Games on Networks

Matthew O. Jackson, Yves Zenou, 9 September 2012

Vox readers can download CEPR Discussion Paper 9127 for free here.

Journalists are entitled to free DP downloads on request; please contact pressoffice@cepr.org. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.

URL: www.cepr.org/pubs/dps/DP9127.asp
Topics: Frontiers of economic research, Industrial organisation
Tags: crime, education, unemployment

Reflections on the curious contrast of public policies between Germany and the US: Real estate versus human capital

Joshua Aizenman, Ilan Noy, 25 August 2012

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During the years leading to the global crisis, the US and Germany were the dominant growth poles in the Americas and Europe, respectively (ADD CITE). Their position reflected their growth performance and their dominant size.

Topics: Education, Global crisis, Macroeconomic policy
Tags: education, Germany, global crisis, housing, subprime crisis, US

Finance and the good society: An interview with Nobel laureate Robert Shiller

Robert Shiller interviewed by Romesh Vaitilingam, 14 Oct 2013

Robert Shiller of Yale University has just been awarded the Nobel Memorial Prize in Economic Sciences (with Eugene Fama and Lars Peter Hansen). In this interview recorded in May 2012, he talks to Romesh Vaitilingam about his book, ‘Finance and the Good Society’, which argues that even after the crisis, rather than condemning finance, we need to reclaim it for the common good. They discuss financial innovation, personal morality, the importance of education and the contribution that finance can make to our lives.

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Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today’s interview is with Professor Robert Shiller from Yale University. He and I met in the city of Bristol in the UK in May 2012, where we spoke about his book Finance and the Good Society. The basic theme of the book is the need to democratise finance by making the financial markets work better for everybody.

I began by asking Bob to explain exactly what he means by that.

Robert Shiller: The Occupy Wall Street and Occupy London people say “We are the 99%”. There’s an increasing concern with unequal distribution of wealth, and finance is perceived as the villain in all of this. But I’m thinking it can’t be the villain; finance is a technology that can, if it’s properly applied, help reduce inequality if it’s applied to everyone. So I think that people who are in finance today have a moral obligation to help advance the trend toward democratisation of finance. That means using the principles to really help people.

RV: Could you explain a little bit more on what that means? In the book you use the phrase “finance is about human desires and human possibilities” which is a very powerful sense of being about our deepest wants and what we’re able to achieve. Could you explain how finance helps us to fulfil our desires?

RS: When you think of finance, you come to it thinking “Make money! Get rich!” You should instead think about financing activities, things that people do together that are important to them. Achieving goals that are shared by groups of people. Financing activities is what it’s all about. And the underlying problem is that just about anything that we think is important to do can’t be done by one person. You need groups of people and you need resources, various things that are produced in other countries that would be inputs to your activities. And the organisation generally has to last for years and years to achieve the goal, so it has to have some kind of continuity of support from people and resources. And that support is called financing, so that’s what it’s all about.

RV: Can you give us some specific examples of great innovations, great advances in the technology of finance that have helped society to develop?

RS: There’s a lot of scepticism about financial innovation. Paul Volcker, the former Fed chair, said he couldn’t think of a financial innovation other than the Automatic Teller Machine that gives him cash. He said that about two years ago and it’s been quoted a million times. Even since he said it I can think of a number of innovations. One of them is the benefit corporation, which was created in the United States. The first one was about a year and a half ago.

The benefit corporation is a new kind of corporation that’s halfway between profit and non-profit. It fills a need. The benefit corporation makes profits and distributes them to shareholders just like a for-profit corporation. The only difference is, and this may seem like a small difference to some, the corporate charter specifies a purpose – a social, environmental or charitable purpose – in addition to the profit-making purpose. It doesn’t really clarify how the effort will be divided between the two. Some traditional economists who look at this would say, “This doesn’t make any sense! A company should make profits and be focused on that. If there’s any charity it’ll come after the company distributes the profit to shareholders, and they can do what they want with it, including charity.”

But the problem is, and this is what’s bothering people these days, a strictly for-profit corporation just seems selfish. And it is selfish, because focusing directly on profit is just not humane. I think everyone will feel better about these benefit corporations. They’re just starting up now, only in the US at this point but I think the idea will spread. So that’s one innovation.

