2.1.5. know how / education

The productive factors of the classical theory are labour, land and capital. It is not really clear what they understood by the last one, because say used capital and money as synonyms, sometimes even in the same paragraph. For a more detailed discussion see interest rates.

The neoclassical theory has (almost) abandonned this concept. If we want to find a clear difference between the classical theory and the neoclassical theory, this one exists really. The "marginal revolution" that is put forward very often to mark the difference, never happened.

In the neoclassical theory we have just costs. In other words the three productive factors labour, capital and land had become costs. The concept of optimal allocation, any productive factor is allocated in a way that the monetary marginal product is the same in any use, see optimal allocation and natural price / market price, is therefore valid for just any input factor.

If we look the things from a more practical point of view we can say that land is not really a very important productive factor. In industrialised countries the agrarian sector contributes with more or less 2 percent to the GPD.

Capital is not a productive factor at all, because capital is just money, see interest rates. Considering capital as a productive factor is the most fundamental error in economic thinking. It leads to an endless amount of errors, see as well the booklet downloadable from the startsite of this website.

If land is not a productive factor and capital either, there is only one productive factor left: labour. However even with labour we have a problem, because that is what the marxist ideology affirms as well. In marxism labour as well is the unique productive factor, see labour and added value, but this theory is as well completely misleading.

Karl Marx and his precursors, especially David Ricardo, assumes that labour exists always in any qualification in any amount and therefore it is possible for the capitalists to pay them only a wage at subsistence level. For Karl Marx and David Ricardo labour is a homogeneous factor, that exist in abundance and is therefore always paid the same wage at subsistence level.

[Actually both argues a little bit different. They argue that a complicated work is only the multiplication of a simple work, but statistically there is only one type of work. However such a complicated argumentation is not needed and irrelevant for their theory. The crucial point is, that the wage will never exceed the subsistence level. In other words: For their theory it is not even necessary that the qualification is the same, presumed it exists in abundance or at least enough, that the capitalist can set a wage at subsistence level.]

It is obvious that these assumptions doesn't fit with reality. Some kind of labours are scarce. The neoclassical assumption that the wage for these scarce qualification is at the monetary marginal product might be true, but it is, as we all know, above the subsistence level.

To make this point clear and explained in an easy way. Marxism assumes that T-Shirts are produced by paying the workers a wage at subsistence level. T-Shirts are therefore very cheap and a lot of T-Shirts are produced and sold. However if it not possible to produce more T-Shirts, because if the wage falls under subsistence level, the workers will die and dead workers don't produce T-Shirts. That's obvious. The logic monetary marginal product = wage is therefore true in marxism as well. In this case any demand will be satisfied who is willing to pay pice that covers the subsistence of the workers.

[We put aside for the moment the problem the problem that it is unclear how the "capitalists" can set a price that allows them to keep the added value. In a situation of competition the competition will disminish this added value.]

In the neoclassical theory the rule monetary = wages is valid as well, but the labour, or the respective qualification, is scarce. Airplanes could be much cheaper and more airplanes could be produced and sold if we pay the engineers a wage at subsistence level. However this is not possible. For a wage at subsistence level we wouldn't find engineers. In this case only the demand will be satisfied that covers a much higher wage than the subsistence level.

That makes a big difference, if we look at the economy as a whole. In the marxist ideology whatever happens and whatever increase in productivity we have, wages will never exced the subsistence level. In neoclassical theory, at least in theory, it is possible that labour get scarce and the wage is above the subsistence level. (The situation we actually have, at least in industrialised countries.)

If productivity increases, labour be reallocated in the more productive sectors and due to the fact that these sectors need more qualified labour, the labour in these sectors are well above subsistence level. At the end nobody remains in the sectors where wages are at subsistence level and we have full employement.

It is not very hard to see why marxism is wrong. It is obviously wrong.

However it is a little bit more difficult to see, why the neoclassical theory is wrong. First of all, it is kind of a tautology. If productivity is very low, the wage is at subsistence level and the workers who earn less than subsistence level, die and the dead are not unemployed, therefore the thesis that full employement is always true.

There is actually no way to prove that neoclassical thinking is wrong, because unemployment can always be removed by lowering the wages. It is cristal clear that there is no unemployement if the wage is 1 dollar a day. In this case it is cheaper to employ something to make the laundry instead of buying a washing mashine and in the long run, the workers earning one dollar would die and therefore they woudn't be unemployed. The real question is therefore a different one. The question is whether the whole potential of a worker is actually used and what can be done to use it.

The second problem is more complicated and this problem is addressed by the keynesian theory. We can say that keynesian theory is not only about unemployment <=> full employement, but about the question whether the whole productive potential is actually used and that leads to other questions, for instance if the demand is high enough to absorb the demand.

A lack of demand is not a big problem for the neoclassical theory, the answer is always the same. Wages have to decrease. We won't address this issue again and the reader is referred to the little book about keynes downloadable from the startsite of this website.

It is true that the only relevant factor in marxism and keynesianism is labour, but it is completely erroneous to beliefe that there is any resemblance between keynesianism and marxism. The difference is that marxisms assumes that capital is accumulated labour. In keynesiamism capital for investive purposes is just money and can be printed. To put it simple: The European Central Bank can print in one day more money than all the capitalists of the world can squeeze out of the workers in a whole year, see interest rates.

