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I want to start with a broad question. What is economic growth, and where does it come from?

Economic growth is just change in economic well-being. Usually, we measure it with GDP.

Where does it come from? There are a lot of stories that people tell. Traditionally, people said it comes from capital accumulation and better-quality labor. But when you really go to the numbers, neither of these things can explain anywhere close to the full change, so most growth has got to be from technological progress, broadly defined. That is the main difference between the world of today and the world of 2000 years ago.

In your piece, you distill it to a single word: ideas.

That’s right.

Why is economic growth important?

In any given year, it seems like getting another percentage point of growth couldn’t make much difference. You barely even notice it. And yet, as many people have pointed out, when you compound an extra percentage point of growth per year over the course of 100 years, it’s the difference between poverty and riches. And riches are what allow you to buy free time. Riches are what allow you to buy culture, to save your child from worms.

Right. So economic growth is an increase in wealth, it comes from new ideas, and ultimately, it is highly correlated with things like better infrastructure, better hospitals, and so on.

Absolutely.

What is the purported relationship between education and growth?

The normal view is that education is the crucial determinant of growth, that it turns unskilled humans into the skilled workers of the modern economy. This is an idea not just from politicians, teachers, and the general public, but also from economics. If you take a class in economics, they will constantly talk about how it’s important to have lots of education because that’s how we build human capital.

So, the purported relationship is that education creates human capital, which creates new ideas and thus more growth?

That’s one version. The more common one is simply that education leads to human capital, which immediately leads to growth. The typical college grad isn’t going to invent anything, but they’re capable of being a more valuable cog in the machine.

Right, so the standard inference is that if you have a more educated workforce, they can accomplish more sophisticated tasks. What does the evidence show?

So, I have a book called The Case Against Education, and I’m not going to be coy about this: I expected to find that education was overrated. However, I also expected to find that a lot of other people researching would say they had clear evidence that education raises economic growth.

However, when I read all the mainstream work on education, there was a big debate about “how come we’re not finding what we know to be true, which is that education is the crucial cause of economic growth?” I think that they are finding the truth, which is that education isn’t a factory for building human capital, but a certification machine for stamping people: good worker, great worker, not so great worker. People like to think about education as a way of building skills, but actually, it’s more like a passport to the real training, which happens on the job.

So, by going to university, you are offering your employer a sign that you are intelligent and conscientious enough to do so.

You’re showing intelligence, conscientiousness, and also conformity. There’s no “I” in team. Most jobs require you to follow a chain of command to achieve the goal of the group. While on some level I don’t like conformity, on a deeper level it’s really important for most purposes.

I want to read you something that you wrote. “Contrary to conventional stories about the positive externalities of education, mainstream estimates of education’s national rate of return were consistently below estimates of education’s individual rate of return.”

What does that mean?

Great question.

A rate of return is basically a measure of how good an investment is. So, for example, you might try to calculate the rate of return of putting extra insulation on a house. We can do the same for education and figure out how all the costs of education compare to the payoffs.

When you do this from the point of view of an individual person, it’s pretty common to get a 10 percent inflation-adjusted rate of return. In my book, I say this is probably too high, but you can bring it down to maybe 7 or 8 percent.

We can also think about this at the level of the country. What if we raise the education level of the whole workforce of a country by a year? How much does that enrich the country? What that quote is saying is that even the high estimates of how much a year of education does for a country are typically around half of what it does for an individual. And a lot of the estimates find that sending the whole country to school for an extra year increases national income by 1 or 2 percent.

In other words, a stamp is a good way for one person to get ahead in life, but stamping the whole country does not help that country get ahead; it just creates credential inflation. You need more and more degrees in order to get the same job that your parents and grandparents got with fewer.

Let’s talk a little bit about innovation. Where do new ideas come from? Are we talking about a very small group of individuals who share certain characteristics?

It’s an exaggeration to say that innovation only comes from a few people. There are millions of small-scale improvements coming from many different people. Opening a new kind of restaurant is not revolutionary R&D, but so much of the improvement in our living standards comes from these small acts of entrepreneurship. When I was in high school, there were only three kinds of restaurants: American, Italian, and Chinese. Now we have a cornucopia of different cuisines. The same goes for so many other simple products. Dog collars now come in 100 more varieties than they did back when I was growing up in the ’80s.

