sonner or later we have got to use those years more efficiently.

We have to teach abstract systematic reasoning better. More science for more people.

My vote is that honesty and integrity are more important to productivity than education or intelligence. When you put $100,000 in an American bank, it never occurs to us that it wouldn't be returned. Would you feel the same way about a Russian bank? A Mexican bank?

The US economy works on trust. When I fly Southwest, I give them a CC number, they give me a confirmation number. I trust that they will get me to the destination ontime. And for the most part, they do. I send unknown people money for ebay purchases and they send me goods (with rare exceptions).

When corruption runs rampant, people stop investing and innovating. Much time, energy and capital are spent on defensive measures instead of innovation and productivity improvements.

Why are workers in other countries with lower wages so much less productive than American workers? Part of the answer is capital investment. A forklift can make even the most manual labor more productive, allowing the worker to be far more productive than the poor sod who's lifting and toting without mechanical assistance - even when forklift guy is paid ten times as much. For the employer, whatever educational degree potential forklift guy might have serves as evidence that potential forklift guy can follow instructions, show up on time, etc. Even if forklift guy has an advanced degree in astophysics, it's irrelevant to the job. (And yes, it could be forklift gal - in fact, the willingness of some cultures to have forklift gals, using the work of all willing workers, is another advantage over cultures that de-value the work of persons of the wrong gender, race, or caste)

The Chinese have forklifts. There are forklifts in Egypt. Anyone here care to invest their life savings in a bank in either country? Zoot Fenster has the answer to that question already, although the details of where that trustworthiness ("worthy of trust", remember) comes from needs to be discussed.

IMO trust is a cultural artifact that exists independent of legal structures. Why some cultures can be high-trust cultures, and others seem to be doomed to low-trust conditions, is something we all ought to be thinking about...

ellipsis

Trust is not something that exists independent of legal structures. When I put my money in a US bank, part of my trust comes from the fact that the US has a legal system that will allow me to recover that money (plus damages) if they arbitrarily refuse to return it. Part of that trust comes from knowing that the bank has to follow certain regulations that improve their chance of being able to return my deposit to me. Part of my trust comes from the FDIC backing of my account. When you put all of these instutitions together it makes it very easy for me to acheive a high base level of trust in my bank. Given this base level of trust, there is marginal value to my bank in being more trustworthy than others. A reputation for screwing your customers as much as the law allows eventually costs you business. So you eat the relatively small cost of some additional marginal trustworthiness.

The same is true in much of our society. The certainty of repercussions for gross acts of untrustworthiness together with value assigned to the small marginal increases to trust that people can add makes for overall a very trustworthy society.

I think that a big part of the US productivity is productive cultural charateristics we have, like trustworthiness. I think that institutions contribute to those cultural characteristics though.

Bruce,

Not sure we're going to see those years used more productively. Indeed, I expect the number of years to rise on average. The reason has less to do with productivity than with free time, which our economy produces in great abundance. Free time to specialize in obscure fields, to produce luxuries, to retire early, and to spend more time in school. We're spending more time in school because we can. Its a way to feel useful without having to actually be particularly useful. And of course there are some positive spin-offs. Some actually do learn something useful.

Jane: "most education ... simply functions as a signalling mechanism to separate the employable wheat from the risky chaff."

chris: "I have long thought that education is 100% disconnected from happens in the real world. After you get that initial job no one looks at the papers any more unless you are in a very scientific discipline (or academia)."

Perhaps an education in liberal arts means little. But is anyone going to pass a CPA exam without years of accounting classes? Is a nurse going to pass licensing exams without many hours of classroom and practical training? Does anyone really want engineers who lack extensive technical educations to design chemical plants? Perhaps one could learn law without attending law school, but isn't guided classroom instruction the most efficient way?

One month after receiving my B.S. in computer science, I used the knowledge gained directly from my professors to build a vehicle maintenance tracking system.

Three months after receiving my MBA in Finance, I used knowledge gained in the classroom to evaluate acquisition candidates for a Fortune 100 company.

I believe that for at least half of us, college degrees represent much more than signalling of employability. We truly did gain knowledge that was essential to performing our jobs.

