How to make the economy go zoooom in the night.
The main determinants of long-term economic prosperity and growth are explained.
Part I of 2
A major factor involved in the growth and prosperity of a nation today is whether or not the culture within that nation encourages and rewards the acquisition of knowledge. By knowledge I mean a broad definition including manufacturing skills, technical know-how, an ability to learn by doing, all combined with leading-edge information gained from intense investigation.
A useful example of this is the knowledge that the human genome project provided the world, for instance.
Over a decade has passed since scientists successfully mapped the entire human genome in 2001, yet the incredible benefits flowing already throughout the world today are likely just a minor trickle compared to the major benefits yet to be enjoyed tomorrow from that tremendous effort. Every day brings new genes being analyzed as possible culprits causing this or that affliction, afflictions once thought to be and once accepted as a normal part of the human condition.
My contention is that if the educational framework within a country allows sufficient positive incentive (read: economic profit) to acquire knowledge such as research and development skills and technological know-how, then a country can vastly improve the human capital side of production.
Therefore, this kind of knowledge acquisition can enhance the added value of the labor factor many, many times, wonderfully magnifying standards of living in that country.
EDUCATION IN CHINA & JAPAN
The economy that has grown the fastest over the past 30 years has been China. The Chinese economy is now the 2nd largest in the world. To be sure, market forces have been unleashed in China, but economic freedom is an after-effect and only a partial explanation, not the underlying cause of Chinese economic prosperity, I think.
Perhaps a better fitting explanation is that education is highly prized in China and has been for at least 2000 years. The pursuit of knowledge is perceived to be a high value to most of the citizens of China. And millions of Chinese have become well-to-do during the last three decades.
Centuries ago, long before America was even an idea, China was selecting provincial governors and filling related political positions based on who finished first on nation-wide tests that required memorizing entire books over a period of 15 or more years. Admittedly, the Chinese emperors may have had ulterior motives championing their citizens' education as their brightest students became part of the political bureaucracy instead of potential revolutionaries bringing down the empire. :-)
In his book As The Future Catches You, Juan Enriquez, once the director of the Life Science Project at Harvard University, identifies the global economy as rapidly becoming a knowledge economy. He suggests that the determining factor for economic well-being in the 21st century will be how well a nation can apply their citizens' collective knowledge to their country's cumulative goods and services output.
Japan, the former 2nd largest economy in the world, recently exceeded by China, with 10 times more people, excels at applying knowledge to their Gross Domestic Product (GDP) and has grown robustly for most of the last 60 years.
In other words, in order for a country to gain and sustain economic prosperity for the long-term, that nation's citizens must recognize the pursuit and acquisition of knowledge to be a real value. Therefore, that nation's culture must perceive gaining and learning new information and new skills as a benefit worth the cost.
Unfortunately, the pursuit of knowledge that makes real differences to a nation's economic well-being is neither short-term, nor painless. In fact, a real difference may take a decade or two or more to show up. Since most politicians' planning horizon is much shorter (the next election), anyone hoping for political help is likely to be disappointed. Geoff Colvin, in the most recent Fortune magazine (4/9/12, p53) points out that neither Barack Obama nor Mitt Romney offer relevant education solutions to the issues outlined herein.
If politicians cannot help, then who or what can help? The Harvard economists Goldin and Katz argue in their book The Race Between Education and Technology, that the American economy continually demands higher-level skills from workers.
If we assume SAT scores to be a reasonable approximation for knowledge acquisition, then Americans should be unhappy. Looking broadly at the SAT scores of American High School graduates who go on to college from 1970 to 2010, one notes that the SAT scores in Reading and Math have largely decreased over this period. This decrease means American technological companies need to go abroad to find workers with advanced skills or go without.
My contention is that instead of being overly concerned with short-term economic happenings, Americans will have a greater impact on long-term future economic health by focusing on the acquisition of real knowledge among our nation's citizens.
This means that as painful as many American children may find acquiring math and science mastery during their K-12 years, it turns out that math and science capability have proven to be the main building blocks for technological development over the last 50 years throughout the world. Technological development lowers the economic cost of production inputs while raising the number of units being produced. This is the classic definition of economic productivity. Economic productivity IS the driver of long-term economic prosperity.
May I include one telling example from Juan Enriquez' book? In 1985, Mexicans were granted 35 patents from the US Patent Office while South Koreans received 50 or close to the same number. Just thirteen years later, in 1998 the US patent office granted South Koreans 3,362 patents while granting 77 patents to Mexicans. The impact of this significant difference is astounding. The real economic growth rate of South Korea from 1990 to 1998 was eight times larger than Mexico's.
People are not born able to create patent-able discoveries or processes. Why was South Korea able to outpace Mexico in economic growth so dramatically? Education is emphasized culturally in South Korea much more than it is in Mexico, just as education and the pursuit of knowledge is emphasized in many Asian countries today.
The dramatic emphasis on K-12 education in some countries, including a mastery of basic math and science directly results in faster technological development. The long-term economic benefits stemming from hands-on technological development are almost too numerous to grasp.
Consider the smart phone, the Kindle and the iPad and the dramatic profitable growth of the companies Amazon, Apple and Google during the past decade, for example.
Truly amazing, I think. One might wonder whether math and science mastery during K-12 education can be over-emphasized.
Part 2 of 2 of Practical Economics will discuss and analyze the tax and regulatory environment related to gain and sustain long-term economic prosperity.