Why knowledge and ignorance are not always moving in opposite directions

Last night, the news showed a group of climate change activists blocking traffic in Oxford Circus causing havoc, while a tv commentator was saying that if instead of disturbing the shoppers, which did not improve climate, the protesters had instead persuaded the shoppers to stop eating meat they would be contributing to improve the climate.

The level of silliness shown by the protesters and the commentator could be looked at with benevolence and a smile if they were from a primitive tribe dancing or fasting to ask the gods for rain. But, in XXI London, where most population is well educated and there are some top universities this seems at odds with normal expectations.

Unfortunately, this is not an isolated case and we see a rise of such phenomenon worldwide in many other spheres. For instance, in politics one of the most advanced democracies elected one of the stupidest presidents. But, interestingly, this president now plays the role of the child shouting “the king is naked” in relation to the climate change activists.

So, why aren’t science and ignorance moving always in opposite directions?

There are at least two reasons for that.

First, just because we now know how to develop models showing how the movement of a butterfly in Asia can cause a hurricane in the Caribbean, it does not follow that there is significant chance of that happening. That is, simple minded people are prone to confuse theoretical possibilities with likely occurrences.

Second, humans seem to have a need to stand out in a crowd. This is now exacerbated by social media. And, if someone gets recognition by an exotic behaviour or stance others immediately follow a similar conduct. Again, politics gives us a good example. The rise of a silly Trump was not followed by the rise of a wise Democrat but by the emergence of an equally foolish representative Ocasio-Cortez.

Should wise people despair because we live in such a world? Of course not. The voyage of humankind from primitive predators to civilized people is a long journey on a tortuous road. We simply need to avoid crashing out while enjoying the diversity.

Human capital and social mobility

In general, capitalism is based on meritocracy. For instance, paternal earnings had the least effect on sons’ earnings in Canada, Norway, Finland, and Denmark, where less than 20 percent of income advantages were passed onto children (Isaacs, 2008). However, there are concerns that this does not apply across the board (e.g. the USA, UK and Italy have low mobility) and that mobility is mostly determined by the parents education.

Yet, there are also concerns that under capitalism markets do not work well for long term human capital investment.

For instance, some professionals see their investment in training destroyed because of supply and demand mismatches. This happens to many graduates who end up in low skill jobs. This mismatch between qualifications and job opportunities may be specific to some markets or may be the result of cyclical trends, but it is not a feature of capitalism.

Markets with a permanent excess supply of labor are usually found in industries with winner-takes-all business models. For instance, in the entertainment industry there are only a limited number of slots for handsomely paid super-stars, which act as a magnet to the many candidates to win the super-star lottery. The consequence is that most of the runners-up end up working in bars or McDonald’s, thus losing the investment they made in art school.

Changes in cyclical trends are also significant and can be illustrated by teachers. The demand for teachers depends on population growth with demographic cycles usually long but, occasionally, suddenly shifted by migratory flows or changes in enrollment policies that cause large mismatches in demand that cannot be corrected quickly.

For instance, the baby boom of the 1950s and the economic growth in the 1960s generated an impressive growth in the population of schooling age and enrollment rates. However, the subsequent decline in fertility rates had the opposite effect. It had a dramatic effect on the employment and earnings of teachers who, starting from a position of high social status, ended up unemployed or in a low-status low-wage sector. That is, their investment with a view to social climbing through education had a negative return.

Although the return on education depends on many factors, including parenting, it is obvious that the laws of supply and demand influence the income and status of the various professions which are subject to rotation in status. This flexibility is required by competitive markets but it affects differently the various professions.

For example, if someone trains to be a sales representative in one industry and that industry shrinks he or she can still move to another industry because his qualifications are not specific to that industry. That is not the case in highly specialized jobs. These have a higher risk of becoming obsolete or requiring extremely high costs of retraining.

However, while free competition may increase the risk of human capital obsolescence it also increases the opportunities for more investment in human capital, and the later exceeds by far the first. Moreover, the impact of free competition on human capital is probably less than that of technology and demography.

In conclusion, capitalism may be disruptive in relation to returns on human capital and social mobility, but it is not a major cause on the inequality of individual returns. On the contrary, it is a driving force in the promotion of equality of opportunities.

Luck, merit and hard work

The ethics of capitalism can also be examined in relation to how it rewards individual luck, merit and hard work. Like in many other human activities, success in business results from a mix of luck, merit and work. There are always many that work hard and skillfully but who are unlucky in their ventures while many lazy and inept succeed through sheer luck.

Obviously capitalism does not determine luck. One either has it or not. However, capitalism raises the number of lucky opportunities available as well as our ability to profit from them when they come our way. Because capitalism is based on the principle of free entry (free markets), when one “strikes gold” nobody has the right to take it a away (private property rights) or to prevent its exploitation (rule of law). Moreover, if some do not have the necessary resources to dig it up they may use those of other passive capitalist.

One aspect about luck that cannot be corrected by capitalism is its reproduction and access. For instance, knowing the right people is often the best way to find the best opportunities. So, if one is born in a family of business people he or she is more likely to become aware of such opportunities. However, being rich also brings in many distractions and that partly explains why many business dynasties rarely go beyond the third generation. Overall, the small hereditary bias in luck it is not enough to deny the neutrality of capitalism in relation to luck.

Despite its few limitations capitalism is broadly a meritocratic system. Even if you do not have the required skills you may always bid for other people’s talent. And, should one fail to do so someone else will step in and force you out of the game.

