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A student of Milton Friedman, the “father” of contemporary liberalism, Gary Stanley Becker was the first to apply the tools of economic research to issues normally reserved to sociologists and demographers, such as education, racism, crime and the family. He was the first to formalise the concept of human capital, providing a scientific justification for the need to invest in education to ensure the economic development of a country. During his meetings in Milan, Becker will join Italian experts in examining the most relevant issues in his research – from the free market to discrimination, from new patterns of consumption to the role of innovation and human capital as strategic factors in competitiveness. |
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Human Capital, Free Markets and Innovations Public conference Milan, 22 June 1998 What are the prospects for nations in the modern global economy? I will emphasize two points: 1) the necessity of investing in people, in their knowledge and skills, and, 2) the importance of providing a free market economic environment. 1. Human capital Prior to the 19th century, systematic investment in human capital was not important in any country. Expenditures on schooling, on-the-job training, and other forms of investment were quite small. This began to change radically during that century with the application of science to the development of new goods and more efficient methods of production, first in Great Britain and then gradually spreading to other countries. During this century, education, skills, and other knowledge have become crucial determinants of a person's and a nation's productivity. One can even call the twentieth century the Age of Human Capital in the sense that the primary determinant of a country's standard of living is how well it succeeds in developing and utilizing the skills, knowledge, health, and habits of its population. It has been estimated that human capital - education, on-the-job and other training, and health - comprises about 80 percent of the capital or wealth in the United States and other advanced countries. Even if such estimates are somewhat exaggerated - and I do not believe any exaggeration is large - they clearly indicate that human capital can be neglected at a country's peril. The amount of knowledge in an economy today is immense, so immense that no one person or organization commands more that a tiny fraction of the total. It is only through specialization, the division of labor, and exchange that economies effectively utilize their extensive knowledge. For example, no longer do we have just economists; now they are so specialized that some economists only study employment of young males raised in broken homes. In the 19th century about 1/5 of all medical doctors were specialized; today about 75 percent of all American doctors are specialists: cardiologists, oncologists, and so forth. Almost without exception, studies show a close relation during the past several decades between economic performance and schooling, life expectancy, and other human capital measures. In particular, although on the average third world nations grew a little less rapidly than richer ones, poorer nations with more educated and healthier populations managed to grow faster than average. Especially important are elementary and secondary education. The importance of education and training as factors in promoting economic growth was ignored in writings on economic development after World War II in the 1950s and 1960s. Most of this literature believed that physical capital and protected domestic markets were the keys to growth, and that countries which encouraged more investments in machines and plants and export substitution would succeed in growing more rapidly. Of course, machines and other physical capital are important. But alone they are far from sufficient in producing growth because skilled workers and managers, and innovative entrepreneurs are needed to operate complicated machinery, to produce efficiently, to develop new products and processes, and to utilize innovations from other countries. Neglect of human capital and world markets by most economists at that time led to a seriously distorted view of the growth process, and ultimately to a failed vision of what is necessary to achieve economic progress and reductions of poverty. In the United States and Europe, schooling began to spread into the general population during the mid 19th century. During the rest of the 19th century, elementary school and child labor laws took hold, although more than 1.5 million children under age 15 in the United States were still employed by 1890. The first part of the 20th century was the period of most rapid spread of secondary school education in the United States - the fraction of persons who had secondary school diplomas increased from 9 percent in 1910 to more than 50 percent in 1940. The past 30 years have seen the spread of higher education - colleges and university. About 2/3 of all high school graduates in the United States now go on to some form of additional schooling. These trends are similar in other richer nations, although they occurred later. Europe lagged United States in both trends by three to four decades: secondary school movement started after World War I and higher education only in recent decades. European nations still generally have more of an elite approach to higher education than America does. 2. Technology and education These advances in education levels are, I believe, in large measure responses to changes in technology that increased earnings of more educated persons. The gap between earnings by education level in both Europe and the United States grew significantly from the middle to the end of the 19th century. The growing gap stimulated the high school movement of the first three decades, and that led to the rapidly increased supply of