The social impact bond, which started also in the last couple of years in the United Kingdom. It’s a bond issued by the government which pays out only if some social goal for the society is met. So, for example, the UK government issued a bond that will pay out in six years if the re-incarceration rate of prisoners released from Peterborough prison falls by 7.5%. A very well-defined goal. They release someone after his term is up and six months later he’s done it again, he’s right back in jail, and they just can’t figure out what to do about that problem. So the social impact bond opens it up to entrepreneurship. They’re finally saying, “We don’t know what to do about this problem. Can somebody out there figure it out?” And anybody who wants to can come in and invest in these bonds and the money goes to, say, working with prisoners, finding them jobs, that sort of thing. But these people know that they will get nothing unless they actually reduce the rate. The idea is that this incentivisation will bring in some diverse new ideas and enthusiasm to fix the problem.

RV: You’ve described a couple of financial innovations that have a really pro-social motivation. But when a lot of people think of financial innovation they think of specific things like collaterised debt obligations and credit default swaps and the kinds of things that people think contributed to the crisis.

RS: Collateralised debt obligations are a source of problems because they were flawed and they did help worsen the crisis. But I think collateralised debt obligations are in the same category as the things I just mentioned. What they do is they make it easier for people to buy a house. What they do is they take mortgages and package them, and then they split them up into tranches, and they have a triple-A tranch which is thought to be safe. It wasn’t, as it turned out, but next time they’ll get the problems ironed out and it will be. So they’re able to get investors investing in the mortgages. The ultimate thing is, and it’s kind of hard to see but it’s real, it ought to bring down the mortgage rate. And that means bringing more people into housing than there could have been. We don’t know who they are, but there are some families living in homes who otherwise couldn’t afford that if there weren’t collateralised debt obligations. I have nothing to do with these people who issue CDOs, and I don’t mean to sound like they did it right, but I don’t think it’s in a different category. I think it’s something that has a social benefit.

RV: Are there different categories? Could you divide financial innovations into productive and not so productive innovations?

RS: Absolutely. I am not saying in this book that everything that happens in the financial world is good. There are plenty of bad things that have happened, and they anger people, and they anger me too. If we stay on mortgages in the United States during the recent financial crisis, many people were lured into mortgages that weren’t right for them. There was a common practice: employers would tell their mortgage counsellors to get the guy into the most expensive mortgage. If this guy qualifies for a lower rate, don’t tell him. And they also said they would give these ‘teaser’ lower rates. They would out-compete the competition by saying, “for two years you have a really low rate”. If they ask, “well what about after two years?” you just brush it aside. And, by the way, they don’t care that when this higher rate comes they won’t be able to pay and will default, because then they’re putting off the mortgage securities under some vulnerable investors and they’re out of there. That was not good, and it’s bordering on criminal. People are justifiably angry about that.

The way we respond to that is regulators, and our regulation of mortgages has tightened up. For example, mortgage brokers were never even licenced in the United States until after the crisis. So you could come right out of Peterborough prison and go in to mortgage broking, and you could lie and no one’s watching you. We’ve corrected that now.

RV: You talk in the book about a certain sense of sleaziness, a sort of inbuilt tendency to dishonesty, or certainly the pursuit of greed in finance.

RS: There is an incentive towards dishonesty. One of the fundamental things, especially when you’re trading, is not to let people know what you know. Keep it a secret. So, for example, Goldman Sachs was selling these Abacus Securities. And they knew that John Paulson, who was the other side of this, had stocked these securities with junk that would likely fail, and Goldman didn’t tell the other side that this was happening. Ultimately Goldman had to pay a settlement of $550m. This was bad practice, and these things happen. That’s why we need regulators and we need industry organisations, and we need people in the industry who voluntarily uphold standards. But of course it slips, and I’m not saying that everyone is nice.

RV: Obviously there have been regulatory efforts made by governments and other public agencies over many, many years, and there have been recent efforts in the wake of the crisis. But there’s always the danger with regulators that they’re behind the curve, they know less, they’re less well paid than the people doing the financial innovations. And there’s the possibility of regulatory capture as well, that they’re taken over.

