Education and Unemployment

Is Cyclical Unemployment Mostly A Function Of An Underskilled Work Force?

It is widely known and irrefutable that unemployment is higher among those who have less education. Does it follow that an insufficiently educated rank and file labor force is an important cause of unemployment rates overall? I'm not sure that this follows.

The vexing point is education is to a great extent a way for employers in the economy to sort the workforce. Often, an employer will prefer an employee with more education, on the grounds that it is an indicator of greater general purpose workplace fitness, even when nothing learned during the course of that education is relevant to the job.

To the extent that education is used by employers, on average, as a sorting tool, we expect education to reduce unemployment simply because employers in an employer's market will prefer to hire more educated workers and the lay off less educated workers.

If formal education was the secret to employment, one would expect low education immigrant populations to have the highest unemployment rates, but that isn't the case. The highest unemployment rates are found in native born people with poor educations, not immigrant populations where the relationship between the kind of people sorted into reasonable levels of education in the U.S. and the education levels obtained in their home countries are quite different.

Also, the way that unemployment is defined masks a related problem in more educated workers, which is underemployment. For example, large law firms laid off about 12,000 lawyers in 2009, all of whom had graduate educations and many of whom had spent years on the job developing sophisticated specialty practices. When the market no longer needed lawyers, many of these laid off lawyers would still be able to carry out white collar jobs - perhaps as video store assistant managers, or self-employed divorce lawyers with small case loads, or substitute teachers, and others might decide that this is the time for them to leave the workforce and get more education or have children. But, a measure that looks only at unemployment would greatly understate the economic impact of the lawyer layoffs on lawyers and conclude based upon the low unemployment rates for lawyers that a legal education was somethign that the economy greatly valued in 2009.

While there are some "unemployable" people in the economy, this isn't what is going on when the nation experiences high levels of unemployment in the ordinary course of the business cycle. The vast majority of the people who are unemployed on the day that I write this post (when the unemployment rate nationally is about 9%), have been gainfully employed in a functional way within the last three years, or have been functional participants in educational institutions within the last three years. They don't have jobs not because they are incapable of doing jobs, but because their efforts at their old jobs, while competent, were being directed towards doing things that the economy didn't need, like building more houses in Florida and California and Nevada and providing for the economic needs of people who were doing so. The people who are unemployed during a period of business cycle driven high unemployment are more functional and more skilled unemployed people than those in any other part of the business cycle.

Job Creation As A Function Of Elite Skill Sets

While at the individual level, education of the rank and file workforce is an asset, at the macroeconomic level, it may be that the group whose education matters most is not the education of the ordinary worker, but the education of the economy's elites.

The idea is motivated mostly by two things.

First, my view that unemployment is fundamentally a failure of entrapreneurship. It happens when there is a shortage of executed ideas to find worthwhile things for idle workers to do. The vast majority of the labor force isn't in the business of creating jobs, it is in the business of doing jobs. But, an entrapreneurial elite does create jobs and unemployment is a product of their failure to meet the challenges they face at a certain moment in the economy. Unemployment is about a failure to mobilize ideal resources. There is not a fixed number of jobs in the economy, and there are very few people whose talents can't be put to productive use.

The problem is not that they were doing a poor job at their old jobs, or that they are unqualified to do whatever new job might be created in the near future, but that an entrapreneurial elite has failed to figure out profitable things for them to do.

Car companies don't lose market share and have to lay off the employees whose jobs are lost because of declining market share (as opposed to offshoring) because the employees have collectively done a bad job of building cars. They lose market share because the design engineers, quality control engineers, marketing campaign managers, and senior executives in the company have failed to do their jobs as well as their counterparts in competing firms. When American automobile companies lay off workers and shutter factories at the same time that foreign automobile companies are hiring workers and opening factories in the United States, it is poor leadership by elites in the American automobile companies that is killing the jobs, not an uneducated workforce or excessive regulation or anything else of the kind.

Unemployment happens because the lassiez faire economy has become disorganized.

Second, it is motivated mostly by anecdotal evidence. Good management, leadership even, and a clear vision of how some job creating or economy enhancing institution is works, can have immense effects. Some of the examples that come to mind follow.

* Consider, Tumaini University. It is a private college in Tanzania sponsored by the Lutheran Church (the first private college in Tanzania), which some of my relatives played a significant part in establishing. The lay missionaries that helped build this institution that educates thousands of Tanzanians and employs many people received some outside funding, but the real asset that the church brought to the project was leadership, organization and expertise. Students made their own bricks and helped build college buildings with their own hands (something not so different from the early days of my alma mater, Oberlin College, when it earned its "Learning and Labor" motto starting in the 1830s). Vibrant local congregations provided a great deal of the resources of money and labor to make it work. But, those resources couldn't be put to work until someone who knew how a private university was supposed to work and knew what was involved in managing a long, complex project through all the steps necessary to get from here to there, knew when outside guidance was needed and where to get it, and knew how to establish an organizational culture that was free of corruption in the university's administration came along to guide and crystalize those resources into a large and worthwhile undertaking. A very small number of individuals with those talents and a very modest amount of funding and materials, made possible a big project that will educated large numbers of people for decades or centuries and create countless jobs, both directly, and indirectly through jobs created by graduates who will learn both skills in the classroom, and will absorb through osmosis the way a large bureacratic private entity that runs smoothly works.

