Information, Information, Information

In 1962 Austrian-American economist Fritz Machlup published probably one of the most influential papers in economics since the war. “The Production and Distribution of Knowledge in the United States” was the first academic paper to look at knowledge as a resource that contributed to GDP, rather than just a happy accident of good policy making. Machlup’s revolutionary paper championed the idea of an information based society and lead to a whole new field of economic research, namely information economics. The paper’s great innovation was to try to visualise how an economy would evolve beyond a dependence on manufacturing for its output and what kind of economy it would evolve into. Machlup’s answer was knowledge and services: he couldn’t have been more right. It is certainly true that this paper about the development of an active services industry holds some lessons for countries trying to rebalance their economies away from manufacturing, but in Britain the effects of this paper have been different.

Whilst Machlup’s most influential work did predict the dominance of services and the sharing of information in a modern economy, the paper’s most apparent influence in the UK was on public policy in general and education in particular. Machlup’s vision of a world where knowledge, rather than skill, was the principal asset any citizen could have gave academic strength to the greatest revolution in British education: comprehensive schooling.

The redesigning of British education under Clement Atlee’s post-war Labour government allowed for three types of education: grammar, technical and secondary modern. The common criticism of this setup was that you were, in effect, left out to dry if you didn’t pass the 11-plus that determined your future schooling. These claims gained momentum when the technical schools ended up being consumed into secondary moderns, leaving some two thirds of schoolchildren without the academic education that, according to Machlup, excluded them from the information based utopia.

Whilst it is true that there were grumbles about the tripartite system prior to Machlup’s paper (notably from sociologist Michael Young and former Labour leader Hugh Gaitskell) the foundation stone of information economics gave Labour’s academic base a determination to overhaul education once again, implementing Machlup’s utopia of universal knowledge for all as their ideological anchor.

This is interesting from a political perspective, too. As Patrick Spencer points out (on this website) in his post on July 22nd, this transformative approach to education solidified Labour hegemony on the subject and only now (some 40 years after the fact) are the Conservatives starting to wrestle dominance in education away from them. In an economic sense, the acquisition of knowledge and skill is the real drive behind economic growth and prosperity; it leads to a more diverse economy which is able to withstand shocks in different sectors and markets. Opening a more academic education to everyone should, in theory, unleash a treasure trove of smart professionals on the economy.

However as the system aged, it also showed its flaws. Like many of the Wilson government’s bold reforms some of those it tried to help have ended up trapped under the system’s iron fisted sensibilities. Catchment areas enforced another kind of division on academic attainment, with those worse off getting the worst schools, forming a vicious cycle of underachievement which, much like the social housing boom of the late 60s has ended up trapping people in their poverty, rather than freeing them from it. On top of that, 36 years afterwards, Margaret Thatcher’s asserted that working class people needed grammar schools to compete with their wealthier peers. Despite a 48% increase in state funding per pupil and over 1000 new schools built during Tony Blair’s premiership 5 schools send more students to Oxbridge than 2000 others combined.

Make no mistake; this sort of gap in attainment carries an economic reckoning with it, productivity is harmed if there is a clear divide between academic standards and with it, future growth and innovation. To make matters worse, what expansion there is gets siphoned off by the smartest at the top, leaving little for those below, making growth a one sided achievement. With universities in the UK the mainstay of its academic excellence, there was a view in the Blair period to drastically expand university enrolment, and it worked. University spending expanded by 59% in real terms during the Blair decade, but places kept pace.

At this point Machlup’s vision for a primarily knowledge based economy probably was realised by the time of Blair’s exit in 2007 as the university population was the largest it had ever been (some 40% of young people were going to university, an increase of 20% compared to 1995), economic growth was holding strong and productivity was the highest on record. But problems were present in the labour market for those who looked for them (or had 20-20 hindsight) some 20% of people aged 16-24 were NEETs (Not in Employment Education or Training) and the UK economy generally was developing an unhealthy reliance on services at the expense of exports, in particular manufacturing.

To examine international comparisons that allowed some level of specialisation in their educational mix, with schools based on those going into manufacturing or services or academically grounded subjects, does not make for pleasant reading. Germany has five separate kinds of secondary schools, each devoted to a different kind of employment sector, from vocational to academic. Germany, with its strong mix of manufacturing and services, makes a powerful case for a more fragmented style of teaching. A similar style may well arise due to Michael Gove’s reforms but it will take some time for that to play out so it is too early to speculate.

Which brings us to some fundamental questions: did the pursuit of the purely knowledge based economy that Machlup dreamed of in 1962 distort the policy emphasis from specialisation in education to a sole emphasis on academic rigour and achievement? And, crucially, now we have seen that dangers of placing too much emphasis on services with little regard for manufacturing, is a knowledge economy practical or even desirable?


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