Alfred Marshall didn't have already a full understanding of the role played by money, he still sticks to the idea that "capital", actually mone, is a condition for investments. (Although at least he defines what he means by capital.)

Land is meant the material and the forces which Nature gives freely for man's aid, in land and water, in air and light and heat. By Labour is meant the economic work of man, whether with the hand or the head. By Capital is meant all stored-up provision for the production of material goods, and for the attainment of those benefits which are commonly reckoned as part of income. It is the main stock of wealth regarded as an agent of production rather than as a direct source of gratification. Capital consists in a great part of knowledge and organization: and of this some part is private property and other part is not. Knowledge is our most powerful engine of production; it enables us to subdue Nature and force her to satisfy our wants. Organization aids knowledge; it has many forms, e.g. that of a single business, that of various businesses in the same trade, that of various trades relatively to one another, and that of the State providing security for all and help for many. The distinction between public and private property in knowledge and organization is of great and growing importance: in some respects of more importance than that between public and private property in material things; and partly for that reason it seems best sometimes to reckon Organization apart as a distinct agent of production.

Alfred Marshall, Principles of economics, BOOK IV, THE AGENTS OF PRODUCTION, Land, Labour, Capital And Organization

This is much more concrete than the classical assumption of the three productive factors. He had a broader view on land as a productive factor and mentiones that land and (fresh) water is a productive factor. This is a little bit better, because fresh water is really scarce in some areas of the world, although the production of water depends on know how, see solar desalination, and the intelligent use of fresh water. To mention air and light and heat in this context, is a little bit strange. There is no doubt that these are the most important productive factors, because without them, they would be no live on earth, but they are free.

His definition of capital by "capital is meant all stored-up provision for the production of material goods, and for the attainment of those benefits which are commonly reckoned as part of income" is not very exact, because the crucial question is, how much time it takes to produce it. It is obvious that is make a big dfference if the machine needes has already been developed and just needs to be produced onec again or if the machine needs to be developed from scratch. In other words, capital is a question of know how.

And therefore he get's to very correct statement: "Capital consists in a great part of knowledge and organization".

This is a real problem for marxists and they produced a lot of text to show that know how is as well "accumulated labour". There is no need to discuss this thesis, because in any way this kind of capital has two legs and it is hard to see how the capitalist will squeeze out any added value if the worker possess the really relevant production factor.

We can easily imagine a world, the actual situation in 2015 is a little bit like that, where you have poor "capitalists" desperately seeking for investments, in other words people who possess the know how and the idea for new products and services.

Know how he defines in a broad way. Know how refers as well to the organisation, that means organisation of a company, the interaction between the different market players, the interaction between the government and the economy. Some knowledge and the production of knowledge is produced and belongs to the government, that's true for instance for research and development and other knowledge, for instance the specifique knowledge of company belongs to the company alone. This distinctions is perhaps more important than the distinction between public and private property.

This is indeed true, if we take into account, that the wage depends on qualification and knowledge and it is the government that decides who has access to qualification. If medecins for instance are scarce, they have a good income. If the government creats more university places in medecine, they are less scarce.

The fact that actually know how is the most important productive factor can be easily illustrated by historical facts. The famous "german economic miracle", the strong growth of the german economy can't be explained by the fact that Germany had a lot of capital, in the sense of Alfred Marshall, machines, buildings, raw materials etc.. or capital in the sense of money for investive purposes. The opposite was the case. Some people argues that the german economic miracle is due to the European Recovery Program, the famous Marshall Aid Plan. Actually this aid was largely irrelevant, the volume was 1,7 billion DM. That's a ridiculous some if we know that the german GPD in 1950 was already 250 billions DM. Second the recovery started already in 1947, in other words one year before the European Recovery Program started.

The explanation of the german economic miracle is much simpler. Germans just reached quickly once again the economic growth that corresponded to the know how. It is possible to activate a productive potential with money, that's what the keynesian theory is about, but it is not possible to promote economic growth beyond the productive potential only by incecting money. For more details see interest rates.

If there is no unexploited production potential one can inject any amount of money and nothing is going to happen. That can be illustrated as well with an example taken from german history. After the fall of the wall in 1989 West-Germany injected in the former East-Germany 1000 billions of DM in ten years. That's really a lot of money. The GPD of Germany in 1990 was 3000 billion DM. This money helped to reconstruct the roads, embellish the villages and town and to promote similar flash in the pan, but didn't lead to a sustainable growth. There was no sector where the former East-Germany was able to compete with West-Germany or other industrialised countries.

For the same reason it is useless to inject money in order to promote growth in underdeveloped countries. What they need are direct investments and know how transfer. (And of course a complete abolition of customer duties on all the products they export, banana, coffee, chocolate etc..). With direct investments and know how transfer combined with low wages they can satisfy their own demand.

If it were posible to promote economic growth with "capital", indepedently from the circumstances, economics as a science wouldn't exist, because it would be very simple to promote economic growth. It would be enough to save a little bit, if we stick to the thesis that only capital as a result of not consumed income of the past could be used for investments and just money is not enough and in the long run all problems would be resolved.

This, the fact that economic development depends on know how, explains as well the strong growth of countries like China, Taiwan or South Korea. If only a transfer of know how is needed, growth is fast. If they have to produce know how on their own, it is slow.

