Piketty and Capital in the XXI Century REVIEW (Bill Gates)

(Link to the original article)

Why Inequality Matters

A 700-page treatise on economics translated from French is not exactly a light summer read—even for someone with an admittedly high geek quotient. But this past July, I felt compelled to read Thomas Piketty’s Capital in the Twenty-First Century after reading several reviews and hearing about it from friends.

I’m glad I did. I encourage you to read it too, or at least a good summary, like this one from The Economist. Piketty was nice enough to talk with me about his work on a Skype call last month. As I told him, I agree with his most important conclusions, and I hope his work will draw more smart people into the study of wealth and income inequality—because the more we understand about the causes and cures, the better. I also said I have concerns about some elements of his analysis, which I’ll share below.

I very much agree with Piketty that:

• High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.
• Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.
• Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

To be clear, when I say that high levels of inequality are a problem, I don’t want to imply that the world is getting worse. In fact, thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand, the world as a whole is actually becoming more egalitarian, and that positive global trend is likely to continue.

But extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built in to capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about, and it’s great that Piketty helped advance that discussion in such a serious way.

However, Piketty’s book has some important flaws that I hope he and other economists will address in the coming years.

For all of Piketty’s data on historical trends, he does not give a full picture of how wealth is created and how it decays. At the core of his book is a simple equation: r > g, where r stands for the average rate of return on capital and g stands for the rate of growth of the economy. The idea is that when the returns on capital outpace the returns on labor, over time the wealth gap will widen between people who have a lot of capital and those who rely on their labor. The equation is so central to Piketty’s arguments that he says it represents “the fundamental force for divergence” and “sums up the overall logic of my conclusions.”

Other economists have assembled large historical datasets and cast doubt on the value of r > g for understanding whether inequality will widen or narrow. I’m not an expert on that question. What I do know is that Piketty’s r > g doesn’t adequately differentiate among different kinds of capital with different social utility.

Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there’s a woman who’s giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it’s true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third. I wish Piketty had made this distinction, because it has important policy implications, which I’ll get to below.

More important, I believe Piketty’s r > g analysis doesn’t account for powerful forces that counteract the accumulation of wealth from one generation to the next. I fully agree that we don’t want to live in an aristocratic society in which already-wealthy families get richer simply by sitting on their laurels and collecting what Piketty calls “rentier income”—that is, the returns people earn when they let others use their money, land, or other property. But I don’t think America is anything close to that.

Take a look at the Forbes 400 list of the wealthiest Americans. About half the people on the list are entrepreneurs whose companies did very well (thanks to hard work as well as a lot of luck). Contrary to Piketty’s rentier hypothesis, I don’t see anyone on the list whose ancestors bought a great parcel of land in 1780 and have been accumulating family wealth by collecting rents ever since. In America, that old money is long gone—through instability, inflation, taxes, philanthropy, and spending.

You can see one wealth-decaying dynamic in the history of successful industries. In the early part of the 20th century, Henry Ford and a small number of other entrepreneurs did very well in the automobile industry. They owned a huge amount of the stock of car companies that achieved a scale advantage and massive profitability. These successful entrepreneurs were the outliers. Far more people—including many rentiers who invested their family wealth in the auto industry—saw their investments go bust in the period from 1910 to 1940, when the American auto industry shrank from 224 manufacturers down to 21. So instead of a transfer of wealth toward rentiers and other passive investors, you often get the opposite. I have seen the same phenomenon at work in technology and other fields.

Piketty is right that there are forces that can lead to snowballing wealth (including the fact that the children of wealthy people often get access to networks that can help them land internships, jobs, etc.). However, there are also forces that contribute to the decay of wealth, and Capital doesn’t give enough weight to them.

I am also disappointed that Piketty focused heavily on data on wealth and income while neglecting consumption altogether. Consumption data represent the goods and services that people buy—including food, clothing, housing, education, and health—and can add a lot of depth to our understanding of how people actually live. Particularly in rich societies, the income lens really doesn’t give you the sense of what needs to be fixed.

There are many reasons why income data, in particular, can be misleading. For example, a medical student with no income and lots of student loans would look in the official statistics like she’s in a dire situation but may well have a very high income in the future. Or a more extreme example: Some very wealthy people who are not actively working show up below the poverty line in years when they don’t sell any stock or receive other forms of income.

