Archive for the 'Standard of Living' Category

Feb 20 2017

Some thoughts on educating students for “success” and “happiness” in the 21st century

Today we returned to work after a relaxing week of holiday-making for a day of “professional development”. The day kicked off with our school’s director sharing some information about a recent audit of our school’s parent community, which revealed that there is great anxiety among the parents at our school about their children’s experiences in school today, mostly relating to how well they will achieve on their examinations and whether their levels of achievement will assure them entrance to the top universities to which they (both the parents and the students) aspire.

The ultimate source of this anxiety, it would seem, is not the immediate importance of exam scores or even college acceptances, rather the deeper concern among parents that their children may grow up to be less successful than they themselves have been in their careers. I am sure that this anxiety is one experienced by nearly every parent in the history of mankind: from our primitive ancestors who stressed over their children’s abilities (or lack thereof) with a bow and arrow to blue collar workers of the 20th century who worked 80 hours a week to be able to send their children to state colleges where they may learn a skill that would raise their lot in the future. The parents of my students today likewise fear that their own children may grow up to be less successful in the fields they believe to be worthy of their children: business, finance, law, technology, management, and so on.

In fact, the parents whom our school serves are some of the most successful people in the world in their respective fields. They have risen to the top levels of management in multi-national corporations. They sit at the pinnacles of global financial institutions. Many are successful entrepreneurs or investors who have proudly raised their children in a world of luxury. The very fact that they send their children to our school is evidence of their own career accomplishments (we are a very expensive private school in one of the richest countries in the world).

It is for this reason that I believe nearly all these parents’ should be very anxious about their children’s futures. It is natural for parents to want their children to achieve what they have achieved (or greater!). It is natural for parents to desire for their children to be able to enjoy the living standards they have been afforded thanks to their own accomplishments in business, finance or law. As I have said, every parent in history has wanted as much for their children.

But is it realistic for a major league pitcher to wish for his son to grow up to throw a ball 105 miles per hour? Certainly not.
I believe that today it is less likely than it has been for generations that a child growing up at the top of the socioeconomic ladder will, in fact, achieve the level of professional success and the resulting income and living standard that their parents achieved. These parents’ anxieties are 100% justified and they have very little reason to believe their children will someday earn the incomes they enjoy today.

Here’s why: The entire trajectory of the global economy has shifted since my students’ parents embarked on the career paths that led them to where they are today. Globalization and technological change have displaced (or replaced) many of the blue collar jobs that Europeans and American counted on for a decent living standard in the 20th century, and these same processes have already begun to affect the white collar careers on which many of my students imagine their future paths taking them. The knowledge and skills we teach in schools today will be increasingly devalued in the future.

Knowledge will become a free good as artificial intelligence and other information technologies reduce the barriers to acquiring knowledge to zero. Likewise, the gaps in global skill levels and productivity that allowed the growth of incomes in Europe and North America to exceed those in the rest of the world throughout the 20th century have already begun to narrow, evidenced by a decade of low or no growth in the rich world and nearly 5% growth in the rest of the world. This means the pool of skilled workers of which my students will eventually be a part will be vastly broader and deeper than that in which their parents competed.

The knowledge and the skills we teach our students in school today will only continue to be devalued in the future, meaning students whose future aspirations are based on the assumption that such learning objectives will assure them a high income and living standard will find themselves drowning in a labor pool in which they have less economic value than they ever have in history.

Stated simply, value is a function of scarcity, and as skilled and knowledgeable workers become less scarce, those whose only assets are what they “learned in school” will find themselves far less likely to achieve the levels of income that those of earlier generations did.

The implication of technological advancement and globalization (both the defining forces of our century) for education is that unless we begin teaching something NEW and DIFFERENT than what was taught in the last century, our students will almost certainly not achieve what their parents (educated in the last century) have been able to achieve with their educations.

So this begs the question: What can students learn in school today that WILL help them achieve the levels of success and happiness to which all parents aspire for their children?

