How the cold war led CIA to promote government financed human capital theory..

Fascinating piece by Prof. Peter Fleming of Cass Business School.

We in economics rarely figure how the guys at the top push certain ideas onto us. He says human capital is one such idea. The idea emerged as Profs. Theodore ‘Teddy’ Schultz and Milton Friedman debated how to beat USSR in the ideas battle during Cold War.

USSR announced how it will smash capitalist system by pushing state driven growth in agri and industry. The question was how should US respond?

As the two men faced each other in that dark, oak-panelled office, they had a big problem on their hands. University economists were being recast in a new light by US state authorities; no longer bumbling professors (sporting a pipe and tweed jacket) but the creators of ideational weapons, just as important as the intercontinental ballistic missiles being readied at Vandenberg airbase in California. Members of the Chicago school were confident they could make a significant contribution in the struggle.

But how exactly?

Schultz shifts nervously in his leather-bound chair. Economic growth has to be the answer, he avers. Friedman nods in agreement, but quietly frowns as Schultz makes his case. In Moscow, Nikita Khrushchev has just announced that ‘growth of industrial and agricultural production is the battering ram with which we shall smash the capitalist system’. This brazen provocation caused a stir when it was read to the US Joint Economic Committee of Congress in 1959.

Friedman is stony silent – a rarity that Schultz seizes upon to extend his point. There’s a very pragmatic aspect to his plan, too. Not only is growth a ‘hot topic’ following the Khrushchev speech, but a number of powerful technocrats in the US government are increasingly sympathetic to Schultz’s views, especially the Council of Economic Advisers. They’ve been instructed by the Oval Office to devise a growth strategy that will eclipse the USSR and leave it for dead.

Although Schultz holds staunch neoclassical assumptions about growth and development, he learnt from his earlier studies of agricultural productivity that increased public spending on education was absolutely vital to the nation’s growth agenda. It will not only give the US a scientific edge in the space race but also enrich the country’s wider skill reserves, making it more productive and thus beating the Soviets at their own ‘growth game’.

Friedman abruptly interjects. Yes, he intones, the question of economic growth is vital. But public spending is not the way forward. It’s easy to picture Friedman browbeating his weary chairman once again about the evils of ‘big government’ and central planning. The Soviet enemy instead needs to be confronted on strictly US terms, where individual freedom and capitalist enterprise come to the fore. Government is the problem, not the solution. Friedman’s ideal hero is the self-made entrepreneur.

So from this, emerged the idea of government financed human capital. Invest more in education:

The two academics pause to gather their thoughts. Then the concept of human capital is broached. Possibly by Schultz since it might help to find some common ground with his tiny counterpart. Unfortunately, it proved to be the older academic’s undoing in the debate.

….

Friedman probably agreed with Schultz that human capital theory was the ideational weapon they’d been searching for to counter the Soviet threat on the economic front. The very phrase implied that human beings’ interests naturally coincide with the values of capitalism. But therein lay the tension between the two economists. Schultz’s rendition of human capital theory – with all its talk of public spending programmes and central planning – threatened to dilute this image of the independent, self-reliant pseudo-capitalist that everyone was assumed to be.

Eventually Friedman’s idea stood the test of time:

Back in the 1960s, Friedman envisaged a society in which we’d all be wealthy, thriving entrepreneurs. What we got in reality was a pay cut, reduced holiday or sick leave, a chronic skills deficit, credit-card debt and endless hours of pointless work. If anything, the story of human capital theory in Western economies has been about divesting in people, not the opposite.

That’s because it was born within an extreme period in 20th-century history, when many believed that the fate of humanity was hanging in the balance. It should therefore be approached as such, a rather eccentric and largely unrealistic relic of the Cold War. Only in that highly unusual milieu could mavericks such as Hayek and Friedman ever be taken seriously and listened to. In the face of communist collectivism, the Chicago school developed a diametrically opposed account of society, one populated by capsule-like individuals who automatically shun all forms of social cohesion that isn’t transactional. These loners are driven only by the ethos of self-serving competitiveness. Blindly attached to money. Insecure and paranoid. No wonder we’re so unwell today.

History of ideas and context in which they emerge is so crucial to figure..

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