Home > The Economy > Human capital – The knowledge dimension

Human capital – The knowledge dimension

from Peter Radford

The very words have a bureaucratic ring to them. At least to me. Nancy Folbre has written an interesting article about the ending of the Golden Age of Human Capital, her main point being that there has been a major change in the landscape for higher education. The value of a college degree is not what it used to be, and the cost of getting one is becoming prohibitive.

The second part of that statement – about the cost of education – is testimony to the shockingly irresponsible shambles that academia has become. The cost of providing an education is way out of line, affordability is declining rapidly, student debt shackles the young and reduces their ability to attain the creature comforts of the old middle class, and the future value of college is increasingly murky. Academics decry the cost of getting an education, but offer little by way of a remedy. The productivity within academia is a challenge to say the least, and odd ball solutions like opening up campuses of our universities in China solve nothing. Indeed they make matters worse by building the supply of graduates and thus eroding the return available for all graduates.

Folbre hints that there may have been a shift in the demand for educated workers, at least here in the west, with employers now focusing on more specific skills rather than the old fashioned generalists pumped out en masse by liberal arts colleges.

Let me add my voice to this discussion.

Corporate America is awash with highly educated bureaucrats. The demand for such folk rose strongly during the 1980′s as big businesses sought to upgrade the talent of their management teams. Prior to then it was not unusual to find a large corporation being run by a raft of ‘corporation men’ – invariably men – who had risen through the ranks and benefitted from employer specific training. Sometime around the early 1980′s in-house training was identified as being too expensive. Those programs thus became an early example of outsourcing, with the cost of management education being pushed onto the employee and off the corporate income statement. This was acceptable to employees as long as the returns to the cost they were now covering was significant enough, which, as we all know, they were. By the end of the 1990′s most employer specific management training programs had disappeared and had been replaced by minor technical training, and, sometimes, the subsidy of employees who sought their own education whilst at work.

This is, of course a generalization, but notice two convergent trends within this history.

First, the early 1980′s was also the onset of the single minded pursuit of shareholder value. Experience and education became costs to be cut or outsourced like any other cost. The drive for efficiency – to pump up returns on equity – drove corporate America to abandon many older methods and ways of doing business. Among those jettisoned notions was lifetime employment and the ‘corporate man’. Instead of providing training big businesses turned to the marketplace to hire already educated employees. This created a boom in demand for anyone with a higher education. Thus the emergence of the Golden Era for Human Capital that Fobre regrets the passing of.

Second, this surge in employment for educated people built the supply of able bureaucrats capable of seeking the very efficiencies that had caused the outsourcing of business education. The ranks of business swelled with accountants, lawyers, consultants, and other highly educated workers whose pay seemed immune to the stagnation witnessed by less educated workers as efficiency became ever more important as a source of profit. These ‘knowledge workers’, as they began to be called, were the ones leading the efficiency charge. They were the ones steeped in the latest management and economic doctrines, and they were the ones reaping the rewards from the slimming down and streamlining they led with such gusto.

It wasn’t the pursuit of innovation that drove the demand for knowledge workers, it was the drive for efficiency. Creativity was valued more for incremental tinkering with corporate costs, not for breakout product or process changes. Despite all the hype from management gurus, innovation was the lesser source of short term profit, by a long way, than was the search for efficiency. As long as costs could be cut the demand for bureaucrats willing and able to cut them was near insatiable.

Sooner or later, though, the fat had been trimmed and the demand for such bureaucrats tapered off. The newly lean corporations could manage themselves with fewer managers. The relentless pursuit of shareholder value brought the high cost of those bureaucrats into focus. Business decided it needs fewer. It began to outsource the activities they occupy. The drive for efficiency entered a new phase.

Which is where I think we are.

The value of those higher educations has diminished for many, leaving ever larger spoils for those who manage to remain. The top 1% of wage earners began to separate from the top 5%. The skilled bureaucrats began to feel the same heat that they applied to lesser educated workers.

Let me step back and add a wrinkle to the story.

In an economy there are two kinds of knowledge. What I call ‘primary’ and ‘secondary’. They are distinguished by the role they play rather than the content. This is different from the tacit/explicit dichotomy of Michael Polanyi in his 1966 book “The Tacit Dimension”, and which has become so popular amongst management and consulting theorists.

The two kinds of knowledge relate to the two impulses upon which an economy is based. Innovation creates the long haul rise in wealth that we all benefit from – and which the McCloskey book I commented on last week brings into sharp focus. Efficiency re-arranges the existing resources to reap greater rewards from them.

In my terms: primary knowledge is the source of efficiency; and secondary knowledge is the source of innovation.

Primary knowledge is embodied in the skills of workers doing repetitive tasks, in the capital machinery and technology that clutter the business world, and in the management methods that dictate the structure of production processes. Primary knowledge allows the pursuit of efficiency because it can be economized upon. It can be replicated exactly. It can be transferred. It can be coded. It can be compressed. It is the stuff of corporate process. These qualities allow for the reliable reproduction of product. Because they are so predictable and replicable, they allow for the minimization of cost and the maximization of profit – don’t forget that the pursuit of a maximum requires a stable and well known set of inputs for the computation. Primary knowledge needs known problems with known solutions. It assumes a future that mirrors the past so that its efficacy can endure.

