Education and the Zoo Economy

Capitalism is supposed to be a jungle. The state is trying to make it a zoo...

WE WITNESSED exactly how state-managed capitalism works back in 2008 when the financial crisis hit. Favored companies are allowed to make as much money as they can. But they are protected from going broke, writes Bill Bonner, founder of the Daily Reckoning.

Certain firms are deemed "too big to fail," by virtue of the key role they play in the economy, or at least by the role they play in a politician's plans for re-election or future employment. But state-managed capitalism is very different from the real thing. It is capitalism in a degenerate form.

Real capitalism progresses in fits and starts, described by Josef Schumpeter as "creative destruction." It is like a jungle...not like a zoo. It cannot be managed. You cannot take out the predators or feed selected species without upsetting the balance of nature. Take out the destruction, and you block the creative process too.

Since the beginning of the Industrial Revolution, most real wealth has come from real capitalism. Not from "playing the market." Not from getting a good job. Not by trying to cadge favors from the government.

So, what is real capitalism? It is what we've seen in the computer/Internet industry over the last 20 years. This was a new industry. It had not yet been tamed by the government. Regulations were few. There were no large, entrenched companies to block start-ups. There were no lobbyists to curry favor from the politicians. There were no subsidies...and no barriers. It was young, dynamic, chaotic...and very prone to blow-ups.

The whole industry blew up in January 2000. Mistakes were not bailed out. They were corrected. Money moved from weak hands to strong ones. Many companies failed. The companies that survived, and prospered...went on to glory. Amazon. Google. Microsoft. Apple.

And who was behind these new companies? College drop-outs, computer nerds, products of teenage mothers and broken marriages. They did not enter the ranks of existing technology companies, work their way up to senior management and then create new product lines. It is almost as if they succeeded not because of advanced American capitalism, but in spite of it. They created an entirely new industry...with new companies nobody had ever heard of. And then, they destroyed some of the biggest businesses in America.

Typically, in a correction, asset prices fall and unemployment goes up. Misallocated resources — including labor — needs to be re-priced and put back to work. But when markets are not allowed to work the bid and ask spread in the labor market it can stay out of whack for years. Joblessness becomes a structural problem, not a cyclical problem. People do not find new jobs. Old businesses are not swept away and new businesses do not start up.

A zoo economy keeps the old animals alive as long as possible.

Let's look at education. Now, there's an industry — we can all agree — that adds value. You could look at it as a charitable activity. Or as a profit-making business. Either way, education has to be a plus for the individual and for the society, right?

Wrong on both points. Education is only a benefit when freely floating prices are allowed to determine what it is worth. First, let us look at the whole industry. Since the 1960s spending on education, in raw terms, in per capita terms, in terms adjusted for inflation, has soared. From the 1930s, when the first careful records were compiled, to the 1990s, real spending on education multiplied 5 times per student. It more than doubled from the '60s.

Did this increase in spending do any good? Not on the available evidence. Test scores — measuring achievement — have not budged in 40 years. In other words, the additional investment over the last 40 years has been wasted. We might as well have thrown the money down a well.

But while tests of achievement have not moved...the tests of potential achievement have improved. For whatever reason, IQ tests and SAT tests show young people are getting smarter...or better able to take the tests. This may seem like good news. But not when it is set alongside the performance tests. What we see is that the investment in education over the last 4 decades has actually had a negative return. The raw material was better able to learn. But the investment in the teaching industry produced less in the way of actual learning.

Today, the US stands out for its educational spending, as it does for the bombs it makes and the drugs it distributes — it is on the top of the heap, by a wide margin. Spending per school aged child in the US is about $8,000 per year. In Japan, it is half that. France is in-between with about $6,000 spent per child per year.

Which country has the best scores? The one that spends the least — Japan. On math tests, Americans score 474 (out of 600). The French do a little better at 495. And the Japanese get a score of 523.

Science, the same thing. US students get an average score of 489. Japanese students are at 531.

There is nothing very surprising about these figures. Nearly thirty years ago, American researchers found that there was no connection between spending and educational results. They just looked at different school districts in the US. Spending was not correlated with results, they concluded.