It’s not that we should ignore the wealth and income data. But consumption data may be even more important for understanding human welfare. At a minimum, it shows a different—and generally rosier—picture from the one that Piketty paints. Ideally, I’d like to see studies that draw from wealth, income, and consumption data together.

Even if we don’t have a perfect picture today, we certainly know enough about the challenges that we can take action.

Piketty’s favorite solution is a progressive annual tax on capital, rather than income. He argues that this kind of tax “will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.”

I agree that taxation should shift away from taxing labor. It doesn’t make any sense that labor in the United States is taxed so heavily relative to capital. It will make even less sense in the coming years, as robots and other forms of automation come to perform more and more of the skills that human laborers do today.

But rather than move to a progressive tax on capital, as Piketty would like, I think we’d be best off with a progressive tax on consumption. Think about the three wealthy people I described earlier: One investing in companies, one in philanthropy, and one in a lavish lifestyle. There’s nothing wrong with the last guy, but I think he should pay more taxes than the others. As Piketty pointed out when we spoke, it's hard to measure consumption (for example, should political donations count?). But then, almost every tax system—including a wealth tax—has similar challenges.

Like Piketty, I’m also a big believer in the estate tax. Letting inheritors consume or allocate capital disproportionately simply based on the lottery of birth is not a smart or fair way to allocate resources. As Warren Buffett likes to say, that’s like “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.” I believe we should maintain the estate tax and invest the proceeds in education and research—the best way to strengthen our country for the future.

Philanthropy also can be an important part of the solution set. It’s too bad that Piketty devotes so little space to it. A century and a quarter ago, Andrew Carnegie was a lonely voice encouraging his wealthy peers to give back substantial portions of their wealth. Today, a growing number of very wealthy people are pledging to do just that. Philanthropy done well not only produces direct benefits for society, it also reduces dynastic wealth. Melinda and I are strong believers that dynastic wealth is bad for both society and the children involved. We want our children to make their own way in the world. They’ll have all sorts of advantages, but it will be up to them to create their lives and careers.

The debate over wealth and inequality has generated a lot of partisan heat. I don’t have a magic solution for that. But I do know that, even with its flaws, Piketty’s work contributes at least as much light as heat. And now I’m eager to see research that brings more light to this important topic.

The four main barriers to talent mobility in Africa

Link to the original article

Flexible immigration procedures are essential for skilled workers to move easily between countries and businesses. However, all around the world, there’s a certain tension between the needs of governments seeking to manage immigration, and businesses wanting to hire the most talented people. As the global competition for talent intensifies, new policies for resolving this tension have emerged, including preferential visa regimes for certain types of workers and quotas.

One region that lags behind in tackling these issues is Africa. While the free movement of labour is a principle enshrined in certain sub-regional agreements, it is often either not ratified or not effectively implemented. In many parts of Africa, there are prohibitive, time-consuming and costly obstacles to the mobility of people, including talented Africans. Not only does this thwart innovation and competitiveness, it risks exacerbating the “brain drain” that takes skilled Africans away from their own continent.

For many businesses in Africa, it is easier to employ a skilled non-African expatriate than a skilled African expatriate. Overall, barriers to African talent mobility are a drag on the continent’s growth and economic performance. As African countries pursue policies designed to encourage economic growth, freer movement of talented people is becoming an increasingly important issue.

So what are the main barriers to talent mobility in Africa? A recent pilot survey of several multinational businesses operating in 17 African countries, conducted by the World Economic Forum’s Global Agenda Council on Migration, identified four issues:

Visa requirements: Surveyed companies identified a range of visa-related obstacles across numerous African countries. In the Democratic Republic of the Congo, for example, the number of different visas required (entry, exit, working establishment) was considered burdensome. In Nigeria, the eligibility criteria for a visa for a skilled worker were considered to be too demanding, focusing on formal education level rather than experience gained through work. In the case of one specific visa in Senegal, it was unclear what sort of work permit could subsequently be issued.

Quotas: A number of African countries covered by the survey promote a national preference system by imposing a quota on the number of foreign workers – no more than 10% of a company’s workforce in Gabon, for example – or their sectors – “network and support professionals” in South Africa. Quotas are often used to protect the national labour force, but several companies surveyed for this report were concerned either that they were unnecessarily prohibitive, or that they were not applied consistently. In both cases quotas risk reducing the supply of talent to business rather than promoting local employment, especially where they are not regularly revised.