Secondary knowledge is very different. It is embodied in the problem solving ability of workers and machines capable of ‘thinking’. It is how we deal with new problems and issues. It does not assume that the future is a mirror of the past, but that there exists a capability to innovate when presented with a need or an opportunity. It creates new solutions to new problems. But there is a downside: it cannot be economized upon since it exists as a vague potential up until the moment of problem solving. This, by the way, is why McCloskey can subtitle her book: ‘why economics can’t explain the modern world’ – standard economics deals only in a world of primary knowledge and maximization and has nothing to say about ad hoc problem solving. Secondary knowledge is also expensive since it requires a complex of available routines, thought processes, and associated information, much of which may never be called into action. It is idiosyncratic and personal, making it intractable to both to business, and to standard economic theory. Yet it is the source of the breakthroughs that constitute innovation.

This dichotomy adds, I think, a dimension to Folbre’s analysis. The surge in interest in human capital coincided not with a heightened interest in creativity or innovation – despite the claims at the time – but with the need expressed by corporations to translate their existing secondary into more efficient primary knowledge. In other words the drive to embody existing knowledge and ring the last ounce of profit from it produced a demand for bureaucrats to re-invent older products and processes rather than to invent new ones.

Once that drive had run its course, and as our economy had been compressed to produce the most profit, the demand for ever greater bureaucratic armies ebbed.

Interestingly, this narrative explains some of the macro trends that others attribute to structural problems in the economy. People like Tyler Cowan, for example, predict a diminished trajectory for GDP growth because our economy is not innovating as well as it once did. According to Cowan, our latest inventions have a far smaller impact on future wealth creation than did those of a century ago. This conclusion feeds into his standard right wing cry for freeing up enterprise and the reduction of social entitlement programs. He says we cannot afford those programs because of the diminished future, and if we want to move the growth curve back upwards we need to reduce government controls.

But my narrative produces a different interpretation: the cause of our diminished future resides in the private sector’s single minded pursuit of profit being extracted from efficiency rather than from innovation. We have succeeded mightily in squeezing profits from our current set of  ideas. But at the cost of thinking about and finding the innovations that build the future.

We have become overly bureaucratic, technocratic, and reliant on primary knowledge.

I think the Golden Age of Human Capital is yet to come. The age of problem solving, that is. Not the age of rote learning.

  1. paul davidson
    June 25, 2013 at 1:39 am

    the first question one should ask is — what is the purpose of a college education?

    I believe it is not necessarily the equivalent of a vocational school for “educated jobs — but one for making citizens of a nation not only literate , but well informed and ability to make all sorts of judgments about life.

    As someone who started teaching at the University of Pennsylvania when the salary scale was very simple: Instructors were paid $1800 per year; assistant professors $2400; associate professors #3600 and professors $4800 — this in 1950’s- . (And the normal teaching load was 4 courses per semester for all ranks)

    At the same time the average annual income of plumbers was close to $6000 per annum (according to studies done at the time). Of course tuition was very small –my recollection it was $2400 per annum.

    The high cost of tuition is in large part because the price of professors has risen dramatically in the years — since Russia put up Sputnick and the US congress realized it was necessary to invest heavily in higher education –even under a Republican president [ Eisenhower].

    Secondly, who should fund this higher educational costs. I have always argued that it should be the government — just as we fund public education through high school [Personal discloser: I went to Brooklyn College where the semester costs was $5.00 plus textbooks. The citizens of New York City paid the rest of the cost of higher education.

    Milton Friedman would boast thst his parents were to poor to send him to College but luckily he lived in New Jersey. Rutgers University was the State University and it was a free university at the time .Milton went to College basically for free. He later boasted that the Taxpayers of New Jersey were stupid for paying for his undergraduate education because the day after he graduated from Rutgers he left New Jersey and never returned .

    Accordingly he never paid any New Jersey taxes to compensate the State and the taxpayers for his higher education.

    He concluded that his college education was an investment in what we later call “human capital” and therefore students should not get a free ride. Instead we should require all students to finance this investment out of their own purse — just like we require businesses to finance plant and equipment investment.

    from this type of illustrative argument Milton ‘s philosophy convinced Congress and the start of student loans under federal regulations began! The high level of student debt defaults suggests to me that the ncxt financial crisis may be set off by the collapse of student debt derivatives! —Thanks Milton for such a legacy!—)

    • Newtownian
      June 27, 2013 at 2:49 am

      Paul your ‘low tuition fee’ looks like the salary of a mid level academic. You may have forgotten to consider a little item called inflation. At least it looks that way.

  2. sffein
    June 25, 2013 at 1:56 am

    the cost of producing college education hasn’t actually changed that much, the price spike is the result of cost shifting plus the never ending profit taking of health insurers.

