What is ‘employability’?

EMPLOYABILITY:

DEVELOPING THE RELATIONSHIP BETWEEN HIGHER EDUCATION AND EMPLOYMENT


by LEE HARVEY

Opening presentation at the

Fifth Quality in Higher Education 24-Hour Seminar


Scarman House, Warwick University,

28 October, 1999.

www.uce.ac.uk/crq


Introduction

There is growing pressure on higher education to develop the relationship between the academy and employment. However, this does not mean that in producing ‘work-ready’ graduates, higher education should change its focus to training.

Since the late 1980’s, there has, in many countries, been increasing pressure on higher education to contribute directly to national economic regeneration and growth (Ball, 1989, 1990). Increasingly, national and international assessments of the role and purposes of education indicate a need for higher education to contribute significantly to ‘meeting the needs of the economy’ (DES, 1987; EC, 1991).

A major factor behind this pressure has been the growing concern, within individual economies and within the European Union as a whole, about future competitiveness. For example, the Industrial Research and Development Advisory Committee (IRDAC, 1990) of the European Commission argued that the output of education and training systems (including, in particular, higher education) in terms of both quantity and quality of skills at all levels, is the prime determinant of a country’s level of industrial productivity and hence competitiveness.

This view was, for example, recently endorsed by an Expert Group appointed by the Irish Government: ‘A highly skilled and motivated work force is essential to remaining globally competitive’ (EG, 1998) and by the Department for Education and Employment (DfEE) and the Committee of Vice-Chancellors and Principals (CVCP) in the UK: ‘It is becoming generally believed that improved skills training for the UK work force would lead to increased competitiveness’ (CVCP/DfEE/HEQE, 1998a, p. 2). Furthermore, the DfEE estimates that the public rate of return on state investment in higher education is 7–9%, and the private rate of return to graduates themselves is between 11–17% (CVCP/DfEE/HEQE, 1998a, p. 2).

Recent UK research has also specifically argued that small businesses benefit from employing graduates. A study of 1100 small business improvement projects, 250 small firms and 56 case studies of successful small businesses in Merseyside showed that graduates enhanced small businesses. Benefits included improvements to IT systems, enhancement of production processes, development of new products, updating of administration systems, expansion of client bases and, most important, management support that frees up owner’s time. It was estimated that 70% of graduate impact is ‘indirect’ — freeing up time — allowing owners to focus on improving the business performance (GEU, 1988). With that in mind, owners of successful small businesses perceived graduates as medium- rather than short-term investment and give them opportunity to develop or ‘grow the job’.

Research undertaken at the Centre for Research into Quality during the 1990s (Harvey, Burrows and Green, 1992; Burrows, Harvey and Green, 1992; Harvey with Green, 1994, Harvey, Moon and Geall, 1997) highlighted the ways in which this pressure on higher education is reflected in the expectations that employers have of graduates. The Research, which fed directly into the National Committee of Inquiry into Higher Education, Chaired by Lord Dearing (NCIHE, 1997), emphasised, among other things, the effectiveness of work experience.

At the heart of the Dearing Report is the assertion that the primary purpose of higher education is to prepare students for the world of work. Following Dearing, there has been growing pressure from government and government agencies to ensure better links between higher education and employers. For example, a recent joint CVCP and DfEE Report noted that:

Employers and employer-led organisations, as consumers of graduates, should be important influences on the context and content of employability skills training programmes. As recommended by Dearing, HEIs should review the extent and nature of their existing links with employers and employer organisations so as to improve the interface and to enhance the responsiveness of their institutions to employer needs. The review will need to consider how the institution will interact externally with employers, employer organisations and other agencies; it will also need to look at the extent to which partnerships with employers can be enhanced and developed.

(CVCP/DfEE/HEQE, 1998a, p. 10)

However, government policy in the UK to enhance employability of graduates is part of a wider strategy to extend the skill base in the UK. In early 1998, the Secretary of State for Education and Employment appointed a Skills Task Force (STF) to advise on the development of a National Skills Agenda. This presumes current skills shortages and gaps in the labour force. The first task of the STF is to identify shortages along with strategies to overcome them. Although the STF will not report until the end of 1999, a consultative document Towards a National Skills Agenda (Sept. 1998) emphasises that partnership is key: partnerships between employers, individuals, central and local government, educational establishments, voluntary sector, Training Enterprise Councils (TECs) National Training Organisations (NTOs) and the European Union. The main objectives are to:

• equip those at risk of exclusion with skills needed especially at NVQ level 2 (A-level);

• promote skills beyond level 2;

• help employers identify their own skills needs and to adapt their training accordingly;

• provide individuals with good information and guidance and encouraging suppliers of education and training to be responsive to their needs.


As part of this, the University for Industry is to be launched in 2000. It will, in effect, be a brokering agency designed to advance these aims — the ‘hub of a brand new learning network’.


Locked into this is a proposed further expansion in higher education of both part-time and full-time provision (the former supported in part by employers). Along with this expansion is a growing focus on making graduates ‘work-ready’:


The Government has endorsed the view of the Dearing Committee of Inquiry ‘Higher Education in the Learning Society’ July 1997, that enhancing the employability of graduates is a key task for higher education. (DfEE, 1999, p. 40)


The British Government made it clear in 1997 with the publication of the Graduate Apprenticeship Framework (DfEE, 1997) that it wanted a clearer link between graduates and the world. It is now piloting Graduate Apprenticeships in up to eight business sectors.


Furthermore, there is an intention to link some funding for higher education in the UK to ‘employability’. This is a joint Exchequer and DfEE initiative endorsed at ministerial level and civil servants are currently working on ways of implementing this through the development of an employability performance indicator.


In anticipation of such moves, and in the wake of the assessment of skill shortages in Wales, the Higher Education Funding Council for Wales (HEFCW, 1999) recently undertook a pilot audit of all its higher education institutions to discover the nature and extent of the employability-skills development offered by Welsh institutions.

What is ‘employability’?


Raising the question of ‘what is employability’ reflects the beginning of the debate about ‘quality’ in higher education at the start of the 1990s. There was much debate about ‘what do we mean by quality?’. ‘Can we define it?’. Or ‘do we just know it when we see it?’. It was, for example, a long time before quality and standards were disentangled. Much time was also spent trying to adapt industrial models to higher education; debating whether ISO9000 was part of, or separate from, TQM.


‘Employability’ is likely to go through the same processes. Employers’ views will be wholeheartedly embraced by disciples, as TQM was in some quarters of higher education. Mostly, employers and academics will ‘talk past each other’ and there will be endless debates about appropriate language. Employability processes will be confused with outcomes. Employability-linked learning will be subject to crude measures of outcome, viz. first-destination returns. The following is a working ‘definition’ of employability.



Employability of a graduate is the propensity of the graduate to exhibit attributes that employers anticipate will be necessary for the future effective functioning of their organisation.



The implication is that:

• employability relates to individuals seeking work;

• employers have an idea of what are necessary attributes;

• desirability is linked to future requirements;

• employers have mechanisms for determining that graduates exhibit appropriate attributes.



This definition does not specify that graduates need to exhibit ‘graduate’ attributes nor that they are recruited into ‘graduate jobs’. This is because:

(a) graduates enter employment at a variety of levels;

(b) what constitutes a graduate job is no longer clearly specified.



Indeed, the Association of Graduate Recruiters now defines a graduate job as any job that a graduate does. This is not a fatuous response to a changing situation but one that reflects the diversity of graduate employment.



There is plenty of evidence that graduates, in fact, take on jobs that may not necessarily have been seen as graduate jobs and grow them. That is, the ‘mundane’ job taken by the graduate evolves to become far more important and more far reaching and have a greater impact on the functioning of the organisation than was anticipated.



What are the desirable attributes?



Over the last twenty years there has been considerable research on the necessary or desirable attributes of graduates. There are many lists of attributes and a good degree of convergence. The context in which assertions are made about graduate attributes is the rapidly changing organisation.