However, the really revolutionary stuff—new vaccines, new business models, new forms of energy—comes from very special people. I think it’s reasonable to say that almost all the really big ideas are coming out of the top sliver of the IQ distribution. There was a psychologist named Lewis Terman in California who, I believe, in the 1920s, saw that there was a standardized test administered to all the kids in the state of California school system. He managed to get data on the top hundred scorers in the whole state of California in that year, and he followed them through life. In his honor, these kids are named the termites, and there’s been a lot of research on them.

While the vast majority of this group didn’t do anything really impressive, they had many times, maybe a thousand times, the normal rate of stellar success. So, just doing these kinds of tests is a good way of identifying the most promising people. At a minimum, just have a system where you basically let children advance as rapidly as they’re capable of. A lot of very intelligent people feel very isolated from their own age group, and it makes sense just to advance them as far as their talent will take them.

I have a personal view, which is that our society is very open to the idea of the STEM prodigy, but we are very closed to the idea of there being a prodigy in, say, history. And I think that there are history prodigies. I have met kids with not just a broad, but a deep understanding of history by the time they’re 13 or 14. People think it’s crazy to put them in a PhD program in history when they’re 14 years old, but I don’t. Why not skip that kid ahead and let him become a star? Look, maybe he wants to be a regular 12-year-old even though he is a genius, but maybe he doesn’t. Maybe he wants to be with a peer group of geniuses. Let’s pave the way for him if that’s what he wants.

Do you think that AI will allow us to continue innovating if the population starts declining?

There was a long period where people working on AI kept over-promising and under-delivering. I would personally hear extravagant claims and check them out and find that they weren’t true. Finally, about two years ago, they started being correct. I was as shocked as anyone. I actually have a bet out about AI, which I’m probably going to lose. It’s embarrassing because I have otherwise a perfect public betting record.

That said, one incredible achievement does not mean that they’re going to have a whole series of incredible achievements. And there’s a lot to the idea that AI is basically just amazing at compiling what has already been said rather than truly coming up with new stuff. While it’s not impossible for it to get better, a lot better, it’s also not guaranteed.

Another thing worth pointing out is that we’ve had, by many measures, falling rates of innovation despite a rising population. There’s an idea that we’ve already discovered a lot of the low-hanging fruit, and so we need to keep multiplying our efforts to maintain the same rate of growth. Another plausible story is that we have doubled the number of people that we call researchers, but really only the best ones count, and the other ones are kind of fake.

Given that much of the money we spend on education is spent poorly or even counterproductively, what should we do with the money instead?

I’m totally on board with giving it back to the taxpayers or just paying down the national debt. We badly need austerity. We are driving at 100 miles per hour towards a brick wall, but there’s still time to change course and get our foot on the brakes. One of the easiest ways of doing that is by spending less on education.

Is education more useful in the developing world?

Poor countries have a severe problem with teachers even showing up. They, on paper, have many years of education—I think Haiti now is around where France was in 1960—but mostly they are just throwing money at a corrupt system that doesn’t even teach basic literacy and numeracy. The way that people in the third world are learning to use technology is the way that almost all normal people learn anything, which is by doing.

It seems to me that we are doing the exact opposite. We are keeping people in the education system for many years, which could prevent them from starting to work and learning by doing.

Yeah. It would be much better if people started adult life at an earlier age. They’re totally ready for it. There’s no reason why 13- or 14-year-olds should not be working. One of the best ways to get kids to actually learn stuff, especially the kids who hate school, is to make it practical. They need to see concrete results and make money.

If you read biographies or autobiographies of people in earlier eras, it is amazing how far people got at young ages. By the age of 15, Malcolm X had worked four different jobs and been all over the country. Many people listen to me and say, “Oh, that’s so dystopian.” I think the system we have now is dystopian, where someone has to sit in a classroom until they’re 30 listening to some boring windbag talk about things he doesn’t even know how to do.

Summary: This article examines how the market economy drives down the cost of automobiles over time, making them more affordable and accessible to ordinary people. It compares the nominal and time prices of the top ten most popular cars in America in 2000 and 2020, and shows that Americans had to work fewer hours to purchase a car in 2020 than in 2000. It also highlights the improved quality and features of modern cars, and argues that such improvements are largely possible through the innovation and productivity facilitated by a free-market system.