I think the answer to this question also came up in this morning’s speech by my school’s director. He closed by sharing a quote from a student who recently graduated from my school in which the student reflected on what he learned on a school trip to Nepal during his last week before graduating (as part of our “classroom without walls” experience). After spending a week with the orphans of Kathmandu and in a Buddhist monastery in the Himalayan foothills, this student returned to Switzerland with a new understanding of what happiness meant. He realized for the first time in his life that happiness was not measured by how many material things we surround ourselves with, but by the relationships we have with others in our community and by our connection to both other human beings and the natural and spiritual worlds.

My question (and concern) is: Why did it take until this student’s last week of school before he came to this important understanding? Is this not the most important lesson he could possibly learn? Should only those students lucky enough to spend a week in the Nepalese slums come to such important understandings about life, happiness and success?

I wonder if it would relieve our parents’ anxieties if we shifted our focus in school today to place less emphasis on a pre-determined set of rapidly depreciating knowledge and skills and more emphasis on relationships, connections with the community and the environment and spiritual self-awareness.

I wonder what our parents would say if we told them that our school’s focus were shifting from providing their children with information and skills that will earn them the best examination results to instilling in them an awareness of and an understanding that happiness is measured not by what you have, but by what you are able to live without.

Will parents understand that their children’s pursuit of a high paying job based on the same knowledge and skills that they learned in school will prove fruitless in an era where knowledge and skills are no longer scarce?

Will they agree that what matters is not their children’s future success as measured by their income and material well-being, rather their future happiness?

I wonder whether my students’ parents realize how justified their anxieties are. And I hope they understand that if or when their children do not succeed on the paths they envision them pursuing, it won’t be their own faults; rather, it is the inexorable outcome in an era where knowledge and skills are continually devalued by technology and globalization.

Henry David Thoreau, who shed the burden of materialistic pursuits for a simple life in the forest, once said, “A man is rich in proportion to the number of things which he can afford to let alone.”

The happiness of being able to do without material things is that to which our education today must aspire. The path my students’ parents followed will become increasingly narrow and unattainable for the next generation. Therefore, a rethinking of what we teach and, in fact, value, is necessary to achieve happiness for our students in the future.

Many schools have embraced the alternative path to happiness envisioned by Thoreau and others throughout history. The awareness that true happiness is not attained by the pursuit of money and status, rather a connection with our community, the natural world and our spiritual selves and an embrace of simplicity over complexity is nothing new. The Buddha new it, Jesus knew it, Emerson and Thoreau knew it.

The question is, do our students know it? Do their parents know it? Heck, do I know it? And once we’re aware of this truth, how can we begin to redesign our schools’ learning objectives so that our students leave school with a truly attainable path to happiness and success, perhaps of a different kind from that imagined by their parents, but one that will certainly be more achievable and just as valuable in a future in which the spoils of global economic activity will be more evenly distributed between the world’s people than it has ever been in history.

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Jan 08 2013

Income inequality as a Market Failure

The prevalence of income inequality in free market economies indicates that inequality may be the result of a market failure. Those who are born rich are more likely to become rich, while individuals who are born poor are more likely to live a life of relative poverty. In a “free” market, it is believed, all individuals possess an equal opportunity to succeed, but due to a mis-allocation of resources in a purely market economy, this may not always be the case.

The resources I refer to here are those required for an individual to escape poverty and earn a higher income. These include public and merit goods that those with high incomes can afford to consume, while those in poverty depend on the provision of from the state, including:

  • Good education
  • Dependable health care
  • Access to professional networks and the employment opportunities they provide

Whenever a market failure exists, it can be argued that there is a role for government in regulating the market to achieve a more optimal distribution of resources. When it comes to income inequality, government intervention typically comes in the form of a tax system that places a larger burden on the rich, and a system of government programs that transfer income from the rich to poor, including welfare benefits, unemployment benefits, healthcare for low income households, public schools and support for economic development in poor communities.