Most organisations are characterised by a presumption that change is here to stay and have been afffected by significant reorganisation of one sort or another: downsizing, delayering and flexible contractual arrangements. This means that, for graduates, there is an unclear graduate promotion ladder, far more project-oriented team working, a consequent need to be able to interact with a wide range of personnel and a less clear chain of responsibility. On top of that graduates face a wide range of work requirements and greater workload, longer working hours and more responsibility than in the past. In short, graduates need to be flexible and adaptable.



Organisations are thus looking much further than degree subject and classification when recruiting.



…the fact that they have that degree basically confirms they are people who think in a certain way and have certain abilities, so the next stage is a number of key competencies.

(Graduates’ Work: personnel manager, multi-national food manufacturer)



What plays a role in the final decision is, are we talking about people who have done something extra as well, whether it is extra-curricular activities or whether it is work experience, or climbing Mount Everest. Something that distinguishes them and therefore can give you some clue about drive, ambition, commercial awareness or whatever.

(Graduates’ Work: senior executive, large brewing company)



Increasingly, ‘graduate attributes’ are more important in the recruitment process than the graduates’ degree subject. United Kingdom employers are at the forefront of ‘any discipline’ recruitment. That is, the majority of vacancies filled by graduates do not require someone from a specific discipline. On the contrary, employers recruiting in the UK often positively seek out graduates from disciplines other than that which would appear to be relevant. For example, many large accountancy and management-consultant firms seek history, classics, social science or physics graduates rather than accountants. Software firms are not looking for computing specialists they need IT-literate people who can communicate and work in teams.



Subject-specific knowledge is not the primary determinant of suitability for employment in most graduate recruitment, the main exceptions being medicine and engineering. Graduate recruiters want a raft of other skills in addition to a first degree and these override the degree specialism in many areas (CBI, 1994, 1995; AGR, 1995; CIHE, 1996; Hansen, 1998). Similarly, Fisher (1998), commenting on Denmark, noted that employers, are also becoming less concerned about the field of study. What they want are bright graduates and they tend to use grades, rather than subject area, as a first filter. More and more employers are taking ‘exotics’, those graduates with degree subjects not apparently linked to the core business.



I don’t care what you did your degree in, I really don’t. If you want an engineer you want an engineer, if somebody is going to design a vehicle, then I don’t want somebody who has got a degree in sociology. But even in areas like finance, I don’t necessarily want a finance-trained human being. It is as much, if not more, about personal traits, personal drive and ambition. You could be managing director of this company with a degree in sociology.

(Graduates’ Work: director commercial operations, large vehicle manufacturer)



We have done some research, and in the long-term non-lawyers are more successful than lawyers. We take about a third non-law and two-thirds law, because for a whole variety of reasons we have to train non-lawyers for a year more, so it costs us significantly more. We don’t care where they come from or what their discipline is as long as they are the best.

(Graduates’ Work: head of personnel, large law firm)



Employers and their representatives consistently say that, to succeed at work, most people in future must develop a range of personal and intellectual attributes beyond those traditionally made explicit in programmes of study in higher education institutions.



We do look for communication skills. We look for someone who is a team player. We look for someone who has got the ability to put forward ideas persuasively. We like to recruit people who have good social skills, they are able to relate to other people well. Linked in with that is personality and also the ability to cope with stress.

(Graduates’ Work: partner, large law firm)



At root, employers want interactive and personal attributes. The core interactive attributes are communication, teamwork and interpersonal skills. These are necessary to communicate, formally and informally, with a wide range of people both internal and external to the organisation; to relate to, and feel comfortable with, people at all levels in the organisation as well as a range of external stakeholders, to be able to make and maintain relationships as circumstances change; work effectively in teams, often more than one team at once, and to be able to re-adjust roles from one project situation to another in an ever-shifting work situation.



We do look for communication skills. We look for someone who is a team player. We look for someone who has got the ability to put forward ideas persuasively. We like to recruit people who have good social skills, they are able to relate to other people well. Linked in with that is personality and also the ability to cope with stress.

(Graduates’ Work: Partner, large law firm)



Personal attributes are attitudes and abilities including intellect, knowledge (in some cases) willingness and ability to learn and continue learning, ability to find things out, willingness to take risks and show initiative, flexibility and adaptability to respond, pre-empt and ultimately lead change; and ‘self-skill’ such as self-motivation, self-confidence, self-management and self-promotion. These personal attributes are important to allow graduates to fit into the work culture, do the job, develop ideas, take initiative and responsibility and ultimately help organisations deal with change (Harvey, Moon and Geall, 1997).



On one level the set of specified skills has not changed greatly for a quarter of a century: communication skills, numeracy, self-confidence and self-discipline, problem-solving, analysis and interpersonal skills featured alongside knowledge and intelligence in organisational graduate specifications in the 1970s (Kelsall, Poole, and Kuhn, 1972).



Technological and organisational changes over 25 years have added ICT skills, teamworking, flexibility, adaptability. Furthermore, ‘problem solving’ has become ‘creative problem-solving’ and risk-taking has become a key attribute. On the other hand, there is much less emphasis on knowledge and far more on willingness to continue learning.



Measuring employability?



How do we measure employability? There is an attempt to move much more quickly to operationalising the concept of ‘employability’ than was the case with ‘quality’. Debates about employability seem already to revolve around achievement of (full-time) employment (of an ‘acceptable’ type within a specified time after graduation). However, this is precipitous. Measurement is the end result of a process of operationalising a concept. Any measurement is only as good as its operationalisation.



Operationalisation is the process of going from a theoretical concept to a measurable index (Harvey and MacDonald, 1993). The stages of operationalisation are:



• Define the theoretical concept.

• Break it down into dimensions that cover the meaning of the concept.

• Identify a range of indicators for each dimension.

• Select one or more indicators for each dimension.

• Design instruments to collect information on each indicator.

• Decide whether to have a multi-dimensional set of indicators, an array of indices or a single index.

• Where appropriate, combine indicators into an index.



To explore what this means, consider two alternatives (Table 1).



A third alternative might define employability on the basis of their job satisfaction. Which itself may be linked to an array of factors, differently weighted for each individual. In short, how employability is defined will determine its operationalisation.



The exposition, so far, has focused on the employability of the graduate. This is deliberate because it makes no sense to talk about the employability of an institution. All that it is possible to do is to explore how effective the institution is in developing the employability of its students. How that is judged depends on how we define and operationalise the notion of graduate employability. However, the question remains, has any of this got anything to do with higher education?

Table 1: Example of alternative operationalisations of employability

Alternative No. 1 No 2

Stage 1: Theoretical definition Employability is the ability of graduates to get a job. Employability is the propensity of the graduate to exhibit attributes that employers anticipate will be necessary for the future effective functioning of their organisation.



Stage 2: Dimensions E.g.

Nature of employment

Time after graduation

Income

Discipline

Range of attributes:

teamworking

communication

risk taking...



Stage 3: Indicators

E.g. Nature of employment:

Is it linked to degree subject?

Does it involve graduate skills?

Does it have scope to be ‘grown’? E.g. teamworking:

experience of working in teams

experience of leading teams

ability to play different roles in different teams simultaneously







Higher education through its research, scholarship and teaching primarily develops knowledge, transfers it and enables others to use, and further develop, knowledge. Many in higher education thus consider the limits of higher education to be the dissemination of knowledge (to ‘stakeholders’, which usually means to students and peers working in the discipline) and the enabling of students to handle the information via the development of higher-level intellectual abilities, viz. analysis, synthesis, critique, inference, extrapolation. How this meshes with the world of work is not the major issue for many academics.



Indeed, for some, the idea that academia should respond to its primary stakeholder is an unwelcome prospect:



Does the university have to meet the expectations of students or is the idea that the students grow to fit the expectations the university has of them?

(Evans, 1999, p. 10)



So, whatever definition of employability (of the graduate) is adopted requires that we address the question as to whether this is a personal endeavour of the graduate or something linked directly to the institution. Is employability solely a result of the individual making the most of the higher education experience and extracurricular activities? (Figure 1). Or, does the HEI have any role in this?



Whatever role the institution is assumed to play, it is unwise to assume a causal link between the efforts (or lack of effort) of a higher education institution and the extent and type of employment of their graduates.



Figure 1: Individual employability



Graduate



employability



Employment



It is a big step to somehow take this back to measuring the ‘employability effectiveness’ of the institution (Figure 2).