high school graduates. This reduced the gain from high school education during the first half of this century. The declining education-earnings gap during the first four decades of this century encouraged a belief among economists that differences in earnings by education would continue to fall as the supply of college and high school graduates in the labor force grew over time. And in the second half of this century, opportunities for higher education grew rapidly with the expansion of other subsidized public institutions of higher education. From 1940 to the mid 1970s, the prediction of declining education-earnings differences did well, for there was a net decline in inequality by education and other training in the United States and European economies. However, the mid-70s began a remarkable reversal: the spread between the earnings of, say, college and high school graduates began to increase, not decrease, each year until in the United States it has reached almost 80 percent, the largest gap in over a century. The modern economic environment places more of a premium on education, training, and other sources of knowledge than was true even fifty years ago. This can be inferred from changes in the relation between education and earnings within countries. In the United States during most of the past forty years, college graduates earned on the average about 40 to 50 percent more than high school graduates, and the latter earned about 30 percent more than high school drop-outs. The advantages of completing high school and going on to higher education have risen substantially during the past twenty years in the United States and many European countries. I believe this is mainly due to an increasing value in modern economies of having greater command over information and skills. Advantages of schooling, especially secondary schooling, are generally larger in poorer countries than in rich nations. And these advantages have also grown during past several decades as the worldwide trend toward technologies that require skilled workers increased the value of education and training in emerging countries. The growth in rates of return explains the boom in the number of secondary graduates who decide to continue with their schooling in the United States Similar trends are found in Great Britain and Canada. Italy, Germany, France, Sweden and the other Western European countries have been subject to similar forces that have raised the benefits from education. But these forces did not show up in Europe as clearly in the form of rising wage gaps by education level among employed persons. Instead, because of its highly regulated and taxed labor markets, Europe has experienced rapid increases in the unemployment of young persons and other less educated and less trained persons. Indeed there has been a large growth of inequality in Europe too - perhaps worse than in the United States - because of the distinction in Europe between "insiders" and "outsiders." Insiders - those who continued to have jobs - have done well economically. But the number of persons without stable jobs has continued to grow, and these "outsiders" are mainly concentrated among the least advantaged: the young, the less educated, immigrants, and similar groups. What explains this remarkable expansion in the benefits from education and other training during the past two decades? Two main forces: (a) One important factor behind the growing benefit is the nature of the technological progress during the past couple of decades. It has principally favored the more educated who are involved with computers, biotech, telecommunications, health care, quality control in production, and other rapidly expanding activities and sectors. The evidence for this interpretation takes several forms. The importance of computers and biotech have rightly captured the imagination. The rate of technological advance in computers since 1960 is more rapid and prolonged than experienced by any other industry in modern history. Moreover, industries using more educated and skilled manpower have expanded more rapidly since 1960, and wages of educated persons in industries with more R&D have grown more rapidly than in other industries. (b) The emergence of a global economy has also raised the demand for more skilled persons in richer countries. This is in small part due to increased competition from products produced in low wage countries, but mainly due to global demand for capital - human as well as physical - and increased world demand for computers and other products made by skilled labor and ideas. The presumed advance in technologies that are biased toward more skilled and educated workers and globalization both magnified further the importance of investments in human capital, especially in schools, training institutes, and onthejob. The United States and Europe do exceedingly well with on-the-job training; the United States also does well with higher education. This country has several thousand universities and colleges competing for students and faculty. It is the best system of higher education in the world, as proven by the large number of students and faculty who come here to study. European nations have insufficient competition for students and faculty among its universities. The United States and Europe also do reasonably well for about 2/3 of the students in elementary and secondary schools. But America, Great Britain, and other nations have failed the bottom third or so: mainly, but not entirely, students in large cities and rural areas. The bad performance is not due to a shortage of money: real spending per student in public schools has greatly increased since 1960. I believe that public schools in most countries need to be improved because they have become too bureaucratic and rigid. The best way to force improvement is to increase competition for students. This is why I support education vouchers that enable families to choose private as well as public schools. That would not do away with public education, but would expose public schools to the winds of competition, which can do wonders for students. Indeed, I anticipate that competition from private schools for students would make public schools better, not worse, as they come under pressure to improve in order to attract students. 