Many politicians and some economists like to argue that income inequality is not as evil as many people make it out to be, and that greater income inequality can actually increase the incentive for poorer households to work harder to get rich, contributing to the economic growth of the nation as a whole. Allowing the rich to keep more of their income, in this way, leads more people to want to work hard to get rich, as they will be able to enjoy the rewards of their hard work.

Another common argument is that higher income inequality leads to social and economic disruptions that can slow economic growth and bring an economy into a recession or a depression, since the middle and lower income groups in the nation will not benefit from a relatively equal share of the nation’s output, and over time will see their living standards drop and their overal productivity and contribution to national output decline.

The debate over inequality and what government can or should do about it is at ther root of many other economic debates today. A recent study by the Political Economy Research Institute of the University of Massachusetts, Amherst, provides support for those who support the second argument above. Here are some of the main discoveries from the study, “Searching for the Supposed Benefits of Higher Inequality: Impacts of Rising Top Shares on the Standard of Living of Low and Middle-Income Families”.

Discoveries of the study:

Some believe that increasing inequality leads to more growth, others argue that it leads to less growth.

A more interesting question is whether rising income inequality leads to a higher standard of living for everyone in society, or whether standards of living decline for those in the middle as the percentage of total income earned by the top 10% increases.

The study found that the higher the percentage of income earned by the top 10%, the incomes of those in the middle and bottom of the income distribution actually decreases. Not just the percentage of total income, but the actual incomes of these groups falls as the rich get richer.

The popular belief is that reducing taxes on the rich increases the amount of investment in the economy, creating more jobs and helping increase incomes of the middle and lower income households. This theory is sometimes referred to as “trickle down” economics, as the increased incomes and wealth at the top will “trickle down” and raise the incomes of the rest of society as well.

However, actual data shows that a 10% increase in the share of total income earned by the top 10% of income earners leads to a 2% decline in the incomes of households in the middle of the income distribution (based on data for the period between 1979 and 2005).

It’s not just that the rich get richer and the poor get poorer, rather that the rich getting richer makes the poor (and the middle income earners) poorer. This is a breakthrough discovery.

Possible explanations:

  • The rich contribute to growth abroad, rather than at home: Rich households’ higher incomes allow them to consume more domestic output and imported goods and services, but it also allows them to save more, which sometimes translates into more investment. But more investment does not always translate into domestic economic growth, since investment is now global. A rich American saving more does not mean American firms will have access to cheaper capital, as domestic savings may fuel investment in emerging markets or elsewhere abroad. Foreign investment resulting from savings among rich Americans counts as a leakage from America’s circular flow of income, leaving less income within America for the middle and low income earners. Essentially, much of the income earned by the rich is saved abroad, contributing to employment and growth overseas, reducing incomes of the middle class at home.
  • Reduced support for the provision of public goods: When examining living standards, more than just income must be considered, but also access to education, provision of health care and other public goods such as public safety and security. Richer households are less interested in things like public schools and social welfare programs, as they do not rely on these for their own well-being. Therefore, the richer the top 10% become,  the greater their incentive to work against efforts to fund public education, public health and public safety. The underprovision of these social welfare enhancing goods by govenrment further widens the gap between the living standards of the richest and the middle class. Economist Robert Reich refers to this phenomenon as “the secession of the successful”.
  • Wage competition reduces incomes in the middle: Business owners, who make up a large percentage of the richest households in America, increase their own incomes to the extent that they can drive down the wages they pay their employees. In this way a higher share of national income is enjoyed by a smaller proportoin of society. The minimum wage has barely increased over time, and workers have less bargaining power as fewer workers than ever are members of labor unions; this has allowed business owners to pay lower wages over time, concentrating an increasing share of national income in business profits, and less and less in wages for workers.

In the video below, the study’s author shares some of the findings discussed above. Watch the video and respond to the discussion questions that follow.