Figure 2: ‘Employability effectiveness’ of the institution



HEI



employability-

development

opportunities



.

.

.



Graduate



employability



Employment



An employability performance indicator



An employability performance indicator of an institution is thus an indicator of the effectiveness of the institution in developing employable graduates. If such an indicator is based on the employment of graduates then it assumes some kind of causal link. However, this is far from a simple causal relationship. To make a causal link implies that the higher education institution should be able to provide graduates with some sort of package of attributes that meshes with what an employer is looking for.



That also presumes that graduate recruitment is a rational activity. However, despite the convergence amongst employers about the attributes they seek, the graduate recruitment process of each organisation in practice is idiosyncratic, pre-judgmental, restrictive, and at times bizarre (Harvey, Moon and Geall, 1997).



Thus, it is not appropriate to assess an institution’s efforts to provide students with employability skills on the basis of the recruitment activities of employers over which the higher education institution has no control. In short, employment rates of graduates is no indicator at all of the employability-skill development activities of the higher education institution.



Some institutions have good graduate employment rates because of their reputation but that may have more to do with employers’ perceptions that the ‘best’ students go to the institution rather than perceptions about how well students are developed at them. Some institutions have good employment rates because they specialise in areas that have good rates anyway, such as pharmacy, computer science, maths, optometry. Clearly, employment rates are discipline-specific.



There are also discipline differences in time lags to employment. Furthermore, there are discipline differences in the type of job that is desirable. In art and design, for example, almost a third of graduates undertake some form of self-employment for at least part of their time (this far more than in any other discipline area). Some of this represents the pinnacle of a desirable job, some of it is out of necessity because of the nature of the design industry. However, this is not easily identified in such things as First Destination Returns.



To start with a view that an employability performance indicator should be based on First Destination Returns simply because they are available would be unfortunate. What might be gained by what appears a relatively simple measure would be lost on three fronts:

• lack of causal chain between HEI efforts and employment;

• lack of credibility — crude and discriminatory measure (even if it was made discipline-specific and after an appropriate time lag of at least one year);

• lack of encouragement to continue employability skill development if recognition (and incentive) follows employment rates and thus favours those who rely on reputation and are probably already among the best resourced institutions.



On the contrary, a rational approach to an employability performance indicator is needed. First, there is a need to agree a theoretical definition of employability.



Second, it is necessary to go through the appropriate stages of operationalising the concept. The outcome will be quite different depending on the initial definition. Employability might be operationalised as a graduate profile or it might be operationalised as achieved employment or, possibly, job satisfaction.



Third, a performance indicator for employability-development of the institution must follow the measurement of employability of the individual. So, for example, if the employability of the individual is operationalised in terms of a an attribute profile, then the performance indicator of the employability-development of an institution would be based on an audit of the employability-development opportunities offered by the institution (See attached Employability Audit Toolkit, (Harvey, 1999a) as an example). Such an audit would include identifying the work-experience opportunities and the attribute-development opportunities explicitly embedded in the curriculum.



Fourth, the causal link between the performance of the institution and the achievement of the student must not be presupposed. Students, for example, achieve employability attributes both as a result of their higher education and irrespective of (or, even, despite) their higher education. Students may get a job as a result of having a degree in a specific subject from a specific institution, or because they have an array of desirable attributes, or because they have contacts, or they were in the right place at the right time, or their face fits or for many other reasons. How much of this is due to the efforts of the higher education institution is debatable.

Learning



The way to unlock this potential conundrum is to go back to first principles. The two key reasons for the expansion of higher education in Europe is to improve the skills stock and provide people with the attributes needed to be critical lifelong learners. Lifelong learning goes beyond a single focus on an educated work force:



Future economic prosperity, social and political cohesion and the achievement of genuinely democratic societies with full participation, all depend on a well-educated and trained population.

(Alexander, 1997, p. 169)



As such, it is a view compatible with a philosophy of transformative learning. In effect, then, achieving a job within six months of graduation is merely a symptom, and a misleading one, of a much more important development: the enhancement and empowering of the learner (Harvey, 1999b).



Thus employability is not about getting graduates into jobs. It is not even about delivering ‘employability skills’ in some generic sense. Rather it is about developing critical lifelong learners — and employability is subsumed as a subset within that. So the focus needs to be on empowering students to become critical learners.



Students, are empowered by developing their critical, reflective and transformative abilities. This requires an approach to teaching and learning that goes beyond requiring students to learn a body of knowledge and be able to apply it analytically. Anne Brockband and Ian McGill (1998, p. 214) argue that facilitation of learning rather than teaching is necessary to ‘encourage critically reflective learning’.



Developing a critical approach to learning is about challenging preconceptions, both those of the learner and the teacher. It is about being able to develop opinions and be able to justify them, to be able to think about knowledge as a process not some ‘thing’ they tentatively approach and selectively appropriate. A critical approach is about students having the confidence to assess and develop knowledge for themselves rather than submitting packaged chunks to an assessor who will tell them if it sufficient or ‘correct’ (Harvey and Knight, 1996).



Students need to be guided in critical learning and one of the best ways is to make the learning process transparent rather than opaque: to make it so that, for students, it is their learning rather than an initiation into the professor’s mysteries. Empowering learners requires an approach that treats students as intellectual performers rather than as compliant audience. It transforms teaching and learning into an active process of coming to understand.



Increasingly, in a world of change, in which flexibility is a watchword, learners need to be able to help the organisations, in which they work after graduation, to transform in the face of this rapid and continuous change. Graduates will not be able to do that if they are not able to work in teams, communicate well, analyse, and synthesise. More importantly, the future graduate needs to be self-transformative, which requires reflective and critical abilities.



This, in essence, is what an employability performance indicator needs to be measuring. This is not something captured by First Destination Returns.



Conclusion



In conclusion, initiatives that help improve employability of students are to be encouraged, especially where they include significant work-related elements or are embedded in the curriculum. However, an employability performance indicator based on the employment rates of graduates from institutions is problematic.



Apart from implying an unconvincing causal link between institutional activity and graduate success in achieving a job, it is likely to result in acknowledgement of activity that is not genuinely taking the employability agenda forward. In the last resort, employability performance indicators should be subsumed to the higher education purpose. At root, employability is about the relationship between higher education and employment.



As such, employability raises fundamental questions about the purpose and structure of higher education. Employability is not about training or providing add-on skills to gain employment. On the contrary, employability is about how higher education develops critical, reflective, empowered learners.



Despite appearances to the contrary, the real challenge is not how to accommodate employability but how to shift the traditional balance of power from the education provider to those participating in the learning experience.



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How do we develop a student as an employee?

Key competencies, employability skills and the new training organisation

Abstract

Key competencies/employability skills are central to competence in vocational competence and life! The Flexible Learning Leaders program in 2003 commenced with a curiosity about the key competencies and their assessment as a force to improve student participation in training, went on to identify and highlight enhanced delivery methodologies, and led to a new consciousness about the current and future role of Registered Training Organisations. It became a personal journey for improved practice.

Introduction

Core competencies, professional skills, generic skills, key skills, essential skills, necessary skills, workplace know-how, key competencies, ‘nous’, all embody soft skills, but are described by the Australian National Training Authority’s CEOs as ‘hard’ requirements (TAFE frontiers, 2002)! For the purposes of this report, the terms are interchangeable.

Employability skills are based on the seven key competencies developed by the Mayer Committee in the early 1990s. The key competencies formed a firm foundation for the identification of skills required to successfully participate in the world of work (Australian Education Council and Ministers of Vocational Education, Employment and Training, 1992). But, more than a decade on, it has been recognised that the uptake of key competencies has been poor, leading to a number of important studies which focus attention on these skills once again, and interpret them for the new economy. Employability skills incorporate the key competencies. The Australian National Training Authority is determining its list of employability skills, and has been trialling ways in which employability skills will be incorporated in training packages. There is a clear imperative that practitioners ensure that employability skills are included in the training and assessment they provide (NCVER, 2001). In future, Registered Training Organisations (RTOs) can expect to be audited against their training and assessment of employability skills! But what are employability skills, what is their significance and how do we develop them in students?