* Consider the Port of Haiti when it was run for a brief period by outside American contractors (probably Halliburton, but I could be mistaken). All the rank and file employees were the same. But, a very small managerial group who knew how to do that job and were free of the institutional culture of corruption that had reigned before they arrived dramatically increased the productivity and efficiency of the Port.

* I've seen the exceptional talents that entrapreneurs whom I've represented who take an idea from start up businesses to medium sized ventures that employ a dozen or more people exhibit. While something on the order of sixteen million people, about one in six members of the labor force, are self-employed, the percentage of those people who every managed to establish or run medium to large sized businesses that employ lots of people is very small. The vast majority of self-employed people employ only themselves and perhaps a few other people.

* Consider job creation in immigrant communities, where someone in a first wave of early immigrants develop a business model, perhaps Chinese restaurants or laundries, perhaps Mexican subcontracting firms, perhaps Korean wig shops, that works and then later waves of immigrants follow that model and create large numbers of jobs from the clear vision of how to make it work created by the founder. This isn't restricted to immigrant communities of course. For example, the California style burrito vendor and the expresso shop have both been widely imitated by others who created many jobs in the process.

* Consider the economic collapse that followed fast track land reform in Zimbabwe, because the newly installed farmers didn't know enough about how to carry on the agribusinesses that had previously been run by mostly white plantation style farmers:

Before 2000 land-owning farmers, mostly white, had large tracts of land and utilized economies of scale to raise capital, borrow money when necessary, and purchase modern mechanized farm equipment to increase productivity on their land. As the primary beneficiaries of the land reform were members of the Government and their families, despite the fact that most had no experience in running a farm, the drop in total farm output has been tremendous and has even produced starvation and famine, according to aid agencies. Mostly crops for export have suffered severely, e.g. Zimbabwe was the world's 6th largest producers of Tobacco in 2001. It produces nowadays less than 1/3 of the amount produced in 2000, the lowest amount in 50 years. Zimbabwe was once so rich in agricultural produce that it was dubbed the "bread basket" of Southern Africa, while it is now struggling to feed its own population. About 45 percent of the population is considered malnourished.

The problem is not that black Zimbabweans can't run productive farms. I would have done no better than any of the beneficiaries of land reform. The problem is that the people who were given land to farm didn't have the skill set at the time to do it. A small managerial elite did have those talents and that knowledge was one component necessary to create a productive agricultural system in Zimbabwe, and removing the elite before a new one had been trained, had led to the collapse of the entire system.

* Consider franchises and branch stores of successful retail and service businesses. Once on person establishes a working business model, many others follow on to implement that proven business model and they in turn hire may people for their local operations.

* One of the persistant tropes of fairy tales and fantasy, because it has a certain residual nugget of truth to it, is of a erstwhile prince or princess down on his or her luck turning a dismal home into a place worth living, or organizing a lot of local people into a mass movement that gets something done. Call it the "community organizing" of President Obama's youth, or pull this concept out of a handbook on how to run a counterinsurgency campaign, the idea is the same. Even "The Lord of the Flies" extols the immense impact of a cohesive group of people who can organize themselves. World War II POW Camp narratives relate the way that the British more swiftly self-organized and became a functioning whole relative to American POWs who had trouble reaching consensus around leadership and authority within their POW community.

* My strong suspicion is that one of the main reasons that the Islamic Empire swept most of the known world around 700 CE so quickly is that the new system it created organized communities that had previously been disorganized, and by doing so, made them more functional. Christianity in Africa, mostly off the radar screen of American journalists, is doing something very similar today.

* One of the classic ways to end employment is to start a war. This works for two reasons. First, it creates a vision with all sorts of worthwhile things that need to be done. Second, it creates an end that is declared by fiat to be worthwhile.

* The habit of fitting workers to worthwhile tasks that the military develops can carry over into peacetime. This habit probably plays a large part in the pivotal role played by militaries in undeveloped economies from Egypt to China in the non-military economy.

* As noted in a biography of Dan Quayle, who made job training legislation his signature issue in Congress before he was tapped to be Vice President, no job training program ever implimented by Congress has worked very well. This makes a great deal of sense if entrapreneurial job creation failures by that elite, rather than a lack of job skills in the labor force, is the main culprit in unemployment.

* This fits the heuristics about idea exchange that are used to explain why economic productivity is exponentially related to urban population scale, and why some communities that are open to new ideas (like Boulder and San Francisco) over perform other communities given their scale. Richard Florida's work on localized economic development leads to similar conclusions. Idea exchange among elites in large, perhaps shallow networks is critical to economic growth. Economic growth happens better in communities where relationship networks look more like Facebook networks and less like tight knit, high social capital villages of the kind identified by Putnam.