However, capitalism is not a jungle where the strongest prevails in the fight for talent or hard work. By upholding the principle of free contracting, labor and capital usually negotiate long term work contracts rather than opting for piece rate pay. Indeed, this choice is based on calculated self-interest and is not necessarily the result of government imposition.

However, in the case of handicapped workers and less qualified workers there are circumstances when it would not be profitable to employ them even if they were willing to work as slaves. Such cases represent a market failure that needs to be corrected through subsidization or government employment.

With technical progress the number of tasks requiring high qualifications increases while those less demanding in skills are declining in relative terms. Thus access to education is of paramount importance in a capitalist system. The system can be trusted to produce efficiently the necessary qualifications but it cannot ensure equal opportunities in access to education, especially for advanced levels.

Given the importance that education has as a screening device for the top jobs it is normal that those with more resources use all kinds of aid to secure a top school for their children. This ranges from private tuition to crammer schools which are not available to the less favored. Nevertheless, provided that there is a market for student financing and that schools compete for bright students (whether they are poor or rich), those from disfavored families may still secure a place in top institutions.

In what concerns fair promotions and rewards for merit and hard work these are secured under capitalism by giving workers the freedom to change employers. Although there are many instances of nepotism in relation to family and favorites this cannot be extensive, otherwise firms will not be able to maximize profits and stay competitive.

There are however cases where in the short run it would be profit maximizing to lead workers to work to death. This was initially feared given the poor working conditions in the early days of the industrial revolution and because capitalists did not own the workers. However, history has shown that it would be counterproductive since in-the-job training and the costs of hiring would make such behavior untenable.

Indeed, a dramatic example of working slave labor to death was carried out in German and Japanese concentration camps during World War II and proved them to be both inefficient and resisted by some company managers. Obviously in a free labor market, as required by capitalism, workers themselves would not accept that.

Yet, there are industries (e.g. law, auditing and finance) where greed may lead professionals to accept overworking in return for a high compensation and the opportunity of retiring rich at an early age. It is interesting to note that such practices are more common on partnerships than on corporations. That is, the pursuit of profit under overworking conditions is not profitable in the typical capitalist firms - joint stock companies.

In conclusion, despite some early abuses, capitalism turned out to be the closest we got to a meritocracy, rewarding hard work and creating a level playing field to take advantage of one’s luck.

Personality and Productivity

In a recent book Susan Cain tries to rebalance the current obsession with extrovert personalities, by illustrating “the Power of Introverts in a World That Can't Stop Talking”.

Just as the fashion industry has been promoting a major slimming industry by employing only skinny models, the entertainment business is creating a similar big business in personality spinning through self-help books and coaching seminars on assertiveness, social skills, team playing and many other activities aimed at making us all extroverts.

There is nothing wrong with the extroversion and slimming industries as long as they profit from such passing fads and illusions without damaging our health. However, Cain claims that contrary to conventional wisdom introverts are in fact significantly more productive and creative than extroverts. Therefore, if that is true, the current bias in educational pedagogy to promote extroversion through group work and other socializing techniques might threaten our children´s future productivity.

Nevertheless, from my personal experience, I am inclined to favor the hypothesis that personality has little or no role in explaining individual productivity in most professions (with the obvious exception of showbiz). And, this might be so regardless of whether higher individual productivity is achieved by effort (endurance) or creativity (entrepreneurship).

So, until psychologists and biologists provide us with sufficient data on the link between productivity and personality the jury is still out to decide on this matter, and parents and educators should be careful about embarking on fads to manipulate personality in whatever direction they like more. Education is more about diversity than conformity.

University Men in Business

University Men in Business was the topic of one of the earliest radio broadcasts by John Maynard Keynes in 1927. Obviously, the much discussed and little understood relation between Universities and Business is an ever-lasting theme. The talk was moderated by Sir Ernest Benn, a business man who had not attended University. The two discussants were Mr. Walls, the Managing Director of Lever Bros Ltd, who had attended University and Mr. Keynes of Cambridge University.

After an introduction by Sir Benn, where he made a distinction between education and instruction, here are some interesting extracts of what they said:

Mr. Walls: Universities can help us in business … making the career of business more of a profession than it is today. … Today it is expected that an undergraduate … will leap straight from the university into business and settle down immediately into it. No one expects the same thing of a lawyer or any other professional man (clergy, doctors, etc.).

Business calls for a professionally trained business man and the question is: Can the universities provide him in the same way that they have successfully supplied the older professions?

Mr. Keynes: The men whom the universities have supplied to the business world in the past have belonged to two quite distinct types.

There are first of all the sons of wealthy business parents … they will, at the end of it all, find a safe berth in the family business or in some other concern where the family has influence. … The degree he takes will not be much scrutinized. For him, the university is a pleasant and delightful interlude without much serious bearing in his future career.

The other type consists of undergraduates with no family or other influence in the business world, who are faced with the necessity of earning a living immediately after the conclusion of their university career, and have nothing but themselves to depend upon. These young men are naturally, as a rule, pretty serious workers.

Now, in the past, the majority of university men in business have belonged as a rule to the first type. … I fancy, however, that the other type … is going to become increasingly important.

[Blogger comment: How much has this ratio changed?]

Mr. Walls: What I would be interested to know is what kind of vocational training, if any, followed the university course in these cases.

Mr. Keynes: it is a mistake for the universities to attempt vocational training. Their business is to develop a man’s intelligence and character in such a way that he can pick up relatively quickly the special details of that business he turns to subsequently. … special training … can only be taught by business men to business men.

[Blogger comment: Where are we now on this endless dispute?]

Note: The full transcript can be found in: Keynes on the Wireless, Edited by Donald Moggridge