The model student or employee – what do they look like?

As lecturers, we warm to the student who loves to learn, thrives on reading and research and asks questions. These students teach themselves, with minimal input from teachers. They have highly refined research skills, are motivated and disciplined. Similarly, research carried out by the Australian Chamber of Commerce and Industry, showed that industry are equally seeking more than technical skills. The ACCI developed a framework of employability skills as perceived by industry, and these included the key competencies such as team work and communication, problem solving and technical skills, but also identified self management, learning, initiative and enterprise, and also interestingly and most controversial, personal attributes such as loyalty, integrity and a sense of humour, to name just a few! (ACCI 2002).

The framework comprehensively lists the elements of each skill, therefore unpacking the components for consideration. So, the skill of communication includes listening and understanding, speaking clearly and directly, and writing to the needs of the audience. This aligns with the guidelines given by the Mayer Committee in interpreting the key competency ‘Communicating ideas and information’ by identifying the purpose, audience and context of the communication, select the appropriate form, communicate and adapt by responding to feedback (Department for Education and Children’s Services (DECS), n.d.).But the ACCI framework goes further to identify persuasion, being assertive, negotiating and using networks, as equally important. The employability skills to be incorporated into training packages are yet to be revealed by ANTA, but it appears that personal attributes will not be included, as the subjective nature of these is too controversial. Yet attributes such as enthusiasm, personal presentation and commitment are underlying qualities for which a candidate (including ourselves in job interviews) is often judged, and indeed may even be overtly stated in a job and person specification (Clayton, Blom, Meyers and Bateman, 2001)!

Largely, it appears that employers are seeking individual with the skills to be an independent thinker, who can add value to their business beyond the mere technical skills, someone who can use his/her initiative, solve problems, work as a team member, yet equally be able to work effectively on his/her own, and who will take responsibility for their learning and development (ACCI, 2002). ’Lifelong learning equals lifelong earning’ (Turner 2002: 11).

How do we develop a student as an employee?


Assessment

It is worth first considering assessment strategies, for assessment will guide the experiences practitioners will provide to their students. Assessment of generic skills is perhaps one of the most difficult tasks. Evidence must meet the obligations of valid, fair and reliable assessment in an arena that can be quite subjective, given the variations in the depth and interpretation that practitioners adopt. Assessment of employability skills can be adjunct, that is, separate to, assessment of the vocational skills and may or may not be carried out in the vocational context. The assessment may consist of a checklist, often very simplified tick boxes that are developed by the assessors, which may be used in their judgement, or in conjunction with an employer to say – ‘yes’ the student can communicate, or ‘no’ he/she can’t.

More advanced checklists ‘unpack’ each skill, clearly articulating the meaning of each skill and the expected components of it. In more sophisticated fashion, students first work with the checklist themselves and by reflecting back on previous technical skill assessments, identify the examples where they have demonstrated the specific key competencies or employability skills, before this is then verified by the assessor.

The work done to unpack each skill is fundamental to the development of an integrated approach. I believe that by matching existing assessment strategies to the most appropriate key competencies, the methods that are best suited, will naturally assess the generic skills, in context. For example, using a problem based assessment tool, it may be possible to assess the technical knowledge and skill, whilst also assessing the student’s ability to solve the problem; having collected, analysed and organised the information, perhaps using electronic means, and communicated with the relevant stakeholders to assist with the solution. It will be important to provide the assessor and the student with a clearly defined set of criteria for each skill to highlight the elements of the skill.

Another important assessment tool may be profiling the student, a form of continuous assessment, which may incorporate 360 degree feedback collected from stakeholders such as managers, supervisors, peers and the assessor, assessing the technical skill phrased in terms of employability skills.



Delivery

Training organisations have long prided themselves on their ability to meet industry’s training needs, and many would articulate that they have always trained in the key competencies and employability skills, within their established delivery and assessment strategies. The Electronics program at Torrens Valley Institute of TAFE in South Australia is offering one of the most comprehensive programs for the development and assessment of the key competencies, providing a flexible training program which is self paced with rich and diverse learning experiences, in a heavily mentored and supported environment.

And therein lies the key lesson to employability skill development in students - create a learning environment which encourages/enables students to develop the generic skills. It includes the following elements.

Create a learning environment of hope and fulfilment. At the AUSTAFE Conference in South Australia, Tim Costello spoke of the fractured nature of society in modern days. For learning to be most successful, the environment we create for students is critical. Whilst the concept of student support is considered fundamental to most training practitioners, hope and fulfilment is asking for an environment of optimism and positive outreach, a place of belonging and inclusiveness (Costello, 2003)

Create a learning environment of social interaction. Students’ motivation to learn often comes by peer group discussion and opportunities for discussion with each other.

Create a learning environment of passion and enthusiasm, that resonates with a capacity for vocationally enthusiastic students to thrive, and sufficiently captivate those whose interests lie elsewhere! Model drive and energy.

Create a learning environment with pastoral care for students at its centre, intense contact in the first few months to establish the expectations of communication and commitment.

Place the training emphasis on learning how to learn (McMahon, Patton, Tatham, 2003) – concentrate on how people learn, not just the content, and lead students to recognising their own learning styles and to seek the resources that meet their needs. Rob Denton of Torrens Valley Institute of TAFE encourages reflection as the fundamental learning tool. And at the Pedagogy and Partnerships Forum in Adelaide (2003) the notion of helping people learn how to learn was determined as the most empowering force we can let loose – it is a meta-competence.

Translate training packages into learning experiences (Pedagogy and Partnerships Forum) – return to the fundamentals of teaching, not just re-producing the same method of delivery and assessment, seek new ways to challenge students learning (and your own!). And therefore again, model a passion for meeting individual student needs.

Create a rich and diverse learning environment, one with multiple modes of delivery that are stimulating to the generation for which the environment is intended. Discard the learning guide as a standard delivery tool. It is just one of a suite of possibilities. Work with the student and together discover new resources (websites, references, people, pamphlets, organisations and professional bodies) and new ‘learning objects’. This is nothing new! Consider using work-based problems as the learning method. This is truly the flexible learning environment. At Torrens Valley Institute of TAFE, the flexible learning environment enables the development of the key competencies/employability skills, for the skills cannot necessarily be taught by on their own (the strategies can), but must be allowed to develop through the enriched learning environment.

Develop the skills in context, therefore providing meaning and understanding, so the technical vocational skills become the conduit for learning employability skills.

Holistically develop the student, taking into consideration the life skills they experience through sport and community activities.

Allow - students to own and lead the process, as the centre of the learning, and understand the underlying implications of flexible learning in the environment they find themselves.

Re-analyse our use of the grade “fail”. The student is simply on an ever-spiralling cycle of development in which there is no fail, just not yet competent.

Be aware of actually developing the key competencies and not just coaching in the language for assessment purposes

Encourage enterprises to identify and develop a culture and spirit which incorporates training and links learning to work (NCVER, 2002), where the training is valued, supported, encouraged and an integral component to work and an expectation of ongoing employment with the enterprise. Attempt to halt the downward trend in skills by encouraging a shared responsibility to workforce development (Government of South Australia, 2003).



The Future for Registered Training Organisations (RTOs)

Reflecting on the points poses some interesting new (or re-emerged) roles for Registered Training Organisations, perhaps a major conceptual break in VET practice. What really constitutes the building blocks of vocational education and training (VET) and therefore the role of RTOs? What knowledge really matters for VET?

RTOs will need to ensure:

provision of diverse and greatly enriched learning environments incorporating multiple modes of delivery

innovation and creativity in flexible learning will form part of the measure of success of learning for RTOs and students alike

a new or enhanced role for RTOs in the provision of employability skills development

social interaction forms the pivotal delivery strategy, in an increasingly fractured society, for enhanced learning in a flexible environment

collaborative partnering will form the foundation to achieving the points.

In 2004, the Horticulture program area of the South East Institute of TAFE will trial the mapping of assessment strategies against the key competencies and trial the subsequent assessment tools. The program will also offer a pre-vocational training program, and a re-vamped Contract of Training program, trialling a mixed delivery methodology of workshop topics, such as self-paced activities, video-conferencing and industry based practical workshops, to encourage students to identify their learning styles in a social environment. The challenge will be to balance a supportive approach whilst encouraging autonomy and independence of learning! The development of an online site using the Janison toolbox platform will enhance this outcome.



