23 Things They Don't Tell You About Capitalism

Now, with the increasing emphasis on higher education in the recent period, an unhealthy dynamic has been established for higher education in many high-income and upper-middle-income countries that can afford to expand universities (Switzerland has not been immune to this, as figures above suggest). Once the proportion of people going to university goes over a critical threshold, people have togo to university in order to get a decent job. When, say, 50 per cent of the population goes to university, not going to university is implicitly declaring that you are in the bottom half of the ability distribution, which is not the greatest way to start your job search. So, people go to university, fully knowing that they will ‘waste time’ studying things that they will never need for their work. With everyone wanting to go to university, the demand for higher education increases, which then leads to the supply of more university places, which raises university enrolment rate further, increasing the pressure to go to university even more. Over time, this leads to a process of degree inflation. Now that ‘everyone’ has a university degree, you have to do a master’s, or even a PhD, in order to stand out, even if the productivity content of those further degrees may be minimal for your future jobs.

Given that Switzerland was until the mid 1990s able to maintain one of the highest national productivities in the world with a university enrolment of 10–15 per cent, we could say that enrolment rates much higher than that are really unnecessary. Even if we accept that skills requirement has risen so much with the rise of the knowledge economy that the 40-plus per cent enrolment rate that Switzerland now has is the minimum (which I seriously doubt), this still means that at least half of university education in countries such as the US, Korea and Finland is ‘wasted’ in the essentially zero-sum game of sorting. The higher education system in these countries has become like a theatre in which some people decided to stand to get a better view, prompting others behind them to stand. Once enough people stand, everyone has to stand, which means that no one is getting a better view, while everyone has become more uncomfortable.

Education vs. enterprise

If not just basic education but also higher education does not matter so much in determining a nation’s prosperity, we must seriously rethink the role of education in our economy.

In the case of rich countries, their obsession with higher education has to be tamed. This obsession has led to unhealthy degree inflation and the consequent over-investment of huge scale in higher education in many countries. I am not against countries having a very high – or even 100 per cent – university enrolment rate for other reasons, but they should not delude themselves into believing that it would have a significant productivity effect.

In the case of developing countries, an even more radical change of perspective is needed. While they should expand education in order to prepare their youngsters for a more meaningful life, when it comes to the question of productivity increase, these countries need to look beyond the education of individuals and pay more attention to building the right institutions and organizations for productivity growth.

What really distinguishes the rich countries from the poorer ones is much less how well educated their individual citizens are than how well their citizens are organized into collective entities with high productivity – be that giant firms such as Boeing or Volkswagen or the smaller world-class firms of Switzerland and Italy (see Thing 15). Development of such firms needs to be supported by a range of institutions that encourage investment and risk-taking – a trade regime that protects and nurtures firms in ‘infant industries’ (see Things 7 and 12), a financial system that provides ‘patient capital’ necessary for long-term productivity-enhancing investments (see Thing 2), institutions that provide second chances for both the capitalists (a good bankruptcy law) and for the workers (a good welfare state) (see Thing 21), public subsidies and regulation regarding R&D and training (see Things 18 and 19), and so on.

Education is valuable, but its main value is not in raising productivity. It lies in its ability to help us develop our potentials and live a more fulfilling and independent life. If we expanded education in the belief that it will make our economies richer, we will be sorely disappointed, for the link between education and national productivity is rather tenuous and complicated. Our overenthusiasm with education should be tamed, and, especially in developing countries, far greater attention needs to be paid to the issue of establishing and upgrading productive enterprises and institutions that support them.