* Consider that most of the most obvious things that separate Third World living from life in the developed world are carried out in the United States by non-partisan local government officials according to best practices that are mostly so uncontroversial that they never become a subject of political debate in the United States: good water and sewer services, regular trash collection, paved local roads, traffic laws that are routinely followed, widespread K-12 education, building codes enforced by non-corrupt building inspectors, property and sales taxes that are collected by non-corrupt local officials, police forces that are mostly not engaged in any political conspiracy more grand than to arrest criminals and maintain order. Indeed, real estate developers routinely put together new communities in "virgin territory" on these same principles every day and there are tens of thousand of professional city managers in the country (as well as many amateur local elected officials) who make them run smoothly. Many of the residents of these communities aren't exceptional in any way, and indeed, many of the elected officals charged with running these communities wouldn't know how to run them, but do know that one hires a city manager and that it gets done. The clear vision of the people establishing these municipal services held by a very small elite reproduces a modern functioning version of American society in first world style.

* Governor Hickenlooper, like most Governors interested in economic development, has rightly focused his short term job creation efforts on tapping the skills of highly talented retired or semi-retired corporate managers in Colorado who have created jobs before and know how to do it and are interested in contributing to the economy of their new home state. His intuition is right, because the highly networked, highly skilled people who make connections that other people failed to, in ideas and in people, are the ones who create most jobs. Jobs need boosters and entrapreneurs to be created.

Job creation is the process of finding something worthwhile that people in the labor force can do and then repeating it rapidly until it stops working. The people up come up with those business models create vast numbers of jobs, many of which they will never receive credit for creating. A few good ideas can create thousand or even hundreds of thosuands of jobs.

The skill set involved in creating these jobs is only partially academic. Even business school, either at the undergraduate level or the MBA level, doesn't fully capture what is necessary to be a prolific job creator. It also takes large personal networks, strong people skills, and the mix of skill and good fortune needed to identify ways to monetize worthwhile things that can be done with available labor (I say monetize rather than finance, because borrowing money or raising capital is a distinct issue from development a business model that turns meaningful work into business revenue.) And, more than any of these things, it takes a clear vision of what needs to be done that is true. A clear, valid vision of a way to make an enterprise work is more important than anything else in creating jobs.

Implications

One key implication of a theory of unemployment that focuses on the skill sets of entrapreneurs rather than the skill sets of rank and file workers, is that it dramatically shifts the natural conclusions about what kind of educational efforts are necessary to reduce unemployment. If a failure to perform on the part of elite is the problem, then doing a better job of providing them with what they need to make the economy thrive and create jobs matters more than training for rank and file members of the labor force, particularly those rank and file members of the labor force who were perfectly functional employees before an economic downturn hit.

There may indeed be individual skill gaps, but this is probably a fairly small part of the problem -- functional employees in one job setting can usually work at a job of comparable responsibility in another job setting in a different industry with only modest on the job training. There may be some technical skills that are in short supply, but my sense is that this is rarely the big bottleneck. Often, when there is a shortage of properly licensed and certified workers, the problem is more one of loosening barriers to entry so that people who can actually do the work are allowed to do so than a lack of actual ability. Similarly, in the tech boom the computer industry routinely hired people with the right computer skills before they graduated from college, because the demand was so great, even though jobs of that level of sophistication are usually reserved for college graduates in sectors of the economy that aren't growing so fast.

Another implication is that the biggest part of a government response to unemployment may be to inject organization into the economy by finding worthwhile things for unemployed people to do until the private sector can come up with something better. No government worth its salt can't find something it wouldn't like to do, and since it has to pay the unemployed something whether they work or not (not only unemployment benefits but a wide variety of other benefits), why shouldn't it use those resources to directly hire people to do things that are worth doing? As long as the pay is not so high in "make work" jobs that it drives up labor prices to high for when the private sector can find work to do, this shouldn't harm a recovery and prevents waste caused by a massively idle labor force.

A third implication of this analysis is that is greatly recasts the role of immigration in employment. A lot of immigration rather than filling some fixed quanity of jobs in the economy, creates jobs by bringing in entrapreneurial individuals who know how to creat jobs. In times of cyclical downturns in employment it makes particular sense to engage in an active policy of brain drain calculated to bring elite potential job creators to the U.S., rather than closing the doors on the grounds that the U.S. needs to reserve jobs for its own workers. Jobs are created by exceptional individuals, and people who are willing to cast aside the culture and world they grew up in, in order to make a better economic life for themselves disproportionately have the drive and visions that it takes to create jobs, and will tend to return home discouraged if they don't.

Unanswered Questions

This view of unemployment comes with unanswered questions. Why do entrapreneurs fail to come up with worthwhile things to do that they can monetize when the economy goes into recession? What are they missing? How can you measure that failure? What distinguishes someone who is capable of prolifically creating jobs from someone who is capable of filling a job competently but not likely to create one? What kind of stimulus fosters more connection making and creates a better climate for implementing entrapreneurial visions? How do you get people to change gears? Can economic indicators better tailored to capture this critical job creating component of the economy help us better understand unemployment?

Still, you can't get the right answers until you ask the right questions, and I am convinced that most people thinking about the issue of unemployment in politics and mainstream economics and the media are not asking the right questions.

READ MORE - Education and Unemployment

Historic Moments

Conventional political science exams questions like regime change and legislative change primarily as domestic events with domestic causes. But, this model doesn't do a good job of capturing what is going on in either process.

Historic Moments

One of the defining features of regime change, and of most notable (and many not so notable) legislative policy changes, is that neither happens in a vacuum. While political science likes to neatly divide itself into foreign affairs and domestic politics, the reality is that domestic politics is generally strongly influenced by regional context. These kinds of changes happen in waves at historic moments.