Summary

Moving to a whole life approach to training and assessment is a great challenge to vocationally orientated training organisations, but it has also become a social imperative, crucial to building the capacities of communities, and their industries.



References

Australian Chamber of Commerce and Industry & Business Council of Australia, 2002, Employability Skills for the Future. Retrieved 30 September 2003 http://www.acci.asn.au/text_files/reports/Employability_Skills.pdf

Australian Education Council and Ministers of Vocational Education, Employment and Training, 1992, ‘Key competencies’ Report of the Mayer Committee, Sands and McDougall Printing, Pty. Ltd. Retrieved 3September from http://www.acci.asn.au/text_files/reports/Employability_Skills.pdf

Clayton, B., Blom, K., Meyers, D., Bateman, A. 2001, Assessing and certifying generic skills. What’s happening in VET? National Centre for Vocational Education Research, Leabrook, Adelaide.

Costello, T., 2003 ‘Leading change in a changing world’, Keynote address, AUSTAFE Conference, Adelaide.

Department for Education and Children’s Services (DECS), no date, ‘Integrating the key competencies into teaching and learning practice’, in Ready, Set, Go program brochure, DECS Curriculum Services, Adelaide. South Australia

McMahon, M., Patton, W., Tatham, P., no date Managing Life, Learning and Work in 21st Century: Issues Informing the Design of an Australian Blueprint for Career Development, Miles Morgan Australia Pty. Ltd.

TAFE frontiers, 2002, Generic Skills TAFE frontiers-Discussion Paper. TAFE frontiers, Melbourne.

Turner, D. 2002, Employability skills development in the United Kingdom, National Centre for Vocational Education Research, Leabrook, Adelaide.

Government of South Australia, 2003, Skills for the Future. Final Report of the Ministerial Inquiry, South Australia.



Further Information

Down, C. 2002, Employability Skills in Training Packages, a report in conjunction with ratio, ANTA.

NCVER generic skills page at http://www.ncver.edu.au/generic.htm.

The Bologna Process and Employability

Bologna Expert Colloquium




“The Bologna Process and Employability”





Thursday, 21 May 2009



09.30 – 13.00



Croke Park Conference Centre (Cusack Stand Side), Dublin



This workshop, which is funded under the Bologna Expert programme, supported by the Higher Education Authority and the National Qualifications Authority of Ireland will:

• Raise awareness among the enterprise sector of the role of the Bologna process in Employability

• Consider the extent to which graduate employment and career structures are compatible with the Bologna process

• Demonstrate how recognition tools such as the Diploma Supplement can support recognition of degrees in the labour market across Europe



Employability has been identified as a priority area for the creation of the European Higher Education Area (EHEA) from the very start but many concerns still exist - among employers, students, academics, higher education institutions and governments. For the purpose of this Colloquium, the concept of employability is defined as the ability to gain initial employment, to maintain employment, and to be able to move around within the labour market.



The role of higher education in this context is to equip students with the knowledge, skills and competence that individuals need in the workplace and that the workplace requires, and to ensure that people have the opportunities to maintain or renew those skills and attributes throughout their working lives.













Programme





09.30 Registration, Tea/coffee



10.00 Welcome, Higher Education Authority



10.10 Employability and the Bologna process



“Following up on the introduction of the three-cycle degree system, we ask the BFUG to consider in more detail how to improve employability in relation to each of these cycles as well as in the context of lifelong learning. This will involve responsibilities for all stakeholders. Governments and HEIs will need to communicate more with employers and other stakeholders on the rationale for their reforms”. (London Communiqué 2007)



Professor Ellen Hazelkorn, Director of Research and Enterprise and Dean of the Graduate Research School, Dublin Institute of Technology will present the Bologna process in the context of globalisation and Higher Education and will examine the challenges facing all stakeholders responsible for enhancing the employability of graduates.



11.00 The National Framework of Qualifications and its relationship with the Bologna Framework and European Qualifications Framework.



The Bologna process requires that national qualifications frameworks are to be compatible with the overarching Qualifications Framework for the EHEA with mobility facilitated and employability enhanced.



Dr. Jim Murray, Chief Executive, National Qualifications Authority of Ireland provides an overview of the relationship between National Frameworks of Qualifications, the Qualifications Framework for the EHEA (The Bologna Framework) and the European Qualifications Framework of the European Union (The EQF)



11.30 Break





11.45 The Enterprise perspective on Graduate Employability.



The Enterprise sector, both public and private, and Higher Education Institutions need to be encouraged to co-operate more to ensure that the skills that graduates need are reflected in higher education provision. There is a need to encourage a more systematic dialogue between Higher Education Institutions and the Enterprise sector at all levels – locally, regionally, nationally and internationally.



Ms Teresa Wilde, Head of Human Resources, Siemens Limited, will provide an enterprise perspective on the employability dimension of higher education and training qualifications.



12.15 Recognition for Employability: The Diploma Supplement



When it comes to recognition for employability, the awareness of existing recognition and transparency tools (ECTS, Diploma Supplement, Europass, work of the ENIC and NARIC Networks) seems to be there. However these tools are not used as widely as possible. It is essential that all “users” of these recognition tools (employers, professional bodies and education and training providers) become more involved in their further development and use.



Dr. Brendan McCormack, a National Bologna expert and Registrar, Institute of Technology, Sligo will assess the value of the Diploma Supplement as a recognition tool for enhancing employability and provide an overview of the work of the National Steering Group responsible for co-ordinating the implementation of the Diploma Supplement.



12.45 Questions and Answers



13.00 Concluding remarks and close of colloquium



13.15 Lunch

Five Sweeping Trends That Will Shape Your Company's Future

The New Workforce


Five Sweeping Trends That Will Shape Your Company's Future



Author: Harriet Hankin

Pub Date: November 2004



Overview

Think beyond today’s human resources issues...and into the future.

Today’s workplace is already a tapestry comprising people of countless different backgrounds, ethnicities, age groups, regions, and more. But that diversity is just the beginning of a radical shift in the makeup—and requirements—of tomorrow’s workforce.

The New Workforce gives you a clear picture of the rapid changes now underway—along with the steps required to attract and retain motivated, loyal, and productive employees. Based on a wealth of statistics, research, interviews, and firsthand experience, the book pinpoints five sweeping trends:

* An increasingly aging yet active population: Lifestyle changes and medical advances are keeping people alive and fit into their 90s; financial pressures and personal desire are keeping them working as well. Companies that can harness the power of these experienced and skilled employees will reap concrete financial benefits.

* The decline of the nuclear family and the rise of alternative households: Once considered the unshakable norm, the traditional nuclear family now represents only a small fraction of households. Today’s workforce increasingly consists of female heads of households, same-sex partners, stay-at-home dads, dual-income families, unmarried couples, and other arrangements. And the benefits programs required to support and retain them are quickly evolving to make flexibility a key component.

* Four generations working side by side—with a fifth on the way: The Silent Generation, the Baby Boomers, Generation X, the Baby Boom Echo, and the newest entrants to the world—the Millennium Generation…. Each has competing needs, values, expectations, and working styles. Smart companies will mine the wisdom and experience of their older employees with the energy and stamina of the younger ones to create a powerful multi-generational workforce.

* A workplace that is growing more diverse and more blended: Whether it’s race, ethnicity, religion, gender, or sexual orientation, the workforce is growing more diverse at a faster rate than ever before. Truly successful companies won’t just tolerate diversity; they will accept and respect their workforce in a blender.

* The need for a “higher purpose” in the workplace: A paycheck is not the only thing that employees want. Studies show that they also seek a spiritual component, which includes personal growth, balance, and meaningful purpose. Organizations that champion trust, individual respect, and ethical conduct will build committed workforces and creative thinkers.

In addition to mapping the path from current needs to future requirements, The New Workforce supplies powerful ideas for radically revamping HR policies, recruiting efforts, compensation and benefits, and learning and training, including advice on: flexible scheduling, in-house medical support, double family leave, telecommuting, literacy tutoring, sabbatical programs, digital matching, aptitude testing, total-rewards strategies, mentoring up, and much more.

