Theodore W. Schultz Nobel Laureate in Economic Sciences, 1979
Theodore W. Schultz’s insights may sound obvious to the modern ear, but their genius lies in their simplicity. He had little time for the rich urban elite, and believed that since most people in the world are poor, they should be economists’ focus.
Schultz grew up burning 'cow chips' for warmth on a farm in the Great Plains states. His feet were planted firmly in agricultural territory throughout his career, even when Harvard tried to tempt him into a prestigious academic role. But his professional interest in farming folk was not just about staying true to his roots. He understood the great economic contribution that ordinary people could make as long as they were allowed to reach their potential.
At a glance
Born: 1902, Arlington, South Dakota, USA
Died: 1998. Evanston, Illinois, USA
Field: Development Economics
Prize-winning work: Analysis of the role of investment in human capital for economic development, particularly in agriculture
Research quirks: Preferred to work in isolation with no telephone and no people around
A "modern" Franciscan: Defined not having much as a term of freedom
When is a community poor?
From an early age Schultz was aware of the value of education because, as his own story taught him, it’s the only way of coming out of poverty. On his two-and-a-half mile walk to school and back, he had plenty of time to think. "As a little boy, it seemed to be a long, long way," Schultz said when we met him in Chicago in 1992. "Especially throughout the wintertime, you had to be dressed very warm. It was terribly cold." Schultz’s youth was tainted by the outbreak of World War I. As a boy who was quite strong and tall for his age. He disrupted his schooling to support local families and farmers in the field who were affected by the wartime shortage of labor. His interest in issues that later became his specialties was piqued at an early point in his life.
Schultz set out to investigate an important area of economics; an investigation that would help humanity as a whole. He directed his attention to examining agricultural economics and poverty, which culminated in his world-famous work "What is the economics of being poor?".
"I was trying to understand the composition of what made people poor," Schultz said. "My first efforts went into identifying the poor. I’m not talking about the individual that is poor. I’m thinking of a whole community, or as it’s the case in some places, I’m thinking of the whole country."
How can you identify poor communities?
Schultz developed three effective methods to identify poor communities. The first examines the amount of income people in the community spent on food. "If the fraction of income spent on food is half or more, then that’s a pretty strong sign that they’re really poor," Schultz explained. "By this test, you will be able to identify most of the poor communities. You don’t have to go any further, but I went further." He smiled, and then explained that the second indicator is average life expectancy in a given area. But, as he highlighted, the most important factor is the third: the level of skills, the abilities that people have acquired and their state of knowledge. "So many people don’t even have the beginnings of writing and skills, language command," Schultz said. "75 percent of the annual income of people in the United States is derived from work. From a highly skilled population. And that’s what you have in Europe and Canada too."
How can we enhance poor people’s welfare?
Before Schultz, intellectuals held the common view that, for an economy to progress, attention should be focused on advancements in industry and not agriculture. They held the view that agriculture was a symbol of the past, not the future. Schultz countered: "Most of the world’s poor people earn their living from agriculture. So if we knew the economics of agriculture, we would know much of the economics of being poor."
As an example, he mentioned people in Africa. "People on the unproductive soils of the Sahara, on the somewhat more productive soils on the slopes of the Rift landform, and on the highly productive lands along and at the mouth of the Nile, all have one thing in common: they are very poor." He strongly underscored that understanding the history of the people, the educational standards, and the level of ability and skills has been far more important than the most detailed and exact knowledge about the composition of the Earth’s surface. "While land per se is not a critical factor in being poor, the human agent is: investment in improving population quality can significantly enhance the economic prospects and the welfare of poor people."
Schultz pointed to Taiwan and South Korea, where education had taken a great step forward. "When people get into the right kind of environment, when they get higher education, they can suddenly learn a great deal in very short time. The labor force got more productive, and they have become a successful exporter. They entered our market," he explained. "And the key to this was the rapidity in which they brought up the skills of the people."
How can we improve people’s lives on a global scale?
As to what actually improves the quality of life for the population, Schultz was adamant that health and wellbeing are as crucial as educational initiatives. "The improvements in health revealed by the longer life span of people in many low-income countries has undoubtedly been ground shaking," he told us. "In India from 1951 to 1971, life expectancy at birth of males increased by 43 percent, and that of females by 41 percent. Longer lifespans provide additional incentives to acquire more education, as investments in future earnings. Parents invest more in their children. More on-the-job training becomes worthwhile. These consequences translate directly into the population quality, and thus directly affect the poverty threshold."
Can intelligence counter scarce resources and climate change?
Schultz stood against the widely held assumption that there should be fixed areas of land suitable for growing food, because this would make it impossible to continue to produce enough food for the growing world population. In his opinion, mankind also had the ability and intelligence to reduce its dependence on traditional agriculture. "By means of research, we discover substitutes for cropland and, as incomes rise, parents reveal a preference for fewer children, substituting quality for quantity of children. History demonstrates that we can augment resources by advances in knowledge. The future of mankind is open ended, our future is not predestined by space, energy and cropland. It will be determined by the intelligent evolution of humanity," he clarified.
Human advancement has transformed traditional agriculture and its uses of raw land into a vastly more productive resource. Furthermore, achievements in the field of science and research have provided new grounds for agricultural development. In the past, European soils were of a very poor quality. Today, human innovations have converted these into highly productive ones. Schultz remarked that also the soils of Finland and Japan were originally much inferior to those in northern India; they are greatly superior today. The observed changes in both high and low-income countries suggest modern developments in agriculture will help sustain population growth. But for Schultz, these advancements must also have a positive impact on human capital in order to be truly successful.
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Visiting the poorest communities on earth
On his life journey to understand how one manages to live under poverty, Schultz immersed himself in the poorest communities on earth, interacting and living in the conditions he was studying. It was in India, where Schultz was introduced to the Nehru-Gandhi family, that he established strong bonds with the modern movers of India. He stated: "In retrospect, I value highly what I have discovered about the economic behavior of rural people while abroad. In order to learn what I wanted to know, I went out to rural communities and onto actual farms to see for myself what was actually happening."
Schultz noted that poor people are equally worried about the future of their children as those of us who have incomparably greater advantages. "We in the high-income countries have forgotten the wisdom of Alfred Marshall, when he wrote that knowledge is the most powerful engine of production," he quoted. Schultz again pointed back to the importance of education and advised that maybe we all should stop looking at poor people as different people. Schultz would be happy to see that in recent years, number of low-income countries have successfully followed his advice by improving population quality and acquiring useful knowledge, thereby contributing to not just the local or regional community, but to a global one as well.
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"Schultz is the economist I want to be. Schultz was an economist who lived in the real world. His ideas came from talking to real people."
Global Chief Economist
UBS Wealth Management