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Saturday, October 13, 2007

Human Capital

An email suggests this article from Economic Principles:

The Generation of 1958, by David Warsh: Fifty years ago last week, the Soviet satellite known as Sputnik roared into orbit around the Earth, catching the United States completely by surprise. Americans had expected that their Vanguard satellite would lead the way into space. ... The Soviets’ successful launch was a beacon to some, a fright to many. A future in space for mankind suddenly seemed an exhilarating possibility, at least to those who had thought about it since the time of Jules Verne. But so did missile-driven global thermonuclear war. In its way, Sputnik was every bit as galvanizing an event as 9/11. ...

The real watershed came the next year, however, when Congress passed the National Defense Education Act. President Dwight Eisenhower signed the NDEA into law on September 2, 1958. School reform had been on the table for most of a decade. ...  As Peter Dow makes clear in Schoolhouse Politics: Lessons from the Sputnik Era, the October surprise broke a longstanding logjam on Capitol Hill. Southern Democrats in the House of Representatives, for whom “the three Rs” meant Reds, race and religion, were finally forced to report out a bill

What exactly was the $10 billion NDEA?  It depends on whom you ask.  (A billion dollars was a lot of money in the 1950s; the National Defense Highways Act of a couple years before, which created the Interstate highway system, was budgeted at $25 million over a decade. In today’s dollars, each program would cost ten or fifteen times as much.)

To some, the NDEA was about curriculum reform:  the Physical Science Study Committee’s high-school physics course ...; various innovative approaches to chemistry; the “new” math ... To others, it was bricks-and-mortar: new schools, audio-visual materials, language labs and greatly expanded language study, especially Russian. Still others thought it was about the salaries of teachers...

In retrospect, however, the real payoff seems to have been the generation of 1958 ­ a cohort of students for whom school became harder immediately, with advanced placement offerings proliferating and much more emphasis on math and science. Their sense of possibility shifted. In the next dozen years or so, they found their way to advanced degrees, thanks to a system of generous scholarships, billed as loans, but for the most part quickly forgiven. They began teaching in universities themselves or, in some instances, started companies to commercialize the new ideas they had picked up in school. And their students, who arrived in college in the 1970s and ’80s did the same ­ Bill Gates, Robert Swanson, John Doerr, Mark Andreessen for example.  What the GI bill had been to college education, the NDEA was to graduate study, with an emphasis on science and engineering.

Nor was it just physics and rocket science. Bright students found their way into fields never envisaged by the sponsors of the act. Continuing revolutions in molecular biology, biochemistry, computer science, microelectronics, linguistics, cognitive psychology, Earth and environmental sciences, economics and decision sciences were underwritten by NDEA loans. Universities ... created doctoral programs in fields where none had existed before, most notably in computer science and molecular biology. In time, huge new industries sprang up where once there had been nothing more than a series of relatively inexpensive loan programs, artfully camouflaged by all the rest. 

In the language of Paul Romer, an economist at Stanford University’s Graduate School of Business, the NDEA stimulated the supply of scientists and engineers, not the demand for their services. The implications for investment under uncertainty are profound.  There was plenty of government demand in those days, as well, of course ­ the weapons labs, the Apollo space program, the Supersonic Transport, various Great Society programs, the Vietnam War.

But the real action turned out to be far away from the spotlight ­ in opportunities sensed and acted upon by young scientists, engineers, bureaucrats and venture capitalists in their late twenties and early thirties. This was supply-side economics that meant something:  investment in highly-decentralized human capital, the decisions being made by individuals who, in the first instance, simply elected courses of study. ...

On the anniversary of Sputnik, it is still easy to overlook the phenomenal potency of the policy response in 1958. It is true, as physicist Robert Park says, we have little to show for “the herd shot round the world” -- the dogs, monkeys and astronauts that were fired into orbit and, eventually, to the moon. Instead of lunar colonies and manned missions to Mars, we got the clunky Space Shuttle and the abortive Star Wars project. Sophisticated instruments in space now yield troves of information at a fraction of the cost of manned spaceflight.

The overall disappointment of space enthusiasts was summed up by science writer Dennis Overbye recently in a poignant column that appeared in a special section of The New York Times last month, commemorating the anniversary of Sputnik. “Our machines have gone ahead of us,” he writes. “But someday people will hike through the canyons of Mars.”  Perhaps. ...

Meanwhile, it is worth emphasizing the bounty of the NDEA, in the form of the Generation of 1958. It might not be too much to say that they were the ones who won the Cold War, by so completely outstripping the Soviets in basic economic development as to bring the competition to a peaceful close. It will be many years before economic historians and econometricians combine to develop truly persuasive evidence about the growth-fomenting role, if any, of the big surges in human capital formation of the past century-and-a-half ­ the Morrill Land-Grant College act of 1862, the high school movement in the late nineteenth and early twentieth centuries, the Servicemen’s Readjustment Act of 1944 (otherwise known as the GI Bill), the NDEA, and the Head Start child development program of 1965.  For now, it is enough to stipulate that these effects exist, and to suggest that they may be large.

Indeed, it makes you wonder ... what would have been different if, instead of tax cuts and the war in Iraq, the US had responded to the terrorist attacks with another binge of investment in human capital?  It is a small but startling irony that a Washington press conference had been scheduled for the morning of 9/11 to introduce a bill that contained many NDEA-like provisions. ...

    Posted by on Saturday, October 13, 2007 at 07:47 PM in Economics, Science | Permalink  TrackBack (0)  Comments (58)

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