Paul, thank you for having me here and thank you for giving me a chance to see this wonderful facility that you have here. Harvard’s pretty proud of its libraries, and when it talks about its peer group in libraries and talks about those upon whom we wish to gain, the New York Public Library is always discussed.
I am not going to attempt to recognize all the Harvard alumni and good and devoted friends of Harvard who are here. There are many I recognize. There are, I suspect, some who I haven’t yet gotten to know in the Harvard capacity, but at gatherings at Harvard, at gatherings like this one, I am reminded of something de Tocqueville said: that the great strength of America was that more than in any other country, private people were prepared to come together in various kinds of associations to promote the common good.
And the tradition of philanthropy and private support for institutions like the New York Public Library, for institutions like Harvard, is, I suspect, a source of strength and stability for our country in ways that we tend, over time, to take for granted and not appreciate.
What I thought I would do today is offer a few reflections on the new economy. And perhaps not surprisingly, some of what I say will connect to the mission of academic institutions like Harvard University.
That would have seemed a semi-irrelevant topic, had I chosen it three months ago, because we all would have been focused on the aftermath of September 11th — still a momentous issue — and what we would then have seen as the reality of continuing recession, which most of us, certainly me included, would have judged to be protracted. And it is still too early to offer a definitive cyclical verdict. But I would note that productivity grew at a 5 percent annual rate in the fourth quarter and that there are serious people in high places who believe that the GNP growth rate in the first quarter could well exceed 4 percent. And so the economy has demonstrated substantially more resilience than many of us would have supposed even a small number of months ago, which at least affords us the luxury of thinking about some longer-term issues.
Let me highlight four framing realities for the next 20 years, which I think have implications for all concerned with the economy and all concerned with higher education.
First: demography. The number of American workers between the ages of 25 and 54 increased by 54 percent between 1980 and 2000. They were the most rapidly growing group in the population. At the same time, the fraction of American workers who had college degrees increased by nearly 50 percent. Now social science doesn’t know much, but we’re actually pretty good at predicting how many people there will be between 25 and 55, 20 years from now, and if you make it be native-born people between the ages of 25 and 55, we’re really exceptionally good because it’s a task of counting.
And here are the facts. There will be essentially no growth in the population between the ages of 25 and 55 over the next 20 years in the United States. In the native-born population there will actually be decreases in the number of people between the age of 25 and 55. And on current projections, the fraction of college graduates in the work force will change very little between now and 2020.
We had a huge gain from the fact that the pre-war and early post-war cohorts of college graduates were a very small fraction of the work force, washed out of the labor force, and were replaced by newer cohorts that were more educated. That has largely happened. And so we are looking at a next 20 years when we are going to have to rely much more on the qualitative dimension than the quantitative dimension. Neither the demography nor the trends in the quantity of education are going to be on our side in the way that they have been in the past.
Pete Peterson will never speak with me again if I do not observe that this points to a changing dependency ratio and greater problems for our senior entitlement programs. And that is, of course, a crucial issue. But an equally large issue that I think we have failed to appreciate is the extent to which this work force that was increasingly comprised of people who were the best positioned to work has contributed to our prosperity and our low unemployment over the last 20 years.
We cannot change the demography of our country. We will not be able to change substantially the extensive margin in terms of the quantity of education. What we are left with is changing the quality of education. And that is why for each of us involved in education in the sector that we’re involved, improving the education and the usefulness of the education we provide is so terribly, terribly important.
Second framing reality: wealth will derive ever more from knowledge. My friend, the Yale economist Jim Tobin, died last week. He made many contributions to economic thinking. One of the most important was the Q-ratio, which was a sophisticated and somewhat altered in other conceptual respects, version of what people on Wall Street would think of as a ratio of market value to book value of companies.
What is conspicuous if you examine the evolution of that ratio over time is that Q in recent years has been in a place that it has never before been. That is to say, market value is enormous relative to the underlying value of assets. Part of that reflects all kinds of market phenomena that we probably have more sensitivity to today than we did two years ago. But a significant part of that is almost certainly secular and reflects the fact that value derives less in physical assets and more in knowledge than it did a decade or two decades ago.
I think this points to an interesting and not usually remarked connection between the economy and the academy. The obvious thing to say, which is right, is that the academy produces the knowledge and the basic science, which leads to this knowledge, which then can be capitalized. And that’s certainly true.
But there’s a different point that I’d want to emphasize, which is that while people often deride the university as an ivory tower and note its somewhat undisciplined character, if you think about the modern business organization and you think about the university, the modern business organization has actually converged substantially on a set of longstanding university values.
The role of hierarchy is substantially diminished and the role of open debate within the best business organizations is larger than it was in the past. The willingness to take ideas from any source within a business organization is greater than it was 50 years ago. The emphasis on open debate is greater in the best organizations than it was a generation ago. The willingness to respond to what is happening internationally is greater than it was a generation ago.
And the career patterns in many industries have increasingly looked like typical academic career patterns where a typical first-rate person in academia is likely to spend time at a number of universities over the course of their lifetime. And that pattern, too, is more common in the business world.
So I think it is worth thinking about the fact that in many ways, the ways in which universities are organized, with their emphasis on peer evaluation, with their emphasis on debate rather than hierarchy, has perhaps inadvertently become an important template in the larger society, and I suspect that is closely related to knowledge being a larger part of the major asset of the most successful business organizations.
The third feature of the new economy that I would highlight is that it is profoundly and inherently global. The trade statistics make the point. The fraction of U.S. GNP that is exported or imported is now about four times what it was in the 1950s. If you looked at any ratio that involved the flow of capital — either direct investments or financial flows — the growth over time would be far more rapid.