Procedures: In the majority of countries covered by the survey, procedural obstacles to applying for, processing and renewing visas and work permits were reported. At the application stage, problems included a lack of published information on visa requirements (Algeria, Uganda), no uniformity in visa requirements between different embassies and high commissions (Nigeria, South Africa), and inconsistency in instructions for supporting documentation such as education certificates (Egypt, Uganda). An inordinate processing time was reported in Algeria, Chad, Tanzania and Uganda, for various reasons. In the case of Uganda, for example, decisions can only be made when the immigration board meets to consider work permit applications, and it does so on an irregular basis. In Ghana the processing fee was considered too high; and in two other cases concerns were expressed about the discretionary power of immigration officers. In Madagascar and Swaziland, responding companies had experienced difficulties in having work permits renewed.

Lack of staff or skills: In a number of countries, these and other obstacles arose not necessarily because there was no legal or policy framework, but because there was a lack of capacity to implement the framework. Across several responses and countries, businesses worried about a shortage of staff, a lack of trained staff, misunderstanding of the procedures, and too much individual discretionary power.

We asked companies what the consequences of these obstacles were. Responses ranged from the practical – dealing with them was time-consuming and costly; to business impacts – inability to attract talented workers and even intra-corporate transferees; to impacts on the national economy – for example where quotas are resulting in skills gaps in the labour market that cannot immediately be filled locally.

For these and more reasons, lifting barriers to the mobility of talented Africans should be a priority. In addition to a range of country-specific observations, our project has identified the following preliminary recommendations:

• Development of online systems to make processes accessible and transparent
• Where quota systems exist, ensuring that they respond more accurately to labour market requirements
• Simplification of visa and work permit application and renewal procedures
• Cross-government coordination, in particular between labour, economic affairs, foreign affairs and immigration ministries
• More effective consultation between governments and the business sector
• Country-level training of immigration officials and consular agents

None of these recommendations is easy to achieve. The African Talent Mobility Project will form the focus for the work of the Global Agenda Council over the next two years. We will continue to survey both large multinationals and medium-to-large African companies, and also expand the survey to African governments, focusing on cooperative solutions.

For Africa’s economies to thrive, the continent will need to unlock the potential of its most important asset: its people.

Human Capital (Written by Gary Becker)

Link to the original article

To most people, capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time.

But such tangible forms of capital are not the only type of capital. Schooling, a computer training course, expenditures on medical care, and lectures on the virtues of punctuality and honesty are also capital. That is because they raise earnings, improve health, or add to a person’s good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.

Education, training, and health are the most important investments in human capital. Many studies have shown that high school and college education in the United States greatly raise a person’s income, even after netting out direct and indirect costs of schooling, and even after adjusting for the fact that people with more education tend to have higher IQs and better-educated, richer parents. Similar evidence covering many years is now available from more than a hundred countries with different cultures and economic systems. The earnings of more-educated people are almost always well above average, although the gains are generally larger in less-developed countries.

Consider the differences in average earnings between college and high school graduates in the United States during the past fifty years. Until the early 1960s, college graduates earned about 45 percent more than high school graduates. In the 1960s, this premium from college education shot up to almost 60 percent, but it fell back in the 1970s to less than 50 percent. The fall during the 1970s led some economists and the media to worry about “overeducated Americans.” Indeed, in 1976, Harvard economist Richard Freeman wrote a book titled The Overeducated American. This sharp fall in the return to investments caused doubt about whether education and training really do raise productivity or simply provide signals (“credentials”) about talents and abilities.

But the monetary gains from a college education rose sharply again during the 1980s, to the highest level since the 1930s. Economists Kevin M. Murphy and Finis Welch have shown that the premium on getting a college education in the 1980s was above 65 percent. This premium continued to rise in the 1990s, and in 1997 it was more than 75 percent. Lawyers, accountants, engineers, and many other professionals experienced especially rapid advances in earnings. The earnings advantage of high school graduates over high school dropouts has also greatly increased. Talk about overeducated Americans has vanished, replaced by concern about whether the United States provides adequate quality and quantity of education and other training.

This concern is justified. Real wage rates of young high school dropouts have fallen by more than 25 percent since the early 1970s. This drop is overstated, though, because theinflation measure used to compute real wages overstates the amount of inflation over that time (see consumer price indexes). Real wages for high school dropouts stayed constant from 1995 to 2004, which means, given the price index used to adjust them, that these wages have increased somewhat.

