Rodent Regatta

Here’s another excellent piece by Craig Cantoni. Enjoy!

According to conventional wisdom, education is the best way for the United States to compete in the New Economy of knowledge-based work, instantaneous information and the free flow of capital and products across national boundaries. The conventional wisdom is wrong and has led to the wrong national priorities.

The great education fallacy
By Craig J. Cantoni
(For Internet publication)

According to conventional wisdom, education is the best way for the United States to compete in the New Economy of knowledge-based work, instantaneous information and the free flow of capital and products across national boundaries. The conventional wisdom is wrong and has led to the wrong national priorities.

The best way for the nation to compete today is no different from what it was a century ago in the industrial-based economy. The best way is entrepreneurialism, coupled with the conditions that allow entrepreneurialism to thrive, including free markets, property rights, the rule of law, low taxes and a national culture that values risk-taking over risk-aversion.

If a nation’s competitive advantage comes from education, then the former Soviet Union would have had a thriving economy, since it had a well-educated populace. Likewise, today’s Germany, with its well-educated, highly skilled work force, would have a booming economy. Instead, it has stagnation, high unemployment, and a loss of industry and jobs to other countries.

In the case of the Soviet Union, of course, the preconditions for entrepreneurialism did not exist under communism. In fact, entrepreneurial activity was outlawed by the communists. In the case of Germany, entrepreneurialism is being strangled by the regulatory state, inflexible labor laws and skyrocketing social welfare costs. Similarly, the Japanese economy has been dead in the water for a decade, in spite of Japan’s well-educated populace, due to a reliance on the orderliness of industrial planning instead of the messiness of market forces.

Education is very important, but in the absence of an entrepreneurial economy and culture, it does not magically lead to a higher standard of living and economic growth. Granted, education does lead to breakthroughs in science and technology, but the breakthroughs would remain dormant without entrepreneurs risking capital to transform them into marketable products and services.

A case can be made that entrepreneurialism drives education as much, if not more, than education drives entrepreneurialism. It takes only a relatively small number of well-educated scientists to create scientific and technological breakthroughs that entrepreneurs can bring to the market, but it takes entrepreneurs to create a need for universal education for the masses.

This was seen in the early 20th century, when entrepreneurial industrialists like Henry Ford built new industries that created a demand for not only unskilled labor but also for tool and die makers, machinists, electricians, mechanical engineers, metallurgists, bookkeepers, secretaries, managers, and myriad other skilled and educated workers.

In 1910, only 13 percent of Americans had graduated from high school, but the percentage grew over the century in lockstep with the industrialization of the nation. At mid-century, as with China today, there began a massive exodus of workers from farms, due to huge gains in farm productivity, resulting from the mechanization of farming, which in turn was due to industrialization. Released from the plow, farmers could gravitate to higher-paid occupations and find the time to improve their education.

After World War II, the demand for educated workers accelerated as America’s entrepreneurial economy accelerated, during a period in which much of Europe and Asia lay in ruin. The GI Bill helped to meet the demand by subsidizing the college education of returning veterans.

It is important to remember that although the United States had developed its own educated work force over the century to meet demand, it also had benefited from a steady stream of well-educated immigrants, thanks to the opportunities produced by its entrepreneurial culture and political and economic freedom. For example, immigrant scientists played a key role on the Manhattan Project during W.W.II. And after the war, immigrant scientists from Germany played a key role in America’s rocket program. Today, the high-tech industry is dependent to a large extent on immigrant scientists and engineers.

The United States still has a net brain gain instead of a brain drain. But due to the Internet and other communications technology, American companies are now hiring well-educated foreigners and having them work from their home countries at a fraction of what they would be paid in the United States. For example, companies are establishing research and development campuses, technical call centers and software development facilities in India. If you call the AOL help line, chances are that the technician at the other end with the impeccable English is sitting at a desk in India and earning four dollars an hour.

This latest trend suggests that education is becoming an abundant global commodity and will not, by itself, create a competitive advantage for the United States in the world economy and differentiate the nation from other developed and developing countries.

America’s competitive advantage has to come from something that is in shorter supply in the world than education and is not such a readily transferable commodity. It has to come from entrepreneurialism, along with the conditions that allow entrepreneurialism to thrive, including free markets, property rights, the rule of law, low taxes and a national culture that values risk-taking over risk-aversion. Many Indian entrepreneurs start businesses in the United States instead of India, not because the U.S. has a better educated work force, but because it has a more favorable political and regulatory environment in which to conduct business.

Alarmingly, the U.S. may be losing its competitive advantage. While it still ranks high in political and economic freedom, there are danger signs that it is becoming a risk-averse nation, one that values the regulatory state, dependency and income redistribution over entrepreneurialism, independence and wealth creation. Some of the danger signs are as follows:

– Taxes and regulations are estimated to cost the average American household $19,000 per year, or about three times more in constant dollars than in the early 1900s. – Government employment is at an all-time high of 21 million workers at the federal, state and local levels. This astonishing number is about 7 million more than the number of workers in manufacturing. – Entitlements and other mandatory spending are at a record high and increasing, They now comprise two-thirds of the federal budget. – An increasing number of America’s growth occupations are those that are dependent on the regulatory state and that redistribute wealth instead of create it. For example, the number of lawyers per thousand population remained flat until 1970. Then, because of the growth in government and litigation, the number tripled between 1970 and 2000. Similar increases were seen in the number of tax accountants, human resources managers, safety specialists, benefits consultants, lobbyists, congressional staff and scores of other occupations to numerous to list here.

The above trends result in less capital in the hands of entrepreneurs and, hence, less capital that is invested in new businesses and productivity improvements.

Some danger signs are not as noticeable as the ones above but are more alarming, because they reflect the onset of a risk-averse, anti-capitalist mindset among the American people. For example, a law firm in Phoenix is running a TV commercial that solicits investors who have lost money in the stock market. It is an updated version of the McDonald’s coffee case, in which a patron sued the company when she scalded herself with hot coffee. Now investors who burn themselves in the stock market can blame someone else.

In another Phoenix example, a neighborhood fought the construction of a computer chip factory because of environmental hysteria. The residents preferred low-wage convenience stores and retail outlets in their neighborhood over a high-wage factory, not thinking through the long-term economic implications of such a preference, especially when it is multiplied by thousands of neighborhoods and millions of residents across the country.

The most troubling warning sign is the lack of knowledge about economics and history among today’s high school and college students. Illiterate in economics and ignorant of the moral and philosophical foundations of capitalism and our constitutional republic, they fall for every crackpot socialist scheme and think that ”capitalism” and ”free markets” are dirty words. In guest-lecturing to senior business students at Arizona State University, I have found that the attitude and ignorance exist even in business schools.

What are the odds that the nation will stop believing the great education fallacy and begin to establish a national priority of returning to our entrepreneurial roots? Considering that most members of Congress are lawyers instead of entrepreneurs, and considering that entrepreneurialism is foreign to government schools and unionized teachers, the odds are not very good.

I’ll close with a couple of paragraphs from one of the greatest economics books, Human Action, written by one of the greatest economists, Ludwig von Mises. It is telling that both the book and the man are virtually unknown in government schools and in Congress.

”It is not generally realized that education can never be more than indoctrination with theories and ideas already developed. Education, whatever benefits it may confer, is transmission of traditional doctrines and valuations; it is by necessity conservative. It produces imitation and routine, not improvement and progress. Innovators and creative geniuses cannot be reared in schools. They are precisely the men who defy what the school has taught them.

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing and opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand.”
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Mr. Cantoni is an author, columnist and strategic planning consultant. He can be reached at ccan2@aol.com.