RS: You’re talking about some genuine and important problems. Fortunately, people are not entirely selfish, and that ought to be obvious. And people will go into regulation out of public spirit. You said that they’re not paid well, and there’s a common assumption that they’re less smart, that the smart people go and become billionaires on Wall Street or in the City but they couldn’t make it so they end up as regulators. I don’t think that’s true. In fact, the same people will go in and out of those jobs. They’ll be on Wall Street, and then they’ll become a regulator.

RV: Is that a good idea? Do you want to have someone from Goldman Sachs moving into a regulatory position? Do you want someone from Goldman Sachs being your Secretary of the Treasury?

RS: Unfortunately those things often make sense. Henry Paulson – not John Paulson – was head of Goldman Sachs and then President George Bush made him Treasury Secretary, and he handled the AIG bankruptcy in a way that benefited Goldman Sachs. You wonder: was that corrupt? It’s not obviously corrupt, and yet I don’t know what happened. I think President Bush may well have done a good thing by putting Paulson in, because the guy’s just financially savvy and he’s doing a million things. I can’t answer whether he was biased and funnelled money to Goldman, but it seems like we have a fundamental dilemma that the financial system represents a complicated technology, and you can’t pick someone who knows nothing about it and put them in as Treasury Secretary. This is a fundamental dilemma in society. People who join professional groups start to identify with them and then start to promote the cause. People are cliquish, this is human nature, they form groups and then they feel loyalty to each other. It feels almost like a moral virtue to be loyal to your professional group. It’s part of the process that generates inequality. But we have other processes that limit it, so there is a sense of public spirit that is very common. People become regulators because they don’t want bad things to happen.

RV: In the wake of the crisis there’s also been talk about finance just being too complicated. Some of these innovations have been too complicated even for the organisations that have made them. So the kind of people who were running organisations, dreaming up new kinds of derivatives, didn’t really understand what was going on. That must be a real problem with financial innovation, that the people in charge don’t really understand the technology that they’re using.

RS: That is a problem, and I would say that it’s a problem with technology in general. When someone designs an airplane, if it gets too complicated then the engineers don’t understand what’s happening. This is to do with systems, so if you’re designing an air traffic control system and it’s too complicated, there’s going to be a catastrophe. But on the other hand I’m thinking that modern civilisation with modern computers can create some pretty complicated things. I’m thinking of, for example, the automobile. It’s got more and more complicated over the years and it’s getting harder and harder for the backyard mechanic who wants to fix the car. So you take it out to a dealer who has a computerised diagnostic system and so on. That’s the kind of society we’re living in. We always have to be mindful of some catastrophe that could result from our not understanding the complexity, definitely. But on the other hand I think we’re on a secure trend to more complexity, and computers are an important reason why we are. Life is going to get more and more complex and specialised, that’s pretty inevitable while civilisation advances.

RV: A number of people recently, including Mervyn King, the Governor of the Bank of England, have made a distinction between what they describe as essential financial services and the sort of exotic work that investment banks are up to. People make this distinction between the utility that finance is and the casino out back with all these people trading and speculating and trying to make money. Do you see any sense in making those distinctions, or do you see the financial world as one thing in which there might be some odd things going on that are not socially desirable?

RS: I don’t really like gambling, personally. I don’t go to casinos. We have a problem that there’s a gambling instinct. People are often bored with life, you go to a humdrum job and you just want some excitement, and there’s this casino and it seems to beckon. That attitude drives people to do all sorts of strange things. The question is: what do we do about that, and how much of a problem is it? It seems to me that we have to leave a little gambling in our lives. Trying to abolish that behaviour is like trying to abolish sex: you’re never going to do it, it’s too hard-wired into our brains. We just have to make a good civilisation. I’m looking for constructive solutions, and I don’t know what constructive solutions people who lament this are pointing to.

RV: I guess they’re thinking that it’s important to protect the savings of the regular person in the retail banks. You let the investment banks go off and do their stuff, but you want some kind of protective firewall.

RS: But you don’t want to make life boring for them, either. Another example of an innovation, which I think is very controversial but which I support, is the crowd funding that was passed by the US Congress that allows websites to raise money for young startup companies. And getting it from a whole crowd, from thousands of people, small amounts from each person, so that people can become venture capitalists. The criticism of this was that someone’s going to get ripped off, someone’s going to blow their whole life savings on such an investment. But the US Congress then just closed that, they said that crowdfunding websites can’t take more than 5% of anyone’s income in total, for all the websites, and they have to manage that. They have to report and prove that they’re not, so it can’t be a disaster. So gambling casinos are alright too, as long as they don’t let you put your whole life savings on. Maybe they do let you do that, so regulation of casinos could be improved too! But you get down to a world where people don’t have to gamble their lives in order to get a little excitement, and let’s try to focus them on doing something constructive.