Thinking about higher education as an investment in human capital helps us understand why the fraction of high school graduates who go to college increases and decreases from time to time. When the benefits of a college degree fell in the 1970s, for example, the fraction of white high school graduates who started college fell—from 51 percent in 1970 to 46 percent in 1975. Many educators expected that enrollments would continue to decline in the 1980s, partly because the number of eighteen-year-olds was declining, but also because college tuition was rising rapidly. They were wrong about whites. The fraction of white high school graduates who entered college rose steadily in the 1980s, reaching 60 percent in 1988, and caused an absolute increase in the number of whites enrolling despite the smaller number of college-aged people. That percentage kept increasing to an all-time high of 67 percent in 1997 and then declined slightly to 64 percent in 2000.

This makes sense. The benefits of a college education, as noted, increased in the 1980s and 1990s. Tuition and fees did rise by about 39 percent from 1980 to 1986, and by 20 percent more from 1989 to 2000 in real, inflation-adjusted terms (again, using the faulty price indexes available). But tuition and fees are not, for most college students, the major cost of going to college. On average, three-fourths of the private cost of a college education—the cost borne by the student and the student’s family—is the income that college students give up by not working. A good measure of this “opportunity cost” is the income that a newly minted high school graduate could earn by working full time. During the 1980s and 1990s, this forgone income rose only about 4 percent in real terms. Therefore, even a 67 percent increase in real tuition costs in twenty years translated into an increase of just 20 percent in the average student’s total cost of a college education.

The economics of human capital also account for the fall in the fraction of black high school graduates who went on to college in the early 1980s. As UCLA economist Thomas J. Kane has pointed out, costs rose more for black college students than for whites. That is because a higher percentage of blacks are from low-income families, and therefore had been heavily subsidized by the federal government. Cuts in federal grants to them in the early 1980s substantially raised their cost of a college education. In the 1990s, however, there was a substantial recovery in the percentage of black high school graduates going on to college.

According to the 1982 “Report of the Commission on Graduate Education” at the University of Chicago, demo-graphic-based college enrollment forecasts had been wide of the mark during the twenty years prior to that time. This is not surprising to a “human capitalist.” Such forecasts ignored the changing incentives—on the cost side and on the benefit side—to enroll in college.

The economics of human capital have brought about a particularly dramatic change in the incentives for women to invest in college education in recent decades. Prior to the 1960s, American women were more likely than men to graduate from high school, but less likely to go to college. Women who did go to college shunned or were excluded from math, sciences, economics, and law, and gravitated toward teaching, home economics, foreign languages, and literature. Because relatively few married women continued to work for pay, they rationally chose an education that helped in “household production”—and no doubt also in the marriage market—by improving their social skills and cultural interests.

All this has changed radically. The enormous increase in the labor participation of married women is the most important labor force change during the past twenty-five years. Many women now take little time off from their jobs, even to have children. As a result, the value to women of market skills has increased enormously, and they are bypassing traditional “women’s” fields to enter accounting, law, medicine, engineering, and other subjects that pay well. Indeed, women now constitute about one-third of enrollments in business schools, more than 45 percent in law schools, and more than 50 percent in medical schools. Many home economics departments have either shut down or are emphasizing the “new home economics”—that is, the economics of whether to get married, how many children to have, and how to allocate household resources, especially time. Improvements in the economic position of black women have been especially rapid, and black women now earn almost as much as white women.1

Of course, formal education is not the only way to invest in human capital. Workers also learn and are trained outside schools, especially on the job. Even college graduates are not fully prepared for the labor market when they leave school and must be fitted into their jobs through formal and informal training programs. The amount of on-the-job training ranges from an hour or so at simple jobs like dishwashing to several years at complicated tasks like engineering in an auto plant. The limited data available indicate that on-the-job training is an important source of the very large increase in earnings that workers get as they gain greater experience at work. Bold estimates by Columbia University economist Jacob Mincer suggest that the total investment in on-the-job training may be well above $200 billion a year, or about 2 percent of GDP.

No discussion of human capital can omit the influence of families on the knowledge, skills, health, values, and habits of their children. Parents affect educational attainment, marital stability, propensities to smoke and to get to work on time, and many other dimensions of their children’s lives.