Discussion Questions:

  1. Summarize the argument against a government taking measures to redistribute its nation’s income to reduce the level of inequality between the rich and the poor.
  2. Summarize the argument for a government reducing inequality.
  3. Popular belief holds that “a rising tide lifts all boats”. In other words, if the total income of a nation is increasing, it does not matter if the rich are enjoying a larger percentage of the higher income than the poor and middle, because everyone is likely to be better off than if total income were not growing at all. Does the study discussed above support this popular view? Why or why not?
  4. What measures can a government take to assure that higher national income leads to higher standards of living for everyone in society, including the middle class and the poor? Why might the highest income earners be opposed to such attempts by government?
  5. Should government intervene to reduce the level of income inequality in society?

90 responses so far

Feb 27 2012

A closer look at Apple’s iPad and iPhone – “made in America”?

I have two  interesting stories on Apple and the iPad to reflect on today.

First, ABC’s Nightline recently became the first Western journalists actually welcomed into an Apple assembly plant in China. The show recently aired a 15 minute feature on working conditions inside Apple’s Foxconn factory in Shenzhen, China last week. Watch the video and then scroll down for what may be some additional surprising news about Apple’s operations in China.

Next, the story that has gone unreported lately is a University of California study titled “Capturing Value in Global Networks: Apple’s iPad and iPhone”. The study’s most interesting finding, in my opinion, is the tiny percentage of the total value of Apple’s iPhone and iPad that actually goes to the Chinese manufacturers of the products. The charts below, from the study, show how the value is divided among the various groups involved it their production and sales:

The Economist provides the analysis:

The chart shows a geographical breakdown of the retail price of an iPad. The main rewards go to American shareholders and workers. Apple’s profit amounts to about 30% of the sales price. Product design, software development and marketing are based in America. Add in the profits and wages of American suppliers, and distribution and retail costs, and America retains about half the total value of an iPad sold there. The next biggest gainers are South Korean firms like Samsung and LG, which provide the display and memory chips, whose profits account for 7% of an iPad’s value. The main financial benefit to China is wages paid to workers for assembling the product and for manufacturing some inputs—equivalent to only 2% of the retail price.

A student today asked why Apple doesn’t produce its products in the United States, where an economic downturn has left 14 million American out of work for the last three or four years. If iPads and iPhones were just made in America, jobs could be created, households would have more income to spend on Apples products, and both the country and the economy would benefit.

The data in the UC study indicates that in fact, more than half the value of an iPad or iPhone does end up in the hands of Americans. But Apple could never achieve the low costs and high profits that it does by assembling its products in the US. After watching the Nightline video above, it should be clear that the type of production involved in Apple factories’ is very low-skilled and labor-intensive. Using American labor, with its unions, minimum wages and 40 hour work weeks, would require Apple to employ such large numbers of workers and raise the company’s variable cost to such a level that the firm’s profits would be reduced significantly and its sales would fall dramatically. Apple would lose out to foreign producers of smart phones and tablet computers, such as LG, Samsung, Sony and others, which would continue assembling their goods with Chinese labor.

Ultimately, any gain to the low-skilled American workers (presuming Apple could even find enough to do the work of the 400,000 Chinese employed in the production of Apple products in China), would be offset by a loss of profits enjoyed by the millions of Americans who hold shares in Apple Computer and the thousands of American who are employed engineering and designing its products, as the firm’s sales would slip in the face of lower-cost competitors.

So this student’s question identifies an interesting paradox: America, with its large pool of unemployed workers, will never be attractive as a place to produce labor-intensive products such as phones and tablet computers, due to the vast wage differential between the US and China. And even if one firm did decide to produce its products in America, the gains to low-skilled workers who may find minimum wage work in the new assembly plants would be off-set by losses to the firms’ shareholders and the high-skilled workers whose jobs would be lost as sales decline due to the lower prices offered by lower-cost competitors.

The lesson here is two-fold: First, Apple and other American technology companies should continue using Chinese labor to assemble their products, and second, America is better off for it: lower costs mean cheaper products and higher sales, thus greater employment in the high-skilled sectors of the US economy, and more profits and returns on the investments of shareholders in American corporations. Americans are richer and enjoy a higher standard of living thanks to the millions of Chinese working in factories assembling the goods we consume.

