In academic circles that specialise in the theory of economic growth, human (or cognitive) capital has become an important addition to the original models.
Cognitive capital is simply the average measure of stock of mental skills within each nation. We measure it using internationally standardised tests such as PISA measures of reading, mathematics and science proficiency, or IQ tests using abstract patterns. We know the PISA and IQ tests measure the same thing, partly because the skills used to solve abstract patterns are highly dependent on experience and learning. The two measures are interchangeable.
Academics express the national average scores as if they were IQ scores of individuals in the UK – a Greenwich Mean score if you will. Despite the use of IQ tests as a measure and the use of an IQ scale, cognitive capital is not a measure of intelligence or inborn potential per se.
The inference of intelligence or IQ from such tests requires an equal opportunity to acquire the knowledge assessed, that is, standardised experience, which is obviously not the case when comparing nations. The scores are however accurate measures of the current stock of those cognitive skills needed in modern economies. So, when pondering cognitive capital think current skills rather than intelligence. We use standardised scores because growth economists have discovered that mere time at school or enrolment rates are poor proxies for skills. Only the mental skills produced by education matter.
Every production or service task, no matter how small, involves knowing what to do in a variety of circumstances. This is an absolute requirement and not merely a ‘nice to have’. You cannot do the task at all if you do not know how. Fantasies about equitable representation will not change that.
Mental skills are also important beyond the immediate task. For example, petrol pump attendants need to know how to operate the pumps, how much fuel is needed to fill a tank and how to work the credit card machines. That requires a minimum level of numeracy and literacy.
However, they also need to have skills to managing customers. More complex high-productivity jobs require a much higher minimum level of numeracy, literacy, and scientific knowledge.
Often the whole will not work at all unless every component is perfect, such as, for example, in high-tech ‘O-ring’ industries like space rockets. That lifts the cognitive capital requirements beyond those needed for the individual tasks. The entire economy becomes more productive if it contains more ‘O-ring’ type of enterprises. So, the higher our cognitive capital the better our prospects.
How much do these skills matter?
If we look at the log of GDP per capita measures (it is always better to use the log of an income measure) then average national cognitive capital accounts for two thirds of the variation between countries.
If instead of an average we use the proportion of the population above a high cognitive capital threshold, then that proportion accounts for almost three quarters of the variation in national incomes.
Good or bad fortune
However current GDPs may be the result of past good and bad fortune, such as a war, or striking oil, so it will be more informative to look at economic growth rates.
The problem with growth measures is that the growth rate over a single year is 99.5% noise. Any two single-year growth rates only have about half a per cent signal in common.
A compound growth measure over 30 years will concentrate the signal far better, but even that is only 65% signal. We know that for the last sixty-odd years poorer countries grew faster than richer countries, so any estimate of the effect of cognitive capital must control for the initial GDP per capita at the start period studied. That has the effect of telling us what the relationship would be if all countries started with the same per capita GDP.
It turns out that cognitive capital is highly associated with economic growth.
If growth were noise free, average cognitive capital would explain fully three quarters of the variation we see. All the other factors, including luck, for example, discovering oil, explain the rest. A 1-point difference in the national cognitive capital is associated with a persistent 0.11-0.16% difference in annual growth rates (and 6-7% greater productivity).
A growth rate difference of 0.135% may not sound like much but compounded over 30 years an otherwise identical country with a cognitive capital just 1-point higher will be 50% richer. When differences in cognitive capital reach 15-points (common) we are talking about a persistent 2% annual growth (and double the productivity) advantage and being 82% wealthier after 30 years.
As important as cognitive capital is, there are other factors that influence economic growth. Economic liberty is important. We all know how bad communism can be. Nations choose their economic systems, and differences in national cognitive capital explain 59% of the differences in the economic freedom they get.
Economic freedom is one of the principle intermediate pathways by which cognitive capital creates growth but also contributes to growth independently to cognitive capital. Curiously, once we account for other factors, greater liberty in non-economic spheres slows down growth.
Other intermediate pathways between cognitive capital and growth include good governance, the adoption of technology, and effective health and education systems. Higher cognitive capital is associated with more effective and better governance (especially the rule of law.) Much of that effect is via having people in the institutions of the state (including police and justice), and in government, who are exceptionally bright and informed. Think Lee Kuan Yew, John Keynes, Jan Smuts, Abdelaziz Bouteflika, William Pitt the Younger or Bismark. It pays to be selective about who gets into the civil service or government.
Technology is what drives long-term economic growth. Cognitive capital is what drives the development of technology, as well as the rate of its adoption by those who do not create it. There is a strong connection between health and cognitive capital across countries. Naturally, decent health systems require higher cognitive capital levels, but it may be that poor health is a major break of cognitive capital development too.
Better education
Finally, there is evidence that better education does increase cognitive capital. It pays to keep citizens healthy and impart mental skills as best we can.
In sum, the cognitive capital of a nation determines its fate. To be more precise, it is the proportion of citizens above a high cognitive capital threshold that determines a nation’s fate.
The minimum level of mental skills needed to do the necessary tasks is equivalent to about the top third of the UK (> IQ 105.) Those are the people who create industries and jobs, who keep them operating, who develop technology and drive its adoption, who govern effectively and who teach or heal. The rest of us depend on them to lift us above subsistence.
South Africa’s cognitive capital level is poor – equivalent to the bottom 2% in the UK and worse than our poorer neighbours, Eswatini, Mozambique, and Zimbabwe. Only 1% of the country reaches a cognitive capital level equivalent to the top third of the UK, that is, we have about 3% of the growth potential of the UK.
I estimate that better education alone could realistically add 8-points to our average cognitive capital (although we should be more ambitious) and add an extra 1% to our annual per capita growth rate, while increasing our productive capacity 3.4-fold.
If that were the only thing we changed, after 30 years we would be 38% better off than we would otherwise have been. Naturally, we could also work on improving national health, liberalise the economy, and impose minimum skill requirements on civil servants and politicians.
[Image: by GoldenDayz]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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