Number of words: 3,521
“An investment in knowledge pays the best interest” … reads the banner hanging on the wall of a mammoth building, just across the street from my office. This quote is by Benjamin Franklin, one of the founding fathers of the United States of America. During a British Airways flight from London to Washington DC in January 2000, I first came across the phrase the ‘White Man’s burden’ in an article in the Economist magazine. The phrase referred to the aid given by rich countries to the underdeveloped and developing countries in Africa. The phrase is also the title of the book written by Easterly William, a noted economist, and now professor at NYU. This phrase triggered my curiosity: Why did the U.S., with only 300 years of history, achieve such rapid economic growth?
For many years, I tried to find the answer to this question. In literature that I researched, the discussion often has been NOT why the U.S. grew so rapidly, but why did other nations not grow as rapidly? (Development Economics – a special branch of economics deals with this topic) Both the questions can be construed to be two sides of the same coin; yet they are different. The first talks exclusively about U.S. growth, the second evaluates the growth of the underdeveloped countries benchmarked on basic growth indicators set by developed nations. The first is examining success, without examining others’ failures. Can we claim we are successful, because others have failed?
The relevant question is the second one. And the need of the hour is benchmarks of success to compare with. Classical economics captures a country’s economic growth in terms of final output. It defines its production function (Y) in terms of endogenous input factors – capital (K) and labor (L). And an exogenous factor – technological progress (At). Mathematically,
Y = At • f(K, L), where f is function of K & L.
The theory indicates that in the long run it is only technology (At) that ultimately drives productivity, and hence, economic growth. (Note that K & L have diminishing marginal returns, the more you add, the less you get.)
In the 18th century U.S., rapid growth in population, labor (human capital), capital formation and trade spurred the initial economic growth. But from late 19th century onwards, it was technological progress that propelled the productivity that lead to rapid economic growth. (I visited MIT in 2007. In the hallways of its main building are all the breakthrough technological inventions that have happened in the past 200 years.)
But this measurement of national input and output is physical (quantitative). It provides a partial answer because it implicitly assumes that the necessary conditions for growth are already in place. It doesn’t answer the fundamental question: what led to the growth in capital, labor, and technological progress which resulted in this economic growth? There must have been an exceptionally conducive social, economic, and technological environment that must have facilitated this phenomenal U.S.growth.
In 2008, I visited Stanford University. (I enjoy visiting Universities wherever I travel. I have visited MIT, Harvard, Berkeley, Yale, Princeton, ..University of Manchester, London school of Economics in UK and a few more) In the Economics Department at Stanford, while walking up the stairs to the second floor, some glass frames caught my attention. In those glass frames, Prof. Alfred Landau’s important research papers were displayed. One of the frames showcased a ‘Growth Matrix’ which listed the conditions and factors necessary for economic growth.
Alfred Landau was a well-known chemical engineer and entrepreneur, who later became an economics Professor at Stanford. Alfred has written extensively about the necessary conditions for growth of a nation. He played a key role in bringing together U.S. academia, industry and government. The building that houses the economics department at Stanford is named after him. Landau lists growth factors under four main categories – social, political, institutional, and technological. The growth matrix pretty much summarizes everything that a country must have in place for achieving economic growth. After studying this growth matrix the question that came to my mind was: how could the U.S. get all those necessary growth conditions – social, political, institutional, and technological – in place, in such a short period of time?
The answer lies in the U.S. Constitution. The U.S. Constitution rests on the principles of liberty, equality, and justice. It protects civil liberties and civil rights. The adoption and protection of these values defined and shaped the U.S. political system that we see today. The protection of civil liberties and rights provided American citizens freedom and equal opportunity. It guaranteed citizens political and social freedom.
One of the most important provisions that the civil liberties include is freedom of religion. American citizens are free to practice any religion. The provision of religious freedom separates religion from state polity. As one of my American friends once told me .. .. ”.. behind the collapse of most civilizations are religious people ...It is not the religion by itself but the religious people ..“ Historical evidence clearly points to this. The separation of religion from national politics was a visionary step, given that the majority of the settlers were actually Christians (either Catholics or Protestants). This separation helped the newly born U.S. avoid division along religious fault lines. It prevented religious groups from indulging in national polity.