The enormous influence of the family would seem to imply a very close relation between the earnings, education, and occupations of parents and children. Therefore, it is rather surprising that the positive relation between the earnings of parents and children is not so strong, although the relation between the years of schooling of parents and their children is stronger. For example, if fathers earn 20 percent above the mean of their generation, sons at similar ages tend to earn about 8-10 percent above the mean of theirs. Similar relations hold in Western European countries, Japan, Taiwan, and many other places. Statisticians and economists call this “regression to the mean.”

The old adage of “from shirtsleeves to shirtsleeves in three generations” (the idea being that someone starts with hard work and then creates a fortune for the next generation that is then dissipated by the third generation) is no myth; the earnings of grandsons and grandparents at comparable ages are not closely related.2 Apparently, the opportunities provided by a modern economy, along with extensive government and charitable support of education, enable the majority of those who come from lower-income backgrounds to do reasonably well in the labor market. The same opportunities that foster upward mobility for the poor create an equal amount of downward mobility for those higher up on the income ladder.

The continuing growth in per capita incomes of many countries during the nineteenth and twentieth centuries is partly due to the expansion of scientific and technical knowledge that raises the productivity of labor and other inputs in production. And the increasing reliance of industry on sophisticated knowledge greatly enhances the value of education, technical schooling, on-the-job training, and other human capital.

New technological advances clearly are of little value to countries that have very few skilled workers who know how to use them. Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth.

The outstanding economic records of Japan, Taiwan, and other Asian economies in recent decades dramatically illustrate the importance of human capital to growth. Lackingnatural resources—they import almost all their energy, for example—and facing discrimination against their exports by the West, these so-called Asian tigers grew rapidly by relying on a well-trained, educated, hardworking, and conscientious labor force that makes excellent use of modern technologies. China, for example, is progressing rapidly by mainly relying on its abundant, hardworking, and ambitious population.

---

About the Author

Gary S. Becker is university professor of economics and sociology at the University of Chicago, a professor at the Graduate School of Business, and the Rose-Marie and Jack R. Anderson Senior Fellow at Stanford’s Hoover Institution. He was a pioneer in the study of human capital and was awarded the 1992 Nobel Memorial Prize in Economic Sciences (see also biographies section).

---

Further Reading

Becker, Gary S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. 2d ed. New York: Columbia University Press for NBER, 1975.

Freeman, Richard. The Overeducated American. New York: Academic Press, 1976.

Kane, Thomas J. “College Attendance by Blacks Since 1970: The Role of College Cost, Family Background and the Returns to Education.”Journal of Political Economy 102 (1994): 878-911.

Mincer, Jacob. “Investment in U.S. Education and Training.” NBER Working Paper no. 4844. National Bureau of Economic Research, Cambridge, Mass., 1994.

Murphy, Kevin M., and Finis Welch. “Wage Premiums for College Graduates: Recent Growth and Possible Explanations.” Educational Researcher 18 (1989): 17-27.

National Center for Education Statistics. “Digest of Education Statistics 2001.” NCES 2002-130. U.S. Department of Education, March 2002.

National Center for Education Statistics. “Paying for College—Changes Between 1990 and 2000 for Full-Time Dependent Undergraduates.” NCES 2004-075. U.S. Department of Education, June 2004.

National Center for Education Statistics. “Projections of Education Statistics to 2012.” NCES 2002-030. U.S. Department of Education, October 2002.

“Report of the Commission on Graduate Education.” University of Chicago Record 16, no. 2 (1982): 67-180.

Topel, Robert. “Factor Proportions and Relative Wages: The Supply Side Determinants of Wage Inequality.” Journal of Economic PerspectivesII (Spring 1997): 55-74.

Welch, Finis, ed. The Causes and Consequences of Increasing Inequality. Bush School Series in the Economics of Public Policy. Chicago: University of Chicago Press, 2001.

---

Footnotes

1.

National Center for Education Statistics, “Educational Achievement and Black-White Inequality,” NCES 2001-061, U.S. Department of Education, 2001.

2.

Gary Solon, “Intergenerational Income Mobility in the United States,”American Economic Review 82 (June 1992): 393-408.

Capitalism Reduces Poverty in the World (Written by Xavier Sala i Martín)

Link to the original article (in Spanish)

If we turned all the wealth of the super rich of history and we made ​​the current ranking of the wealthiest people of all time, we would see that the top of the list is the emperor Mansa Musa I of Mali who lived between 1280 and 1337. His empire drew huge amounts of gold which he used to create cities, universities, palaces, mosques and madrasas and promote culture, science and art. Musa became the most important city of the empire, Timbuktu, one of the world capitals of commerce, culture and the intelligentsia, with palaces and buildings designed by the best architects of the Spanish era.