For normal people, but not for economists, it is obvious that know how is not always know how. Some know how can be completely useless. Economic "studies", for instance this one A HUMAN CAPITAL AND ECONOMIC GROWTH: COMPARATIVE ANALYSISOF THE IMPACT OF KNOWLEDGE AND HEALTH ON ECONOMIC GROWTH INNIGERIA AND TURKEY, easy to find thousand of other similar studies and never discussed discussion papers just talk about knowledge, or human capital, without realy defining the term.

For normal people it is obvious that knowledge, human capital or know how can be of very different kind and some can be useful and other completely useless. A lot of economists for instance who can only write never discussed discussion papers are quite useless. Concerning lawyers we can even say the more we have, the lower the GPD. In Spain for instance we have 355 lawyer per capita, in Germany 516, in Nicaragua we have 170 lawyers per capita. The record helds Trinidad Tobago with 120 lawyers. It seems that the more lawyers we have, the lower is the GPD and in general we have to much of seem, see for instance Is America’s lawyer bubble getting ready to pop?.

Concerning lawyers it is hard to say what is the cause and what is the effect. If there are a lot of lawyers there will be an increase of legal pursuits, all these people have to live from something. In this case the amount of lawyers would be the cause. At the other poor nations offers only few jobs for engineers, computer scientiests, chemists etc.. People will therefore study law. In this case the abundance of lawyers would be only the cause.

It can be said therefore that the number of graduates is an indication for a high qualified population. The opposite can be true. If there are lot of economists who want to write a lot of discussion papers, it is well possible that there is a lot of waste of money and time.

Almost all the studies about the impact of "human capital", actually a term that is not needed, know how or knowledge would do it as well, suffer from a typical error. Quantitative relationships of whatever kind, statistical relationships, function or equations, doesn't explain CAUSAL relationships and that's what we need to know.

With statistical data that tries to figure out the impact of knowledge on economic growth and that take the amount of graduates as an indicator for knowledge it is easy to prove that knowledge has a big impact on economic growth as well as the opposite, that it has no impact at all. In Tunisisa for instance we have a lot of graduates in law, what is actually not very helpful.

The term "human capital" establishes a relationship between investment in training and output through quantitative methods. For instance the percentage of GPD spent on education and similar statistical relationships. Obviously this data doesn't allow any insight. Germany for instance only spends 5.0 percent of his GPD in education, Moldova 8.6, see Government expenditure on education, total (% of GDP), however there is no doubt that Germany is better off than Moldova. Most of the countries are about 5 percent, however the GPD / per capita is very different.

This results could had been expected even without any statistical data. Interesting to have them, but nothing really stunning. A proportional relationship between investments in "human capital" and output doesn't exist. Things are more complicated.

Knowledge is very often aquainted in an informal way, for instance by training on the job. This is obviously only possible, if the economy is complex enough to allow this kind of training. That explains as well why industrialised regions develope more quickly than agrarian regions. Industrialised centers attract other companies which supply special products and services for these centers and that will induce other companies to establish themselves around them offering services for them and so on.

This has very concrete consequences for the development policies to be followed. Instead of injecting money for just anything without a clear strategy, it would be more useful to identify what could be the motor of a sustainable growth. Solar energy in countries with hot but uninhabited regions, a wool industry in countries which can produce high quality wool, for instance the alpaca wool in Bolivia and Peru, a chocolate industry producing more elaborated choclate products in countries producing choclate beans etc.. This would allowed people to get aquainted with logistic issues, marketing issues, technological processes and so on.

Informal training will become more and more important in the future due to the new technological possibilities as well. The success of the internet is in large part due to the fact that all the technology needed to spread information through the internet was delivered by the internet itself without any costs.

Informal learning responds always to very concrete need and is therefore very efficient. Nothing useless is learned by an informal way. Nobody learns objective-c if he doesn't have a concrete idea in minde what he wants to with that. Training on the job is obviously very concrete. That is not only true in the sphere of economics, it is also true for education in a larger meaning. Reading The Waves by Virginia Woolf at school or in a informal situation is very different. In the first case there is perhaps an interest in reading it, in the second case it is sure.

Concerning informal learning through the internet we can observe big differences between the different countries. While in the english and german speaking internet almos any kind of information is accesible through the internet, this is not the case at all for instance for spanish, italian, french speaking countries. There is space for improvement, especially because producing content for the internet is a big business.

Formal training and education and especially the academic world have systemic problem. They are not steered by the clear and objective signals of the market, but by something else and economics is a very illustrative example that shows the tragedy. To make a career at the university publications in "scientific" journals are needed, in other words never discussed discussion papers with no impact on the real world. The practical impact of these "studies" is irrelevant.

Schooling has the same problems. Nobody actually can tell who decides why what is taught and how. Most of the issues addressed be the oficial school system are the result of customs, that slowly changes if the society changes. In a system like that, where is no clear steering mechanism, the allocation of resources depends on the capacity of interest groups to defend their interests. Teacher of latin in greek for instance will foresee the downfall of civilisation if latin and greek is eliminated at school and they will try to exert pression. Something they do in some countries in a very efficient way. We will return on the topic in the chapter about Milton Friedman.

There are thousands if not millons of articles who tries to define human capital, or at least try to give a summary of all the existing definitions, and to describe the impact of human capital on the economy. (Or give a summary of all the different concepts about this issues they had found in other never discussed discussion papers.) Institutions like the OECD have a lot of money and can therefore employ a lot of people who produce every year a mountain of paper higher than the Kilimanjaro. If some needs an example for that, here he get one: HUMAN CAPITAL AND ITS MEASUREMENT. The author knows, that the reader won't read it, that's why he calls this kind of "science" never discussed discussion papers.

