Where is the Economy Headed?

By Paul J. Updike

INTRODUCTION

What are we looking for when we analyze economic indicators? What is the point? Do we want prosperity, the entire society to get richer, and the national economic pie to grow larger? Yes, by today’s standards, that is exactly what we want. Why? The second paragraph of the U.S. Constitution says "… certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness." A wise person once said, "money may not buy happiness, but money sure makes the pursuit of money more enjoyable." (Anonymous)

I contend that a major factor involved in the growth and prosperity of a nation today is whether or not the culture within that nation encourages and rewards the acquisition of knowledge. What I mean by knowledge comprises a broad definition, including manufacturing skills, know-how, an ability to learn by doing (combined with leading-edge knowledge gained from intense investigation and success), various technology mastery, combined with the knowledge gained of which college Bachelors, Masters and PhD degrees are usually good indicators. For instance, this broad definition of knowledge includes the information that the human genome project (DNA) provided the world.

If the educational framework within a country allows sufficient positive incentive (read: economic profit) to acquire research and development skills, then a country can improve the human capital side of the labor factor of production. (Colander, Microeconomics, 4th Edition, Chapter 8) Therefore, knowledge can enhance the added value of the labor factor many, many times.

The purpose of this article is to provide the reader a richer understanding of exactly how productive output may be augmented by improvements to the human capital side of the labor factor of production. Some of these improvements are directly related to what we mean when we measure an improvement in productivity, or more output for less or the same cost.

The reason economic indicators and economic forecasting are used is to provide us a glimpse into short-term future probabilities. My contention is that instead of worrying too much about short-term economic forecasts though, we will have the greatest impact on long-term future economic health by focusing on the acquisition of real knowledge among our nation’s citizens. 

ECONOMIC PROSPERITY

As Colander indicates in Chapter 18 of his textbook Microeconomics, 4th edition, the main purpose of the university is to teach those who come to learn how to ask better questions, not simply to memorize answers.

Economically speaking, the best of all worlds would be a combination of relatively low interest rates, relatively low unemployment, relatively low inflation (including low future inflation expectations) and high productivity. That economic picture describes America in the second half of the 1990s decade and again from 2003 to 2007. For several reasons, that specific situation in America may not be sustainable. However, this positive economic combination is still highly desirable.

PURSUING KNOWLEDGE

In order for a country to gain and sustain economic prosperity, that nation must make the pursuit and acquisition of knowledge a value to the citizens of that nation. In other words, the adult population of that nation must perceive that gaining and learning new information and new skills is a benefit worth the cost. Unfortunately, the pursuit of knowledge that makes real differences to a nation’s economic well-being is not short-term. In fact, a real difference may take a decade or two to show up.

Since the mid-1970s, much of the growth of the global economy, besides coming from America, has come from Asian countries. South Korea, Taiwan, Singapore and Hong Kong even earned a nickname in the 1980s, the ‘Little Tigers’. What is it about Asian countries that allows for and encourages growth? I suspect that it is not a specific form of government. I also do not believe that long-term economic growth is related to favorable geography. As a matter of fact, natural resources such as oil, gold, and diamonds are much more plentiful in Middle-Eastern and African countries, even though economic growth has not been a long-term visitor to almost any of the countries found in these areas.

In my opinion, the main favorable difference of the Asian countries is that education is prized in Taiwan, South Korea, India, Singapore, Hong Kong, Japan and China. The acquisition of an education is highly valued by the majority of the adult population of those countries. Many countries of the world make their opinions known, because approximately 25% of the approximately 400,000 students in American graduate schools are foreigners. (See link below http://www.nsf.gov/sbe/srs/databrf/sdb99316.htm).

Many of these foreign graduate students eventually become American citizens, which ultimately adds to the American economic labor pool, and to America’s long-term economic health, instead of to the foreign country from which they came.

However, many of these Asian countries are aware that many American graduate students do not return. Therefore, these countries have improved their own country’s graduate school offerings.

In 2002 there is something like 1.5 times more Chinese (from mainland China) university graduate students around the world, including those in America, and China, than the total graduate students in American Universities. Many of these Chinese students are pursuing graduate degrees in science and technology. (http://www.chinatoday.com/edu/a.htm)

WHY SCIENCE & TECHNOLOGY DEGREES?

One of the main sources of economic growth is technological development. (Colander, p186) Technological development regularly lowers the economic costs of production inputs while raising the number of output units being produced. This is the classic definition of productivity.

One of the major contributors to the improved economic situation in America in the 1990s and early 2000s was the Internet. The Internet is a technological wonder. What the Internet has done to the American economy is to speed up the process of disintermediation. This word means doing away with the middleman, especially the financial middleman -- which process lowers costs and raises output - significant productivity increases - over and over again.

In America in the late 1990s, this disintermediation process went forward in a big way. One of the causes of the dot.com bubble was billions and billions of dollars spent trying to capitalize on this process by buying shares in business models that ultimately did not work. (Bad business models are the major reason that the bubble burst, not that the promise of disintermediation was false).

But as buyers of Amazon’s offerings or eBay’s offerings can testify, the process of disintermediation does work, when the business model works. Please notice that Wal-Mart did not give up on its Web Site and has no intention of doing that. Please also notice that the Internet is still growing.

