In the new knowledge-based economy, only those at the highest skill levels have seen real wage increases... ...over the past 25 years... Lester C. Thurow, Building Wealth, 1999
Commentary of the Day - February 4, 2001: Building Wealth - The New Rules for Individuals, Companies and Nations in a Knowledge-Based Economy - A Review:
Lester C. Thurow is an MIT economics professor who has made a cottage industry out of writing popular books on the so-called "dismal science". His most recent effort, Building Wealth - The New Rules for Individuals, Companies and Nations in a Knowledge-Based Economy, has met with mixed reviews. A quick scan of the 29 reader reviews of this book on the Amazon.com web site shows that readers either loved the book or despised it.
Thurow's detractors generally feel that he is not laissez faire enough in his views. They also point to one of his earlier books Head to Head, which wrongly predicted that the United States would lose out to Japan in the contest of economic superpowers. As Thurow himself notes free markets have a tendency toward instability built into them, and such an instability caused a financial meltdown from which Japan has not yet recovered. At the same time the economy of the United States, with the help of the computer revolution and the Internet, began to be driven primarily by rapid information transfer, knowledge, and intellectual property development. This led to the unprecedented economic expansion of the past decade.
Regardless of Thurow's lack of prescience regarding the collapse of the Japanese economy, he seems to be on the mark with regard to the value of education in the knowledge-based economy that we find ourselves in now. He traces the rapid growth of the American industrial economy in the late 19th century to the decision by the capitalists of the time to champion a strong system of public education in the United States. It was this system of essentially free public education that provided a ready source of skilled workers, which in turn allowed American industry to achieve levels of productivity unmatched elsewhere in the world.
He also notes that the shift to a knowledge-based economy has increased the value of education and training. Companies no longer can be successful merely by providing goods and services. They also must control the information and intellectual property attached to the production of those goods and services. In fact, the control and management of information can be far more profitable than the actual production of goods and services.
An example in point is the rapid growth of Enron, a Texas-based energy company with strong ties to President George W. Bush1. Though this company produces very little electric energy in its own generating plants, and delivers very little electric energy over its own transmission facilities, Enron nevertheless earns a fortune in profits every day by mastering the flow of information related to electric power production and demand. Acting as a broker between the producers of electric power and the utilities that deliver this power to the consumers, Enron is able to turn a small profit on each of literally thousands of spot market transactions every day. This is possible only because of the elaborate, near instantaneous trading facility that the company has developed using the skills of highly educated mathematicians, physicists and engineers.
Though Enron neither produces the commodity (electric power) nor distributes it, Enron nevertheless provides value both to generators and distributors by managing the risk associated with production and distribution. It can be argued that companies such as Enron not only make the market but also manipulate it to their advantage. That is a different issue, and one worthy of pursuit, but what cannot be argued is that knowledge and control of information puts Enron in the "cat-bird's seat".
Thurow notes a disturbing trend in the relationship between skill level and income that few other economists have focussed on. Namely, that real wages have been dropping in the United States for all but those at the very top of the skills ladder.Among men, only those with advanced degrees (master's degrees and above) have higher real wages than they had twenty-five years ago. As one goes down the education curve, the wage reductions get bigger and bigger -- 3 percent for college graduates, 29 percent for high school graduates, 31 percent for high school dropouts.......The emphasis on education in the recent presidential election clearly is a reflection of this observation by Thurow. Though Gore and Bush approached the need to reform K-12 education from different directions, both understood, at least implicitly, that the American economy will be unable to expand without a highly skilled workforce. Indeed, the only hope for slowing the growing gap between the small percentage of the population who are at the top of the economic ladder and the remainder of the population is to improve education and skills level for all.
.......There is a message in the observed shift in wages in America over the last twenty-five years. In the twenty-first century, no country that wishes to be rich can leave some of its citizens uneducated. This applies to women as well as men......
The problem, however, as Thurow points out is that public investments in education as a percentage of GNP actually have been dropping in recent years. This can be traced to two factors. First, the growth in the number of retired Americans has caused a shift in the deployment of public resources from infrastructure development to health maintenance. Second, the end of the Cold War also meant the end of a number of government programs that subsidized higher education for many Americans.
It remains to be seen if the Bush approach to education reform, with its greater emphasis on testing and vouchers rather than on hiring better qualified teachers and improving the K-12 infrastructure will have the desired effect.
Whether you agree with Thurow's premises or not, Building Wealth is well worth reading.
1Business Week, February 12, 2001, pp. 70-80. (This story also is available online to registered Business Week subscribers.)
Building Wealth - The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy (ISBN 0-88730-952-6) is published by HarperCollins and is available in hard-cover, paperback, and audiocassette versions.
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