The problem with all these thousand of studies is that they didn't focus on the real problem. Aquiring knowledge is a systemic problem, in other words, the question is whether the system gives the right incentives, incentives that induces the system to do the right thing in order to achieve the desired goals.

In the case of a system of informal learning we can be sure that the right incentives are given. This kind of learning works with the same incentives as the market economy. In a case of a "training on the job" the individuum has a very clear goal and he knows very exactly what he has to learn and what will be the award for his effort.

In the case of an institutional training, in school or at the university, this is far less clear. The goal of the institution are not necessarily the same as the goals of the students. Students of economics for instance can desire to acquaint knowledge for their professional live, but academic teachers are not interested in that. Their career depends on the publication of papers in "scientific" journals. The system is steered by wrong incentives.

If we want universities to prepare for professional live, we need the right incentives. One possibility could be for instance to allocate the resources depending on the percentage of graduates that found a job one year after having finished their studies and the average wage per year. The best performers would get more money, the bad performers less. Obviously that has to include the possibility to reduce or close some faculties and to fire the people working there. This method would have a lot of other positive effects, see preliminary.

Most studies about human capital are about irrelevant aspects. The crucial question, when it comes to the institutionalised education system at any level, is whether the incentives given are the ones needed to get the desired results.

The institutionalised education system is like any other system. It's performance depends on the incentives given.

The problem is less important in the case that there is a strong interaction between reality and study. Faculties of medecine for instance would have very quickly a serious problem if the studies of medicine doesn't suit the demand of the hospitals. Hospitals have a very clear idea what a physician has to know. There is therefore little discussion about the content of the studies. If the future physicians don't meet the expectations of the hospital, they will get into trouble. Academic teacher in medecine can't follow their personal hobbies.

If this relationship is less clear, as in economics, there is big chance that the system takes the wrong path. If the goals are undefined, the everyone will try to follow his owns interest which are not necessarily compatible with the interests of the others, in this case the students.

What is valid for a company, which is a system as well, is obviously true as well for any kind of public administration. If there is no controller who sets goals and the right incentives and controlmechanisms, everybody will try to follow his or her own goals at charge of the efficiency of the whole system. To make this point clear: Without control a professor of economics will write hundred of discussion papers on topics he is interested in, even if nobody cares about that, because his academic career depends on that.

Promoting interesting projects which perhaps leads to the foundation of a company has no impact on his career and therefore he will not do it. (Beside that, he is not able to do it, because these people have no working experience.)

It is not difficult to find similar statements as the one above in any language. They are funny. That's the way professors imagine the world. It would take the author an hour to find similar statements in any language.

La formación, el capital humano adquirido por un individuo previamente a su incorporación al mercado
de trabajo no contribuirá positivamente a un aumento considerable de su productividad per se, sino que para ello son además necesarias una serie de condiciones y factores, en numerosas ocasiones, exógenos a la propia formación, tales como la posibilidad de encontrar un puesto de trabajo en el que desarrolle plenamente su especialización o formación, el que las condiciones de trabajo y la remuneración obtenida satisfagan las expectativas y el coste de la inversión en formación o simplemente motivaciones psicológicas y sociales.


The training acquainted by an individuum before entering the labour market alone will not contribute positively to a considerable increase of his productivity. Other conditions and factors are needed, very often exogeneous of his own education as the possibility to find a job in which he can develope completely his especialisation or training, in which the conditions of work and the remuneration satisfy his expectations and the costs inverted in his study or simply psycological or social motivations.

Professors sometimes tell us a lot of interesting things. They assume that studying engineering is more interesting if the graduates find a job after their studies in if there are companies who hire them. Yes, indeed, that's a plausible thesis. It is absolutely necessary that someone mentions it, otherwise nobody would believe it.

However inside the context where the impact of "human capital" is normally adressed that statement is not a big help. In underdevelopped countries there is no way to walk into a ready-made position. In these countries the companies must be founded first, they didn't exist. Graduates will not find a job, they hace to create it themselves and it is the job of universities to enable them to do that. There is no need for people who constates the problem. What we need are people who resolve it.

If the costs of the studies is to hight, it is their job to think about how to reduce the costs, for instance by introducing more e-learning. We don't say that this is ideal, but it is a beginning: Microeconomics. (It's a video from the Khan Academy, sponsored by Bill Gates.)

It is crystal clear that people want get paid well, being apreciated, do something they identify with, don't have risks, the job must be a lifetime job and so on. Unfortunately Mick Jagger is right:

You can't always get what you want
But if you try sometimes
well you just might find
you get what you need

For developing countries it is meaningless what our spanish professor says. All the graduates want, they have to create it themselves, but it can be doubted that they will learn what the need from a public employee paid by the tax payer.

Economists have a tendency to describe problems, sometimes even problems that actually don't exist. They are less interesting in resolving them. To write never discussed discussion papers and to publish them in "scientific" journals its enough to describe a problem. There is no need to resolver it. That's the difference between a company and a university. Companies only earn money if they resolve a problem. Describing it is never enough. Hier is a funny example of this kind from a german poet.