The New Workforce is indispensable for human resources professionals, managers and executives, and entrepreneurs. It’s an all-in-one resource for peering into the immediate future and preparing for the rapidly changing face of tomorrow’s workforce.

Role of the Chinese community in achieving the NEM and 10th Malaysia Plan targets

Changing for the better




Sunday August 15, 2010

Changing for the better



MCA president Datuk Seri Dr Chua Soi Lek’s address to the Prime Minister and guests at the opening of the party’s Chinese Economic Congress yesterday.

WELCOME to the “Chinese Economic Congress” with the theme “Role of the Chinese community in achieving the NEM and 10th Malaysia Plan targets”.

The NEM and the 10MP are two of the four pillars of national transformation that will enable Malaysia to achieve the goals of Vision 2020, that is, to be a high-income economy and developed nation by 2020. The other pillars are the 1Malaysia concept and the Government Transformation Programme.

Keynote speech: Dr Chua delivering his address at the Chinese Economic Congress yesterday.

Much thought and effort has gone into crafting the NEM and 10MP, and, of course, far more work needs to be done for the actual implementation.

Let us bear in mind that these are national plans, and not just the Government’s plans. This means the nation as a whole has to come together and pull in the same direction in order for the NEM and the 10MP to succeed. Our immediate priority is to jointly grow the economic pie, instead of noisily debating over which slice we deserve. Make no mistake, failure is not an option.

We are here to ensure the transformation is successful and the targets for both the NEM and the 10MP are met.

> Liberalisation of economy

For a country to achieve accelerated growth, one needs to liberalise the economy. One of the better examples of sectors is the liberalisation of the oil and gas sector which encompasses areas as such shipping, distribution of gas, petrochemicals, education and vocational/technical training, and so on.

Our oil and gas sector has reached a stage in which we are already an established player in the global stage. Yet the opportunities for the SMEs are still small compared to other countries including non-oil producing nations like Singapore. Therefore, given the maturity of the sector, the opening up of the sector will boost the country’s GDP by many folds.

As such, sir, I sincerely urge you (Prime Minister Datuk Seri Najib Tun Razak) to consider liberalising Malaysia’s oil and gas sector, and allow many more of our non-bumiputra investors to be joint-venture partners, contractors and sub-contractors in areas such as exploration, platform constructions, logistics, deep-sea operations and others.

Another area that needs to be liberalised is the telecommunication sector. With the full opening of the sector, increased competition actually augurs well for both the operators and the consumers.

With protectionism, rates of telecommunication services offered are high. Thus the country’s broadband usage is less than desired. We are hardly touching the 40% penetration rate as compared to the higher levels achieved by other countries.

> The Role of GLCs in the NEM

The GLCs make up nearly 40% of the value of the Bursa and there is no denying that they dominate the private sector in the economy in terms of their assets and capitalisation. GLCs have been instrumental in helping the bumiputra business community to flourish – to give them a head start to form a core cluster of bumi entrepreneurs to mentor and nurture others to be equally competitive and to be confident in the global stage.

But at the same time, it must be recognised that Malaysia is just a small market with 26 million people. As such, GLCs must take the bold step to venture regionally and/or globally like CIMB Bank. CIMB has expanded its financial wings to Thailand, Singapore, Indonesia and is doing very well in South-East Asia.

However, to be regionally and globally competitive, we need to make sure that the best talent remains in our shores. I encourage more GLCs to open up their board of directors to include more non-bumiputras as well as international expertise. It is important also that GLCs open up their procurement system to include competitive SMEs based on the quality of their service and products that they offer, rather than based on race or equity requirement.

> Open Tender System

Likewise, we call for greater transparency in our tendering process. Closed tender systems have always been associated with corruption and kickbacks. Quality of projects will also be compromised. This does not go down well with the good governance which the Government is trying to project. The open tender system not only removes accusations and talk of corrupted administration but also lowers the cost of projects.

We hold the opinion that all the public procurement should be open to all local SMEs, provided with equal access and opportunities. Under the 9th Malaysia Plan, over RM1bil was allocated for SME development alone. Bank Negara estimated the number of SMEs in the country at about 600,000.

The importance of the SMEs is recognised by the Government. The NEAC report stated that SMEs currently make up 35% of Malaysia’s GDP and 20% of its exports. If the future procurements were to be opened to the SMEs, the SMEs would account for much more than the current 35% of the GDP. If the value of the SMEs were to double, they will account for over 50% of the country’s GDP.

Following the decision to relax the 30% bumiputra equity requirement for IPOs as well as the liberalisation of the 27 services sub-sectors I urge you, sir, to similarly consider being flexible in implementing the 30% bumiputra equity in other sectors.

Rather than enforcing the 30% bumi equity requirement across the board, a more flexible system in the form of a Margin of Preference system should be implemented on a sector-by-sector basis.

In the days of traditional economic structure, when capital and land were the major economic input, we could insist upon a certain percentage of equity distribution and still be fairly successful.

But we are now in the age of knowledge economy, where brain power in the form of innovation and creativity is the major (if not sole) requirement. If a talented investor, whether local or foreign, wants to start a new venture to design and manufacture a product based on his innovation for the new IT generation consumers in Malaysia, we cannot insist that he shares 30% of his creativity with us.

He is talented and can go to any other part of the world to pursue his dreams. Instead we should offer him all the assistance he needs so that he can come to Malaysia, create high-paying jobs and help propel us to being a high-income economy.

> Merit–based and Needs–based System

Fundamentally, the Malaysian Chinese have been and still are very understanding and loyal citizens. Globalisation has presented Malaysians many opportunities but it has also forced us to continue to be a competitive nation. Malaysians cannot remain globally competitive unless we go to a merit-based system.

On the other hand, we must inculcate a caring society in which the poor must be looked after. The NEM has pointed out that the bottom 40% of households earn less than RM1,500 per month. Thus, it is clear that preferential treatment must be given according to needs rather than race.

> Retaining and Attracting Talent

To achieve a high-income nation status, the NEM sets out a couple of primary thrust and enablers to move the economy up the value chain and also to address the persistent socio-economic inequalities. Amongst the enablers are developing a quality workforce and reducing dependence on foreign labour. In order to retain our talent pool in the country, we must recognise their contribution to the nation – to make sure that they are rewarded according to their merits.

Therefore, at this juncture, I would like to applaud YAB Datuk Seri’s recent decision to offer scholarships to all students, regardless of race, who scored 9A+ in their SPM examinations. This is truly in the 1Malaysia spirit.

This shows the Government’s efforts to develop human capital. Don’t forget high achievers are in fact hidden talents and assets to a nation. Elevating and improving the level of education in the country also mean paying more attention to vernacular schools.

Approximately 20% of Malaysia’s total trade over the last couple of years is with countries that adopt Mandarin as their main language. Total trade of the primary countries that use Mandarin as their mother tongue has been estimated at over US$2.5 trillion per annum. Malaysia’s trade with these countries in turn accounts for only 2% of their total trade. Given our multi-lingual and multi-cultural society, we believe Malaysia has yet to tap into the full potential of these trading nations.

The great strategist Sun Tzu has been frequently quoted on this where he said that whoever is first in the battlefield and awaits the coming of the “competitors” will be fresh for the fight. Whoever trails behind in the field will arrive exhausted, having to hasten to battle.

Thus, with more schools, we would be able to produce more students from these vernacular schools. Only then can we generate a workforce conversant in Mandarin in order to be able to seize the opportunities offered in the global markets.

Not only are additional schools required to cater for future demand and population growth but more importantly to ease the current overcrowding problem.

To add to the problem, the number of students in Chinese schools is expected to increase by an additional 65,000 over the next five years.

> Rationalisation of Subsidy, Minimum Wage and Skilled Workers

In Malaysia, only 23% of workers (11 million) are skilled workers, including those with higher education degrees. We are one of the countries with the least qualified workers in the region. Singapore, Hong Kong and Taiwan have about 40% skilled workers. Lack of skilled and qualified workers in Malaysia is impeding economic progress.