Apart from this separation of religion and politics, it was the protection of civil liberties and rights that actually facilitated early market development in the U.S. How? The 5th Amendment to the U.S. Constitution (1791) protects property rights. The protection of civil liberties and rights, and property laws in turn helped people carry out their business freely and fearlessly. Citizens could interact and transact freely. It is now well accepted that property rights and contract enforcement are fundamental to the development of a market economy. In the U.S., this was in place right from the beginning, even before U.S. independence in 1776. The initial thirteen colonies also had their judicial system in place and property rights were well protected.
I quote here.. “the difference between prosperity and poverty is property. Nations prosper when private property rights are well defined and enforced.” The protection of property rights incentivizes individuals and firms to take risk, innovate, and invest. It enables entrepreneurship to flourish. The result is the effective functioning of the market (efficient allocation of resources) and hence economic growth. Self-earned property is a fruit of man’s own labor and embodies personal freedom.
The antithesis of this is the Communist ideology. Communists consider private property as capital which they claimed became the means to exploit working classes. They considered property as “collective product” and regarded it as “social power”, the allocation of which, they thought, must be done by the state and not by any individual or powerful ruling class. “The Manifesto of the Communist Party” prepared by Karl Marx and Frederich Engel emphatically states that …” … in that sense the theory of communist can be summed up in the single sentence: Abolition of private property …” …. The subsequent communist revolutions (e.g. Bolshevik/Russian communist revolution of 1917) declared possessing private property as a criminal act. We now know what happened to these communist countries. Economists agree that the property rights are the primary determinant of economic growth and development. (Ronald Coase won Nobel prize on his property right theory, albeit, his insightful theory says the opposite – that property rights don’t matter as long as the transaction cost is zero. This appears counter-intuitive. But zero transaction costs are a hypothetical case, and hence, property rights matter and are important in the real world for the smooth functioning of the market.)
How could those who drafted the U.S. Constitution – the founding fathers – be such visionaries? From where did their knowledge and understanding of a democratic system came from? I again dig more into history to trace its roots. As I researched U.S. pre-independence history, I came across an interesting statement by one of the early visiting scholars who described American settlers/colonies as “The Best Poor Man’s Country in the World.” This sentence gives hints about the progressive mindset of the settlersand their leaders in 17th and 18th century. Those who came to U.S. were from the deprived and poor sections of Britain and Europe. They ventured to come to the U.S. East coast, crossing the Atlantic in ships, in search of better social and economic opportunities.
Though the settlers and their descendants were poor, their mindsets were different. Their mindset had been influenced by new revolutionary thoughts and ideas that were taking shape in Europe (era of Enlightenment 17th & 18th century). They despised the traditional and hierarchical European system, in which personal freedom and liberty was compromised. They detested status by birth or patronage. They questioned the religious orthodoxy and traditional authority of the monarch to rule. .. “What gives one person the right to rule another?” They didn’t allow the past to dominate the present.
They allowed the present to dominate the past and future by doing right things in the first place, rather than doing things right later. They protested British imposition of traditional system (including British tax) and hierarchy (monarchy). They revolted, and in 1776 proclaimed independence from the British rule. A new country was born of which foundation rested on democratic principles. The new order was not based on traditional nationalism, hierarchy, religion, culture, or language. But its order was based on rational thinking defined by life, liberty, and pursuit of happiness. An order in which both political as well as social freedom were granted.
How was this progressive mindset developed, and propagated across generations? The U.S. institutions of higher education existed during the pre-independence (colonial) era. Many universities already existed even before U.S. independence (1776). Prominent amongst them were Harvard (established in 1636), St. John College (established in 1696), William and Mary (established in 1693), Yale (1701), University of Pennsylvania (founded in 1740 by Benjamin Franklin – also its first medical school 1765), Moravian College (1742 – first women’s college), University of Delaware (1743), Princeton University (1746), Washington and Lee University (1749), Columbia University (1754), Brown University (1764), and Rutgers University (1766). The 17th century curricula was well-developed and modern. It included subjects from all three main branches of higher learning – social science, physical science, and philosophy. The curricula clearly emphasized thinking based on reasoning, observations and scientific methods.