Aus entwicklungspolitischer Perspektive ist zunächst darauf zu verweisen, daß nicht nur die Produktion von Wissen knappe Ressourcen verschlingt, sondern auch dessen Aneignung durch Individuen, die Humankapitabildung. Ein Entwicklungsland, das die wachstumspolitische Bedeutung des Faktors Wissen erkannt hat, sieht sich demnach - mehr noch als (relativ humankapitalreiche) Industrieländer - einem Zielkonflikt zwischen der Förderung der Wissensproduktion (z.B. durch Forschung) und der Wissensverbreitung (z.B. durch formelle Bildung / Ausbildung) gegenüber.

Hans - Rimbert Hemmer, Endogene Wachstumstheorien y implicaciones para países en desarollo
From the perspective of the development policy it must be taken into account that not only the production of know how devours resources but as well the acquisition of know by individuals, the creation of human capital. A developing country that has realised the importance of know how for development is therefore confronted - still more than developed countries (with more human capital) - with a trade off between the production of know how (for instance through research) and the difusion of knowledge (through the education system).

First of all: Developing countries don't have to produce new knowledge. They just has to diffuse the existent one. There is no need to develop once again wind mills or biogas producing electricity, techniques to desalinate water, who to elaborate wool and leather in a way that suits international standards etc. etc.. All that knowledge is already produced. That's not the problem. The problem is diffuse these technologies. Introducing these techniques is not an expenditures, it's a profitable business.

The question is, why the spread of technological possibilities is much faster in some countries than in others. This is a question of political stability and transparency and accesibilty to markets. No developing countries plays any role in research and development. They don't have the resources for that and it is not necessary. If there are an advance in research and development that leads to marketable products, the owner of the patent will have an interest in spreading it.

A general assumption that the acquisition of knowledge is expensive is idiotic. That's like saying that the production of bread and smartphones is expensive. That's obvious, but a company would try to reduce the costs and only if they have concrete ideas how to do that, they will survive.

Furthermore there is no relationship between expenditures in education and output. Germany for instance has one of the best paid teachers worldwide, spends a lot of money in education, but if we believe in the results of PISA, what we have obviously no intention to do,
the results are modest. Even if PISA is not very meaningful, we all know from experience that the output of a learning process depends from a lot of things and the resources invested are not the most relevant ones.

Some people spend thousand of dollars to learn a language, others learn it with a free available course on the internet and get to the same results. To illustrate it with an example.

What we can say is that it doesn't make a lot of sense in underdeveloped countries to offer studies in branches that actually don't exist in this countries. The author of these lines for instance taught gave some years ago classes of bioinformatics. (Bioinformatics at that time was mostly done with PERL.) Due to some strange connections between german subsidised schools in foreign countries and german universities there where a lot of people from Chile and Guatemala in this course. However these studies where completely useless for them, because jobs in bioinformatics only exist if there are research institutes of molecular biology, something inexistent in these countries.

Underdeveloped countries have to identify the branches where they are strong and to focus on these branches.

The real problem for underdeloped countries is not a lack of research and development. The real problem ist, that there is a lack of research on how to use the results of research and develoment in underdeveloped countries. This is a systemic problem. The career of governmental paid scientiest depends on their publications in scientific journals with high impact points, not on resolving concrete problems and a scientist is not necessarily an entrepreneur.

A sentence of the type "...that not only the production of know how devours resources but as well the acquisition of know by individuals..." is not very meaningfull if we abstract from the concret situation. Beside the fact that there are big differences between developing countries in general, the money to be invested at any level of schooling is very different. If people are living in big cities it is easier to organise than if they live in far away villages difficult to reach.

Basic schooling, read, write and basic arithmetic operations, is less difficult to organise than professional training and concerning basic schooling there is no public debate concerning the content, but sometimes there is debate about HOW to teach that.) At a higher level there is big debate even about the subjects to be taught.

A little google research with keyword like importance of foreign languages will show millions of articles, statements, studies from lobby groups (teacher associations), political parties, universities about the importance or irrelevance of foreign languages and the opinions vary greatly from one nation to another. In England for instance the heroic decisions was made to abolish completletly the teaching of foreing languages, see The language crisis in British schools, in France foreign languages doesn't count a lot, see L'élève français, ce cancre en langues étrangères and in Germany two foreign languages are compulsory, at least in theory, in practise only one language is taken seriously, obviously english. The debate is whether it is useful to learn one, which languages should be taught, russian, chinese or arab, how to teach them etc. etc.. It the governments wouldn't decide which, how and whether they should be taught, people never would agree on this topic.

(By the way, the problem has a solution. If colleges offer many choices, every but can make the choice he wants and the public discussion is finished. We will return on the topic in the chapter about Milton Friedman.)

Obviously the debate is still more intense concerning literature. It seems that the teaching of literature has no impact on the reception of literature and how people deal with literature once left school. It is very possible that whatever goals are pursued by teaching literature, normaly the discussion is about goals, they were not attained, because the teaching of litterature has no impact at all. We will return on the topic in the chapter about Theodor W. Adorno.

It seems that there is a global agreement that economics is not necessary and shouldn't be taught at school, because in no country of the world, beside specialised colleges, economics is a official subject. That is actually strange. History is always a subject at school, people assume that we don't know who we are if we don't know where we comes from and thinks like that, but it is assumed, justified or not, that there is no need to understand the function of money.

Math in contrary is considered the basis of everything and, as illustrated by economics, equations are alway true. There is no need to question whether mathematical modeling can be used everywhere.

