Economics of Education

From Freakonomics Radio:

So of all the topics that economists have studied, I would say one we are most certain about are the returns to education. And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8% increase in earnings over your lifetime. So someone who graduated from college will earn about 30% more on average than someone who only graduated from high school. And if anything, the returns to education have gotten larger over time. They’re as big as they have ever been. And I think it makes sense that the returns to education now are higher than they’ve ever been because of how the economy has changed. It used to be that with a low education, you could get a good manufacturing job, lifetime employment. But now with the Chinese competition for instance, almost all the manufacturing jobs are gone, because there are Chinese workers willing to work, who are able to do these jobs at wages that are one-fifth or one-tenth of what an American worker would demand to do it.

Nothing overly surprising. But it does show why education is and will continue to be very important.

The Near Future of American Economic Growth

The inspiration for my series against self-verification was inspired by this final example of where I used to be wrong. A common theme of this blog is the recognition of just how rich we are. Whether you're an American, a high school teacher who's married to a social worker, a breakfast eater, a person with too many hobbies, or almost anyone who's been alive for the last 200 years, you're historically very rich. Along with that assumption, I've argued that economic growth will continue as it has since the Industrial Revolution. I'm less sure of that now.

If there was ever a person who could challenge such an important presupposition of mine it's Tyler Cowen. He's smart, well-read, and most of he's reasonable. He's also the only person with his own tag on my blog. Wikipedia (and his wife) describes him as a ""libertarian bargainer", a libertarian who's not so radical that he can't influence those in power. Tyler recently published a new short ebook, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better. Thanks to my friend with a Kindle, I was able to read it this weekend.

The thesis of the book is clear and the facts are to deny. Median income growth is down. The economic growth and technological innovation that began with the Industrial Revolution has slowed. From the late 19th century to the mid-20th century technological innovation changed the face of America. The use of fossil fuels and electricity, telegraph/telephone, radio, car, refrigerator, penicillin, light bulb, airplane, nuclear power, running water, and germ theory are many examples. Now compare those to the important inventions for last 75 years. Spaceflight, lasers, solar power, DNA/genome/stem cell discoveries, credit cards, heart surgery, cell phones, smaller better computers, and of course the internet. Although those are all very important, collectively they have made less of an impact on the human race.

It's the simplicity of his claim that makes it so believable. The world is not ending and is in fact is still getting better, just more slowly. Per his book's subtitle, he describes the problem as an issue of "low hanging fruit". The first set of inventions I described are fairly simple and more important compared to those in the second list. Finding out mold kills disease is much easier than how to successfully remove and replace a human heart. We've picked the easy inventions off the tree of innovation. The next ones will require more effort. Also, the benefit of the more recent innovations are also not as evenly spread as the earlier ones. The poor gain a lot from running water, light bulbs, and penicillin and very little from Google, smart phones, and heart surgery.

However the biggest problem with this new reality is what it means for debt and investing. Originally I was less worried about our government's debt because, like it has in the past, economic growth can help pay most of it off. If we're richer in the future, it's easier to pay off poor debt. Without even counting the Great Recession, if economic growth will continue to slow down, it will make paying those debts off much more difficult. Less economic growth also means less growth in the stock market. Which means less growth for retirement and savings accounts which can have important changes on how we invest.

But remember this is bad news, not tragic news. The world is still great and getting better. In many ways the irony of this ebook is that it is an ebook. The internet is the great shining hope for, as Tyler predicts, another spurt in economic growth. The book is an example of how good the great stagnation can be. Four dollars for a lesson on American economic growth doesn't add much to GDP, but it sure made a huge impact on my economic and political perspective. I highly recommended the book and for the author's personal words on the book I recommend the interviews from EconTalk, The American, and BloggingHeads.

The Past Wasn't Completely Impoverished

In the first post my series against self-verification, I'd like to try and balance an argument I make regularly. Though like was significantly worse before the Industrial Revolution, in some places it wasn't as bad as I thought:

In the first, with Joseph Cummins and Brock Smith, he shows that England was surprisingly rich before the Industrial Revolution. This assertion is based on the fact the a small share of the population was engaged in farming. The primary sector accounted for 52% in 1817, and even 60% in 1560. These measurements are based on the occupations listed in men's wills and indicate that a substantial fraction of people living in rural areas were in fact not engaged in farming. Thus measuring the urban population share can be misleading in this respect.

