Public Over-investment

Amidst all the discussion on public education and the need to develop human capital, here is an example of the adverse consequences of over-investment in public education.  The example has to do with the paradox that while India has a lower GDPPC than Mexico, Indian immigrants in the United States tend to hold higher-skill jobs (such as IT technicians),

In the 1950s, India pursued an aggressive development program by expanding educational facilities at nearly 11 percent per year.  This growth rate doubled the  annual enrollment about every six and one-half years.  Trilok Dhar and colleagues contend that “next to the United States, India probably has more students in universities than any other country, though the proportion of university students per 1,000 population is amongst the lowest.”  The ensuing mismatch between highly educated persons and actual labor needs prevented India from absorbing all its university graduates.  By 1967, one out of every ten university graduates went abroad.  The emigration of scientists was 11 percent; of doctors, 10 percent; and of engineers, 23 percent.  Of those who remained, the proportion of unemployed within the stock of educated labor rose from 14 to 15.7 percent between 1955 and and 1961.

— John M. Liu and Lucie Cheng, “Pacific Rim Development and the Duality of Post-1965 Asian Immigration to the United States,” in Paul M. Ong, et. al. (eds.), Struggles for a Place: The New Immigration in the Restructuring of Political Economy (Philadelphia: Temple University Press, 1994), p. 87.

An additionally important statistic would be how many educated Indians did not enter employment fields in their areas of expertise (i.e. how many took “lower-tier” jobs).

I still hold that the idea that the government should invest in human capital by subsidizing higher education puts the cart before the horse.  You  cannot create demand for engineers by training more engineers.

16 thoughts on “Public Over-investment

  1. Daniel Kuehn

    This is an excellent post.

    Is this for a class? There’s a good older article on unemployment of Indian grad students in a book by Richard Layard should send you – I’ve gotta dig it up at home.

    Reply
    1. Jonathan Finegold Catalán Post author

      I had to read the article for an “Immigration and Border Politics” class, but I am getting increasingly interested on the causes of migration and the benefits/costs of immigration to the United States.

      Reply
  2. Vishal Verma

    This is generally what a lot of people in India discuss as the ‘brain drain’ that occurred a few decades ago since the Indian economy at that point could not absorb such highly educated people in such vast numbers. Of course, going abroad was a much better option. It’s better having a brain drain as compared to ‘brain in the drain’.

    Reply
  3. Robert Mróz

    So basically the same thing is going on in Poland right now. After the transformation from socialism to democracy and the alleged free market, percentage of young people choosing higher education rose multiple times, yet after those, say, 20 years, overabundance of educated people is clearly visible. But that’s of no interest to our gov’t that only likes to brag about how we have the greatest value of this indicator in UE. So what? People who want to pursuit academic career need to go abroad anyway to really do science, and university-educated people work in call centers. Great success, indeed!

    Reply
  4. Taylor

    The government can’t “invest” in anything because it does not earn a productive return on its “investments”.

    Investing capital into a production process that eventually returns principle plus profit, and all the individual, market-based calculation that goes into that, is not the same thing as “investing” capital into people or infrastructure that eventually returns tax revenue, votes, or whatever other product results, and all of the “calculation” that goes into that. They’re two completely separate actions, economically and it’s abusive of the economic concept of investment to speak of them with the same word-concept.

    Reply
    1. Jonathan Finegold Catalán Post author

      There is a lot of government investment that has positive returns. A simple example: the government can invest in Apple stock, Apple stock can rise, and the government earns a return. This doesn’t mean that government investment obtains “optimal” results. However, efficiency and profit are two different things; human agents can make profits on the market, but it doesn’t mean that their actions were optimally efficient (in fact, an Austrian would argue that optimality is impossible). My point is that we might agree on the fact that government investment makes us worse off, in general, than would that same investment made through the market process; but, this is different than saying that government does not earn a profitable return on investment.

      See my article here: Government Spending is Bad Economics.

      Reply
      1. Taylor

        Jonathan,

        Respectfully, I think your analysis is missing something: the gun in the room.

        Physically speaking, an agent of the government could buy a stock (for example), watch it appreciate in value, sell it and therefore earn a profit just the same as a private individual could.