One of the reasons that the University of Phoenix (UOP) has grown into the largest private university in America is that their business model for Online adult learning also works. In my opinion, one of the biggest contributors to the success of the UOP Online is the world-class technical support group (over 300 experts) that can quickly solve almost any technical problem that arises among both students and faculty such that education of students can continue its progress.

NEXT BIG THING

One fact about Japan that does not get much ink is that Japan is a relatively poor country in natural resources. Japan does not have any oil in Japanese ground, or in the coastal waters nearby, nor is there much arable ground in Japan.

Yet how does this reality square with the fact that the nation of Japan finished the last year of the 20th century with a $4 Trillion GDP, (http:www.pgmm.org) approximately tied with China (or double the size, China's GDP is wildly estimated, Japan's is measured carefully), though with one-tenth as many people, and a GDP second to America with only 37% the number of people? What other factors contribute to economic well-being besides natural resources?

In his book As The Future Catches You, Juan Enriquez, the director of the Life Science Project at Harvard University, points out that the Global Economy is rapidly becoming a Knowledge Economy (Enriquez, Chapter VII). Whether or not a country has few or many natural resources in or around their borders will make increasingly less economic difference. The determining factor for economic well-being in the 21st century will be how well a nation can apply their citizens’ collective knowledge to their cumulative goods and services output. (Enriquez, Chapter VII) Japan excels at applying knowledge to its GDP growth and has done this for the last 50 years.

Enriquez offers a persuasive argument that the number of patents a country turns out in a year serve as a far better indicator of long-term economic vitality than traditional industrial measures.

The explosion of the Internet has coincided with a knowledge explosion around the world. But not all patents are of equal value. With the publication of a map of the human genome in 2000, genomics could become the most important economic force for decades to come. In 1996 there were 500,000 genetic patent requests at the U.S. Patent Office. (Ibid, p96) If a company from any country wants to sell a certain product in America, in order to increase the potential profit of selling that product, that company patents a discovery or new process that is important for creating that product.

In 1985, Mexicans were granted 35 patents from the U.S. Patent Office while South Koreans received 50. In 1998 the US patent office granted South Koreans 3,362 patents while they granted 77 patents to Mexicans. The likely impact of this trend is astounding. The real economic growth rate of South Korea from 1990 to 1998 was eight times larger than Mexico’s. (Ibid, p140)

CONCLUSION

People are not born being able to create patent-able discoveries or processes. Why was South Korea able to outpace Mexico in economic growth so quickly? Education is emphasized in South Korea much more than it is in Mexico, just as education and the pursuit of knowledge is in many other Asian countries today. The emphasis on education in countries and the resulting economic benefits are changing people's perception today.

A Fortune article on China pointed out in a survey sponsored by the Public Policy Institute of California in San Francisco that as many as one-third of the Asian-born professionals in Silicon Valley have business contacts back home. They can live in America and telecommute with Asia. Some 43% of these Asian-born professionals say that it is somewhat likely that they would consider returning to live in China in the future. (Fortune, p132)

This article also pointed out that in many respects, the Beijing Genomics Institute has already emerged as a world leader. The Institute recently decoded the entire rice genome in a matter of months, stunning Western Scientists who are still catching their collective breath from decoding the human genome. The Chinese Institute also recently grew dog-bladder tissue on a rat's back, a precursor to generating human tissue. (Fortune, p127)

In America, meanwhile, whether or not to grant public financing for the research involved in human embryo tissue-related studies has become a political issue in America. I am not discounting the importance of addressing the moral dilemmas involved, just pointing out that the global economic competition in Genomics is already stiff.

Chinese GDP Growth Rate

Assuming a $4 Trillion versus a $10 Trillion economy in 2001, respectively, if China’s economy grows at 6% a year and America’s economy grows at 2.5% a year, then in 30 years, China’s economy will be larger. In macroeconomic terms, the likelihood of this event happening is not beyond consideration. Whether it is politically possible is another issue entirely.

Early in his Microeconomics textbook (pp134-135), David Colander showed that a small difference in productivity growth over 50 or 100 years becomes a very significant difference over time. What he did not specifically say (though I think he would agree) is that developing a faster track for productivity growth over time is highly desirable, especially if that specific development track is economically affordable.

It is important to understand that when per capita GDP in China reaches half of per capita GDP of America, the total Chinese economy will be twice as large as America’s economy, assuming the population difference stays four to one.

Perhaps the most important economic indicator to watch is sustained productivity growth over time. But the productivity indicator is not significant from quarter to quarter or even from year to year. What is important is the productivity growth rate from decade to decade. China is focusing on keeping its productivity growing at a high, but sustainable rate over the next several decades. If they are successful, then the American economy could move into second place.

Are we American citizens helping the rising generation in America to succeed at acquiring math and science skills? Are we emphasizing education that includes research skills, reasoning skills, and critical thinking skills? In effect, when the rising generation chooses to study hard sciences and computer technology, then what follows naturally are patents on goods and copyrights on ideas, ensuring long-term economic prosperity. To me, education of this nature is the best long-term economic insurance for America.

References:

Colander, D.C. Macroeconomics, 4th edition, Irwin/McGraw-Hill, 2001

Enriquez, Juan, As The Future Catches You, Random House, Inc., 2001

Various authors, Constitution, United States of America, 1787

David Stripp, Fortune, China’s Biotech Bloom, September 2, 2002, pp126 - 134