In the second, Gregory Clark shows that there has been relatively little growth over these centuries, which means that way back in 1381, England was much richer than we thought. At that date, only 55% of the population was engaged in farming, based on records of the Poll Tax. This is very close to the number quoted above for 1817. Thus standards of living were not that different four and a half centuries apart.

I think I've also been guilty of ignoring the importance of intimate relationships when it comes to measuring wealth. Having enjoyable conversations with friends is one of many things that won't show up in GDP. And let's not forget, that like me, plenty of ancient cultures had time for games.

Cities Are Greener

From the most recent Freakonomics podcast:

if you love nature, stay away from it. We're much more likely to harm nature, as Thoreau did surrounded by the woods than if we lived in tall urban apartments by ourselves. There's a statistical partner to that, which is together with Matthew Kahn, I've assembled data on carbon emissions associated with living in different parts of the country. And there are two facts which I think are important to come out of that: one of which is that people who live in cities do tend to emit significantly less carbon than people who live in countries. And this is controlling for income controlling for family size. That's coming mainly from driving, from the fact there's just a lot fewer carbon emissions associated with dense living. It's not just the move to public transportation, it's also that for drivers within cities, they're just driving much shorter distances. And then of course, it's because of smaller homes. The higher price of urban space means that people are living in smaller homes even with the same family size. And that leads to lower electricity usage, lower home heating usage, and those are the facts that make cities seem, at least to my eyes, significantly greener.

So if, as the author also claims, that cities are the engines of economic and social growth without the environmental destruction, why don't we all live in big cities? The government:

I think that at the federal level there are three issues, one of which is the home mortgage interest deduction. The home mortgage interest deduction essentially acts as a push away from urban apartments into suburban homes. [...]

Second policy that's problematic, and we're still doing this, and this I actually give President Obama much less credit for—we've been huge on building infrastructure in this country for a long time. [...]

But I worry about a renewed push towards building new transportation infrastructure in this country. The work of Nathaniel Baum-Snow finds that every new highway that cut into a major city in the post war period reduced that city's population by eighteen percent because of suburbanization. Transportation is sort of the opposite of urban clustering. You're sort of subsidizing people to spread out.

And the third thing, which is not really a federal issue, but it's huge is our local system of schooling. Certainly for anyone who's a parent like myself, the suburban school districts offer huge enticement to leave cities.

If you're not subscribed to this podcast yet, I highly reccomend it (and others).

Economics of the Printing Press

It's likely that the printing press played a part in the Industrial Revolution. Here's estimate of it's impact on population:

Historians observe that printing diffused from Mainz in “concentric circles” (Barbier 2006). Distance from Mainz was significantly associated with early adoption of the printing press, but neither with city growth before the diffusion of printing nor with other observable determinants of subsequent growth. The geographic pattern of diffusion thus arguably allows us to identify exogenous variation in adoption. Exploiting distance from Mainz as an instrument for adoption, I find large and significant estimates of the relationship between the adoption of the printing press and city growth. I find a 60 percentage point growth advantage between 1500-1600.

Here's an example of how:

Cities that adopted print media benefitted from positive spillovers in human capital accumulation and technological change broadly defined. These spillovers exerted an upward pressure on the returns to labour, made cities culturally dynamic, and attracted migrants.

China Becomes a Political Power

I've discussed before about how I don't fear China's growth, China's US investments, or China's domestic subsidies. However, China as a global political figure does give me pause for thought. Although I don't support most of the United States' foreign policy, I believe that or global intervention has mostly been attempts to do good. With a hand full of exceptions during the age of imperialism, our military has mostly been a force for more peace and more prosperity. America's unilateral global leadership began after World War II as Europe recovered. In fact, America's post-war aid to Europe, the Marshall Plan, was one of our first acts as the global leader. Now, China is doing something similar:

Citing government sources, the paper reported that Mr. Li said “China is willing to buy as much Spanish bonds as Greek and Portuguese combined, that is, around 6 billion euros.” The Chinese financial support is so welcome that El País referred to Mr. Li as a new "Mr. Marshall"

And here are the political string attached:

China’s goodwill also comes attached to European willingness to open up its markets to Chinese companies and to relaxing restrictions of technology transfers.