RV: You’ve alluded a little to the question of personal morality, perhaps we could talk about that in a bit more detail. You raise the issue of whether someone who has a strong personal morality can actually work in finance. You seem to suggest that they can, but what is that relationship between personal morality and the pursuit of financial gain?

RS: We need philosophers, because life puts you in funny situations. You could be a highly moral person and spend your entire life as a rapacious businessperson, and then give it all away to some grand cause. Bill Gates, I don’t know if he was rapacious but some people think he was, was like that. He’s the biggest philanthropist in the world, and is he good or bad? A lot of people used to curse Microsoft because they seemed aggressive, but they never killed anybody and now they’re helping the world in so many ways. So life is like that.

What I tell my students is that you can’t always be doing things that make people like you. You’ve got to get tough sometimes. You have to do things that seem morally ambiguous, but you are the compass. Nobody else is judging. You are the compass of the ultimate story of your life.

RV: Another comment that people have made about the power of finance, certainly in the buildup to the crisis that started in 2007, has been that the industry attracted too many young people. You’ve seen many students go through your classroom, do you get a sense that the kind of rewards that were available in finance, and perhaps to some extent still are, divert too many people into finance?

RS: I know that at Yale University, where I teach, there are a lot of students who are annoyed and angry about other students who go into finance. They think those people have sold out, they’re just going to make money and move into a lifestyle that makes them insensitive to people and arts and culture and all that. I don’t think that’s true, actually. There must be some element of truth to that, but people exaggerate these kinds of ideas. Some people go into finance and then later they become artists. Jeff Koons is the famous example of that, he was a trader and then became a famous artist. It’s a good example because finance is about financing activities, and a person with a mind focused on doing those sorts of things can help the arts, the humanities, the sciences in profound ways. It’s about getting some frustrated scientist or frustrated artist into a position where they’re flourishing in what they do. That’s financing, and so I don’t think there’s any reason to think that people who do that are morally deficient.

RV: Let’s go back to this word ‘democratising’, linking to the process of education that you’re involved with, educating students at Yale. Do you feel in a sense that, to really achieve democratisation of finance, the whole of the public needs to have a better understanding of finance? Or a more general financial education, not just the smart guys who come to your classes at Yale?

RS: I tell my students, and by the way I have students all over the world with the free online lectures, I tell them all that you should have goals in life of your own and I can’t tell you what they are. You should have higher goals, but you should also know about finance because finance is really about making things happen. So for example, you’re walking down the street in your city and you see something, some problem that the mayor ought to really get on to and correct. So you write a letter to the mayor.

On the other hand you could ask to speak to the appropriate manager in the city government and say, “I think our city should issue revenue bonds, raise the cash, spend the money on such-and-such an improvement, and we would be better off.” If you can go in like that rather than just complaining, if you can go in with ideas of how to make it happen; that is, how to finance it, you’re just that much more effective. So what I’ve been saying is that I want people in all the majors at the university to take my course. I want engineers, I want scientists, I want theatre arts majors, I want artists, because you’re condemning yourself to a kind of childlike existence if you don’t know how things get done in our society. It’s so much better if it’s part of your toolbag, just some knowledge of these things.

RV: The case you’re making for the social value of finance is coming at a very difficult time with such a big backlash; you mentioned Occupy Wall Street and Occupy London. It’s a very hard message to get across, what kind of responses are you getting? Are people just laughing and saying, “How can you possibly say this? Look at the people who work in this industry. Look what they’ve done to our lives, look what they’ve done to our world”?