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One of the greatest features of modernity is that living standards tend to gradually improve rather than remain largely stagnant – as they did for millennia before 1750 or so. Today, ordinary people have access to goods and services that the royalty of centuries past would never have thought of. Air conditioning, air travel, cell phones, personal computers, automobiles, modern hospitals, antibiotics, GPS, the list goes on. This improvement is largely due to the robust market economy that, through competition, encourages innovation rather than stagnation and complacency. As new technology arises and productivity per person increases, access to goods and services spreads, and the overall wealth of society increases. 

There is much talk about U.S. economic stagnation, but, in many respects, we are better off than we were just over twenty years ago. One positive trend that’s often overlooked and underappreciated is the reduction in the length of time that blue-collar workers need to work in order to purchase a vehicle. 

The falling time price of automobiles 

The table below contains the names of the top ten most popular cars in America in 2020 according to Insurify, a company specializing in online insurance comparisons. It also contains the nominal prices for the base models from 2000 and 2020. The prices come from Autoblog.com, a popular American automotive news and shopping website.

As you can see, the price of cars has risen over the last two decades, reflecting a multitude of factors, including inflation, better technology, and safety features. Cars are no longer simply metal boxes with engines but impressive machines packed with advanced technology.

Over the same period, economic productivity, and by extension wages, have not only increased but outpaced rising car prices. According to measuringworth.com, a website of historical economic statistics, the average nominal compensation rate for manufacturing workers rose from 19.36 dollars an hour in 2000 to 32.54 dollars an hour in 2020. The table below shows the number of hours that a blue-collar worker needed to work to earn enough money to be able to afford each car in the years 2000 and 2020. These “time prices” were calculated by dividing the nominal price of the car by the nominal hourly compensation rate.

As shown by the data, Americans in 2020 had to work fewer hours to purchase a car than in 2000. Increases in productivity, which typically lead to higher wages, outpaced rising car prices. And, the cars for sale in 2020 were much higher quality than those in 2000, many of which had worse gas mileage, fewer safety features, and no air conditioning.

On average, Americans save 35 hours of work (almost a week) when purchasing a vehicle. Those working hours can now be used for other things, a perfect example of how free-market competition gradually improves living standards for all members of society.

Losing ground in some other areas 

Although Americans are seeing many improvements in the quality and quantity of products relative to their wages, the trend is not universal. In the automobile industry, the incentives are arranged in a way that drives competition and innovation. However, some industries are not as exposed to market forces, often due to a combination of excessive government intervention and insulation from fluctuations in supply and demand.

Mark J. Perry from the American Enterprise Institute, a think-tank in Washington, D.C., shows that dynamic in the healthcare sector. He notes that the cost of medical care services and hospital fees rose 128 percent and 220 percent respectively between 1998 and 2020. Meanwhile, the costs of cosmetic surgeries have increased at a far more gradual pace, with some even declining in price.

Perry argues that some of this disparity can be explained by the manner in which cosmetic surgeries, on the one hand, and medical care and hospital services, on the other hand, are paid for. He writes,

“One of the reasons that the costs of medical care services in the US have increased more than twice as much as general consumer prices since 1998 is that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage of healthcare costs are paid out-of-pocket by consumers.”

In particular, he notes that out-of-pocket costs have gone from almost half of total healthcare costs in the 1960s to just under 11 percent in 2019. With the consumer paying only a fraction of the bill, health providers no longer have to keep prices low to stay competitive. Instead, they negotiate prices with insurance companies and the government, institutions which have a far smaller incentive to shop around for the lowest price or seek alternative solutions when faced with rising costs.

Cosmetic surgeries are financed differently–almost all costs are paid out of pocket by consumers. As such, there is a higher level of transparency as well as price sensitivity, and the services are cheaper.

A similar dynamic exists in the U.S. higher education system, where a large share of the cost is covered by third parties, such as private loan companies, government-backed debt, and taxpayer dollars. Again, time prices (i.e., nominal tuition prices divided by nominal blue-collar hourly compensation rate) show that Americans are working far longer to afford college attendance today than in the past. 

Source: US News, Human Progress.org

Some of the price increases can be attributed to universities providing additional services, such as excellent athletic facilities, better food and lodgings, etc. However, some of the price increases can also be attributed to the incentives that govern the higher education sector. Much like healthcare, a large portion of college funding comes from third parties, not consumers themselves. According to a 2016 paper published by the nonpartisan National Bureau of Economic Research,

“We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data.”