Keep in mind, this analysis did not even consider the effect on the Chinese economy and the millions of Chinese workers (whose lives are much harder than the typical American) should companies like Apple shut down their Chinese manufacturing plants. That’s a whole other blog post!

5 responses so far

Jan 30 2012

Models of Economic Growth and Development

As we study economic development in year 2 IB Economics, we examine different models for economic growth. Growth in GDP is not the only determinant of economic development, which in order to be measured effectively must account for human welfare determinants such as life expectancy, literacy rates, child mortality rates, distribution of income, and so on. However, it has been shown throughout history that economic growth, or the increase in real output and income, correlates directly with improvements in development factors like those above.

The reason? Increases in national income usually mean at least some levels of improvement in access to basic necessities for the average citizen in a developing country. Also, higher incomes mean more savings, which means greater access to capital for investment by entrepreneurs. More investment leads to greater productivity and rising incomes for those who join the emerging industrial and service sectors that usually accompany economic growth. Furthermore, rising incomes mean more tax revenue for governments, whose spending on public goods like education, health care, and infrastructure result in real improvements in standard of living for not just the emerging upper and middle classes, but the poor as well.

Of course, the following models can be observed to varying degrees among the world’s developing economies today. Some of these models will fail to play out if the institutional and political environment fails to create a stable atmosphere for savings and investment. What you should notice, however, is the underlying importance of savings in all three models. Poor countries suffering from low savings and, even worse, capital flight, are doomed to a cycle of poverty, where funds for investment leading to productivity increases are never made available due to instable institutions like banking and politics. To put a poor country on a path towards economic growth and development, a strategy is needed. Such strategies will be covered in a later post. For now, let’s look at the models:

Harrod-Domar Growth Model:HD model

The model suggests that the economy’s rate of growth depends on:

  1. the level of saving
  2. the productivity of investment i.e. the capital output ratio

The Harrod-Domar model was developed to help analyse the business cycle. However, it was later adapted to ‘explain’ economic growth. It concluded that:

  • Economic growth depends on the amount of labour and capital.
  • As LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.
  • More physical capital generates economic growth.
  • Net investment leads to more capital accumulation, which generates higher output and income.
  • Higher income allows higher levels of saving.

Lewis Structural Change (dual-sector) Model:

Lewis model

Many LDCs have dual economies:

  • The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment.
  • The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas.

  • Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide.
  • Furthermore, as the level of labour productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output.
  • Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people. This might generate a surplus which could them be sold generating income.

Those people that moved away from the villages to the towns would earn increased incomes:

  • Higher incomes generate more savings.
  • Increased savings meant more fund available for investment.
  • Increased investment meant more capital and increased productivity in the industrial sector, higher wages, more incentive to move from low productivity agriculture to high productivity industry, the circle continues…

Rostow’s Model – the 5 Stages of Economic Development:Rostow Model

In 1960, the American Economic Historian, WW Rostow suggested that countries passed through five stages of economic development.

According to Rostow development requires substantial investment in capital. For the economies of LDCs to grow the right conditions for such investment would have to be created. If aid is given or foreign direct investment occurs at stage 3 the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investment may lead to rapid growth.

67 responses so far

Sep 04 2010

Excellence and teacher pay: A New York charter school is not the only school paying teachers $100,000+!

Next Test – Value of $125,000-a-Year Teachers – NYTimes.com

A New York City charter school is experimenting with paying teachers nearly triple the national average teacher salary of public schools. The article below describes the result:

So what kind of teachers could a school get if it paid them $125,000 a year?

An accomplished violist who infuses her music lessons with the neuroscience of why one needs to practice, and creatively worded instructions like, “Pass the melody gently, as if it were a bowl of Jell-O!”

A self-described “explorer” from Arizona who spent three decades honing her craft at public, private, urban and rural schools.