        However, praxeologically speaking, these are two categorically different actions. The private individual (assumedly) begins with capital he rightfully owns. The government agent co-opts his. It is qualitatively different.

        I don’t think it’s right to say government “over-invests” in education, for instance, because the “over” implies there is some optimum you’re aware of and comparing to, which you do not have, and I maintain the belief (though I am open to reconsidering as per this discussion) that the government is not engaged in investment from a praxeological standpoint. Education is not a homogenous good. The government is not just “over” investing– it is blind to quantity, type, geographic location, duration, timing, end beneficiary, etc. etc.

        And it is not producing the education itself. It is taking already existing resources and commanding them into that particular (educational) channel.

        In the “New World”, the equivalent of Spanish military contractors impressed natives into laboring in their silver mines. Would we call this investment in an economic sense?

        The cost of issuing new fiat currency is zero, meaning all emittance of fiat currency is essentially pure profit. Is this investing?

        The government can create financial and accounting profits, perhaps. Is this the same thing as real profits? Is the entire praxeological activity connected to this action (not just the buying and selling of a stock that goes up) productive of new wealth in the economic sense of the term, or is it a paper illusion that hides the reality underneath?

        Why can’t the government hire hedge fund managers to plan the economy for us via the financial markets? Why can’t the government invest its way to never-ending prosperity for us all?

        This is not a question merely of optimality versus sub-optimality.

        Reply
        1. Jonathan Finegold Catalán Post author

          If we think that there would be some level of private investment in education, then not all public investment in public education is over-investment. I agree that there are other problems involved, including skewed coordination (between those gaining skills and the skills sought), and various other problems which plague socialized industries (increasing costs, falling quality, et cetera). I am not saying that the government does a better job at investment than the private sector.

          You are making a more specific claim: that government investment cannot increase real wealth. This claim is false.

          The government can increase real wealth. The loss is in opportunity cost. Let us say that the market outcome of the distribution of those same resources is X, and the outcome of public distribution is Y, where X > Y. That X > Y doesn’t mean that Y < 0. It just means that, on average, private allocation of goods is more productive/efficient than the public allocation of goods. Of course, a lot of public spending is basically consumption or malinvestment. I'm not denying this. But, to argue that all government spending leads to capital consumption is wrong; it just, in general, leads to less optimal outcomes.

          Reply
          1. Taylor

            Hi Jonathan,

            I admit I have to consider this more and I am attempting to do that as we discuss. In the interest of further consideration:

            Is there a difference between “real wealth” and “more stuff”, economically speaking? For example, if a private individual produced 1,000 cords of firewood, but no one demanded (was willing to exchange for, at any price) the firewood and the private individual had no utility-increasing use for it himself, has his mere production of the 1,000 cords resulted in an increase in “real wealth” economically speaking?

            If I impress thousands of people and millions of tons of stone and have a pyramid constructed, have I increased “real wealth”? What if I build a road or a bridge that no one wants to drive on?

            What happens if I build a road no one demanded, but now that I’ve built it, people try to make the best use of it by utilizing it? In other words, prior to my building it the road is in the position of a pyramid, but afterward, people resign themselves and their value scales to incorporating the road into the structure of production? This is a different question than opportunity cost and optimality.

            Government is essentially an organizational structure for the production of real wealth, and a management principle for producing real wealth, correct? In other words, one way to produce goods and to manage the production of goods is the voluntary principle– market prices, consensual exchange of values; the other is the violence principle– central planning, arbitrary dictate and coercive exchange of values.

            Does management itself, of a violent or voluntary nature alike, produce any real wealth by itself? Or does it merely serve to influence how much real wealth is created by the productive combination of labor and land (natural resources)? I am not trying to argue “management is a middleman that produces nothing” or that management/capitalists are not laborers (but maybe that’s what I am saying without meaning to?)

            If the means of production are organized on the voluntary principle of voluntary management, what is produced is often (but not always, if there is entrepreneurial error) what is demanded and thus it is an aid to the production of real wealth.

            If the means of production are organized on the violence principle of coercive management, what is produced is by definition not what is demanded, because if it was demanded it wouldn’t require coercive management to produce, it could be achieved voluntarily. Thus, what happens is goods and services are produced which are not real wealth, they essentially become a part of “land” and are best thought of as naturally-occurring resources at this stage and then individuals readjust their preferences to take into account the new scarcity of natural factors of production (land/resources) and re-integrate as many of these goods and services as possible as real wealth.