Furthermore, a 2016 paper published by Mahyar Kargar of the University of Illinois and William Mann of Emory University, which examined the effect of tightened lending standards for federal student loans, found that more restrictive policies resulted in net decreases in college tuition. That further supports the notion that the government, as a highly influential third-party lender, is largely responsible for driving up the cost of tuition because it creates artificial demand through excessive funding. Instead of being forced to compete for consumers with low out-of-pocket prices and high-quality education, university administrators face similar incentives to the healthcare providers (i.e., a large part of their revenue comes from third-party lenders such as the government, who are less sensitive to price increases). The authors conclude,

“Finally, the large average markup that we estimate suggests that a simple subsidy to consumers may not necessarily be the ideal financial aid design, and that policymakers should instead target barriers to competition in the form of large fixed costs.”

Policymakers should heed the above lessons. The market forces of competition and price sensitivity, combined with increasing productivity that leads to higher wages, allow living standards to rise. However, government policies and perverse incentives can shield service providers from market forces, undermining competition and eroding U.S. standards of living.

Twenty years ago this week – on Indian Republic Day, 26 January 2000 – I wandered into the slums behind the Charminar, in the Old City of Hyderabad, and my life changed forever.

Building on my PhD at what is now the UCL Institute of Education, I had become an expert on private education. Twenty years ago, everyone knew that private education was just for the elite and upper middle classes and I was in India doing consultancy work for the International Finance Corporation, the private arm of the World Bank, evaluating the elite private schools in the area. However, for whatever reason I had always felt that my life should be about serving less privileged communities.

So, on a day off from consultancy, I went into Hyderabad’s slums, down an alleyway and found a small school in a residential building. It wasn’t a state school, but a low-cost private one, charging in those days about $1 a month. Then I found another, and another, and soon I was connected to a federation of 500 of these low-cost private schools, serving poor and low-income communities across the region. I spent as much time as I could in these schools after finishing my daily meetings in the elite colleges that had initially brought me to Hyderabad. I watched lesson after lesson and witnessed young energetic teachers educating classrooms full of children, often in extremely impressive ways.

I remember going back to my hotel room in an upmarket part of the city and thinking that maybe the different parts of my life could fit together after all. I was an expert in private education, and in India private education seemed as much about the poor and disadvantaged as anyone. My life felt suddenly complete.

For many years I ploughed a lonely furrow, trying to convince those with power and influence that private education was good for the poor. Now, 20 years later, the extraordinary, disruptive revolution of low-cost private schools that is sweeping across the developing world is increasingly acknowledged, and sometimes even respected.

In both urban slums and rural villages, poorer parents are abandoning public schools en masse and sending their children to low-cost private schools, typically created by educational entrepreneurs. These private schools are ubiquitous. In Lagos State, Nigeria, for instance, there are 14,000 low-cost private schools, enrolling 2.12 million children, some 70% of preschool and primary aged children. Research from Nairobi (Kenya), Kampala (Uganda) and Accra (Ghana) gives similar results – the highest percentage is in Kampala, where 84% of primary aged children in poor areas are in private education.

Similarly, in urban India at least 70% of children are in independent private schools, while the comprehensive Annual Status of Education Report (ASER) shows 30% of rural children in private schools, a figure that is growing each year. Extrapolation from recent studies indicates there are roughly 92 million children in India who attend around 450,000 low-cost private schools.

The private schools are better than the state schools, where there is a lack of accountability; research has shown teachers in state schools typically teach only half of the time they are meant to. It’s no surprise that a review by the Department for International Development found children in low-cost private schools outperforming those in public schools, even after controlling for socio-economic background variables.

The private schools don’t typically suffer from gender bias and are affordable, even for families on the poverty line. And the majority of low-cost private schools are run as small businesses by educational entrepreneurs (with a minority run by religious organisations and charities), without subsidies from the state or philanthropic organisation. This means that low-cost private schools are already a fully sustainable solution to the problem of improving educational standards for all.

But there are still difficulties to be overcome. Sometimes governments try to close these schools altogether. More commonly they pass regulations that impose impossible conditions, such as the need for very large playgrounds in areas of urban overcrowding, or the insistence that all teachers must achieve the same level of certification and pay as their government counterparts, even though this would make it impossible for the schools to charge low fees.

So, the struggle continues. The work that began for me 20 years ago in the slums of India continues to this day. I’m currently building a team at the University of Buckingham to continue to champion the successes of low-cost private schools globally. Providing burdensome government regulation doesn’t get in the way, low-cost private schools and the education they provide for millions of poor children will continue to thrive.

This originally appeared in CapX.