I second Zoot. Honesty and Integrity are crucial. When I lived in the Philippines, they could barely run their schools because of funds being embezzeled. Police were corrupt. Insider trading on the Philippine stockmarket was rampant. Theft was commonplace. Corruption in customs made international trade expensive. A thriving and accepted black market of stolen goods cut into business investments. I assume there were extra costs for security, etc.

But as Jane mentioned, with most of China still rural and limited access to the cities, Chinese are far from universal education. When you still have a fair number of people who can't even read yet (don't trust any statistics out of China, btw) a little education is valuable.

And even in the US, more advanced education can correlate well with higher income, if a person has the requisite intelligence to assimilate that education.

Gabriel Rossman calls the GED a phoney high school diploma. Actually, earning one requires proving knowledge, whereas many diplomas are awarded simply for not missing too many days of attendance. All other things being equal, I would prefer an applicant with a GED.

As for relative earnings, the statistics are distorted by the fact that high school dropout Dave Thomas did not earn his GED until after he retired.

triticale,

According to the literature you are (or would be) an atypical employer. For the sake of argument, let's say you're right and that maintaining a C average is actually easier than passing an equivalency exam. The fact remains that people usually drop out of high school for a reason and that reason usually ain't pretty. One of the things that Heckman likes to emphasize is that for unskilled workers, discipline is more important than skill or intelligence. GED holders may or may not have the latter two qualities but their failure to complete high school the first time round suggests a lack of discipline.

I don't know if you were joking about Dave Thomas, but these analyses are based on samples and generally don't include such outliers.

The seminal citation is:
Stephen Cameron and James Heckman. 1993. "The Nonequivalence of High School Equivalents." J. Labor Econ. 11: 1–47.
if you have JSTOR you can read it here:
http://links.jstor.org/sici?sici=0734-306X%28199301%2911%3A1%3C1%3ATNOHSE%3E2.0.CO%3B2-5
Here is the abstract:
This article analyzes the causes and consequences of the growing proportion of high-school-certified persons who achieve that status by exam certification rather than through high school graduation. Examcertified high school equivalents are statistically indistinguishable from high school dropouts. Whatever differences are found among examcertified equivalents, high school dropouts and high school graduates are accounted for by their years of schooling completed. There is no cheap substitute for schooling. The only payoff to exam certification arises from its value in opening postsecondary schooling and training opportunities, but completion rates for exam-certified graduates are much lower in these activities than they are for ordinary graduates.

A popular level digest of these findings is here:
http://www.city-journal.org/html/12_1_geds_arent.html

"complementary infrastructure" is dominated by trust / justice /peace. Trust is crucial, as above noted. The right legal system to compare is that AS IT WORKS, not as it is written. The laws on employer-employee relations are important, but more important is that US companies follow them fairly well. And both sides mostly trust the justice system, despite its increasing lottery characteristics.

The need for peaceful agreement, or peaceful tolerance of disagreement, is also crucial. The Free Market is also the Peaceful Market -- and it is up to the justice system to make it the Honest Market.

But Tom G. (great name!) was most correct "It's genuinely very hard to figure out how to organize groups of people well;" -- focus on the single bottom line, profit, helps the decision makers optimize the organization for the purpose of maximizing wealth creation. Most "aid" projects focus on multiple objectives, and then have no way of optimizing between them.

The fact that there are so many competing organizations allows the hard working, on-time worker, with or without much education, to demonstrate high productive value in an organization where a manager will tell him what to do.

The productivity of the US workers is primarily a result of better profit-orientation (mixed long & short term) by manager decision makers.

The US has (and has had for a long time) better government than China, India or Guatamala. That makes a big difference.

Zoot Fenster-
The reason our money is safe in US banks is the FDIC. Have you not heard about the bank runs in the 30's or the savings and loan crisis of the 80's. Bankers as a group are not our most honest, but they are the most regulated.

Given that even poorly prepared (uneducated, non-English-speaking...) immigrants to the US tend to be fairly productive compared to occupants of many other countries, I would think there's more to it than education. And we don't have the natural experiment, but we can try the thought experiment: if Americans chose to go to other countries with low productivity, would you expect them to be highly productive there?