  3. Robert Locke
    June 25, 2013 at 6:54 am

    People in the US & the UK have a peculiar idea about education that the rest of the world (advanced countries) does not share. They believe that public education is vastly superior to state education. Elsewhere private education is meant for dumb rich kids; the great secondary and university level schools are state run and frequented by the top 1% as well as the others, if they academically can gain entry. Many of the problems of Anglo-Saxonian education derive from their odd idea that state-run education has to be inferior.

  4. ezra abrams
    June 25, 2013 at 1:50 pm

    The high cost of college isn’t a bug, it is a *feature*

    The idea is that rich parents can exclude poor parents from the benefits of college educated offspring – just like in a birds nest, where an older sibling will peck a younger sibling to death, rich parents are trying to make life hard for poor parents.

    What I hear from my college age kids is that students doing well in Computer Science and related courses are not having a problem getting good jobs; of course free anecdotal evidence, esp from a teenager, is worth less then what you pay for it.

  5. Bruce E. Woych
    July 4, 2013 at 1:43 pm

    Great article and very thought stimulating overall. The ambiguity of certain terms like “efficiency” or even phrase-term like “existing resources” comes close to mixing ‘metaphorms’ (to coin a term). The implications for distinguishing primary and secondary knowledge with their use becomes a riddle of experience: oversight rather than insight.
    Historical context must somewhat empirically validate such formalizations of terms.
    I mean (humbly at least) for example: (quoted from the text we have the line);
    “Efficiency re-arranges the existing resources to reap greater rewards from them.”
    This is a tricky statement even as a material base but it becomes problematic when the “innovations” are perverted incentives and moral hazards establish “creative destruction” for profit that prioritizes a mythic wealth building as a healthy economy.. in a culture now famous for stealth and control fraud that seeks revenue streams over productive dreams.

    Historically Scale economies for profit which eventually tweaks the minimum to gain the maximum of returns for re-investment at first but in time serves primarily towards the development of wealth for very few at the top. The efficiency business model was based upon behavior modification and essentially reductive fear/desperation driven work forces until unions “innovated” on those controls and historic events unfolded (both physically and ideologically on several levels and dimensions). The split was essentially altered after technical computational levels of automation began to innovate on investments made to reduce labor and free up revenue for reinvestment and a new emphasis upon succession and repetitive wealth building for personal consumption. Progressive and competitive succession planning pushes that formula from the 60s though the 70s.

    Systems approaches revolutionized both effectiveness and efficiency at multiple levels about that time and decisively changed the power scala of mass market output organization to a more technocratic (not bureaucratic) dependency. Later, after the 1990s, the business model learned systems to get back on top and control the “efficient” dependency of its work force with behavioral administration over its professional techs, and restricted the free flow effectively of innovations towards a more tactical focus on wealth and competitive exclusion (middle management & administration over bureaucratic redundancy). The “golden era” of bottom-up technological creations was cut, subsequently, and the growth in technological renovations while advances became more intentionally harnessed into narrow fields of private wealth investment.

    The saving grace of these changes is that there was a mass spillover effect because the entire process of technology was focused intensively on communication. Communication technologies advanced all levels of population education outside of the University system and a new generation of tech-dependent consumers were being advanced and targeted towards the work force and the work force has had the dominating influence on efficiency while the outsiders were most pressured to devise innovations that could establish some new commodity and markets.

    Innovation intensifies even while it is compromised by ‘efficiency’ and “sufficiency begets expedience” and becomes the prioritized guidelines under corporate growth from the top down and competitive domination over asset resources of all measures are delegated.
    “Existing resources” becomes money and instruments of innovative ways like derivative production stretched the apparatus of so-called wealth building to pure exploitation levels of personal gain. Hostile economics and Private Equity determine survival and survival defines “efficiency” through path dependent channels of crisis and the scavenging of destructive potentials.

    The University, parallel to this process, has simply reflected it as reconstructive processing are neglected and progress simply means sustaining growth patterns to wealth and its marginal benefits to a special elite dependency that prioritizes financial supremacy over a not so vital work force that continues to be targeted for devaluation and now austerity. With all due respect to Robert Locke’s statement above, it seems that the barriers to entry are now financially emerging to divide the population and once again establish a ranking and status relationship in a stratified society of scaled power and the “impulse” for innovation or efficiency are not formal instruments of population economy but for a scalar political economy. Education is simply the gateway and broker-licensing agency for that efficient development of exclusive class structure in the social economy of domination, subordination and submission.

  6. Bruce E. Woych
    July 4, 2013 at 3:00 pm

    This is also well worth a reading from Peter Radford: (“McCloskey” highlighted in the text)
    http://www.radfordfreepress.com/?p=541 Say? McCloskey
    by Peter Radford on June 5, 2013 in Economics

    Which harps back to the old argument that independent invention drives history and both progress and prosperity are a consequence of devised 9if not divine) accumulation and abundance provided by these “discovery” giants. It is the heart of the purist surplus model.

    (The alternate being that resource scarcity and demographic pressures eventually necessitate innovations and creative potential emerge when modifications provide novel potentials in both social and technological transitions. Open and closed systems interact, and the positive outcome of progressive civilization overlooks a massive amount of regression and transgressions).

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