If you looked at a GDP concept in which Exxon’s production in Indonesia counted as American GNP and Sony’s production in the United States counted as Japanese GNP — which is a different kind of concept — you would find that globalization had proceeded almost twice as rapidly as if you looked at imports and exports.
There is a traditional pattern that large countries tend inherently to greater insularity than small ones. One of the first things I am trying to do at Harvard is something that Steve mentioned. I was concerned to discover that only 9 percent of our undergraduate students study abroad during their four years at Harvard, and less than half — just about half — go abroad in any way. This is not an area where Harvard leads. In fact, we trail most other universities, though I was reassured to learn that we are ahead of West Point and Annapolis in this regard.
It seems to me that as we think about the future, it is going to be terribly important for all who are preparing to be leaders in this society in any sphere to have some genuine international engagement, some sense of America beyond its borders.
And increasingly, given what I think are going to be the large international challenges of the years ahead, experience not just with countries that are a fair amount like us, like those in Europe or the developed parts of Asia, but contact with the parts of the world that are still developing, where a large part of the opportunity for human betterment resides, and where, as we’ve been reminded recently, a very substantial part of the risks to the global system also derive from.
Part of that for Harvard will be about students traveling abroad. Part of that will be about the people who we bring to our campus. More of it will be about the content of our courses and the approach we take to our material. And an important part of it will be about the use of our convening power to be a place of neutral ground where these international issues can be discussed and can be debated.
But it seems to me that, again, if I think about what is important for the generation of students who are in college now that was important for me, but where there is a clear change, it is this globalization, it is the fact that knowledge is increasingly going to be the crucial asset, and it is the very different demographic picture that we’re headed into.
There’s a fourth and final difference that I think is very important, and I suspect over time may seem to be increasingly important. My guess is that the demands of living a successful, ethical life in a private sector career are going to be greater over the next 25 years than they have been over the last 25 years.
Start by thinking about the professions: the professions of medicine, law, accounting. In all three cases we have seen a profession governed by a kind of guild rule of professionalism be made substantially more aggressive, efficient and effective through market competition. And in all three cases, it’s probably fair to say that we have seen that increasing aggressiveness, effectiveness and competition be accompanied by market pressures to do things that would have conflicted with traditional professional norms.
It’s harder to know what the right thing to do is. Of course it is easy to know and you don’t need to go to Harvard to know that it’s wrong to shred material documents. You don’t need to go to Harvard to know that it’s wrong to have blatant conflicts of interest. But loyalties are more complex when doctors have to make decisions that involve procedures that will be paid for by governments that have enormous costs.
Ethical thinking is more complex when accounting transactions that provide huge benefits to society in spreading risk become so tremendously complex in their implications. And I rather suspect — and I haven’t been able to find data that would bear directly on this — that it is a more ubiquitous feature of private sector life than it was two decades ago that one has ambiguous relationships.
In the economics textbook there are kind of three relations that two businesses can have. They can be competitors who are looking for business — “I win, you lose;” they can be partners — “We’ve merged or we are partners. If I succeed, you succeed;” or they can be unrelated — “You’re an investment banker, I’m in the shoe business.” And those are kind of the three. If you read an economics textbook and you ask sort of “What relationships can two businesses have?”, that pretty much exhausts the possibilities that you’d read about.
Well, if I think about the major New York financial institutions with whom I dealt at Treasury during the Asian financial crisis, none of those three relationships usefully describe the set of dilemmas that those organizations faced. They had interests in common, they had interests in sharp opposition.
If I think about the different pharmaceutical companies, contemplating the bio-medical revolution and the importance of progress, there too there are elements of competition and elements of cooperation. You know, there is the term, that I think it was Andy Grove who coined: “coopetition,” to capture some part of these ambiguities. But I suspect these ambiguities are going to be a larger part of life for many of us for a long time to come.
And I suppose you could say, in a certain sense, “What’s the relationship between Harvard University and the New York Public Library?” At one level we are both enormously oriented to the philanthropic support of intellectual progress. On the other hand, there will be people who will decide to do something substantial for one of our organizations or to do something for the other of our organizations.
And so I suspect that this ethical sensitivity and this ability to manage these more complex and ambiguous relationships is going to be something that is terribly important in the next years and is going to be more important because the world’s going to be more complicated and ambiguous in the next 25 years than it has in the last.
That is a final and I think less remarked feature of the new economy but one that I think has important implications for the way in which we prepare our young people.
Let me just stop there and conclude with this personal note. I had an enormously satisfying time during my two years at the World Bank and eight years in the U.S. government, and felt privileged to have a chance to influence very important economic development in our country and in the world.
But the longer that I was in government, the more I realized that in very important respects we were all a little bit like snakes in a tunnel: running around making decisions, choosing options, but choosing options that were very much shaped and framed by a set of understandings of the phenomena in which we were working, a set of understandings that had very much been shaped by intellectual developments of the previous several decades, that had been very much shaped by what we had been taught, by what the people around us had been taught.
And I came to a much greater appreciation than I had as a professor of the wisdom of the words of Keynes when he said “much of what statesmen do reflects the distilled frenzy of academic scribblers,” and became very much convinced that over the really long term, as much as the decisions of any statesmen, what will shape the world that we live in is the ways in which young people are taught and the new ideas that are developed and that come forth.
And that is very much the work of institutions like the New York Public Library and very much the work and the mission of Harvard University.
Thank you very much.