However we can neglect all these problems, because very hard historical facts shows that this statement of Alfred Marshall is true. The economic output depends on the know how and nations, who have been destroyed completely, as for instance Germany after world war II (what was without any doubt a very good idea, the single case in history where even an atomic bomb would had been justified) reached very quickly the wealth that corresponded to its knowledge. "Capital" plays almost now role.

Knowledge is our most powerful engine of production; it enables us to subdue Nature and force her to satisfy our wants.

As in marxism and keynesianism labour is the only productive factor, but nevertheless there is no similarity between marxism at one side and keynesianism and Alfred Marshall at the other side. Concerning keynesianism the difference is obvious. Investments are financed with money. No need to squeeze out the added value from the workmen, see interest rates.

In opposite to marxism Alfred Marshall focuse on knowledge, not on labour. It is obvious that knowledge is bundled with labour, but the increase in economic growth depends on knowledge, not in the amount of labour. The main difference is, that knowledge belongs to concrete people and if production depends on knowledge, the "capitalist", whose only characteristic is the fact that he possesses "capital", he is not entrepreneur, is not needed any more.

Beside that Alfred Marshall addresses an important issue. Knowledge production depends on the enviornment, but changes the enviornment as well. That why we have an interaction whose result are unpredictable. We don't have a simple mechanical growth as in marxism.

To illustrate it with an example. The internet created al lot of new jobs which before not even existed. It allowed completely new ways to spread knowledge, which had an impact on any sector of the economy. Nobody was able 20 years ago to predict that impact and many people and companies, for instance newspapers, had completely missleading ideas about what was going to happen and still today we are not able to predict the impact the internet is going to have in the future.

In a sense there are only two agents of production, nature and man. Capital and organization are the result of the work of man aided by nature, and directed by his power of forecasting the future and his willingness to make provision for it. If the character and powers of nature and of man be given, the growth of wealth and knowledge and organization follow from them as effect from cause. But on the other hand man is himself largely formed by his surroundings, in which nature plays a great part: and thus from every point of view man is the centre of the problem of production as well as that of consumption.

Alfred Marshall, Principles of economics, BOOK IV, THE AGENTS OF PRODUCTION, Land, Labour, Capital And Organization

If we take the two affirmations together "Knowledge is our most powerful engine of production" and "In a sense there are only two agents of production, nature and man" we can say that the three classical production factors, labour, capital and land has been reduced to one, "man".

It is easy to see that this is true. If the antique Rom, the Rom of Julius Caesar and Company, had been destroyed by an earthquake, the romans would had reconstructed it quickly as is was before, but without electricity, traffic lights, telephone etc.. If Boston were destroyed, it would be reconstructed as well very quickly, but with electrictiy, traffic light and telephone, because the bostoners know who to do that. Whatever the amount of capital the romans had, they would never be able to construct a modern city. In other words. A nation reaches quickly the wealth that correspond to its know how, but further growth is difficut.

Second he addresses the fact that man changes his enviornment but is at the same time changed himself by this enviornment. This may seem trivial to most people, but actually it is not trivial, if we consider the changes of opinions, customs, know how that has happened only in the last fifty year. A protocol like the TCP / IP protocol, the basis of the internet, had changed completely the we way we are informe ourselves, the way we learn, the way we communicate, our shopping customs, the way we do financial transactions, the role of newspapers etc. etc.. All the technologies based on the internet created a lot of new jobs that not even existed before, with new mixtures of qualifications.

Alfred Marshall saw very clearly that economics can only be conceived as a transversal science. It is therefore obvious that it doesn't make any sense to talk about neoclassical theory. Between an intellectual like Alfred Marshall and a bunch of idiots like Léon Walras, Vilfredo Pareto or Carl Menger.

The definition of the goal of economics is very different from what we found normally and goes beyond economic goals, goals that can be measured with money.

The growth of mankind in numbers, in health and strength, in knowledge, ability, and in richness of character is the end of all our studies: but it is an aim to which economics can do no more than contribute some important elements. In its broader aspects therefore the study of this growth belongs to the end, if to any part of a treatise on economics: but does not properly belong even there. Meanwhile we cannot avoid taking account of the direct agency of man in production, and of the conditions which govern his efficiency as a producer.

Alfred Marshall, Principles of economics, BOOK IV, THE AGENTS OF PRODUCTION, Land, Labour, Capital And Organization

We can't really say that nowadays economics, that what we found in textbooks, excludes consciously everything that doesn't belong to economics. This is not possible, because a clear limit between economic issues and other social issues is not possible. There is an intense discussion in all the books of the neoclassical authors, see for instance methodological approach, how this limit could be defined. (Alfred Marshall for instance argues that everything that can be measures with money, belongs to economy and if that is not the case, it doesn't belong to economie.

What really happened is something different. In the last 150 years some concepts, variables and ideas were canonised and every problem is analysed by this concepts, variable and ideas. This has happened more inconsciously thant consciously. The only thing we can say, is that only concept and ideas that suits for mathematical modeling where canonised and if that was not the case, they fall into oblivion.

In other words, a reflection what belongs to economics and about the best methodological approach doesn't happen any more.

Alfred Marshall defines growth in a much broader meaning and he doubts, that economics alone can explain this growth: "In its broader aspects therefore the study of this growth belongs to the end, if to any part of a treatise on economics: but does not properly belong even there."