It is said that in 1324, Mansa Musa organized a pilgrimage to Mecca accompanied by 60,000 men and 12,000 slaves, all dressed in Persian silk, each loaded with a gold bar two pounds of weight. They were accompanied by 80 camels loaded with 120 pounds of gold dust each. Since this was a pious pilgrimage, Musa was giving gold to the poor that stood in the way. The trip ended up described in the books as one of the most lavish and extravagant history. Historian to Humari visited Cairo 12 years after Mansa Musa passed around, and saw that people still spoke with affection and nostalgia, the generosity of the emperor of Mali. Some scholars (*) have been estimated personal fortune of Mansa Musa 400,000 million at current prices, three times higher than that of Bill Gates in the prime of his life (at the time of maximum wealth is estimated that the founder of Microsoft had 136,000 million dollars in the bank).

Despite its immense and obscene wealth, Mansa Musa never eat pizza or chocolate, never went to the movies, could never take an aspirin when I had a headache. He could never turn the TV with a remote control when he got tired of his palace, and could flush the water for their bowel will take, or pull the switch to turn on or off light. In his famous voyage, it took several months to go riding 5,000 kilometers that separate Mali from Mecca, a journey that takes a modern plane in about 6 hours and 34 minutes. The palaces of Mansa Musa had no air conditioning. Even though at the time, Timbuktu was an intellectual center, its sages had no access to books or scientific articles that were developed in other universities worldwide. They had access to Google or newspapers around the world instantly and for free. Their children could not play with the Playstation or Wii, or kill pigs angry birds throwing from his ipad. To communicate with fellow sultan an-Nasir Cairo, Mansa Musa had no Whatsapp nor Facebook, or mobile phone. I had to write a letter that was transported on horseback through the desert and, if not desert pirates intercepted, took months to arrive. Oddly enough, all the richest man in history could never do, by the average worker in a capitalist economy.

Throughout history human societies have been formed by a few very rich people and overwhelmingly poor. 99.9% of the citizens of all societies in history, from hunter-gatherers of the Stone Age, to the peasants Phoenicians, Greeks, Etruscans, Romans, Goths or Ottomans of old, passing by farmers of medieval Europe or the America of the Incas, the Aztecs or the Mayans, the dynasties of imperial Asia or precolonial Africa, lived in extreme poverty. Absolutely all these societies had the majority of the population to the limit of subsistence to the point that, when the weather was not with a significant part of them died of starvation. All this began to change in 1760 when a new economic system born in England and Holland, capitalism, precipitated an economic revolution that changed things forever in just over 200 years, capitalism has made ​​the average worker in an economy average market has not only ceased to live on the border of subsistence, but even pleasures have access to the richest man in history, Emperor Mansa Musa I could not even imagine.

Yup! I know some will tell me that today's workers can enjoy all the comforts of technological progress, not because of the market economy. The question, however, is: why aspirin, air conditioning, the Whatsapp, the "Angry Birds" or the mobile phone invented? Why were invented in capitalist economies? The answer is that the inventors sought to benefit financially from their innovations, and the capitalist system gave them the right incentives for that to happen.

In 1970, 30% of the world population living on less than a dollar a day. In 2011 (the latest year for which data are available), the poverty rate was less than 5%. That is, the poverty rate has been divided by 6 since 1970. What happened since 1970? Well, among other things, the most populous and poorest in the world abandoned the socialist planning system that condemned them to poverty and adopted capitalism as a form of economic organization. The most spectacular case is the most populous of all: China. When Mao Zedong died in September 1976, 66% of 1,200 million Chinese living on less than a dollar a day (one dollar a day is the definition of extreme poverty that the United Nations used to declare the objectives Goals in 2000). A couple of years later, his successor Den Xiaoping introduced capitalism as an economic system in which until that time had been a Maoist socialist country. After four decades of market economy, the percentage of Chinese who live below the poverty line is less than 0.3%: When Mao died, there were 615 million poor people in their country. Of these, a total of 612 million people are no longer poor because the economic system has changed.

