Michael Polanyi

The very words have a bureaucratic ring to them. At least to me. Nancy Folbre has written an interesting article about the ending of the Golden Age of Human Capital, her main point being that there has been a major change in the landscape for higher education. The value of a college degree is not what it used to be, and the cost of getting one is becoming prohibitive.

The second part of that statement – about the cost of education – is testimony to the shockingly irresponsible shambles that academia has become. The cost of providing an education is way out of line, affordability is declining rapidly, student debt shackles the young and reduces their ability to attain the creature comforts of the old middle class, and the future value of college is increasingly murky. Academics decry the cost of getting an education, but offer little by way of a remedy. The productivity within academia is a challenge to say the least, and odd ball solutions like opening up campuses of our universities in China solve nothing. Indeed they make matters worse by building the supply of graduates and thus eroding the return available for all graduates.

Folbre hints that there may have been a shift in the demand for educated workers, at least here in the west, with employers now focusing on more specific skills rather than the old fashioned generalists pumped out en masse by liberal arts colleges.

Let me add my voice to this discussion.

Corporate America is awash with highly educated bureaucrats. The demand for such folk rose strongly during the 1980’s as big businesses sought to upgrade the talent of their management teams. Prior to then it was not unusual to find a large corporation being run by a raft of ‘corporation men’ – invariably men – who had risen through the ranks and benefitted from employer specific training. Sometime around the early 1980’s in-house training was identified as being too expensive. Those programs thus became an early example of outsourcing, with the cost of management education being pushed onto the employee and off the corporate income statement. This was acceptable to employees as long as the returns to the cost they were now covering was significant enough, which, as we all know, they were. By the end of the 1990’s most employer specific management training programs had disappeared and had been replaced by minor technical training, and, sometimes, the subsidy of employees who sought their own education whilst at work.

This is, of course a generalization, but notice two convergent trends within this history.

First, the early 1980’s was also the onset of the single minded pursuit of shareholder value. Experience and education became costs to be cut or outsourced like any other cost. The drive for efficiency – to pump up returns on equity – drove corporate America to abandon many older methods and ways of doing business. Among those jettisoned notions was lifetime employment and the ‘corporate man’. Instead of providing training big businesses turned to the marketplace to hire already educated employees. This created a boom in demand for anyone with a higher education. Thus the emergence of the Golden Era for Human Capital that Fobre regrets the passing of.

Second, this surge in employment for educated people built the supply of able bureaucrats capable of seeking the very efficiencies that had caused the outsourcing of business education. The ranks of business swelled with accountants, lawyers, consultants, and other highly educated workers whose pay seemed immune to the stagnation witnessed by less educated workers as efficiency became ever more important as a source of profit. These ‘knowledge workers’, as they began to be called, were the ones leading the efficiency charge. They were the ones steeped in the latest management and economic doctrines, and they were the ones reaping the rewards from the slimming down and streamlining they led with such gusto.

It wasn’t the pursuit of innovation that drove the demand for knowledge workers, it was the drive for efficiency. Creativity was valued more for incremental tinkering with corporate costs, not for breakout product or process changes. Despite all the hype from management gurus, innovation was the lesser source of short term profit, by a long way, than was the search for efficiency. As long as costs could be cut the demand for bureaucrats willing and able to cut them was near insatiable.

Sooner or later, though, the fat had been trimmed and the demand for such bureaucrats tapered off. The newly lean corporations could manage themselves with fewer managers. The relentless pursuit of shareholder value brought the high cost of those bureaucrats into focus. Business decided it needs fewer. It began to outsource the activities they occupy. The drive for efficiency entered a new phase.

Which is where I think we are.

The value of those higher educations has diminished for many, leaving ever larger spoils for those who manage to remain. The top 1% of wage earners began to separate from the top 5%. The skilled bureaucrats began to feel the same heat that they applied to lesser educated workers.

Let me step back and add a wrinkle to the story.

In an economy there are two kinds of knowledge. What I call ‘primary’ and ‘secondary’. They are distinguished by the role they play rather than the content. This is different from the tacit/explicit dichotomy of Michael Polanyi in his 1966 book “The Tacit Dimension”, and which has become so popular amongst management and consulting theorists.

The two kinds of knowledge relate to the two impulses upon which an economy is based. Innovation creates the long haul rise in wealth that we all benefit from – and which the McCloskey book I commented on last week brings into sharp focus. Efficiency re-arranges the existing resources to reap greater rewards from them.

In my terms: primary knowledge is the source of efficiency; and secondary knowledge is the source of innovation.

Primary knowledge is embodied in the skills of workers doing repetitive tasks, in the capital machinery and technology that clutter the business world, and in the management methods that dictate the structure of production processes. Primary knowledge allows the pursuit of efficiency because it can be economized upon. It can be replicated exactly. It can be transferred. It can be coded. It can be compressed. It is the stuff of corporate process. These qualities allow for the reliable reproduction of product. Because they are so predictable and replicable, they allow for the minimization of cost and the maximization of profit – don’t forget that the pursuit of a maximum requires a stable and well known set of inputs for the computation. Primary knowledge needs known problems with known solutions. It assumes a future that mirrors the past so that its efficacy can endure.

Secondary knowledge is very different. It is embodied in the problem solving ability of workers and machines capable of ‘thinking’. It is how we deal with new problems and issues. It does not assume that the future is a mirror of the past, but that there exists a capability to innovate when presented with a need or an opportunity. It creates new solutions to new problems. But there is a downside: it cannot be economized upon since it exists as a vague potential up until the moment of problem solving. This, by the way, is why McCloskey can subtitle her book: ‘why economics can’t explain the modern world’ – standard economics deals only in a world of primary knowledge and maximization and has nothing to say about ad hoc problem solving. Secondary knowledge is also expensive since it requires a complex of available routines, thought processes, and associated information, much of which may never be called into action. It is idiosyncratic and personal, making it intractable to both to business, and to standard economic theory. Yet it is the source of the breakthroughs that constitute innovation.

This dichotomy adds, I think, a dimension to Folbre’s analysis. The surge in interest in human capital coincided not with a heightened interest in creativity or innovation – despite the claims at the time – but with the need expressed by corporations to translate their existing secondary into more efficient primary knowledge. In other words the drive to embody existing knowledge and ring the last ounce of profit from it produced a demand for bureaucrats to re-invent older products and processes rather than to invent new ones.

Once that drive had run its course, and as our economy had been compressed to produce the most profit, the demand for ever greater bureaucratic armies ebbed.

Interestingly, this narrative explains some of the macro trends that others attribute to structural problems in the economy. People like Tyler Cowan, for example, predict a diminished trajectory for GDP growth because our economy is not innovating as well as it once did. According to Cowan, our latest inventions have a far smaller impact on future wealth creation than did those of a century ago. This conclusion feeds into his standard right wing cry for freeing up enterprise and the reduction of social entitlement programs. He says we cannot afford those programs because of the diminished future, and if we want to move the growth curve back upwards we need to reduce government controls.

But my narrative produces a different interpretation: the cause of our diminished future resides in the private sector’s single minded pursuit of profit being extracted from efficiency rather than from innovation. We have succeeded mightily in squeezing profits from our current set of  ideas. But at the cost of thinking about and finding the innovations that build the future.

We have become overly bureaucratic, technocratic, and reliant on primary knowledge.

I think the Golden Age of Human Capital is yet to come. The age of problem solving, that is. Not the age of rote learning.