Gerald Gunderson is the Shelby Cullom Davis Professor of American Business and Economic Enterprise at Trinity College in Hartford, Connecticut, and editor of the Journal of Private Enterprise.
Graduation this spring seems a long way off to students, but college administrators are necessarily well into the planning cycle for speakers and honorary degrees. Unfortunately, if the pattern of the recent past holds, most of those opportunities to slip a few useful insights into the celebration will be squandered. Most of what the audiences have been hearing comes from outmoded or, worse yet, destructive notions.
Almost every speech neglects one of the keys to the world that the graduates will be entering. Markets now organize a majority of the world’s economy, and their influence continues to grow. This profoundly changes what information is valuable and how best to compile and evaluate it. When governments and bureaucracies predominate, partial bits of information, some of which is intentionally distorted, rule. But markets are dispassionately honest. The pooled, weighted information reflected in the price of a product or service is more accurate than the rules of thumb or judgments based on selected observations that individuals naturally resort to. Contrary to the egocentric predisposition of people to assume they know what is best, markets mobilize more useful knowledge about a product or service than can any participant, no matter how well situated and informed.
A wise graduation speaker, therefore, will check his temptation to offer personal advice and will instead encourage the graduates to look to the messages of prices and markets. Learning to infer the changes they reflect, along with the incentives they imply for behavior generally, is one of the most powerful skills one can take into the world.
The worst graduation advice is often tied to a mindset that ignores or even denigrates markets as a means to organize human affairs. In the more detrimental addresses, speakers tell graduates that the world is riddled with inequities so glaring that simple justice demands their immediate confrontation. Such speakers skip over the distinctions between unsatisfied wants and misallocations on the one hand, and between intentions and results on the other. After all, who would want such details at a graduation? The unstated implication in such a view of the world is that on its own it works poorly, requiring active management by enlightened folks to salvage it.
Another unstated implication is that those greater concerns trump the skills you developed in school. You must subordinate what you learned and what you would like for goals that others see to be overriding. Lending a hand at the soup kitchen is more important than what you prepared for in school.
If “the world demands your full energy” graduation speaker goes as far as to offer examples, the short list will include the environment and helping the disadvantaged. The former likely includes preserving natural resources by recycling and saving the rain forest—recently upgraded from being called the jungle. The latter requires transferring incomes from the rich to the poor whether within the economy or internationally. If the recycling advocates had looked at the evidence of markets they would discover that considerable recycling already takes place, having organized itself spontaneously through the self-interest of the participants from the earliest that we can ascertain human activity. Markets would also tell objective observers that the reason recycling does not occur in some materials currently is that the cost in resources is greater than the returns.
Many graduation addresses edge toward career guidance. The graduates are advised to begin to act like adults, in effect, jump-start themselves to the longer time horizon that people develop as they age. Begin saving now (preferably in a tax-deferred plan). Keep improving your skills; lifetime learning and reappraisal are crucial. Think of yourselves as a capital asset. Plan your work and training after school to maximize your value. Such rules of thumb are helpful to discuss, and for many graduates they may well be the best lifetime strategies. But they grow out of particular assumptions about the forces that drive the world. You begin saving early if the (after-tax) return on savings is greater than your alternative uses. This may be good discipline for a salaried worker who would otherwise be tempted to consume that amount, but for others creating a business or developing skills in themselves putting capital away could sap more valuable uses.
More often than not, the stronger, instinctive forces that drive markets contradict the advice given graduates. People naturally seek their comparative advantage, specializing in one form of production to the exclusion of others, in order to gain the most from their circumstances. Each person benefits by specializing in the work that combines his skills with the interests of buyers as mediated through markets. The critical corollary is that you must specialize, leaving all remaining activities for others pursuing their own comparative advantages. So if helping others is truly your first priority, concentrate on what you do best, improving the benefits you can then share with others. That creates a bigger pie for everyone, including the disadvantaged.
Schools attempt to impart a new, more productive comparative advantage to their students. In America the scarcest things continue to be the analytic and adaptive abilities of people, not manual labor, capital, or natural resources. In addition to learning to evaluate and organize, probably the most important capacity is mastering further skills in response to changes. The start-ups building on the new digital technology are tangible examples, initiated by young entrepreneurs barely out of school—often started while they were still in school.
Meanwhile the graduates continue to receive advice much like that they would have heard two decades ago. A typical example is, “If you hope to run your own business someday learn such building blocks as accounting and financial analysis on someone else’s nickel, while you work for him.” While such skills are certainly valuable, change in the economy—and, as a consequence, in the students’ current comparative advantage—make that strategy less attractive now. Not too long ago—before the global economy really began to take effect—you pursued innovation and wealth by simultaneously creating an innovation and a business to produce and market it. A successful entrepreneur had to know enough about such elements as finance, marketing, and production to get a business running and to oversee its operations. Now, many of these jobs can be farmed out to specialists; witness offshore manufacturing, e-commerce fulfillment, and venture capitalists. At the same time, innovation, always naturally unpredictable, has become even less structured. Digital technology is so all-encompassing that applications are possible all across the economy. Imagination and initiative can now be more important than a thorough grounding in that market niche. On top of all this, globalization has accentuated the comparative advantage of the American economy in innovation, as distinguished from production of established goods and services.
What to Do?
So what should a smart graduate do? Cut out the warm-up exercises and jump right into your own enterprise. You already have many of the technical skills, and you can pick up what else are necessary as you work. Opportunities have been opened up for improvements everywhere that information, communications, measurements, calculations, and control systems are used—in other words, virtually all human activity. Your effort and imagination will pay off more than pausing to gear up for a profession that might well be made obsolete by change in any case.
Self-interest as expressed in comparative advantage is working its way in the capital markets as well. The American economy’s disproportionately large share of the world’s innovations is translated into equity, mostly stock in growth firms. That leads to a net inflow of capital as foreigners buy into such enterprises. This is commonly called a trade deficit, and many see its persistence as a sign of economic weakness that must pull down the economy eventually. In actuality it shows that the rest of the world is willing to exchange goods and services for Americans’ innovations.
Graduation speakers and many parents emphasize the importance of saving, starting early and making it automatic to avoid the temptation of dipping in for “emergencies.” But saving is better done in economies with fewer options for their resources. Americans can create more opportunities as well as reserves for contingencies by creating wealth through entrepreneurial efforts rather than the passive process of not spending. Graduates might well expect to earn far more on the time they invest in a start-up than socking away 10 percent of a salary. Just one modestly successful entrepreneurial venture among otherwise false starts is likely to give an individual more opportunities than a lifetime of faithful saving.
So if you want to really help the world or yourself—or both, for that matter—follow the prodding of the markets. While others see problems in the way the world presently works, you can build new ways that supersede the drawbacks and provide serendipitous opportunities as well. And while others are denying themselves now to build security, you can enjoy creating opportunities that go much beyond insurance. Today’s global reach allows you to leverage your directed creativity on an unprecedented scale. Set aside the expectations derived in earlier eras in favor of the surprising, unprecedented opportunities emerging from the interplay of markets.