RS: Yeah, I have to get a new spam filter for my email. There are a lot of people who think that I am defending bad behaviour. In no way am I defending corrupt behaviour and my book contains a plea for inclusiveness, that all people are created equal. The criticism that Karl Marx advanced of capitalism, in a nutshell, he said the capitalists dominate because they own the capital. And the other people, the working class, have no access to capital. But as modern society becomes more inclusive, everyone who becomes knowledgeable about finance can have access to capital. You don’t have to be born rich; we have a mechanism that allocates capital, that’s the financial system at its best use. So what you have to know is: how do I get into that? You have to know how you can, for example, develop a business plan and present it to a venture capitalist, and in the modern economies I think they really don’t care what social class you came from. You could be very working-class and, before you know it, you have millions of pounds to allocate, and that is the way that it’s increasingly working. That is the fundamental flaw in Marx’s thinking. He thought that these social classes were permanent and hopeless. We’re learning that it’s not. We should seek more progress, more democratisation of finance in the future.

RV: Final question, Bob. You’re unusual among academic economists in being a prolific writer of books, and you make a remark along those lines at the start of this book, saying that you would like to encourage not just economists but all researchers, all intellectuals to focus more on writing books communicating to a general audience than to writing journal articles. Can you develop that idea of the value of books?

RS: I think that professional journals which publish highly specialised articles are very important, but on the other hand there is also something very important about books that are more general in their focus, and not just as popularisation. A scientist will publish articles about chemistry or something, which the public will never read. Only other chemists will read it. But then he’ll publish a popularisation; chemistry for the masses. And many people think that those are the only two things that he can do: the scientific journals or a popularisation. But I’m thinking that there’s another kind of book that a chemist can write which is more broad-thinking and inductive or inspiring in its approach, but actually would be read both by other chemists and by a broader public. I know that there are many books like that, and I think that it’s a really good thing to read them and to take them seriously.

Academics – especially in the sciences and the social sciences – have got away from book writing. I think it’s turning back, I think publishers are telling me that they’re going back more to writing long, thoughtful books and I really recommend that people take these seriously. The problem is that you’re tempted sometimes to pander to the public, so for example in writing about finance your temptation is to make a scandal sheet, to write about how crooked these guys are and how mad you ought to be. And you just know that that would sell better. That’s not what I’m talking about. I’m talking about sincere authors who are thoughtful. I think they are recognised too. It tends to be at a lower level of sales, but those are the really important books to read.

RV: Bob Shiller, thanks very much.

Topics: Education, Global crisis
Tags: benefit corporations, collaterised debt obligations, education, Finance, financial innovation, social impact bonds

De Jure and de Facto Determinants of Power: Evidence from Mississippi

Graziella Bertocchi, Arcangelo Dimico, 22 July 2012

Vox readers can download CEPR Discussion Paper 9064 for free here.

Journalists are entitled to free DP downloads on request; please contact pressoffice@cepr.org. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.

URL: www.cepr.org/pubs/dps/DP9064.asp
Topics: Politics and economics
Tags: education, institutions, race, voting restrictions

How universities helped transform the medieval world

Davide Cantoni, Noam Yuchtman, 21 May 2012

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How does a new form of knowledge enter the public sphere and what are the consequences for economic activity? Today, thousands of students are pursuing university degrees in biotechnologies and computer sciences in order to enter the high-tech labour force or to become entrepreneurs. Do the institutions that train them generate economic growth?

Topics: Education, Frontiers of economic research
Tags: economic history, education, Middle Ages, university

Cognitive skills, self-control, and life outcomes: The early detection of at-risk youth

Martin Kocher, Daniela Rützler, Matthias Sutter, Stefan Trautmann, 16 April 2012

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Topics: Education
Tags: Childhood development, children, education, self-control

Are economics graduates fit for purpose?

Diane Coyle, 22 February 2012

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One of the consequences of the financial and economic crisis since 2008 has been a re-evaluation of economics itself by at least some of its practitioners.

Topics: Education, Frontiers of economic research, Global crisis
Tags: economics graduates, education

Gender differences in risk aversion: Do single-sex environments affect their development?

Alison Booth, Lina Cardona Sosa, 6 February 2012

Vox readers can download CEPR Discussion Paper 8690 for free here

Journalists are entitled to free DP downloads on request; please contact pressoffice@cepr.org. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.

URL: http://www.cepr.org/DP8690
Topics: Education, Labour markets
Tags: education, gender equality, risk aversion

Lawrence Summers and the uselessness of learning foreign languages

Victor Ginsburgh, 8 February 2012

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“I don't speak English. Kurdish I speak, and Turkish, and gypsy language. But I don't speak barbarian languages.”

