More College Does Not Beget More Economic Prosperity

In a recent Forbes column George Leef of the John William Pope Center for Higher Education Policy points out that, contrary to President Obama's claim, higher education does not improve economic performance.  The claim that it does improve the economy arises from an error: the belief that correlation implies causation.  Countries with more wealth have more college graduates because they can afford to send more students to college.  They are not more wealthy because they have more graduates, for college attendance is a consumption good.  My guess is that the number of automobiles per capita contributes more to national wealth than do college degrees.

The claim that education leads to wealth is based on human capital theory. Human capital theory goes back to Adam Smith''s 1776 Wealth of Nations and Alfred Marshall's 1890 Principles of Economics.  The economist most closely associated with the human capital theory is Gary Becker, who won the Nobel Prize in economics.

Labor economists contrast the human capital theory with  Michael Spence's signaling theory, to which Leef alludes in his article.  Spence also won a Nobel Prize in economics.  Signaling theory suggests that ability is correlated with education, so years of education signal underlying ability.  A difference between human capital theory and signaling theory is that the former suggests that the material learned in school is relevant to economic performance while signaling theory does not.  Completion of a course in abstract mathematics suggests a high level of underlying ability even if the graduate ends up working in an unrelated field.  If signaling theory is right, then a simple IQ test and completion of a US Marines or Navy Seals boot camp training will predict as much as a college degree, maybe more.

I prefer a third alternative:  institutionalist theory.  Institutionalist  thinking places weight on mimesis in the creation of cultural patterns that are often irrational.  College is popular because of imitation.  In his 1978 book Culture of Professionalism, Burton Bledenstein shows that the impulse toward professionalism was a crucial foundation of the Progressive movement and that Americans have had a preference for professional status over and above wealth, fame, and learning.  Education is a sign of professionalism, so it is desired as a consumer good.  Likewise, American firms have preferred college graduates because degrees imbue their managements with professional status.  There is no evidence that higher education has contributed to firms' economic success.  To the contrary, the rise in the number of college graduates in America after World War II paralleled the ascendance of Japanese industry and the decline of Detroit.  

In his important work on productivity differences around the world, William Lewis of the McKinsey consulting firm showed, in the early 1990s, that production workers in the third world could be made to be about as productive as American workers through improvement in the organization of work and workplace training.  Third world workers can produce economic results that equal those of high school and college graduates.  Producing them requires insight as to the organization of work.  This was achieved in postwar Japan through innovative thinking at Toyota.  More generally, the individuals most responsible for workplace innovation have been Frederick Winslow Taylor, who chose not to attend college, Henry Ford, who did not go to college, W Edwards Deming, who held a Ph.D. in physics but never got a job related to his degree, and Taiichi Ohno, the inventor of lean manufacturing and the Toyota production system.  Ohno held a degree from Nagoya Technical High School. An exception is Sam Walton, who held a BA from the University of Missouri.

The chief contributions of business schools to business practice have been through the human relations movement, job redesign, the marketing concept, the capital asset pricing model, and other financial theories.  These are minor contributions.  The human relations school, for example, has contributed to Japanese management practice, but it has been ignored in the US as the Marxist critic (and Brooklyn College dropout) Harry Braverman points out in his Labor and Monopoly Capital.  The finance field, which is the one to which academics have made the most contributions, has been a canker sore on the American economy, requiring a multitrillion dollar bailout and ongoing subsidization from the Federal Reserve Bank; it has produced little of value in return.  Without college education Henry Ford invented the assembly line; Taiichi Ohno reinvented it.

In After Virtue, a classic work on ethics, Alisdair MacIntyre claims that there are three fraudulent figures of the modern world:  the aesthete, the psychiatrist, and the manager.  There is a fourth: the business professor who claims to raise productivity but knows nothing about the substance of management.  I am not the first to make this claim:  Abraham Zaleznik, in his Managerial Mystique, argues that business schools have lost touch with the substance of business.  As a critique of business education, Zaleznik's point is right, but its implications go further.  If business schools do not teach students how to succeed in business, why do they exist?

During America's period of most innovative and rapid economic growth, from 1840 to 1920, only about five percent of Americans attended college.  There is no evidence that much of the innovation of that period, chronicled in David Ames Wells's 1889 Recent Economic Changes, came from people with college degrees.  During that period college degrees were associated with professional careers, notably law, although doctors and lawyers often lacked undergraduate degrees. College was mostly associated with careers in the clergy until the 20th century.  It wasn't until well into the Progressive era that the claim that college education had anything to do with business success gained traction.  By then, most of the innovation associated with the modern world had occurred; even television and radio had been invented, by Nikola Tesla, in the 19th century.   Tesla, incidentally, had thought of AC electricity before attending a technological college in Europe, and his professor discouraged his pursuit of the AC motor, which created the modern world.