So far it seems China's goals are similar to the United States, more trade and interdependence. It's important to remember that these have not always been the goals of other global leaders. Rome, Great Britain, Japan, and Germany come to mind. China, who was a global power before the Industrial Revolution in the West, is now moving up the ranks and I'm optimistic, but unsure, what their political aspirations are.

Economics of the Last 200 Years

Although wealth isn't everything, it is very important. Here's a flashier, shorter, still awesome version of Hans Rosling's famous TED Talk:



I was right when I said if you're reading this, you're rich, but I guess I forgot that historically you're also rich if you're not reading this (and you'll get richer).

Geography and the Wealth of Nations

Adam Smith, the founder of modern economics, had one central question he attempted to answer in his masterpiece: An Inquiry into the Nature and Causes of the Wealth of Nations. It's clear that free markets are the key to the the Industrial Revolution. Tyler Cowen's given me his thoughts on the causes. There's probably some cultural factors. But one there's two geographical factors I hadn't given enough consideration. The first is latitude:

Geography determined that when the world warmed up at the end of the Ice Age a band of lucky latitudes stretching across Eurasia from the Mediterranean to China developed agriculture earlier than other parts of the world and then went on to be the first to invent cities, states and empires. But as social development increased, it changed what geography meant and the centres of power and wealth shifted around within these lucky latitudes. Until about ad 500 the Western end of Eurasia hung on to its early lead, but after the fall of the Roman Empire and Han dynasty the centre of gravity moved eastward to China, where it stayed for more than a millennium. Only around 1700 did it shift westward again, largely due to inventions – guns, compasses, ocean-going ships – which were originally pioneered in the East but which, thanks to geography, proved more useful in the West. Westerners then created an Atlantic economy which raised profound new questions about how the world worked, pushing westerners into a Scientific Revolution, an Enlightenment and the Industrial Revolution.

The second is rainfall:

Why have some countries remained obstinately authoritarian despite repeated waves of democratization while others have exhibited uninterrupted democracy? This paper explores the emergence and persistence of authoritarianism and democracy. We argue that settled agriculture requires moderate levels of precipitation, and that settled agriculture eventually gave birth to the fundamental institutions that under-gird today’s stable democracies. Although all of the world’s societies were initially tribal, the bonds of tribalism weakened in places where the surpluses associated with settled agriculture gave rise to trade, social differentiation, and taxation. In turn, the economies of scale required to efficiently administer trade and taxes meant that feudalism was eventually replaced by the modern territorial state, which favored the initial emergence of representative institutions in Western Europe. Subsequently, when these initial territorial states set out to conquer regions populated by tribal peoples, the institutions that could emerge in those conquered areas again reflected nature’s constraints. An instrumental variables approach demonstrates that while low levels of rainfall cause persistent autocracy and high levels of rainfall strongly favor it as well, moderate rainfall supports stable democracy. This econometric strategy also shows that rainfall works through the institutions of the modern territorial state borne from settled agriculture, institutions that are proxied for by low levels of contemporary tribalism.

It's humbling to consider how most of the reasons why I'm rich are not only out of my control, but also out of the control of my family, my country, and at least in this case, my entire species (not to discount the importance of human ingenuity).

Morality During Hard Times

I just finished watching the movies The Book of Eli and The Road. Both take place in a post-apocalyptic world where people are desperately trying to stay alive. Even the heroes are forced to do things we might find morally reprehensible. However, the sobering reality is that these fictional movies aren't fiction for much of the world. Until the Industrial Revolution, man was always on the verge of starvation. There are also countless people in world today forced to make lose lose choices. Whether it's the Dark Ages, Darfur, or hurricane battered New Orleans, it seems our view of right and wrong become more liberal during hard times. The more desperate, the moral gray the lines become.

I assumed this was exclusively a bad thing, that is until I read this post about some governmental changes during the Great Recession. I've posted about the positives of this recession before, but didn't mention these. The federal government recently overturned a ban on internet gambling. California, marijuana is becoming increasingly legal and taxed. There are even some local airports loosening the alcohol restrictions in airports to make money. Maybe just the right amount of hardship can shift cultural norms closer to my preference.

Culture of the Industrial Revolution

A while back I posted Tyler Cowen's answer to my question about why the Industrial Revolution happened when it did. Although his list is exhaustive, he didn't mention this one:

the wide adoption of Bourgeois values was critical. By that, she means that once innovators and capitalists were looked up to or were considered gentlemen, an economic transformation towards industrialization could happen.