Malaysia is addicted to cheap foreign workers. Studies by the Human Resources Ministry show that 34% of our 1.3 million workers earn less than RM700 per month, below the poverty line of RM720 per month.

What is worrying is the World Bank study on wage trend which showed that Malaysia recorded only an annual 2.6% growth during the last 10 years. The influx of foreign workers depresses the wage increase of local workers.

MCA calls for the execution of a minimum wage policy on a sectoral and regional basis. Over 90% of the countries in the world already have legislations in place on minimum wage.

The setting up of a minimal wage system is in line with MCA’s calls for rationalisation of subsidy. Subsidy cut is a must to prevent distortion in the allocations of the country. Implementation of subsidy reduction schemes cannot stand alone as it needs to be complemented with a minimum wage system to offset negative impact of the reduction in subsidy.

The activation of the Minimum Wage Council now is therefore looking more and more appropriate. At this point, our businesses can no longer win market share by trying to be the cheapest producers of goods or providers of services. In a globalised world, such an edge is only fleeting.

Lasting competitive advantage today has to come from productivity-led growth and innovation. The 10MP includes Government measures to create an environment in which the creativity, energy and initiative of private enterprises can be nurtured and harnessed.

On that note, I believe the Chinese Economic Congress today is most timely. We need to ensure we know each and everyone’s role, to be able to tap into each forte to ensure the NEM and 10MP are executed efficiently to achieve the targets already set out. There is no denying the road ahead will be tough but I have full confidence that, under your leadership, we will see the bright light at the end of the tunnel.

I acknowledge that the business community has certain expectations of what the Government should and should not do.

In the overall scheme of things, 10 years is a mere blink of an eye. But for Malaysia, the next decade may well prove to be a crucial phase in our nation’s history.

Permit me to end with a couple of ancient sayings by Confucius. We should “better be a diamond with flaws rather than a pebble without”. Also, “only the wisest and stupidest of men never change” and for one “to know what is right and not to do it, is the worst type of cowardice”.

So we intend to change for the better and to do what is right. We can start off with this congress where we can brainstorm, learn our roles and how we can help in ensuring the target of becoming a high income advanced nation can be met.

WHAT ARE WE TO DO AS AN EXECUTIVE

THE New Economic Model (NEM) WHAT ARE WE TO DO AS AN EXECUTIVE


BY TAN SRI LIN SEE-YAN

It is not good enough to have policies to attract and retain talent. Weaknesses have to be dissected and addressed

THE New Economic Model (NEM) was unveiled in March and the 10th Malaysia Plan (2011-15) in June. These aim to transform Malaysian life and fortunes. At the heart is innovation.



The Prime Minister takes every opportunity to drive this home – to succeed, innovation must be pushed harder and harder until it becomes an integral part of the nation’s culture.



As a concept, innovation simply means the nurturing of talent for creativity. Here, creativity can be likened to producing something original and useful.



Viewed differently, to be creative means to deal with the classic creativity challenge of getting divergent thinking (producing unique ideas) and convergent thinking (putting ideas together to improve life) to work in tandem.



According to Prof Paul Torrance (who created the gold standard in creativity assessment), a creative person has an “unusual visual perspective”, matched with an “ability to synthesise diverse elements into meaningful products.”



It’s essentially about getting the left and right brains to operate as one. A recent IBM CEOs poll identified creativity as the No. 1 “leadership competency” of the future. Unfortunately, we don’t have such a culture.



A culture thing



Since Tun Mahathir Mohamad’s Look East policy, we have yet to succeed in emulating Japan’s innovation culture. Three main elements of this culture remain alien to us: its mentor system of management; acceptance of starting at the bottom to understand a firm’s workings at every level; and the Japanese function in unison as a workforce and the future of the firm. Whatever we have since achieved is still very much work in progress.



As a matter of public policy, we did try to create a Malaysian way of developing our own brand of creativity culture by: making Malaysia an attractive place to live, with security, good infrastructure and communications, within a unique and relaxed way of life that is multi-racial, multi-religious and multi-cultural, which foreigners can easily adapt to; and trying to position the nation as a base for foreign direct investments (FDIs) to come, expand and prosper, with widespread use of English.



We tried these to make up for what is special to the Japanese, but there was only limited success. We just don’t have the culture, and we can’t (and won’t) change readily enough to develop such a culture.



Earlier this year, in a column titled “On productivity and talent management”, I wrote: “Human capital lies at the core of innovation. Raising productivity requires a labour force of high calibre – committed, motivated and skilled enough to drive transformational change based on excellence over the long term. It’s about trapping potential through acquisition of new skill sets in designing new products and services, and devising new processes and systems to do things smarter and more efficiently. This requires ready access to a talent pool of critical skills and expertise.”



Frankly, we don’t as yet have such a pool. Therefore, we need to go back to basics. This means transforming our education system to emphasise meritocracy and lay the foundation for creative thinking and analysis from day one.



For a start, teaching curriculum, pedagogy and management of education have to be reformed. US President Barack Obama is right: “If we want success for our country, we can’t accept failure in our schools.”



Fortunately, as evident from a recent supplement in The Economist magazine, creativity can be taught. It starts with recognising the new view that creativity is part of normal brain function. The trick is to get the classic divergent-convergent creativity challenge working as a matter of habit.



First, we need to discard the emphasis on IQ in favour of CQ (creativity quotient). It is already proven that Torrance’s creativity index is a good predictor of kids’ creative accomplishments as adults.



According to Prof J. Plunker of Indiana University, the correlation to lifetime creative accomplishment was more than three times stronger for childhood CQ than childhood IQ. However, unlike IQ scores (which rise 10 points every generation because presumably, enriched environments produce smarter kids), CQ scores in the US and many other rich nations have fallen, of late.



This no doubt reflects that kids now spend more and more time in front of TVs and playing video games, rather than engaging in creative activities. Also, there’s the growing lack of creativity development in schools and at home.



The same decline is happening in Malaysia. Reform must adopt a problem-based learning approach – where education is revamped to emphasise ideas generation, curricula is driven by real-world enquiry, and pedagogy acquaints teachers with neuroscience of creativity.



Critics argue our kids already have too much to learn. This is a false trade-off. Creativity thrives on fact-finding and deep research.



High global curriculum standards can still be met – but it needs to be taught differently. Creativity is prized in Malaysia, but, we don’t seem to be committed politically to unlock it.



Continuing denial



We have not produced (and are unlikely to produce) talent in sufficient numbers to take us to the next level of becoming a high-income nation. For sure, what got us to where we are today will not get us to where we want to go. To begin with, we have to broaden the human capital base. For this, we need to transform our education system to secure at least a quality supply flow in the next generation.

In the end, it’s not just about sustaining economic growth. We are surrounded with matters of national and international importance crying for creative solutions – from striving for excellence to raising productivity to delivering quality healthcare.



Such solutions emerge from an open marketplace of ideas. These can be sustained by a workforce constantly contributing original ideas and being receptive to ideas of others. What is required is real leadership to effectively harness the vast energies engendered.



The Prime Minister is right in highlighting government as a key component of the creative ecosystem, in what he calls “bringing innovation into government and government into innovation.”



This is to enable the formulation of framework, regulation and policies that support and not hinder innovation. It’s a great policy move but in reality, the Government at large has yet to buy into this transformational change.



If you ask around – as far as talent development and retention goes – much of the Government remains in denial. President Ronald Reagan once said jokingly the nine most feared words in the English language are “I am from government and I am here to help.” This rings all too true!



Come on, get real



Studies by an old friend Prof Rajah Rasiah identified three underlying causes for Malaysia’s poor showing in last year’s FDI inflows, according to the 2010 World Investment Report – its narrow human capital base, absence of synergy between research and development labs and industry, and inadequate technological absorption, in the face of intensifying competition in Asia especially for talent.



Like it or not, the talent game is dynamic as it is intense. It is not good enough to have a set of policy responses to attract and retain talent. Weaknesses have to be dissected and addressed, and practical solutions neatly designed for effective implementation in a well coordinated fashion.



Most policy pronouncements reflect incentives offered by the Government which it considers attractive. Nobody bothers to ask the targeted talent what they want and what it takes to make them want to move.