A similar thing happened in India, which in 1991 abandoned its socialist system of five-year planning a shy and introduce market liberalization. That led to the economic growth of the giant of Southeast Asia and has led millions of people left to live below the poverty line. And since 1995, including most African countries began to follow the path of growth and reduce poverty rates.

Do not! Capitalism is not a perfect economic system. But when it comes to reducing poverty in the world, is the best economic system man has ever seen.

Does entrepreneurship begin in the classroom?

Link to the original article

Recent research shows that start-up rates increase by as much as 20% when entrepreneurship lessons are provided in schools. As we educate the next wave of business owners, we should give young people first-hand experience of the link between entrepreneurship and innovation.

Today’s digital natives are the most adept at using technology, but at the same time they are less certain of the innovative processes that created them. The younger generation need to learn how to create value in the digital economy, and embrace the opportunities that abound in science and engineering. This can only be achieved through close cooperation between education, business and industry.

For Europe, being “innovation poor” is not an option. Our competitiveness agenda depends on the development of smarter economies.

A study carried out in Sweden in 2012 examined two groups of people: those with entrepreneurship training and those without. The researchers found that the former group were at least 20% more likely to start their own business.

In addition, they also found that those who had been trained were much more likely to launch an ambitious venture, such as a corporation, as opposed to proprietorship or partnership.

In Norway, meanwhile, a 2011 study involving 1,200 individuals aged between 24 and 25 found that 12% of them had already started their own company. It’s worth noting that in these two countries around 20% of people receive this kind of entrepreneurship training – the highest in Europe.

Elsewhere, a young team of 16- to 17-year-old students from India participated in sessions with mentors from Hewlett Packard. One creative idea they came up with was revolutionary building material made out of rice husks – a product they dubbed “Green Wood”.

It is light, recyclable and inexpensive, and the raw material to make it is everywhere.

Another set of students from a vocational school in Slovakia, mentored by Hyundai, developed a concept for an iPhone app that would allow parents to see what their kids were up to in the back of the car and communicate with them without turning around – making driving safer in the process.

A team of young entrepreneurs from France thought of an idea to reproduce coral in aquariums and worked out how to commercialize the product (selling it to coral reef experts) without incurring taxes or sea levies.

In each of these cases, as a result of interaction with experts, students have been motivated to progress into specialized areas of industry and further develop their own skills. They have also been “switched on” to innovation.

Through processes like these, innovation is being demystified, and anyone can take part. In the UK, researchers found that students who had participated in entrepreneurship lessons and had gone on to start their own companies were more likely to be active in the creative and technology sectors, such as cloud services (21.1%), advanced engineering (10.3%), product development and environmental technologies.

Innovation requires teamwork, fresh ideas and the ability to shape these ideas into something viable. This is a relatively simple process, but it can lead nowhere unless the focus is on meeting a real, existing need.

Educators learn how to help students move through these steps, shifting from a traditional teacher role to that of a facilitator. The involvement of business and industry partners allows students to understand the relevance of what they are doing.

Part of the learning process is for young people to assess the viability of their ideas in collaboration with knowledgeable people. These people are encouraging, but they can also be critical.

Competitions and pitching sessions are well-tried tools to push students, who quickly identify their own strengths and weaknesses.

What if we could channel this entrepreneurial potential even more than we are now? Europe needs more entrepreneurs, yes, but it especially needs more innovative ones. According to the World Economic Forum’s Europe 2020 Competitiveness Report, innovation-rich countries in northern and north-western Europe have “highly competitive markets, well-developed clusters and an entrepreneurial environment that outperform the United States in enabling smart growth”.

It is interesting to note that these are the same European countries investing most heavily in entrepreneurship education. These are also the countries where collaboration between education and business is most common.

The role the business community can and does play in cultivating entrepreneurship is fundamental. There is great willingness on the part of the private sector to contribute, and there is an increasing consensus among researchers that letting students interact with people outside school or university is a powerful way to develop entrepreneurial competency.

This is an essential step if we want to ensure young people have the skills needed for the job market of the future. It is not enough to be born a digital native. Young people must cultivate skills that will enable them to participate in and contribute to the 21st century – the most fast-paced and high-tech we have ever experienced.

Our report, Fostering Innovation-Driven Entrepreneurship in Europe, is available now. 

Author: Caroline Jenner is CEO of JA-YE, Europe.

Image: Students sit for an exam at the French Louis Pasteur Lycee in Strasbourg, June 18, 2012. REUTERS/Vincent Kessle