There are lots of things going on. For me the de-Soto-ish institutional stuff seems huge: it's my most forehead-slappingly vivid memory of the economics of the Philippines in the 1980s. I stayed with a family which owned a business about the size of a sizable US service station (half a dozen trucks, a little warehouse) about three hours drive up the main road from Manila. They had never been able to get a telephone. Whether one is a good leftist or libertarian or whatever, one's mind should boggle at the ongoing frictional costs caused by operating medium-sized delivery businesses without telephones. (One's policy conclusions may differ. If you're a libertarian like me your mind boggles at the stupidity of legal institutions which forbid people from setting up their own telephone service. The leftists seem to take the wisdom of that broad policy for granted, or not even consider that folk who can repair internal combustion engines could if left to themselves also set up telephones, and instead worry about how to tweak policy so that keep the government monopoly on telephone service will become as benignly efficient as planned. But most people, libertarians and leftists, can see that airdropping some educated USians with telephone system skills wouldn't necessarily do much to solve the problem.)

Perhaps an education in liberal arts means little. But is anyone going to pass a CPA exam without years of accounting classes?
...
Does anyone really want engineers who lack extensive technical educations to design chemical plants?

I know both accountants and engineers that tell me that they learned nothing in college. Or worse, the career related classes they took in college were just plain wrong.

College will help you get licensed, sure. But when the first year out of college is getting re-trained (or untrained) something is wrong.

Full Discolure: I am a college drop-out in a technical field.

"The Power of Productivity" by William W. Lewis (The University of Chicago Press, 2004) has all the answers, many of them at variance with conventional economics. It summarizes the work done by McKinsey & Company over a number of years examining the economies of, I believe, 12 countries industry by industry. Buy it!

Chris,

My background is in physics. I work in tech. The sum total of my *knowledge* from my physics education that I use in my daily work is zero. However, my education in physics has been invaluable to my work. The reasons is because what I primarily got out of my physics education where certain habits of thought, capacities to model, etc that I have been able to apply to widely disperate uses. I find those skills just as applicable to software design as to policy and process design.

I usually find that the top tech folks I deal with are in a similar position. They seldom use the *knowledge* gained from their college education, but they constantly use the skills and adaptabilities they acquired there.

You are trying to assign too much weight to education. It is one of many things others have already cited. But do not forget the economic catch all of capital per worker that is much higher in the US and other advanced countries then in less developed countries. All these things are complimentary and interact and no one of them individual can carry all that much weight.

quadropole: "I usually find that the top tech folks I deal with are in a similar position. They seldom use the *knowledge* gained from their college education,"

That's certainly not true of the tech folks I've worked with. It is true that tech folks - and nurses and engineers and chemists and accountants and bankers and microbiologists, etc. etc. - continue learning on the first job and on every job thereafter. But they must start with some base of knowledge from which they build.

Large corporations do not want to hire financial analysts who haven't already learned basic concepts such as net present value. Engineering firms expect their new hires to understand statics. Hospitals need nurses who understand the basics of anatomy and physiology.

Aer you sure you guys aren't discounting the basic knowledge gained through academic study?

chris: "I know both accountants and engineers that tell me that they learned nothing in college. Or worse, the career related classes they took in college were just plain wrong."

I've worked with accountants for the past 25 years. I simply do not believe that graduates of accounting schools learned nothing that prepared them for their work. Same for graduates of quality engineering schools, at least those who obtain jobs as real engineers. Is it possible that your friends are exaggerating? or that they don't really have true accounting or engineering jobs?

I do agree that some professors are allowed to continue teaching obsolete methods and principles that are no longer relevant. But professional associations keep a close eye on the curricula at accredited schools. Engineering managers and accounting firms want to be certain that schools are teaching relevant material.

The benefits of greater school choice are often discussed. Some of them are obvious enough, such as allowing students to get out of problem schools. One benefit that I haven't heard discussed addresses one of the worst problems in failing schools. Schools in which as significant portion of the student population and their parents do not perceive a benefit from the education provided are much more likely to fail. School choice allows students, or their parents, to select schools that they feel will meet their needs. In turn, that will increase the average level of commitment on the part of students and their parents.

One of the implications of this observation is that the differences between the available schools should be more than just differences in quality. Students should have a choice between schools that prepare them to enter the workforce vs. college preparation. They should have a choice between magnet schools with specific concentrations and general education. A student who has made a poor choice in his educational goals, but is pursuing something he has some commitment to is going to perform better than a student resisting a compulsory education he didn't choose and resents.