Interestingly, these universities were not established by the colonies, but by religious and private entities. So, it was through private initiative. This initiative emerged from the general consensus amongst the influential and intellectuals that it is necessary to have institutions of higher learning. Amongst these select early intellectuals, many had attended British and European elite universities, before migrating to U.S. Their mindset was shaped by modern education and rational thinking. These folks were fully aware of the fallacy of age old traditional hierarchical system (monarchy) and merits of democratic order.
The initial objective of forming these educational institutions was to produce manpower needed for churches and religious purposes (clergymen, priest, ministers, and government), but as soon as the market grew, their focus shifted to nonreligious purposes – manpower for public service, business and economic activities. Interestingly, the enrollment in these Universities in 17th century was very low. Mostly, these universities served elites and well-off sections of the colonists. But these universities produced future national leaders. Those who attended these colonial colleges (17th & 18th century) later transformed the colonial America into a powerful nation.
While discussing this topic an American born friend, who majored in history and policy, commented .. ” .. In fact, immediately after independence, these early leaders could have easily grabbed power .. they could have set up a new monarchy and ruled the new born America in perpetuity. But they didn’t. Instead they preferred a democratic path .. A very different framework of governance at that time .. where there are checks and balances, and no one entity can become powerful and rule …” These new American leaders from colonial colleges designed the system of government by incorporating the new democratic ideas and thoughts that they learned into the three most fundamental documents that legitimized American democratic political system. These three powerful documents are – the U.S. Declaration of Independence, the U.S. Constitution, and the Bills of Rights (1770-80s).
Although, there was a general understanding that the colonist needed many more universities, it was only in mid-19th century (post-independence) that the many publicly supported universities were established. Many of the state Universities that we see now, are the offshoot of the “Land Grant” program – Morrill Act of 1862 which provided free land, and state and federal assistance (e.g. UC Berkeley founded in 1868, Virginia Polytechnic 1872, and many more state universities that were founded in 19th century). The state universities initially were focused on agriculture, engineering, and government service. These universities filled in the growing demand gap for the trained manpower needed for rapidly growing 19th century industrial America.
It is also interesting to note that many more private institutions also emerged in mid-19th century that focused more on basic research as well as applied scientific research e.g. MIT (1861), Johns Hopkins University (1876), University of Chicago (1890), Caltech (1891), Carnegie Mellon (1900).These private nonprofit research universities were founded by the rich and visionary businessmen out of their large donations (e.g. Carnegie-Mellon was founded by AndrewCarnegie, Caltech by A. G. Throop). These Americans businessmen preferred building universities rather than temples or churches or grandiose monuments. These universities soon became the temples of learning. In a very short period, these institutions were recognized for their intellectual diversity and scholarship. The number of Nobel Laureates that they produced as of now is a fitting testimony of their top quality research work; Harvard (151 Nobel winners), Columbia (101), MIT (83), Berkeley (69), Stanford (58), Yale (52), Cornell (43), Princeton (37), Johns Hopkins (36), Caltech (33). The list includes alumni, affiliates, faculty and researchers.
The American higher education system is a fantastic mix of private and public universities. Interestingly, there is no national policy which governs higher education, yet their success is phenomenal. The U.S. higher education system is highly decentralized, independent and self-governing. However, there is a policy for investment in basic research in science and engineering. The National Academy of Science (NAS) was established in 1863 to provide advice on science and technology matters. Today, its members include experts from various fields of science and technology including 500 Nobel laureates. In mid-20th century, in 1950, the National Science Foundation (NSF) was created to promote and fund (through grants) research institutions of higher learning and national laboratories involved in carrying out basic research in science and engineering. The basic research in health and medicine is carried out by the National Institute of Health (NIH).
Both the public and private universities were able to achieve and maintain high academic standards and produce quality research. In fact, research output from the private universities such as MIT, Caltech, Stanford far exceeded the output from public universities. Berkeley is the one public university which is an exception, having surpassed many top private universities in research output. (I visited Berkeley and its Lawrence Laboratory three times. Inspiring place. Great panoramic view of San Francisco city from there). The research that they produced not only benefited Americans but eventually the whole world. I would say that they become not only national resource for the U.S. but also knowledge hub for the rest of the world. Since their inception. American universities remained remarkably open to all students, scholars and researchers from all over the world. It is this “investment” in higher learning that was the foundation for rapid economic growth and American dominance in business, military and virtually every field of knowledge.