            In other words, these coercively produced items are transitioning into a state of nature and then transitioning into a state of consumption goods as if they were a “gift” or a natural factor being homesteaded by the end user.

            It’s possible I am way off here.

            To take it back to a “real world” example, if a Soviet factory builds 2 billion nails of a size and type that no one has any existing use or voluntary demand for, has it created “real wealth”? If, after producing the nails, people shrug their shoulders and say, “Well, these are the only ‘nails’ we’re getting” and then try to make the best use of them by chiseling or otherwise modifying the nails, by changing the way in which they produce items requiring nails so that these nails work, are the nails now “real wealth” and would it be correct to say they had been “real wealth” the moment they were coercively produced?

          2. Taylor

            Jonathan,

            I wanted to add something.

            I might be confusing myself here.

            There are a few separate questions in play:

            1.) Can the government/coercive management, produce real wealth in an absolute sense (ie, can it produce “1 unit of real wealth” from its “productive process”)?
            2.) Can the government produce MORE real wealth than it started out with? That is, can the government be responsible for increasing the amount of real wealth available to society?

            Perhaps, for example, the government could produce a road that represents real wealth. But perhaps it uses up two roads to produce a road (for the purposes of this thought experiment, I am making things homogenous… it is not this simple in real life and the utilities of different roads are not equal and interchangeable). In that process, the government may have been responsible for producing real wealth (1 new road) but it has not “invested” because it consumed 2 roads in the process, so on net it has consumed 1 road’s worth of real wealth.

            This could and does happen to private individuals/entrepreneurs, as well. However, at this point I think this habitually and by definition happens everytime the government “invests”– it never gets out more than it puts in.

            I am trying to see if I have a “gotcha” response for the AAPL example to demonstrate why the government earning a paper capital gain on AAPL stock is not an example of successful government investment. But I am open to the possibility it might be. Will think about it some more.

        2. Jonathan Finegold Catalán Post author

          The entire praxeological approach is skewing the debate. The easiest way to put it is that government acts outside of the market process (read the article I linked to). This doesn’t mean that the government can’t produce real wealth.

          Reply
  5. Jonathan Finegold Catalán Post author

    Taylor,

    I’ll continue the discussion in this new thread to maintain some order.

    The government does not only invest in things that “nobody wants.” People “want” a lot of government products. Thousands of drivers use government highways, for example, to get where they want to go. Thousands of people use government subsidized railroads. Thousands of people use government subsidized electricity. The list goes on.

    In short, the issue is more complicated than “the government invests in things nobody wants.”

    In a model that assumes a certain degree of perfection, “the market” invests in things that people want the most. What this means is that individuals economize between means and ends, and we assume that they choose those that garners them the most satisfaction. We know that in the real world the market process is not so perfect — there is no optimal outcome —, but we can say that the market process allocates goods more optimally relative to other forms of allocation.

    The government taxes, borrows, and/or prints money and uses it to buy goods and allocate them (or, it will give the money through a subsidy and the recipient will use it to allocate goods). This does not mean that these allocations are towards things that have no utility whatsoever. What it means is that overwhelmingly the government allocates goods towards less wanted ends. This is why I conclude that government allocation is less optimal than market allocation (why Y < X, but Y > 0).

    There is still a loss: X – Y. But, this loss manifests through opportunity cost. It is a loss of efficiency.

    All this being said, I have to emphasize the fact that the market cannot possibly fulfill all demand: we live in a world beset by scarcity. Ideally, the demands left unfulfilled are those which are ranked lowest on individuals’ utility scales. What government allocation does, in general, is fulfill demands which are ranked lower, and marginalize demands that are ranked highest.

    Reply
  6. Taylor

    Jonathan,

    Thanks for the response.

    I don’t think it addressed the area of our disagreement at all. The remedial econ lesson was fascinating but I’ve suggested this goes beyond mere efficiency questions. I’m looking at a “net accounting” perspective, so to speak.

    I’ll think about it some more. In the meantime hopefully you can let go of any notion you might have of me being a free market ideologue/dogmatist/purist/whathaveyou.

    Reply
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