Chris,

There is an enormous amount that I learned in college that isn't relevant 20 years later. Some of it wasn't relevant the day after the course was complete. On the other hand, there is a great deal of basic theory that has remained useful to me all along.

What has amazed me over the years is the number of people I've met who never learned what I consider to be the basic building blocks of our field. They were short-changed by schools that concentrated too hard on teaching the currently used tools at the expense of teaching the theory behind them. In a few years, those tools are obsolete, and retraining is necessary.

Re. the productivity issue, could labor mobility have anything to do with it? When I think back to the cruddy jobs I had in my youth, I remember working hard for basically these reasons:
- a raise was always a possibility
- I knew a bad reference would follow me to the next job
- on some level I recognized that I was picking up certain skills that would be transferable to the next, better job
- even in the most boring jobs I felt like I was learning a thing or two about the field that might be useful if I ever wanted, for example, to start a similar business myself some day.

If I had thought that I would spend the next twenty (or even two) years scooping ice cream at more or less the same wage, I think I would have been a lot more inclined to ignore the customers and swipe lots of ice cream.

28+ comments and nobody mentions "IQ and the Wealth of Nations" by Lynn and Vanhanen?

Although population average IQ is clearly just one of several important factors, it certainly deserves consideration.

There is a huge disconnect between K-12 education and productivity. For most jobs that do not require college, the only K-12 educational accomplishments that aid productivity are ability to read and understand at the 9th grade level and basic arithmetic skills. No one cares whether a factory worker remembers the names of the Great Lakes or the dates of the Civil War.

The biggest factor connecting U.S. K-12 public schooling to workplace productivity is regimentation. Get to school on time, bring in an excuse if you are absent, obey your teachers, go to this class now, return your library books each week, follow the dress code, root for your teams. These learned skills carry over into the workplace environment: don't be tardy, don't abuse sick days, obey your supervisors, fill out personnel forms, follow the dress code, help your company outpace its competitors.

An aside: typical K-12 education in the U.S. is poor preparation for future scientists. Critical thinking, logic, problem solving, abstract reasoning, and use of the scientific method are listed as educational goals but are met by only a tiny percentage of public schools. My teenage daughters attend one of the top-ranked public school systems in Tennessee. Their education in these areas has been worse than abysmal: some teachers are so poor that they regularly use logical fallacies or completely screw up explanations of the scientific method. Their approaches to problem solving explain the stupid decisions made by businesses and governments.

I see the end result of our education system: I teach pathology residents and medical students. Even after 16-20 years of education, this "cream-of-the-crop" group contains persons who do not understand the scientific method and who routinely accept logical fallacies. Grrr.

"Why some cultures can be high-trust cultures, and others seem to be doomed to low-trust conditions, is something we all ought to be thinking about..."

I agree, but I don't think they're doomed to stay there forever. There should be more economic research on multiple equilibria and on how to get from one to another. The US has developed a cooperative equilibrium in many areas (they've developed trust), while other countries are stuck in non-cooperative equilibria, as in the prisoner's dilemma, where everyone finks (accepts bribes, cheats, etc.) even though it's a bad joint solution.

Culture can be changed, although it takes time. Hong Kong greatly reduced corruption partly through public relations campaigns, to convince everyone that everyone else was moving to a 'trust' equilibrium where corruption would be prosecuted. The Philippines could do that also, although it would take hard work and some time. Right now, if one person starts a business in the Philippines, distant relatives crawl out of the woodwork to take a cut, often bringing down the business in the process. Such a sharing system is good for mere survival, preventing starvation, but it doesn't lead to prosperity.

Regarding complementary infrastructure that allows the US to be more productive, part of it is the American cultural attitude towards getting things done. In many societies and cultures, getting things done is far less important than following tradition, not offending people, or a whole host of other priorities.

In China, they're good at working a system but have a strong cultural reluctance to trying to actually change the system to make it better, so they stay with the old system until the strain is so great that it falls apart, leading to chaos and confirming their belief that change is bad.

My life's been basically dull these days.
I haven't gotten much done these days.
Today was a complete loss.

drug valium