And yet, studies continue to show that people with more education do better in life. We doubt these studies have much validity, at least as interpreted. It is surely true that people with a lot of education have lower unemployment levels and higher incomes, statistically, than those with little formal schooling. But we have no way of knowing whether any individual student would have been better staying in school...or dropping out like Steve Jobs or Bill Gates.

But we will take a guess: the typical young person would be better off getting out in to the real world and learning as much as possible from working, than he would by staying in school. After all, that's how almost all the world's great geniuses, inventors, scholars, and entrepreneurs learned. It has only been in the last 100 years that public education has been ubiquitous...and only in the last half a century that ordinary people felt they should go to college. But as more people went to college, the less dynamic...less creative...and less productive the US economy became.

The education industry has been corrupted by too much easy money. It is now zombified. Sclerotic. And parasitic. It now subtracts value. It takes valuable resources...not the least of which are the minds and bodies of people at their most energetic stage in life...and squanders them, making us all poorer.

Still, parents are terrified of the idea that their children may not get the "education that they need" and may be condemned forever to the lower rungs of the socio-economic ladder. The unemployment rate for college graduates, for example, is only half that of the rate for the rest of the population — less than 5%, even in the high-unemployment slump since 2008. Parents are afraid an uneducated child will not only be a failure, but will be forced by joblessness and poverty to move back in with mom and dad.

Yes, they will tell you, a degree from a Podunk University in the Midwest maybe be worthless. But get a degree from Harvard or Yale and you are on the train to status and prosperity. They are prepared to mortgage the house...and take out hundreds of thousands in student loans to buy the kid a ticket.

And they may be right. But only because the whole society has been corrupted by the same zombie virus. It has shifted the economy from one that cares if you can produce...to one that cares if your papers are in order. A small businessman will not particularly care if you have a college degree or not. He only cares if you can do the job. But big government and the big businesses it manages are different. They use education as a qualifier. Anyone who can sit still in class for 16 years — without questioning the nonsense that passes for knowledge — is a good candidate for bureaucracy.

What have been the growth industries of the last 10 years? Government is the main one. Obviously, government doesn't care if you can produce or not. Who's measuring? Its output is un-priced. Who's to know if you handled your paperwork well...or made the right decision? Likewise, in the education industry, who's to know if you are productive? What does it mean to be productive? Imagine that you have a job at a major university. You are an assistant director of its Local Community Outreach Program...or its Special Gender Enabling Group...or even its Career Placement Office. Who's to know...or care...if you are doing a good job? All you have to do is to look and act in a presentable professional way. The rest is BS.

In the absence of any market-based test, you can get away with anything. All you need is a bright smile and a good line of talk. And a college degree, of course!

In non-market sectors, mistakes are eventually corrected, but only...like the Soviet Union...after decades of misery, and a final breakdown or revolution. In the meantime, the mistakes compound. The education industry takes more and more of the national resources while producing less and less real output. And if you want a job, you are better off as a well-credentialed zombie than as an energetic (often disruptive) producer.

But what if you were to start up a new business...a private school, with a clear profit-oriented, market priced output? With modern e-learning tools, you could reduce the cost of a real university education, to a fraction of the price people currently pay.

Mr. David Van Zandt of the New School in New York:

"I apologize to anyone here from Nebraska, but there is no reason to teach introductory chemistry in Nebraska in a classroom of 500 students. Not when you can pump in, say, someone from Harvard," to give the lecture on video.

It is just a matter of time before the cushy, over-rich education industry meets destruction at the hands of new technology and new entrepreneurs. But don't expect it to go gently into that good night. It has lobbyists by the score. It has money by the billions. It has its men and women in Washington...who will continue rewarding the failed, zombie schools, while regulating, squeezing out and crushing start-up competition.

That's why, sometimes, it takes a revolution.

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Bill Bonner is founder and owner of Agora Inc., one of America's largest consumer newsletter publishers. Best-selling author and globe-trotting correspondent since 1999 for the Daily Reckoning email, he is chairman of family-wealth advisory Bonner & Partners, and co-author with his son Will of Family Fortunes: How to Build Family Wealth and Hold Onto It for 100 Years (Wiley, 2012).

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