Moments of Regime Change and International Domestic Policy Change

We did not see an isolated dictator case of a dictator being replaced in Tunisia. We saw one man's suicide in Tunisia over bureaucratic hassles in a dictatorship that denied him a livelihood set of a public uprising region wide that has produced a change of regime in Tunisia after decades of dictatorship, a change of cabinet in Egypt accompanied by a promise of the existing dictator to depart in the fall and a promise that his son will not seek to replace him, a promise in Yemen to hold elections soon in which the current leaders will not seek re-election, the sacking of Jordan's cabinet, a promise of prompt local elections in the Palestinian Authority, and the possibility of further tumult in Syria and Sudan.

We did not see an isolated change in government in the Soviet Union. We the non-Russian Republics in the Soviet Union granted independence, the dismantling of Yugoslavia, and the abandonment of a Soviet Communist political and economic system to a greater or lesser degree by every Warsaw Pact country, and every successor nation of the Soviet Union and Yugoslavia.

The Colonial powers of Europe did not one by one decide to grant independence to their colonies. They did so en masse in the years around 1960, granting independence to dozens of newly independent nations all at once.

In Post-War Western Europe, each nation did not decide in a vacuum what kind of regime they would create. Essentially every regime that had been interrupted by World War II in Western Europe created a multi-party parliamentary system, reinstated a civil law judicial system, renounced the death penalty, developed political parties dominated by a Social Democratic party on the left and a Christian Democratic party on the right, and put in place a comprehensive social welfare system supported by fairly high taxes with payroll taxes and value added taxes constituting a fairly large share of the total tax burden.

In World War I, a single assassination in Serbia sparked a bloody world war. The Russian revolution in its wake rapidly spread Soviet Communist to the whole of Eastern Europe.

The process by which Latin American nations secured their independence and put in place republics was so similar from nation to nation and involved a wave of change so clearly linked in time that one studies of the "Latin American Wars For Independence" when one studies the region historically, rather than trying to understand any one of them independently.

Italy and Germany came into being as democratic states, and democracy took hold for good in France in the 1870s.

Democratic revolutions hit almost every monarchy in Europe in 1848.

Moments of Subnational Political Innovation

State constitutions change in much the same way. One year, no state has a prohibition on dueling in its state constitution. Half a decade later, they are widespread. One year, no state has merit appointment of judges. A decade later, the Missouri plan for merit based judicial appointments subject to retention elections is widespread. One year, no state grants women the right to vote. A decade later, women's suffrage is the norm.

* Legislative Innovation

You see the same thing in legislation in state legislatures in the United States, even on matters where federal government policy doesn't apply. California passed no fault divorce and it swept the nation in a few years. Pre-trial release programs that allowed recognizance release of carefully screened defendants awaiting trial went from an experiment to the national norm in less than a decade. Dozens of states passed smoker's rights bills in a few years. The original Uniform Commercial Code was adopted by a large share of all states in a short time period and that area of law has continued to be guided by Uniform Law Commissioners ever since, as have the areas of partnership law and a number of other "uncontroversial" areas of private law. All but a handful of states adopted court rules based on the federal rules of civil procedure in short order, and likewise codified state ethics rules for lawyers based on a bar association model in one big sweep. Most states adopted laws providing for condominiums in about half a decade. Gay marriage and civil union laws have rapidly swept the nation, when less than a decade ago there wasn't even one. States put in place public school systems and structured the financing of state institutions of higher education all at about the same times in about the same ways, and followed suit by consolidating public school systems at the same time decades later. The deinstitutionalization of the mentally ill was done at the state level but happened mostly within the span of a few years without any national guidance. The replacement of orphanages with foster care happened in a similarly sweeping movement in a short period of time.

Worker's compensation laws, minimum wage and hour laws, child labor laws, local "dry laws," married women with property acts, heart balm acts, and laws regulating union-management relations swept state legislatures in very similar forms in the Progressive era. Local zoning laws that were very similar in structure and content were enacted in almost every major (and minor) city in the nation in a small number of years.

A contagion model of innovation dispersal better explains most legislative policy change and regime changes than a conventional account of purely domestic struggles between political factions in individual states or even in individual countries in a region.

* Judicial Innovation

Courts are every bit as prone to waves of innovation as legislatures and indeed, are sensitive to both legislative and judicial trends. A court decision in one state that there is a constitutional right to gay marriage or civil unions produces legislative action in another, and visa versa. The shift to court rules based on the federal rules of civil procedure was adopted legislatively in some places, and by judicial rule in others.

These waves are not confined to areas of the law where there is an arguable common federal constitutional basis for the requirement, and this is justified by the doctrine of persuasive common law authority. Thus, for example, strict product liability in tort, once adopted in California by the California Supreme Court, rapidly became the law of the land in almost every state. A cause of action for unjust enrichment, which was an obscure, mostly European legal concept until the critical moment, rapidly became a standard part of every commercial lawyer's arsenal of causes of action.

Moments Of Economic Change

Economists tend to be more conscious of this than political scientists, although the economists who recognize that economic change is follows a path dependent, evolutionary contagion model of change than acting like a thermodynamic system that is perturbed around an immutable natural equilibrium are still in the minority.

