Fall 2000


The new economy has created challenges and opportunities in the field of learning. Traditionally, people first obtained general skills at educational institutions, and then obtained industry-specific and company-specific skills at corporate institutions. The new technological environment affects the architecture of these institutions as well as their relationship to one another.

In this article, I review the characteristics of the new economy that affect our corporate and educational institutions. Then, I look at the implications for how these institutions may change their approaches to providing learning.

The New Economy

One of the characteristics of the new economy that affects both corporate and educational institutions is the faster pace of technological change. For schools, the trade-off between stability and relevance is more difficult to manage. It even threatens to undermine their authority. Neil Postman has pointed out that television took away some of the authority that elders traditionally held because, as a medium, television is as accessible to children as it is to adults.

With the Internet, this change in authority has been magnified. Last fall, I spoke at a local high school. I asked the students to raise their hands if they used the Internet more than their parents did. Nearly every hand went up. How can schools teach in an environment where young people do not regard their elders as having superior knowledge and experience?

The faster pace of technological change also threatens to undermine the traditional model where formal learning takes place only in the first, school-based phase of one’s life. Can a 60-year-old CEO manage a financial institution successfully without any formal training in option pricing and derivatives? Can someone without computer literacy be an effective executive or policymaker in this age of the Internet?

Another characteristic of the new economy is the tremendous increase in communications capability. This means that the benefits of managing disparate functions internally have been reduced compared with the benefits of aiming for specialized excellence and outsourcing secondary functions to other network participants.

The Traditional Model

Traditionally, people learned general skills at school and learned specific skills at work. Economists refer to the former as “general human capital” and the latter as “specific human capital.” This joke explains the difference: specific human capital means knowing where to find the bathroom; general human capital means being able to read signs so you can find the bathroom.

The traditional model assumes that once you leave school you have little or no need to enhance your general skills. It fits an environment in which the general knowledge base is stable and in which it is valuable to accumulate firm-specific and industry-specific skills on the job. In that environment, you will become more valuable to the company as you learn more about its practices and procedures, which will create an incentive for a long-term relationship.

Another traditional difference between schools and businesses has been in the area of accountability. Traditionally, businesses have well-defined constituencies with clear objectives. For example, customers have requirements for products and services. Shareholders demand the highest possible rate of return. Failure to satisfy the objectives of customers or shareholders will drive the firm out of business.

Schools, in contrast, have faced ill-defined constituencies with diverse objectives. A local public school may be answerable to parents, alumni, and to officials of local, state, and national governments. Objectives may relate to factors other than academic excellence, including health, nutrition, and community socialization.

Yet another traditional difference is in the ways that schools and businesses have approached the learning process. Schools have evolved specific criteria by which students are admitted, evaluated, graduated, and placed. Businesses, on the other hand, generally have used informal appraisals to hire new workers, assess performance, and determine career tracks.

How Businesses Need to Change

In the traditional environment, employees built up valuable firm-specific human capital over time. This served to create a large differential between the value of the employee within that firm and the value of the employee elsewhere. This differential, in turn, created a margin for error in the company’s process of appraising and managing career development for its employees.

In the traditional environment, if you over-estimate someone’s potential, that error will not loom large once the employee accumulates company-specific skills. Conversely, if you under-estimate an individual’s potential, you have little risk of losing that person. Once the employee has worked at your company for a few years, the employee will have obtained enough firm-specific human capital to make it uneconomical for the employee to leave your company.

In an environment of rapid technological change, general human capital becomes more important than specific company training. Evidence for this can be found in the increase in the differential earned by college-educated workers that has taken place over the past 25 years.

With general human capital more important, the margin for error in personnel policies has shrunk. The benefit of formally testing new hires, as takes place at companies such as Microsoft and Capital One, increases. Companies that continue to rely on informal interview processes will find that their mistakes are more costly than would have been the case ten or twenty years ago.

Accordingly, I would predict that businesses will start to behave more like schools in the following ways:

1.   Admissions processes will become more formalized. More companies will use testing, structured interviews, and other techniques. They will track the performance of employees relative to their characteristics at time of hire in order to measure and improve their hiring processes.

2.   Grading systems will be improved. The annual performance review, with its huge surprise factor, will be replaced by assessments that follow the best models used by teachers. Good teachers state grading criteria in advance. They give feedback on many interim assignments and tests, rather than putting the entire burden on the final exam. Managers will themselves be viewed as teachers, and the quality of their teaching will be recognized as a component of their performance.

3.   Placement services will receive more emphasis. Schools are evaluated based on how well they place their graduates. Parents evaluate high schools in part based on which colleges the graduates attend. Students evaluate business schools in part based on what jobs the graduates receive. Similarly, employees may start to evaluate companies according to the success of their employees in terms of career growth. Companies may need to establish explicit services to place employees in new jobs that promote growth, whether those jobs are within the company or with other firms.

How Schools Need to Change

Schools have been somewhat insulated from the rapid changes that affect the business world. Business is characterized by what economists call “ease of entry and exit.” Turnover and the threat of turnover serve to bring new technologies and new efficiencies into use.

Businesses cannot remain alive if they hang onto obsolete processes and ineffective workers. In contrast, at universities, the only individual whose job is at risk is the basketball coach. In the public school system, monopoly power and teacher tenure also are the norm. These institutional rigidities will create an ever-increasing gap between expectations and performance, until the educational system begins to exhibit greater ease of entry and exit than is the case today.

Because of the amount of technological change that has taken place and continues to take place, schools and universities are going to be facing increased demands to adapt more quickly and effectively. In particular, they are going to be asked for.

q      Clear evidence of performance in terms of value added

q      Better mechanisms for experimenting with innovations for evaluating and selecting the successful ones

q      Better mechanisms for rewarding the best teachers

q      Better mechanisms for eliminating ineffective teachers and shutting down ineffective schools

How the Relationship Between Schools and Businesses Will Change

We are going to see a continued alteration in the sequential nature of schooling and business experience. Because of the ongoing need for education, more and more people will take formal courses after they have left college and begun their working lives. By the same token, we may see increasing numbers of people for whom it is best to postpone some or all of the college experience until after they have spent time in the workplace.

The Internet is conducive to greater specialization. It no longer makes sense for a company to perform a broad array of functions, when it has become so easy to connect best-of-breed companies in a network. The trend toward outsourcing and specialization is powerfully rooted in the new technology environment.

Companies will be looking for ways to outsource their training and education. Schools that respond to this need will likely thrive in the future.

Schools themselves will tend to align themselves with the trend toward specialization. The goal of trying to be all things to all students will be increasingly costly to achieve. Instead, schools will try to serve narrower academic interests more effectively.

When we combine the increased specialization with education spread out more over time, I am led to predict the (continued) growth of two-year institutions and non-traditional education at the expense of traditional four-year colleges. A student might attend one type of two-year institution at 18, a different one at 24, and then take courses, one at a time, at various points throughout the student’s life.


Rapid technological change is now a fact. So is the increased opportunity for specialization provided by the increased capabilities of our communications networks. It is reasonable to expect both schools and businesses to undergo institutional adaptation in response to these phenomena.

Arnold Kling, Ph.D. currently is writing a book on starting an Internet business without venture capital (to be published Fall 2001). He is the founder of homefair.com, one of the earliest commercial sites on the Internet. In October 1999, homefair.com was sold to Homestore.com. Kling has a Ph.D in economics from the Massachusetts Institute of Technology. Before becoming an entrepreneur, he worked at the Federal Reserve Board and then at the Federal Home Loan Mortgage Corporation (Freddie Mac). You can reach him directly at arnoldsk@us.net.



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