Too much book-larnin'?

In the category of late to the party, I put a reference to an excellent Vanity Fair article by the reliable Michael Lewis, Wall Street on the Tundra. It chronicles, in painful detail, the way that Iceland messed up its economy. Essentially, the country became obsessed with finance, making scores of young people into untutored investment bankers.

There's too much here to summarize properly, you really have to read it for yourself, but, for me, a telling quote:

Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.

Enter investment banking.

I do understand that one cannot compare Iceland to the United States (though Lewis certainly finds parallels to our high-flying world of finance), but it seems indicative of something that it is at least possible for a nation to have too much education. It demonstrates that the commonly-held idea that more education is always better is false, that its truth depends on a base that is considerably more complicated.

As I have pointed out before, the labor market is in many ways not a market at all. No one really cares if everyone has an SUV, or a big-screen TV, but we want everyone to be working. The employment market really only works in two cases: either there is so much demand for everyone that the supply mix is immaterial, or the demand has to pretty closely match the supply.

I would contend that, for a very long time, the first condition was true in America (generally, that is; I'm not forgetting the Great Depression). We were so productive and had such resources that we needed everyone, no matter what they did. And as classical economics would tell you, that situation leads to incomes being bid up, and that's just what happened, from CEOs to garbage haulers.

But our growth rate, for a host of reasons, is no longer what it was, even potentially. We're not China that can unleash pent-up demand and grow in the double digits every year. We've moved to a mature phase in which growth can come only from real innovation, and that will never be 10+% again.

So our labor market is in the second situation, that is, the people we're producing have to pretty well match up to the opportunities we have. That matching has to come out of the whole system we have. If we tell our young people (as we have) that agriculture is a dead end for the uneducated, so no one enters the field, but we still need, say, 1,000,000 people to work on farms, we can only get them from two places: from somewhere else, or from those who haven't succeeded in anything else.

That is the crux of the Iceland problem, that they can't paper over the mismatch by importing workers to do the fishing and smelting. There are structural reasons, most social, why that won't work. It also is not clear, if they did import workers, what Icelanders would then do, other than leave the country.

Now I hear the objection. What should happen, if Icelanders are extremely well-educated but have nothing to do, is they should become great innovators and creators. That's the assumption our experts make, that more education will lead our youth to make the future.

That's not wholly untrue. We have a far greater ability to assemble a critical mass of diverse-skilled workers to accomplish things, much more than does Iceland. If we overeducate some number of people, there is some probability that they will find something to do, and it may even be productive and lucrative (like Twitter...but I don't want to start on that).

But some is not 100%, and, in my opinion, it is possible to have too much education, and almost certain in specific fields. Which leads us to the Iceland case, one that I think serves as a cautionary tale for us. Instead of assuming that more education in any field is absolutely required to be a good thing, we need to start looking at the mix, and, perhaps, provide incentives for young people to enter vocations that we're actually going to need. More home health care workers, fewer software engineers.

Otherwise, we're left with the argument that supply inevitably creates its own demand, and we're pretty sure that's not an inviolable law at all.