An innovation like franchising or "big box stores" comes along, and, in a decade of two, they are the dominant means by which retail sales are conducted. An innovation like subprime mortgage financing goes from being a trivial part of the mortgage finance industry to an immensely rapidly growing significant part of the whole over a decade and the vanishes almost entirely from the economic landscape in a year or two. A deregulated telephone industry engages in an intense marketing effort for long distance plans and phone service features like caller ID for less than a decade then suddenly starts almost giving long distance services and phone features away and launches into a competition to cell broadband access and mobile phone packages.

Economic collapses tend to spread even more rapidly than the spread of new economic models. The steel industry in the United States went under in the blink of an eye. The textile industry collapsed almost as fast. Airline bankruptcies have happened in waves. Travel agencies were culled in a couple of fell sweeps. Free standing investment banks organized as such disappeared from the economy in a matter of months, despite the fact that many of these firms had been around for more than a century. It took about sixteen years for the housing bubble that led to the financial crisis to reach its peak and only about three years for housing prices to collapse, with most of that devaluation happening in the first year.

There have been gradual, long term shifts in the economy, like the slow decline of the private sector labor union over about four decades, or the shrinking share of agriculture as a percentage of the labor force. But, if anything, these incremental charges are the exception, rather than the norm, and even these gradual changes conceal more dramatic shifts in particular industries and subindustries, and in particular regions.

Outlines of the Contagion Model Of Legal Innovation

What does a contagion model of political, economic and social change look like?

Political, Economic and Social Change Generally Happens In Sweeping Moments

Most of history, by which I mean political, economic and social change, happens not in gradual, uncoupled rational change by individual governments or businesses, but in sweeping historic moments that change the whole landscape in a flash like a disease outbreak, in a way that is path dependent and evolutionary in character.

Waves Of Legal Innovation Are Not Driven Primarily By Formal Legal Mandates

This happens even if there are no political or legal institutions with any formal authority to compel this to happen, and even if the changes adopted in one place have little spill over effects. The United States Constitution was very carefully drafted to make it possible for different states to have different suffrage rules without changing the federal balance of power. Yet, women's suffrage spread rapidly none the less and was the law in almost every state by the time that the 19th Amendment made it mandatory in federal elections, and while the U.S. Constitution does not expressly guarantee women the right to vote in state elections, few people doubt that the 14th Amendment equal protection clause (which clearly did not compel women's suffrage in practice at the time that it was adopted) would be held to compel states to give women the right to vote today.

It is the power of the idea that seems like a good one in its context, once it is cast in the spotlight communicated to the right outsiders, and not outside compulsion, that drives waves of innovation.

Sometimes there are coordinating forces. Federal legislation, or international treaties, or U.S. Supreme Court rulings may force state or national governments to follow a larger trend. But, as often as not, these compulsions are addressed to recalcitrant holdouts from trends that have already taken hold as they are influential in bringing about the bulk of the trend. By the time that Jim Crow laws were dismantled in the U.S. Civil Rights movement, apartheid laws had vanished from most of the world already -- and South Africa was for decades, the only country in the world that had to be compelled by international pressure to dismantle its apartheid system until it eventually submitted. Federal laws governing union-management relations were enacted only after they had become widespread at the state level. The European human rights treaty that banned the death penalty in member nations was adopted only after almost every nation in Europe had already done so.

Waves Of Change Have A Trigger

A wave of political, legal or cultural change generally has a clear identifiable trigger that starts it, focusing the attention of people with the power to act upon it on an idea or possiblity or reality.

The current uprisings in the Arab world were triggered by the Jasmine Revolution which in turn was triggered by the self-immolation of a particular young man in Tunisia. The fall of the Soviet system began when Mikhail Gorbachev started to implement Perestroika in late 1988.

The "no fault" divorce wave of legal innovation was triggered by California's enactment of its "no fault" divorce law. Women's suffrage didn't take off until Wyoming, which had adopted women's suffrage as a territory in 1869, became a state in 1890 (and was followed by Colorado in 1893 and many other states soon afterwards).

The Great Recession was triggered by a short sequence of economic events in the fall of 2007. The Great Deprssion was triggered by the stock market crash of 1929.

A First Innovator Is Often Not The Trigger For A Wave Of Change

Clearly, it does not mean that the first place to innovate will set off a wave of change. Indeed, much of the time, the first innovator or two will stand alone for decades or more before the wave of change takes hold. California clearly set off the "no fault" divorce legislative wave, but other states had no fault divorce for decades before it adopted it. India was granted independence from colonial rule more than a decade before decolonialization became the norm and a decade and a half before it reached its 1960 peak. Wyoming had had an obscure limited liability company law on the books for many years before changing tax regulations caused this kind of company to become one of the primary means of organization for closely held businesses in the United States. The United States, France, Switzerland and Iceland were the only nations to have had republican forms of government for almost a century before democracy became the norm in Europe.

Indeed, a well proven test case may be important in making widespread adoption of an innovation happen more smoothly when a wave of change takes hold. Tunisia's Jasmine Revolution would not have spread had demonstrators there been swiftly gunned down and failed to secure any change. The revolutions of 1848 in Europe would probably not have begun had France and the United States not established that Republican government might be a viable possibility decades earlier.