Two with Ivy League degrees. And Joe Carbone, a phys ed teacher, who has the most unusual résumé of the bunch, having worked as Kobe Bryant’s personal trainer.

“Developed Kobe from 185 lbs. to 225 lbs. of pure muscle over eight years,” it reads.

They are members of an eight-teacher dream team, lured to an innovative charter school that will open in Washington Heights in September with salaries that would make most teachers drop their chalk and swoon; $125,000 is nearly twice as much as the average New York City public school teacher earns, and about two and a half times as much as the national average for teacher salaries. They also will be eligible for bonuses, based on schoolwide performance, of up to $25,000 in the second year…

The school received 600 applications. Mr. Vanderhoek interviewed 100 in person.

It’s amazing to me that a school in NYC that pays $125,000 a year and expects teachers to work year round gets so much attention, while some international schools have been paying teachers nearly as much for decades to work a regular school year. Yet so many American teachers seem unaware of the career opportunities available at international schools! A salary of $100,000 is not unheard of in international schools, and often times that income is tax free (at least the majority of it, since it is considered “foreign earned income” by the IRS).

In economics we study how scarce resources are allocated by supply and demand in the market place. Demand for highly skilled, qualified teachers is huge in all kinds of schools, public, private, charter and international schools alike. But only once an American school like this New York charter school comes along and offers to pay teachers a salary more than double the national average (and then receives nearly a hundred applications for every opening) do we begin to read about teacher pay in the news and reflect on the roll it plays in attracting top notch, expert educators. From one economics teacher’s perspective, it should come as no surprise at all that when a school offers a higher salary it will attract better teachers and thereby improve the quality of the education it provides.

International schools have known this simple fact for years. Unlike the American public school system, which from state to state essentially resembles the “monopsonistic employer” model (meaning each state has a “monopoly” of sorts on the hiring of teachers), the market for international teachers is highly competitive. In most big cities, even, there are several international schools competing to attract the best educators from the limited supply available. And in a particular country, for instance China, there are dozens of private international schools, all seeking to offer the best quality education in order to increase demand for enrollment, competing against one another to hire the best teachers they can.

The result of the competition between international schools for student enrollment is increased competition for skilled, qualified teachers. Add to this the fact that year after year there end up being shortages of qualified international teachers and you end up with the perfect recipe for teachers like myself and all the colleagues I’ve worked with over the years, upward pressure on the salaries and benefits packages offered by international schools.

The lesson here is clear from my perspective. Increased competition among schools for student enrollment will lead to increased competition among schools for better teachers, and therefore better teacher pay. The NYC charter school set out with a clear vision in mind for achieving students success. Attract the best teachers and we’ll provide the best education. And in order to achieve this vision, it followed the most basic of economic principles, articulated so eloquently by Adam Smith himself:

Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.

The bargain being offered to teachers in this case is an attractive salary, and all the schools in question are asking for in return is excellent teaching. “In this manner” schools obtain from teachers a commitment to excellence and teachers obtain from schools a salary that rewards them for this commitment. Society’s need for excellent education and teachers’ need for a living wage are met. But public schools go against this basic tenet of  market doctrine when the monoposony that is the state public school system pays teachers not based on their achievement, training, excellence or results but on their years of service. The lack of competition for student enrollment leads to a failure of the incentive system for attracting good teaches, and what schools find themselves with is a burnt out, underpaid, disgruntled work force and test scores and student achievement that you’d expect to follow.

I hope this charter school succeeds. I hope the students’ scores surpass those of their public school peers. I hope this not  because I like to see the old model of education fail, but because I would love to see a new model, based on the simple market principle that individuals respond to monetary incentives, succeed. I can say from experience that the competition among international schools for the limited supply of skilled teachers benefits all the stakeholders in question: teachers are paid better, the schools that pay the most attract the best teachers and thereby attract the greatest demand for enrollment. The market has worked! If the New York charter school succeeds, how can this be ignored. How can America’s other public schools not admit that to improve education, competition for students and teachers must be embraced.

13 responses so far

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