This excerpt from Philip Auerswald's contribution to the Kaufmann's "New entrepreneurial growth agenda" adds an interesting angle to my earlier "Pension vs. earnability". It's worth a read.
Redefinition: From “Permanent Income” to “Dynamic Purpose”
The primary value of the foregoing analysis is to establish the context for a redefinition of the problem posed in The Great Man-Machine Debate. How do we get there?
Consider the following: In the immediate aftermath of the 2008 financial crisis in 2008, economists devoted a great deal of attention to the shortcomings of macroeconomic and financial models that, at best, failed to predict the breakdown, and, at worst, may have helped to bring it about. Hyman Minsky’s “financial instability hypothesis,” to which few previously had paid much attention, was newly celebrated; Eugene Fama’s “efficient-market hypothesis” was newly questioned. Yet, as events have unfolded, the profession has begun to take more seriously the structural factors that are shaping the twenty-first-century economy and driving economic outcomes that go beyond the business cycle. From the standpoint of the reconsideration of theory, this means shifting attention from macroeconomics to microeconomics and rethinking fundamental models of both consumption and production.
High on the list of models ripe for reconsideration is the “permanent income hypothesis,” introduced into the field of economics by Milton Friedman in 1957 in a book titled, A Theory of the Consumption Function. The idea, as we all know, is simple: Early in life, we as consumers optimize our lifetime earnings by going into debt to invest in education; education delivers the skills that form the foundation for a career. Early in our working lives, consumers stop investing in education and start to save. We keep saving increasing fractions of our income until, all at once, we retire. At that point, we spend down our savings, timing the depletion of savings to coincide perfectly with the depletion of … well, our lives.
The model Friedman developed of the arc of a human life is as technically sound today as it was in 1957. Furthermore—somewhat like the efficient markets hypothesis, which was also developed at the University of Chicago at about the same time—the permanent income hypothesis has become encoded in the operating system of the economy in such fundamental ways that we barely notice its influence. From the Pell Grants to the 401(k), the experience of consumers from youth to death remains framed by the notion that institutions are sufficiently slowly changing and we are sufficiently short-lived that we can invest (one time only) in education at the front of our lives to reap a reward that we ultimately enjoy at the end of life. Predictable and familiar policy prescriptions follow:
- Too much student debt and too few quality jobs for recent graduates? . . . Need more and better education.
- Too much unemployment and too little stability in the labor market? . . . Need to spend more on worker protections.
- Too many retired people and too little saving? . . . Need more and better health insurance.
In a recent column for The New York Times, Robert Shiller wrote: “Most people complete the majority of their formal education by their early 20s and expect to draw on it for the better part of a century. But a computer can learn in seconds most of the factual information that people will get in high school and college, and there will be a great many generations of new computers and robots, improving at an exponential rate, before one long human lifetime has passed.” Colleges and universities have yet to respond adequately to these changes, Shiller concluded. “We will have to adapt as information technology advances . . . . We must continually re-evaluate what is inherently different between human and computer learning.”
Shiller is right: We need to update our thinking about the function of higher education. We also need to update our thinking about workforce training, retirement, and aging to fit the realities of the twenty-first century.