Waves Of Change Can Only Be Triggered When the Time Is Right

Most of the time, the status quo prevails. Yesterday's dicatorship will almost always be tomorrow's dicatorship. Yesterday's fault based divorce law will remain on the books until the moment comes when no fault divorce sweeps the nation. Last year's housing prices will be a good predictor of this year's housing prices.

An single young man's suicide would not have triggered the Jasmine Revolution in 1985, when the latest dictator had been in office for only a few years, and the Soviet Union appeared to provide evidence that one party states could be powerful and economically successful. No fault divorce wasn't ripe to sweep the legislative landscape until lawyers and members of the same social class as legislators had become familiar with just how ugly and hypocritical the increasingly common incidence of fault based divorce had become, and would not have happened without the ferment caused by the sexual revolution at a cultural level. Limited liability companies weren't very attractive until they received a desirable tax treatment. The Financial Crisis that gave rise to the Great Recession wasn't possible until a housing price bubble had reached an unsustainable level, and the entire financial industsry was exposed to more housing default risk than it could easily bear.

Waves of Change Follow Long Periods of Inaction.

Awareness of the problem that will be addressed by the spread of innovation doesn't have to be front and center in the public discussion. Indeed, it may be that a wave of innovation is possible only in circumstances when a problem or imbalance is widely known to exist by everyone involved but is considered an off limits issue or an issue of secondary importance that is not publicly acknowledge by all but a fairly small group of activists.

When a problem is the subject to active public discussion as an important public issue that receives wide attention and is not "off the table," the status quo is less likely to fall so far out of balance that a new wave of innovation, other than any wave of innovation that is already being ridden and worked through at that very moment, can be triggered.

A seven year old regime isn't going to trigger an uprising unless it is very bad. A regional political climate in which most of the region has been governed by local strongmen for three decades of more will.

Political innovations like term limits may be important in securing political stability because they prevent incumbency from allowing the political leadership to grow stale and prevent incumbency from being used with full force to suppress other political views (perhaps even intraparty, rather than partisan opposition, views).

Waves Of Legal Change Are Often Incomplete

A wave of innovation also often does not completely run its course. While the vast majority of the world's colonies secured independence by the 1970s, a handful remained colonies into the last decade of the 20th century and a few colonies remain today. The United States was a hold out against international norms on slavery and apartheid and remains a hold out among developed nations on the question of the death penalty, which is uses more widely than any other developed nation. Cuba held onto a Soviet style communist regime despite the fact that all such regimes in Europe were replaced. Spain had a dictator long after the other nations of Western Europe had genuine multi-party democracies.

This is true at the subnational political level as well. Almost every major city in the United States adopted a zoning code, but Houston was a hold out. The move to replace the grand jury with a preliminary hearing as the main way of determining if probable cause existed to bring criminal charges swept the Western United States, but did not upset the constitutional entrenched rules of almost any of the Eastern states. New York State and California resisted the national trend to adopt state civil procedure rules modeled on the Federal Rules of Civil Procedure. Nebraska uses a unicameral legislature notwithstanding the fact that every other state in the country has a bicameral one. Lousiana and Oregon permit non-unanimous jury verdicts in felony trials contrary to the rule of every other state.

Waves Of Legal Change Do Not Require Genuinely Superior Proposals

The hold outs from waves of innovation tend to disprove the theory that waves of innovation happen because the change that has swept across many jurisdictions actually has overwhelming superiority on the merits.

The differences in the criminal justice process between Oregon, which permits non-unanimous felony jury verdicts and Washington, which does not, is subtle. New York State's refusal to adopt civil procedure rules modeled on the Federal Rules of Civil Procedure has not caused an exodus of business litigation from the state, despite the ability of businesses to agree to other forums. New York State's failure to adopt no fault divorce laws until a year ago did not prevent people from moving there or attract people to the state. Houston's land use patterns are not much different from those of other large Texas cities that have zoning codes (it has more multi-family housing in single family neighborhoods and a few more neighborhood convenience stores, but otherwise isn't much different). North Carolina has suffered few obvious ill effects from continuing to permit alienation of affection lawsuits that have been banned in almost every other state. Cuba's communist economic and political policies have not made it the poorest or more oppressed nation of Latin America. The places that remained colonies long after most of the world had decolonized, like Hong Kong and the British Virgin Islands, are not obviously any worse off than those countries that gained their independence, indeed, on the whole, they are better off than their peers that gains independence sooner.

It is enough that a proposed legal change is widely believed to be superior. Indeed, even proposed legal changes that empirically proved after the fact to be clearly dysfunctional, like the adoption of Western style democratic systems and legal regimes in newly independent nations that were former European colonies, which led to long periods of one party states, dictatorships, or military regimes in short order in almost every place they were attempted the first time (and often the second and third time) that they were attempted, did not prevent legal changes from being rapidly adopted on a widespread basis.

Wave Of Legal Change Have "Natural Boundaries"

Legal and political innovations (and no doubt economic and cultural ones, as well) do not automatically sweep the entire world. They have an impact only on jurisdictions where changes elsewhere are viewed as relevant.