“Barbarian languages?”

“English! German! Ya! French! All the barbarian”.

—Yasar Kemal, a Turkish writer whose words are quoted by Paul Theroux in The Great Railway Bazaar

Topics: Education, Politics and economics
Tags: education, English, globalisation, language skills

Education and economic development: Evidence from the Industrial Revolution

Sascha O Becker interviewed by Romesh Vaitilingam, 13 Jan 2012

Sascha Becker of the University of Warwick talks to Romesh Vaitilingam about his research on the important role that formal education played in facilitating industrialisation in nineteenth century Prussia. They also discuss the relationship between education and fertility, and historical evidence in support of ‘unified growth theory’. The interview was recorded in August 2010.

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Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with the economic historian, Professor Sascha Becker, deputy director of the Centre for Competitive Advantage in the Global Economy at the University of Warwick. We talked about Sascha's research on the importance of education in driving economic development in the Industrial Revolution.

Professor Sascha Becker: So when studying the existing literature on the Industrial Revolution, the thing we noticed is that there is quite a lot of work looking at England and how England industrialized, and most of that work concentrates on the textile sector. Much less work has been done with data that really covers large parts of the country, in continental Europe, and in particular in Prussia, which was one of the first countries on the continent to industrialize. We were kind of wondering how the industrialization there got going and whether education, which nowadays people see as very important to growth and development, had any impact on the adoption of these new technologies that were developed in England. What we found also with the literature on England is that there, people typically don't find education to be a key driver of industrialization, which is kind of puzzling.

But then, when you look more in detail of how these results come about, then the findings are often at a relatively local level. People look at how industrialization got going in Lancashire and Shropshire and have less of a comparison regionally whether areas that had lower literacy levels in, say, the northeast of England would industrialize later also because of these lower literacy levels.

In the Prussian context, we are in the fortunate situation that since the industrialization there started later due to, amongst other, wars the Napoleonic Wars, et cetera, in Prussia industrialization starts after a statistical office has been founded, so that there we are in the fortunate situation that we can look before the industrialization, something we cannot really do with good data in the English context.

So what we did is we got hold of the first census that was ever done in Prussia, in 1816, where we have, for more than 300 counties, information on school enrollment rates. So we know how many kids went to school in the age bracket 6 to 14, which, on paper, was compulsory schooling age. Or let's say there was a recommendation that kids should go to school, but it was not really strictly enforced, so that in some areas there was more of an effort to send kids to school than in others.

So that then, when we look in the middle of the century, around 1850, where we have the first factory census, so we can count how many people work in different kinds of factories, whether those counties where literacy rates were higher or where school enrollment rates were higher were those that had higher rates of industrialization in the middle of the century. We do find these effects, so that higher literacy rates in 1816 matter for industrialization in the middle of the century.

What we also can do, because the data is pretty detailed, is that we can split up the sectors into textiles, metal, fabrication, and all other sectors, which includes stuff like paper, wood, rubber, kind of sectors. And, similar to what people find for England, we do not find education to matter in the textile sector, but it does matter in the other sectors. A little less so in the metal sector, which is also pretty much resource dependent, you can only produce relatively low cost metal kind of fabrics if you have the related primary resources there. Whereas all other sectors that don't depend either on sheep or on metals in the ground, education is a key driver of developing those sectors.

Romesh: How do you think the link actually happens between education and industrialization? Is there some issue around having people who are well educated who are able to work in these industries? Or is there some issue of, in a sense, that the Industrial Revolution started in Britain and there might have been some ability to access some of that know how - that R&D, if you like – and then implement it in Germany?

Sascha: So on that, we think about several possible channels, but data wise we can't pin them down, so we can't say the share going to this particular channel is so and so. But the possible channels we think about is that, on the one hand, the probability of having an entrepreneur, of someone who is driven to develop something and of someone inventing something, is higher the more educated the population is. So, just probabilistically, the likelihood of having a good entrepreneur, an inventor around is higher if you have more educated people. Then, also, reading and writing was probably key to being able to read manuals for these machines. So, very often, machines were shipped over from England and were brought to Prussia. And then you needed people to run them and to really be able to understand also how to fix them when they are broken, and there literacy came in as being important.

But also, literacy was probably key in supplementary sectors, like accountancy, that were key in getting these factories going.