The problem is that principles of economics was written almost 130 years ago (in 1890) and at that time it was usefull to analyse some isolated aspects like elasticity, producer / consumer surplus, equilibrium price etc.. That "contributed some important elements".

However the idea of Alfred Marshall was that in the long run this isolated view is abandoned and and the full picture of all interactions is taken into account. What happened is the opposite. We didn't see in the past century a broadening of the methodological approach and a wider range of topis, we saw a tendency to discuss almost every problem with the same concepts, parameters, modells and ideas.

The modells used abstract completely from any social context and we actually we can't really say, that the deal with human beings, or man as Alfred Marshall calls it. The driving force of economy is capital, not capitalists, something that could be imagined as a decision making entrepreneur. Prices and costs leads to equilibrium, not the decisions that leads to a certain price and cost structure.

This tendency is somehow logic. If we abstract from any social circunstances, economics works like a machine and a machine doesn't care about social circunstance, a machine is not even able to take them into account.

This is the opposite what Alfred Marshall expected economics to do: "...Meanwhile we cannot avoid taking account of the direct agency of man in production, and of the conditions which govern his efficiency as a producer...".

Alfred Marshall is a mixture. At one side he analysis very exactly some aspects of the economy, that's why he is the founder of microeconomics, at the other side his way of thinking is somehow "intuitive". Sentences like that are surprising: "...and in richness of character is the end of all our studies...".

Diversity of character is considered as a goal. This is already astonishing and it is to be supposed that Alfred Marshall was influenced by John Stuart Mill, see On Liberty. Beside the philosophical meaning, this statement is relevant as well for the economy. New professions require a new mixture of abilities. A web designer is not a programmer nor a designer, he is not a specialist on marketing nor on controlling, nevertheless he has a little bit of all of that, at least if he wants to be successful. The more complicated and differentiated the economy, the more differentiated the people.

We can't therefore say what kind of qualification will be needed in the future. This has very concrete consequences. The aim of the Bologna Process was compatibility and comparability of the studies. This make sense if the the goal, in this case the qualification needed for a certain job, is well known and clearly defined. In this case it is good to have clear criterias which allows to determine if someone has the necessary qualification to exert a certain job.

This is for instance useful for physicians. Physicians have to comply with certain international standards.

In the case that the qualifications needed are not clearly defined or even completely undefined as in economics, sociology, humanities, arts etc.. the compatibility and comparability doesn't make any sense. Still worse: It is contraproductive. If we have several universities with different contents, methodological approach, organisation of the studies, didactical methods etc.. we can measure afterwards the success of each university and we can learn therefore what is efficient and what is less efficient. We can shut down the less efficient ones and invest more money in the efficient ones. If they all do the same, there is no way to find out what is efficient and what is inefficient. We don't need, in this case compatibility and comparability, we need the opposite: diversity.

The todays well known failure of the Bologna Process was predictible. If a professor of roman languages, with no concrete working experience, conceive a curricular, he will focus on literature of the Middle Age, his personal hobbies. That is not going to be helpful at the moment the graduates enter the job market. If all the faculties of roman languages do that in order to be comparable and compatible, it becomes more difficult to find out that something goes wrong.

Beside that the Process of Bologna leads to a lot of new bureaucracies, the studies has to be certified by certification institutes what implies a lot of bureaucracy, it is useless, because the efficiency of a study can be determined in a much easier way. It is enough to calculate the amount of graduates who found a job one year after having left the university and what they earn.

One may reply that this would lead to an "economisation" of the society. The problem is, that the aim of the Bologna Process was to improve efficiency in economic terms. If this is the goal, we have to discuss about the most efficient way to achieve this goal. If they have other goals, we must discuss how to achieve best the other goals.

If there are no clear criteria that allows to measure the efficiency of the studies, the best way to measure it is by the amount of people who find a job one year after having finished their studies.

The faculties of humanities will argue that we can't measure the output of humanieties this way, because humanities addresses the good, the beautifull ant the true, there are millions of articles that goes in this sense, see for instance Why Study Humanities? What I Tell Engineering Freshmen. All of this articles have a somehow "obscure" argumentation.

From a purely practical point if view things are easier. The questions posed by humanities are relevant. People pass their days thinking about the sense of live, what is moral or immoral, they were looking for a "deeper" understanding of the world and if they go to Florence, Rom, Madrid etc. and visit the museums there, hundred of millions of people do that each year, they want to know what they see. If they don't know it, they will see nothing.

The problem is, that academic humanities don't participate in public discussion. Not the questions are irrelevant, but the way they treat these questions. If they reach a larger public, they will find a job. If they can only write never discussed "scientific" discussion papers, they won't find a job. Therefore it is needed that faculties who find innovative ways to interest people for their questions will get more money and that the others disappear. If one faculty for instance only produces never discussed discussion papers about Michelangerlo and the others train their students to represent difficult relationships between the society, politics, artists in an entertaining way, the first ones should disappear.

To illustrate that with an example: The author of these lines had created together with english musicians a website, A lot of english folk songs need to be explained. Explaining them is kind of edutainment and this page has a lot of visits.

Later on, in the chapter about Theodor W. Adorno, we will address the issue about the "economization" of the society. It may be true that market economies tend to consider everything under an economic perspective. That undermines culture, if we understand by cultures an authentic approach to the world. (In other words: If people only learn things that yield money, the goal is money and the content is irrelevant.) However the idea of Adorno, that we get what he wants by creating zones free of any economic pressure is completely misleading. We get tons of never discussed discussion papers, see culture indurstry.