The impact of the Jasmine Revolution in Tunisia has spread to almost every other Arab state in region with a generally similar history. But, it shows no signs of extending to dictatorships in former Soviet Central Asia, and doesn't even seem to be spreading to dictatorships in Sub-Saharan Africa or Southeast Asia.

Chinese style communism had enough of a distinct identity of its own that it did not collapse when Soviet Style communism did.

Political innovations in Europe in the 19th century had little impact on most of Asia and Africa that were seen as different in kind than European nation-states, but did have an impact on North American and Latin American colonial states whose significantly European populations did see their situations as more parallel to those of Europe.

Western European nations in the post-World War II era have generally seen political and legal innovations in other Western European nations as relevant to them, but have generally been oblivious to political innovations in Eastern Europe, the Third World or the United States. Latin America, Canada, Australia and New Zealand have paid more heed to innovations in Europe than in the rest of the world, with Latin America being particularly strongly influenced by Iberian political and legal development, and Canada, Australia and New Zealand being particularly strongly influenced by English political and legal innovation.

The United States, by and large, has borrowed relatively little from the rest of the world politically, legally or culturally considering the amount of information available to it from the rest of the world. For example, even innovations adopted everywhere else in the world, like the metric system, have only made modest inroads in the United States. Indeed, the general disregard that American policy makers have had for the rest of the world, and their tendency to focus heavily on federal rather than state and local politics for reasons explained by the national level of organization of academic scholarship, may explain the relatively insensitivity of American legal scholars and political scientists to the profound role of waves of legal and political innovation that is so obvious elsewhere.

Lousiana has resisted many legal innovations that are widespread in the rest of the United States because it sees itself as a civil law jurisdiction unlike the other 49 states in the Union, although this sense of exceptionality appears to be waning. Utah, similarly, is a place where political and legal innovations may arise despite not being found elsewhere, and may not spread very readily when Utah alone innovates, as its identity as a predominantly Mormon state limits the tendency of other states to follow its lead.

Political innovations like the realignment of Christian conservatives from the Democratic to Republican party have been profound in the Southern states where there was previously a dominant party system in which the Democratic party controlled everything and was the only viable political party, but have played out very differently in places that had a viable two party system before the Republicans adopted the Southern strategy.

To the extent to which jurisdictions are within the same "natural boundaries" and receive information from each other, they will strongly tend to follow the same course of political and legal innovation. But, places outside those natural boundaries will tend to follow courses of political and legal evolution independent of those within those boundaries.

"Natural boundaries" of Legal Innovation Aren't the Same In Both Directions.

The strength of the natural boundaries aren't necessarily the same in each direction and flow from historical ties and relatively scale. Japan, for example, to a much greater extent than any other nation in Asia, due to the lingering impacts of U.S. involvement in the post-World War II reconstruction of the nation, is influenced by the U.S. much more than other nations of Asia that tend to receive the U.S. influences that do impact them second hand through Japan.

For example, after U.S. occupation, the Japanese began to celebrate Valentine's Day, although in a different way than in the United States. In Japan, women express their romantic feelings for men on February 14 (generally with gifts of chocolate), but men reciprocate towards women romantically not on Valentine's Day but on "White Day" on March 14, and this modified Valentine's Day-White Day tradition has spread from Japan to South Korea, urbanized China and Taiwan (South Korea, in turn, had further innovated with "Black Day" on April 14, when singles who lacked Valentine's Day and White Day suitors commisserate together.) The Japanese have also adopted a version of the American criminal jury trial, baseball, a form of the American Thanksgiving celebration (in Japan they have KFC Chicken instead of the grand Turkey feast), Western clothing styles, American style toilets, and their own versions of the American comic book tradition.

But, Japanese political, legal and social innovations have had considerably less penetration into the American scene, and Japan, because it is considerably different from the U.S. has adapted rather than directly copied many of the innovations it has brought from the United States and Western nations generally. In the same time period, in contrast, South Korea, which sees Japan as within its national scope of relevance as a model, has heavily borrowed from the Japanese model in its laws, form of economic organization and culture.

Dominant Players More Strongly Resist Innovation From Others

It also seems to be the case that the more dominant a political and cultural unit is, the less prone it is to be influenced from contagions of innovation from elsewhere. New York, California and Texas are more comfortable being outliers that ignore legal and political innovations from outside their states than Connecticut, Washington State and Oklahoma. The United States was more comfortable ignoring innovations in the rest of the world than the nations like Canada, the United Kingdom, France, Germany and Italy.

The fact that Egypt could be so strongly influenced politically by developments in much smaller, but otherwise very similar Tunisia is a testiment to Egypt's lack of dominance in the region and its lack of a strongly distinct self-identity from its neighbors as a culture of its own as opposed to as a large generically Arab state, at this moment in history. Its unique identity has been swallowed in its understanding of itself by its regional identity, something that was not true in the ancient world, were it was a dominant player on the international scene that largely went its own way.

READ MORE - Historic Moments

The Economics of Place

Suppose that the 300 million people who live in the United States were all bunched together at the population density of Brooklyn. And for those not familiar with it, Brooklyn is certainly not the most densely populated part of New York City (that would be Manhattan). Denver's Capital Hill neighborhood, for example, is more densely populated than Brooklyn. So, how much space would it take to fit the population of the United States in one place at Brooklyn's population density?