The tendency is to assume that, given the right incentives, Malaysian talent overseas would move back and foreign talent is readily attracted to come to Malaysia. Hence, the dismal failure of the “brain-gain”

programme. The approach is all wrong. Get real!



The bar on talent has since been raised. Fuelling the war for talent, enterprises in Asia are providing higher salaries and perks.



A sea change is taking place in the way businesses organise themselves, create wealth and market their brands and wares worldwide.



The rise of the Web and tech-based professions in logistics, biotech, life sciences and information technology put a premium on scientists, engineers, financial analysts and computer geeks.



In Asia, soft skills which were previously sidelined (such as adaptability, English and Chinese skills, ease in fitting into other cultures, negotiation and political savvy), are now in demand.



It’s no longer enough to be talented in Oracle and Java. Global experience, an ability to lead multicultural teams, and diplomatic know-how to move seamlessly across borders, are among the skills in short supply.

The globalised economy has changed everything. Indeed, businesses will ultimately have to rethink the way they recruit and steward talent.



Today, China and India are becoming sources of innovation. Already, these nations are benefiting from “brain-circulation”, with capital and talent returning after value-adding in skills and experience abroad.

This is occurring without government incentives. National ecosystems are evolving nicely for them. It’s happening simply because it makes good business sense. There is much Malaysia can learn from the new reality.



As wealth and power change hands, talent is no longer a buyer’s market for the traditional rich. By 2015, the International Monetary Fund projects that Asia-Pacific will make-up 45% of global gross domectic product as against 20% by the US and 17% by Euro-zone.



The talent drain can only get more intense. We now have a world where talent can be found anywhere. The problem is particularly acute in Asia and Latin America, where breakneck growth is pushing management to the limit.



The talent crunch is real. Throwing money and incentives at talent won’t necessarily solve the problem. We need to think long-term and re-think old ways.



To do that, corporations are already investing to create the talent they lack, going so far as to establish their own universities to shape raw recruits into corporate leaders. In the end, nations need to have a workable process to recognise talent, fast-track careers, and provide fresh opportunities; essentially, to understand what makes them tick.



It needs high-potential programmes to attract and retain key talent within an ecosystem that provides for high living standards, where security and rule of law are taken for granted.



But, risks remain in the global economy. Concerns of citizens must be addressed by developing and investing in them. The quality of tertiary and vocational education has to be raised as a matter of priority. Imported talent will reinforce local talent; only bring in people who can contribute. Striking the right balance is vital.



>Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome at

How Did Economists Get It So Wrong?

September 6, 2009
How Did Economists Get It So Wrong?
By PAUL KRUGMAN
I. MISTAKING BEAUTY FOR TRUTH
It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Last year, everything came apart.
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.
And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.
What happened to the economics profession? And where does it go from here?
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
II. FROM SMITH TO KEYNES AND BACK
The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.
This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.
Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.
It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. The neoclassical revival was initially led by Milton Friedman of the University of Chicago, who asserted as early as 1953 that neoclassical economics works well enough as a description of the way the economy actually functions to be “both extremely fruitful and deserving of much confidence.” But what about depressions?
Friedman’s counterattack against Keynes began with the doctrine known as monetarism. Monetarists didn’t disagree in principle with the idea that a market economy needs deliberate stabilization. “We are all Keynesians now,” Friedman once said, although he later claimed he was quoted out of context. Monetarists asserted, however, that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions. Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened. Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its “natural” level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment — a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.
Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.
Not all macroeconomists were willing to go down this road: many became self-described New Keynesians, who continued to believe in an active role for the government. Yet even they mostly accepted the notion that investors and consumers are rational and that markets generally get it right.
Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.
III. PANGLOSSIAN FINANCE
In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”
And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
By 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the “efficient-market hypothesis,” promulgated by Eugene Fama of the University of Chicago, which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information. (The price of a company’s stock, for example, always accurately reflects the company’s value given the information available on the company’s earnings, its business prospects and so on.) And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino.”
It’s hard to argue that this transformation in the profession was driven by events. True, the memory of 1929 was gradually receding, but there continued to be bull markets, with widespread tales of speculative excess, followed by bear markets. In 1973-4, for example, stocks lost 48 percent of their value. And the 1987 stock crash, in which the Dow plunged nearly 23 percent in a day for no clear reason, should have raised at least a few doubts about market rationality.
These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.
To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.
But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”
By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.” Since this collapse of the intellectual edifice was also a collapse of real-world markets, the result was a severe recession — the worst, by many measures, since the Great Depression. What should policy makers do? Unfortunately, macroeconomics, which should have been providing clear guidance about how to address the slumping economy, was in its own state of disarray.
IV. THE TROUBLE WITH MACRO
“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end.
Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.
This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.
Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .
In short, the co-op fell into a recession.
O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.
Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.
Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.
But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.
Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.
By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.
Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.
Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.
But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.
Even so, you might have thought that the differing worldviews of freshwater and saltwater economists would have put them constantly at loggerheads over economic policy. Somewhat surprisingly, however, between around 1985 and 2007 the disputes between freshwater and saltwater economists were mainly about theory, not action. The reason, I believe, is that New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed. At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed’s governing board, declared of the Great Depression: “You’re right. We did it. We’re very sorry. But thanks to you, it won’t happen again.” The clear message was that all you need to avoid depressions is a smarter Fed.
And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about. (They didn’t believe that monetary policy did any good, but they didn’t believe it did any harm, either.)
It would take a crisis to reveal both how little common ground there was and how Panglossian even New Keynesian economics had become.
V. NOBODY COULD HAVE PREDICTED . . .
In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.
Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”
How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.
But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”
Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.
In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.
Now that the undiagnosed bubble has burst, the true riskiness of supposedly safe assets has been revealed and the financial system has demonstrated its fragility. U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940. So what guidance does modern economics have to offer in our current predicament? And should we trust it?
VI. THE STIMULUS SQUABBLE
Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Fresh­water economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.
But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever.
Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.
During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.
But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.
Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.
Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown.
And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)
Meanwhile, saltwater economists, who had comforted themselves with the belief that the great divide in macroeconomics was narrowing, were shocked to realize that freshwater economists hadn’t been listening at all. Freshwater economists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.
And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.
And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”
Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.
Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?
The state of macro, in short, is not good. So where does the profession go from here?
VII. FLAWS AND FRICTIONS
Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.
There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.
On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. Larry Summers once began a paper on finance by declaring: “THERE ARE IDIOTS. Look around.” But what kind of idiots (the preferred term in the academic literature, actually, is “noise traders”) are we talking about? Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).
Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.
On the second point: suppose that there are, indeed, idiots. How much do they matter? Not much, argued Milton Friedman in an influential 1953 paper: smart investors will make money by buying when the idiots sell and selling when they buy and will stabilize markets in the process. But the second strand of behavioral finance says that Friedman was wrong, that financial markets are sometimes highly unstable, and right now that view seems hard to reject.
Probably the most influential paper in this vein was a 1997 publication by Andrei Shleifer of Harvard and Robert Vishny of Chicago, which amounted to a formalization of the old line that “the market can stay irrational longer than you can stay solvent.” As they pointed out, arbitrageurs — the people who are supposed to buy low and sell high — need capital to do their jobs. And a severe plunge in asset prices, even if it makes no sense in terms of fundamentals, tends to deplete that capital. As a result, the smart money is forced out of the market, and prices may go into a downward spiral.
The spread of the current financial crisis seemed almost like an object lesson in the perils of financial instability. And the general ideas underlying models of financial instability have proved highly relevant to economic policy: a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse.
Meanwhile, what about macroeconomics? Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.
There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.
VIII. RE-EMBRACING KEYNES
So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.
Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”
When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.
Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”
This article has been revised to reflect the following correction:
Correction: September 6, 2009 Because of an editing error, an article on Page 36 this weekend about the failure of economists to anticipate the latest recession misquotes the economist John Maynard Keynes, who compared the financial markets of the 1930s to newspaper beauty contests in which readers tried to correctly pick all six eventual winners. Keynes noted that a competitor did not have to pick “those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.” He did not say, “nor even those that he thinks likeliest to catch the fancy of other competitors.”