Only in the case that the government knows exactly the demand of the market, what is for instance the case in medecin or in engeeniring (at least more or less) it makes sense that it conceive the curriculum. If he don't know it, the best solution is to offer a lot of options to the students. The students at least knows what they can do best, what the like and they know their personal situation, can therefore chose best what fits best to their personal situation. The same rules that are valid for the a free market society, are valid as well for education.

If the government knows better than the individual market player what suits them best, he should determine how the resources are used. If it doesn't know it, and that's the case, he should let decide the individual market players. There is no doubt that the will err, but they will learn more quickly from their errors.

This problem obvioulsy doesn't arise in basic schooling. In this case the government, as well as anybody else, know exactly what is needed: read, write and fundamental arithmetic. For a more detailed discussion see Milton Friedman.

Public debate about academic studies, if we consider the debate on a global level, is more about financing than about quality, what possibly is an error. The question is less how it is financed, but whether it is efficient. If it is efficient, it is profitable from a private and a public point of view. If that is not the case, it is not profitable from a private point of view nor from a public point of view.

In a lot of countries academic studies are paid by the students themselves, for instance in the United States, in other countries by the tax payer. The argument put forward in favour of private financing is that the people who benefit from the studies should pay for it.

There are two critical points in this argumentation. The first point is, that it is the government or lobby groups that create kind of monopoly for certain studies, in other words only some institutions has the right to deliver grades. What we have therefore is a monopoly price for education.

To illustrate it with an example: German faculties of medecine state that a study of medecine costs 120 000 euros. Profit oriented universities in Hungary, to take an example, charge 60 000 euros and the quality is the same, because the grade delivered in medecin from Hungary are recognised in Germany. Tuition fees of 150 000 dollars as in the USA are simply made and have nothing to do with the actual costs.

It is strange kind of phenomenon that the cost structure of the studies are never discussed, nobody knows where the data that are floating around comes from and no university has a controlling system allowing exactly to calculate the coste. The author assumes that in economics 10 000 dollars for the whole study would cover all costs and with 10 000 dollars it is a very profitable business for the society because even if economists work in something that has little or nothing to do with what they have studied, in thirty years they pay more than 10 000 dollars of taxes.

In the future we will see that organisations and companies like,, will get the right to deliver grades as well. We can assume that in ten years, at least in studies where no equipment is required, tuition fees will be near to cero. (We are still in 2015, in other words in 2025 the problem is resolved. However even in 2015 it will be interesting, because people can learn how efficient institutions defends there interests.)

This is the most strange phenomenon concerning this issues. If we put "tuition fees" on youtube we get almost 45 000 results. Some in favour of private financing, others in favour of public financing. (But most of them agree that universities needs more money.) It would be more logical to discuss first the question how much money is needed and then how to get the money needed. That would be a normal business plan.

Universities see it obviously in a different way. They just want the maximum, wherever it comes from, and enough is never enough. That is curious, but not astonishing. Every system is steered by the incentives given. If we have no goals or only very vaguely defined ones, people will always find arguments why they need more money.

A controlling system as in companies doesn't exist for universities. There is no clear distinction between the expenditures for research, to be paid by the whole society, and the expenditures for teaching. There is no schedule how to divide the overhead costs between the different faculties. Should a cheap study like economics bear the same part of overhead costs than medecine and if this is the case, the whole faculty of economics that then charge each student or should every student bear the same part? It is really necessary that basic things like algebra, statistics or accounting are taught by a professor or would a normal teacher or a doctoral candidate can do that as well?

The author of this lines worked some years ago at an university, giving programming lessons. The work is not teaching itself, that's ridiculous, the real work is correcting the exames. However most of the exames can be realised in a way that can be corrected by a computer. Than it takes 10 seconds to correct them instead of three days and the costs can be reduced drastically.

Most of the lectures are useless and can be substituted by online videos. If we add to this videos interactivity, for instance a forum, there would even be more interactivity then in a middle age lectures. Lecture is a way of teaching that dates from a time where books were not available. Since 500 years we have books and since 30 years even more sophisticated ways to spread knowledge. The problem is, the teaching staff has an interest to maintain this obsolete way of teaching, because a reorganisation would lead to a drastic reduction of the staff.

Actually expensive is basic schooling, because in this case there is no way to reduce the costs and if the success depends on this basic schooling, it would be better to reallocate resources. More money for basic schooling and less for colleges and universities. Students who didn't learn to learn, in other words to find the information needed themselves, shouldn't study at all and save their money.

Some countries, for instance Spain, have a very strange way to calculate the tuition fees. In Spain the tuition fees are based on the credit points. Something is to pay for every credit point. We understand that without a controlling system, something inexistent in the world of the universities, but to base the tuition fees on the credit point is the most stupid system possible. A credit point in medecine costs more than a credit point in literature.

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Knowledge is our most powerful engine of production

Alfred Marshall

There are actually only two economists who focus on the importance of know how and knowledge: Alfred Marshall and Jean Baptiste Say.

If know how becomes the dominant production factor, the capital becomes irrelevant, because know how is always bound to a person.

However although nowadays everybody agrees on the importance of knowledge in general, there is no agreement on how to finance the public education system.


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