3. Free markets and growth The collapse of communism and the success of the Asian Tigers stimulated a worldwide movement to privatize and deregulate, for these events appeared to indicate that economic freedom is much more effective than government control in promoting growth. Revisionists have questioned this conclusion, but it receives resounding support from a major study. A book, Economic Freedom of the World, uses 17 categories to measure the degrees of freedom during the past 20 years in more than 100 countries. The authors estimate restrictions on international transactions in goods and capital, the extent of price controls, the incidence of movement operated enterprises, the importance of government subsidies and transfers, the level of the top tax rate, the freedom to hold money abroad, and the extent of inflation. These factors were then combined into overall indices of economic freedom that rank countries and show changes since 1975. The indexes provide the most convincing evidence yet that nations are unlikely to continue to grow without appreciable economic freedom. Per capita gross domestic product in the top 10 nations on the freedom scale grew at an average rate of 2.3 percent per year from 1980 to 1994, compared with a miserable decline of -1.3 percent per year for the 27 countries at the bottom. The closer to the top, the faster tended to be a country's rate of growth. Real per capita income levels are also generally much higher for countries with greater economic freedom. The half-dozen freest countries had several times the per capita incomes of countries in the middle, and more than 20 times the incomes of those at the bottom. The evidence shows why many African nations have had the lowest growth of any continent. African nations occupy half the lowest 20 positions - including Somalia, Zaire, Nigeria and Zimbabwe - while only Mauritius and Botswana rank in the top 50. South Africa is in the 54th position, followed by Gabon and Chad at 60 and 61. Apologists blame Africa's bad record on its extended period of domination by colonial powers, but that is not the major reason. Rather, the main cause appears to be that after independence, many African nations were led astray by imitating the government-dominated economies of communist and socialist countries. Since most nations had rather stable freedom rankings during the past two decades, the growth experience of countries that made major changes in the openness of their economies is especially pertinent. Output in the 10 economies with the largest increase in economic freedom had an average rate of growth of 2.7 percent per year from 1980 to 1994, whereas the 10 nations with the biggest fall in freedom had negative growth. Chile, Portugal, Pakistan, and Mauritius, the four less-developed countries that became significantly freer, grew much more rapidly than the four less developed nations - Honduras, Iran, Nicaragua, and Venezuela - that greatly raised government involvement. Unfortunately, politicians are usually unwilling to take unpopular measures to reduce governmental intervention in the economy. Despite high unemployment rates in Western Europe during the past few years, even conservative governments in France, Germany and other European countries have done little to deregulate, apparently because they fear the reaction of voters. These new estimates provide persuasive evidence that economic freedom is essential for economic growth. Countries suffer unnecessarily because their energies and imagination are not allowed to flower in a free environment. There is also interaction between investments in human capital and the functioning and organization of the economy. For example, without markets and competition, education's contributions to an economy are blunted, and even an extensive education system does not lead to economic progress. This happened in the former Soviet Union and elsewhere in the communist world. Many of these nations had widespread education programs, which looked good on paper, but their economic system wasted most of the educated personnel. In the 1960s and 1970s, human capital analysts did not sufficiently appreciate the important interactions between human capital and public policies in determining the effects of human capital on economic growth. Interaction of free economy and skilled labor force is especially important for nations in the global world. This affects not only the products they can sell in the world economy, but also whether they can attract foreign investments. Different emerging economies compete for capital and investments in what is becoming a world capital market. Those economies that provide the most attractive economic environment obtain more of the investments that stimulate the development of better technologies and help promote economic growth. 4. Conclusions Human capital is increasingly important in modern economies. Skills and knowledge are highly valuable in more high-tech economies, especially because of the globalized economy. Therefore, every nation that wants to participate fully and effectively in the modern economic world must be deeply concerned about how well it succeeds in encouraging effective investment in its people: all its citizens, not just a small elite. Investment in human capital is more effective if markets are freer and private enterprise replaces public enterprises. The future looks bright for a dynamic economy like Italy's if it can accelerate both the amount invested in its people, and the privatization and freeing of its economy. |
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