Not surprisingly, there is a correlation between the cultural appreciation for entrepreneurs and past economic growth. Now, what does the recent backlash against CEO's mean for future growth?

Economic View of Past, Present, and Future

In a 25 minute lecture to the Federal Reserve, economist Steve Landsburg lays out a great description of life before and after the Industrial Revolution. This was too good to just put in a links list and a a must watch if you truly understand the world you live in. It's followed by a worthwhile Q & A session.

Rationally Poorer

I teach and my wife is a social worker. Those aren't very high paying jobs. In a ranking of the lowest paid jobs with a college degree, social worker is #1, elementary education is #2 and general education is #7. Who would have guessed there would be a capitalist with so little capital? Before you pity me, I'll explain why our choice of college degrees were incredibly rational. I've already posted on how Americans in 2010 are richer than any civilization ever. I've also mentioned how that wealth has increased faster than our life expectancy, giving us more money, but less time to spend it. And I discussed that wealth has a diminishing positive impact on happiness, especially after about $40,000. And even though my wife and I make less than the average person in the US, we have a very clear plan for children, college payments, and retirement.

We chose low paying jobs not so we could maximize our income, but our goals. Though I am currently working very hard to create the intellectual property needed in the classroom, my workload will decrease (and has decreased) as I gain more experience. My hope is that by the time I have children, I will actually be working less than the average American (currently 8.8 hours a day). I currently have a spring break, a Christmas break, two months off in the summer, and school is over before 3 o'clock. In the future I hope to take advantage of this extra time and spend it with my lovely wife (and future kids), performing improv, and becoming more relationally responsible for my community. I am free riding off the Industrial Revolution and the hard work of the generations since. Hopefully I'm heeding the Biblical warnings against personal wealth while enjoying the comfort that has been produced by society as a whole. This helps to explain my simultaneous feeling of sympathy and appreciation for those entrepreneurs currently working hard to create more wealth for future generations. Being productive is important, but it's not solely measured by personal income or national production.

Timing of the Industrial Revolution

Tyler Cowen recently did a request for requests. I asked him this:

Why did it take so long for humans to have the Industrial Revolution?

He was gracious enough to give a thorough answer:

That's a reader request from the especially loyal Harrison Brookie. First, you might wish to go back and read the MR reviews and debates of Greg Clark's Farewell to Alms,

More generally, extended periods of economic growth require that technologies of defense outweigh technologies of predation. They may also require that the successful defender, at the same time, has good enough technology to predate someone else and accumulate a sizable surplus. Parts of Europe took a good deal from the New World and this may have mattered a good deal.

Building a strong enough state to protect markets from other states is very hard to do; at the same time the built state has to avoid crushing those markets itself. That's a very delicate balance. China had wonderful technology for its time and was the richest part of the world for centuries but never succeeded in this endeavor, not for long at least.

England was fortunate to be an island. Starting in the early seventeenth century, England had many decades of ongoing, steady growth. Later, coal and the steam engine kicked in at just the right time. English political institutions were "good enough" as well and steadily improving, for the most part.

Christianity was important for transmitting an ideology of individual rights and natural law. As McCloskey and Mokyr stress, the Industrial Revolution was in part about ideas.

There are numerous other factors, but putting those ones together -- and no others -- already makes an Industrial Revolution very difficult to achieve. It did happen, it probably would have happened somewhere, sooner or later, but its occurrence was by no means easy to achieve. The Greeks had steam engines, proto-computers, and brilliant philosophers and writers, but still they did not come close to a breakthrough.

One question is how long the Roman Empire would have had to last to generate an Industrial Revolution and don't mention the Eastern Empire smartypants.

If you are asking why the Industrial Revolution did not occur in the Mesozoic age, or other earlier times, genetic factors play a role as well.

I tell my high school students that the Industrial Revolution is second only to learning to farm when thinking about human history. If that's true, then this answer is important. If I'm understanding Tyler correctly, it took humans a while to figure out how to make a government strong enough to defend property rights (especially from the outside), but weak enough to allow the market to work. I also agree that religion, perhaps in the form of the Protestant Reformation was an important step in understanding human liberty. That also helps explain why England as an island was more likely to begin this revolution.

Other interesting suggestions from the comments of Tyler's post are the importance of the printing press in saving and spreading ideas and how cheap manual labor in the form of slavery may have delayed it (I don't buy the second one).