Answer: About the land area of New Hampshire "with extra room for parks (because Brooklyn could use more)."

Of course, not all activities necessary for the survival of the United States economy and civilization can function at that population density. A big chunk of the United States is farmland and the 2%-3% of the population in the farm economy would have to be spread out to tend those farms. Likewise, another 1%-2% or so of the population is engaged in harvesting lumber, fishing, and mining, which likewise have to be undertaken where the resources are located.

Even these intensely location dependent industries continue to grow less labor intensive. Less than half of all farms produce a very large share of all agricultural output in the United States. Shrinking wild fish resources mean that in the future there will be fewer fishermen. Recycling has muted the demand for newly mined metals. An increasingly paperless world needs less pulpwood than it used to require. Energy efficient technologies have reduced the amount of energy consumed in the course of making each $1,000 of GDP.

But, for the most part, location is a matter of choice. Historically, for example, car factories and other heavy industry in the United States was located in Rust Belt in cities like Detroit, Flint, Toledo, Cleveland, Buffalo and Pittsburg. But, there's nothing sacred about that today given the much reduced cost of transportation. A new automobile assembly plant was recently built in Mississippi, and the old guard of internal combustion engine automobile makers recently handed over an automobile assembly plant in California to a new guard company set on making electric cars. Some of the cars you see on the street were made in Japan (which is famous for its utter dearth of natural resources) and Germany, both of which are half a world away, even though a car is one of the heaviest goods (and hence most expensive to transport) that the average person owns other than a home. Vehicles are made in North American both in Mexico, just across the border from El Paso, Texas, and in Ontario, just across the border from Buffalo and Detroit. Manufacturing enterprises have immense freedom to locate pretty much anywhere they want, subject to very modest constraints.

Most of the economy, retail trade, hotels, branch commercial banking, gas stations, post offices, schools, hospitals, construction, government, and so on, needs to be located conveniently to the people who buy the goods and services they offer but aren't intrinsically connected to any particular place. There is very little that is done in Denver that couldn't be done just as functionally in Fort Collins or Colorado Springs had the path of history taken a slightly different step.

We also have quite a few industries where geography is absolutely critical, but it is critical because the industries operate in national or international marketplaces where proximity to industry colleagues is critical. New York is the center of the American investment banking industry because it started there and never left, and because there is considerably value in that industry in being able to have face to face meetings with other members of the investment banking community on short notice, not because the intrinsic geographic benefits of New York, like its status as a port city, have any continuing relevance to what the financial industry does there these days. The same is true for some of New York City's other major industries like television, publishing, and live theater. These industries are prominent simply because they thrive on large local markets and intra-industry interactions, and the New York City metropolitan area is one of the largest local markets in the country with the most established publishing houses and theater scenes. It is helpful to have key parts suppliers for a company near the company that makes the final product, particularly if the parts are physically large, the demand for them fluctuates unpredictably, and it may be necessary to make adjustments to return or modify parts that don't quite fit.

Indeed, industry inertia frequently trumps considerations of geography that would seem to be important. Lots of movies set in the United States are filmed in Prague or Toronto, for example. A majority of publicly held companies in the United States are incorporated in a suburb of Philadelphia called the state of Delaware that doesn't have any notable skyscrapers of its own (the pyramid of Giza built by the ancient Egyptians was 451 feet tall, while the tallest building in the state, the Chase Wilmington Building, is 330 feet tall), lacks an Ivy League college or a prestigious law school, is the only state in the United States without commercial air service, and closes its bars at 1 a.m. The state doesn't even have a single major league professional sports team of its own.

Even industries you might think of as highly location dependent, like tourism, aren't quite as bound to a particular place as you might think. Las Vegas could have been built anywhere within a moderate drive from a major population center. Disneyland and Disney World are likewise not to tightly tied to the world beyond their walls, a fact evidenced by the fact that new ones have sprung up across the world.

If a Nor'easter did to New York City what Hurricane Katrina did to New Orleans, with a similar amount of lead time to allow most people to evacuate, and the Mayor of New York City convinced everyone to move to Fargo at some critical moment, the city that never sleeps could be rebuilt in the Great Plains and continue on a more or less business as usual basis. Something is lost in translation at first, as we observe in cases where national capitals are relocated to completely planned cities like Canberra, Australia and Brasilia, Brazil. Washington D.C. was established on that kind of basis as well, but has aged enough into a character of its own that we tend to forget that fact.

The disconnect between economic activity and location is relatively new. In the 1920s, for example, close proximity to natural resources, consumers, water routes and rail lines was much more important for manufacturing firms. Until World War II, a much larger share of the population lived on farms.

Telecommunications have gotten cheap even more recently. I used to spend a large share of my monthly budget on long distance phone charges so that I could talk with the woman I would later marry when I was in law school, while she was half way across the country going to school somewhere else. These days, there is usually no extra charge for long distance calls relative to local ones. The postal service is coughing up red ink because information can be sent for a near zero marginal cost over the Internet and so people don't send letters nearly as often.

It isn't that location is irrelevant. But, today, what matters is "who lives there?" and "how nice of a place is it to live?" Not, "what is there?"

READ MORE - The Economics of Place