Romesh: In the case of Britain, do you think it's just been a lack of data that we haven't been able to find this link? Or do you think there might have been a difference there in that Britain was the first industrializing country, whereas Prussia was coming along, following on in its wake?

Sascha: So, theoretically, some people say that there is a difference between being the leader and the follower. So we also, in our work, say that there are models where people describe that adopting existing technologies requires relatively basic education, like reading and writing whereas inventing requires the super brain who comes up with a new spinning jenny, a new machine, that kind of type. And in the Prussian context, you only have to be able to adopt that which was already out there. In terms of data, yes, I think the fact that people concentrated on textiles where textiles were, in a sense, a sector where the transition was somewhat smoother. What we also find in the Prussian context is, in the factory data, they have information about people who work at machines, but you still have hand driven looms in the factory. So people would, at some point, move out of their homes, where they would weave, and go to the factories and be side by side to people who operate the machine.

So this sector, in a sense, had a smoother transition, where people learned more, on a step by step basis, these new technologies, whereas it might have been more disruptive in other sectors. In the English context, I recently talked quite a bit with Bob Allen in Oxford, and he says, also, there education may be more at work than we realize so far. So he gives the example of Lancashire, where he says, "Why is it that Lancashire was one of the first areas to industrialize?"

And it turns out, when you go back some centuries, that Lancashire was the hub of the clock making industry. And this knowledge that people had built up, of being able to work with little gears and mechanics, was helpful then, also, to build larger machines. Of course, then you can go back even further and ask, "So why was it that the clock making industry set up there in 1500?"

But then we end up with Adam and Eve. But also there, a bit, the idea is that education was there. There was some human capital that was useful, then, to get industrialized processes going.

Romesh: You've established a clear link between education and industrialization in Prussia, but you're carrying on with this research program. What are the kinds of issues you're looking at in your further work on this data?

Sascha: So, we have looked at other issues that go away from the industrialization in the stricter sense, where we look at the trade off between education and fertility. So, in modern day research, people tend to find, in developing countries, that at some point families have to choose whether they want to have more kids and have too little money to give all of them good education, or to have fewer kids but send them to Harvard. And this is, to some extent, a modern idea, and many historians reject that this kind of trade off was going on in earlier periods of history. And we were interested in seeing whether, maybe already in the 19th century, parents were trading off the quantity and quality of children. This actually has some theoretical background, because of the work that has been done by Oded Galor and co authors on the so called “unified growth theory” tries to explain the development, from the early days up to today, now in a unified framework. Earlier on, people said we had a period in which there was essentially no growth, then the Industrial Revolution came in and suddenly economies in Western Europe started growing. And what Oded Galor and co authors try to say, that this was an evolutionary process that was smoothly gaining ground.

And one key element there is demographics. So, they brought into the whole growth literature the idea that fertility rates matter and the way people also trade off education and fertility. And that's what we then look at, also, with this Prussian data, again, looking at the county level and knowing how many children females gave birth to, and how high the enrollment rates in school were. And we do see the same trade off there that we find in modern day data, so that is the nice piece of evidence that sustains the arguments made in the theoretical literature.

Romesh: Final question, Sascha. As you mentioned, the pressure on developing countries these days is always "Invest in education. Invest in human capital. That is the way to growth." As you mentioned, the English data maybe questions that. Your data seems to suggest that that is a very good idea. What's your perspective on the light that your work can shed on this modern day debate for developing countries?

Sascha: Well, I'm always very reserved when it comes to drawing bold conclusions out of restricted work that I do, but I personally am surprised in how many different contexts, both in modern data and in history, you find education to matter. And this earlier work, where we traced down the developments also across the German lands to the Reformation, where Martin Luther wanted people to read the Bible, and that was kind of a key driver to push in Protestant areas, the first schooling efforts.

And you find those areas that became Protestant earlier on to have higher development levels even today, so after 500 years. And I find it quite striking how important it is. And these effects may sometimes take a while to really take off, but in the long run, they have such a huge effect that it is unwise to stop education efforts today, even if you don't see the immediate payoff. But it does matter so much in the long run.

Romesh: Sascha Becker, thank you very much.

Topics: Development, Economic history, Education
Tags: education, fertility, industrialisation, unified growth theory

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