Barack Obama has done much harm to the nation through his  ill-conceived health reform and common core.  His claims about higher education, as Leef points out, will contribute to American economic decline.

Moses Maimonides, Profit Maximization and the Case of a Disabled Actor

I recently posed the following discussion question to students in my web-based human resource management course:

>"Your name is Daryl F. Zanuck, co-founder of Twentieth Century Fox. It is the early 1950s. A talented actor, recently graduated from Yale Drama School, asks to meet with you. He says that he wants to be a leading man for Fox. The problem is that the actor is missing an eye. He had lost an eye in a childhood illness. You tell him that although he has acting ability, it is not realistic for someone missing an eye to be a leading man. Appearance is an essential job requirement, a job related requirement or a business necessity, and you cannot consider him for such a role. Only one in a million people gets to be a movie star. Someone missing an eye has to be ruled out. The answer was "no".

(1) Did Zanuck make the right decision?
(2) What are the two or three chief ways to validate staffing decisions and employment tests?
(3) Did Zanuck apply a potentially validated selection criterion?
(4) Does your answer to (3) matter to your answer to (1)?

All students must participate. Do not wait until the last minute as failed postings will not get credit."

Of the twenty-odd responses, only two or three said that it might be possible that the actor should be hired. Most said that he should not. Several students contrasted profit-maximization (not hiring) with altruism (hiring). None suggested that the profit maximizing decision would be to hire the actor if he were competent.

The following response was typical:

>"Depending on how you look at it the decision that was made could have been right or wrong. The two ways of looking at it is the legal way or your own selfish way. Legally the decision Zanuck made (may be) against the law, since it's discrimination to reject some one due to a defect or appearance (if they're the best qualified and reasonable accommodation can be made). But on the other hand if I was looking from my own selfish point of view I made the right decision because the job does require appearance and for this job he was not the right candidate even though he might have been an outstanding actor but sex sells."

(Technically, the above answer is incorrect because if appearance is an essential job requirement, as it is with actors, then the Americans with Disabilities Act does not mandate hiring.)

The question is a trick one, because it is based on the A&E biography account of Peter Falk.

Wikipedia's entry on Peter Falk states:

"Falk's unusual gaze is due to a glass eye that he has had for most of his life. His right eye was surgically removed at the age of three because of a malignant tumor."

According to the Peter Falk official site, Falk has appeared in 38 films, to includ "Murder, Inc.", "It's a Mad, Mad, Mad, Mad World", "A Woman under the Influence", the (1979) original "In Laws" in which he co-starred with Alan Arkin, "Wings of Desire" and "The Sunshine Boys". He has been nominated for two Academy Awards. Imdb.com indicates that he has appeared in 130 television shows.

Falk is best remembered for his starring role as Detective or Lieutenant Columbo, one of the best known and most memorable roles in television history.

According to Falk's A&E Biography, Daryl F. Zanuck told him that he could not be a star because of his eye.

In Economics of Discrimination Gary Becker showed that not discriminating, basing hiring decisions on pure performance criteria, is profit maximizing. Thus, economic justice and the maximization of profit coincide. The individual who best fits the job ought to be hired regardless of race, creed or disability.

The idea that a disabled actor might be best qualified is not intuitively obvious. Human resource management ought to serve the end of rationalization; HR ought to overcome psychological and social biases and develop employment methods that are profit maximizing. This is an ethical quest. However, the rationalism of good human resource management is seldom appreciated because it does not acknowledge the egos of senior managers, who may flatter themselves into believing that their judgment is more reliable than methods that are statistically validated over long periods of time. One example might be not doing something stupid like hiring an actor with a glass eye.

In fact, few American firms utilize human resource management policies that could improve financial performance to the extent that they might. One example is in hiring boards of directors. I have not heard of firms using statistically validated selection methods in hiring boards. The idea is almost never suggested. Yet, current governance problems could be swept away if the current "I shoot pool with a guy so let's put him on the board" approach to corporate governance is replaced by identification of the skills needed; development of ability, knowledge or assessment center tests; and application of those tests to the rational selection of corporate boards.

The equation of justice and ethics has Aristotelian roots and has many links to the Judeo-Christian tradition. In an article in Online Athens Ronald Gerson discusses the ideas of Moses Maimonides, the famous Aristotelian Jewish philosopher, about the rungs of charity:

>"While he emphasizes anonymity in the higher rungs, when he reaches the eighth and highest level, this is what he says: 'The highest form of charity is to strengthen the hand of the poor by giving him a loan, or joining him in partnership, or training him out of his poverty, to help him establish himself.'"

That is, the best form of charity is to enable people to help themselves. This is done by empowering them with competence and the ability to succeed on their own. Good human resource management involves uncovering the competencies that can best support firms' performance; finding most competent employees; and finding ways to enable the most competent employees to flourish.