Although, many public and private universities were established in U.S. in 18th and 19th century, there was also a wider recognition for free primary and secondary education system. The founders and subsequent leaders were fully aware of the necessity of universal primary and secondary education. Thomas Jefferson, one of the founding fathers of America, recommended publicly supported universal mass education as early as in 18th century.In fact, the leaders and education reformists from 18th and 19th century were deeply concerned about lack of public education system especially, primary and secondary education system which can be universal and free. They all agreed that the mass education will reduce ongoing societal tensions, reduce poverty trap, and eventually bring social stability.
It was also well recognized that such a universal education system will create a force of educated, responsible citizens who will actively participate in democratic process and nation building and help sustain hard earned freedom and democracy. It is this recognition that by mid-19th century the primary education was brought in the ambit of local and state regulations. Obviously, private and religious institutions were also allowed to offer private schooling with strict guidelines on quality control from the local and state governments. By 1900 many states passed the laws making primary education compulsory. Regulations were also enacted for compulsory school attendance, teacher’s qualification, and overall quality control including curriculum. Universal free public education was a reality by the end of 19th century. Americans completed median 8 years of schooling by 1910 and 13 years of schooling by 1990. The well-being of all sections of society is essential for equitable economic growth. It is worth noting here the educational opportunities for women and African-Americans (Blacks) existed even in the early life of the U.S.
Coeducation in primary education existed even before the American Revolution of 1776. By 1850, most secondary schools were coeducational. Although, educational opportunities were available for women, their enrollment in higher educational institutions was abysmally low. Low social expectations and discrimination were the reasons. Only in the 20th century did women’s enrollment in the institutions of higher learning start increasing.
The educational opportunities for the African-Americans who were brought to America as slaves were nonexistent prior to the American Civil War (1861-65). The American Civil War was fought over the slavery issue between northern and southern states. The north supported abolition of slavery while southern state didn’t. Northern states saw slavery as breach of civil liberties and rights, while southern states seen it as their rights over slaves. After the end of the Civil War in 1866, the African-Americans were granted voting rights. However, in the Southern States, laws were passed to have separate schools and colleges for blacks and whites. The African-Americans were separated from whites in hotels, restaurants, public transportation and other public places (segregation). They were legally segregated. Thus, the African-Americans were granted political freedom but not social freedom. Political freedom without social freedom is useless.
New schools, colleges and universities were set up exclusively for African-American community, prominent among them are Fisk University (1866), Howard University (1867), Hampton university (1867) and Morehouse College. These were mostly liberal arts school. These schools and colleges, though they were created with ulterior motive (to segregate), did provide some opportunity for education. In the course of time they produced many future African-Americans leaders; one of them is Martin Luther King Jr. (Morehouse College).
The issue of abolition of slavery is not the discussion point of this article. Nonetheless, it is worth noting that the abolition of slavery was an important step towards creating social stability. As I noted earlier, economic growth hinges on social stability. Providing economic and educational opportunities for historically oppressed and disadvantaged societies on par with others is essential to create a stable, equitable and just society. The strength of a nation is determined by the quality of human resource. And the quality of human resource is determined by the quality of education. Investing in mass education for all sections of society and knowledge creation is the primary key for economic growth. The U.S has done this since its beginning.
It is this “investment” in primary and secondary education, university education, and then investment in research and knowledge creation that created the foundation for rapid economic growth and American dominance in virtually every field. It is this investment in knowledge that brought America the “best returns”. America’s true wealth lies in her education system,universities, public and private laboratories. research institutions, public libraries and the infrastructure where knowledge is stored.
Before I conclude, I would like to recall the statement I noted in the beginning of this article. “.. examining the failure in the light of others success ..” The U.S. success story has provided the answer to this widely debated question – why many other nations failed or couldn’t grow rapidly. Many economic theories explain the failure or success of a nation. But this article goes beyond that. It pinpoints the role of mass education and early investment in knowledge in economic growth of the U.S.
My hypothesis can be summed up in one simple equation by revising the earlier long-term GDP growth function(Y):
Y = Ai • At• f(K, L)
Where, Y – National output, K – Capital, L – Labor,
At – Technology … and
Ai – is Investment in Knowledge.
Excerpted from an article by Anant Chaudhari