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Signals and the Substance of Education

Bryan Caplan’s book, The Case Against Education: Why the Education System is a Waste of Time and Money, has been garnering a fair amount of attention in academia and beyond. Much of the response has been negative, if not downright hostile, particularly among academics. A good part of that hostility, I suspect, results more from an implication of the original theoretical model motivating Caplan’s book than from Caplan’s book itself. The original model is found in Michael Spence’s 1973 article in the Quarterly Journal of Economics, “Job Market Signaling.”

Spence received the Noble Memorial Prize in Economics in 2001 (shared with George Akerlof and Joseph Stiglitz) mainly for the contribution of this article. The model’s application, and its importance, extends far beyond education. Nonetheless, a central implication of the model challenges conventional American views on education, and on democratic society more generally. This is, I think, where much of the hostility to Caplan’s book derives.

The conventional view of education, call it the “human capital theory of education,” sees schooling as increasing each individual’s stock of knowledge and skills, thereby increasing their productivity. More productive workers earn more than less productive workers. The implication is clear: increasing access to education increases the number of highly productive workers, thereby increasing their incomes, and increasing social wealth more generally.

And the data bear out the prediction of the human capital theory: people with high school degrees, or college degrees, or graduate degrees, on average, earn higher salaries than people without those degrees.

Spence developed a “signaling” model of education. While schooling can both build human capital and signal in Spence’s world, one set of equilibria in the Spence model, what we might call the pure signaling model of education, accounts for the same empirical association as the human capital model, that is, more schooling is associated with higher wages. But in Spence’s model, this statistical association can exist even though schooling contributes nothing to increasing any individuals’ stock of human capital.

Keeping in mind that much more sophisticated models have been created in the intervening decades, here’s the rub of Spence’s original model: there are two types of workers, high productivity workers and low productivity workers. These are individual attributes and will not change. While it is important to emphasize that this is an assumption made for identifying a clear, albeit, provocative outcome, this anti-egalitarian assumption infuriates many scholars.

Employers pay higher wages to high productivity workers than to low productivity workers, if they can tell them apart. The problem is, in the non-signaling world, if an employer asks a worker “are you a high productivity type or a low productivity type,” all workers say the same thing, “I am a high productivity worker.” Their answers “pool.” Because all workers report being high productivity workers no matter their actual type, the employer learns nothing useful from the question (and so probably wouldn’t ask it in the first place).

Spence then adds an institution to this world called “schooling.” The cost of schooling to people varies inversely to the type of worker they are. For low productivity workers the cost of going to school is high. For high productivity workers the cost of going to school is low. The “cost” here need not be a monetary cost Indeed, it is best understood as a non-monetary cost. For example, it can be the amount of time and effort a person needs to expend to succeed in school.

While the employer cannot observe the productivity-type of a person, the employer can observe credentials. Provided the cost of schooling is neither to high (deterring high productivity individuals from getting the credential) nor too low (permitting everyone to get the credential, thereby “pooling” again) then the credential will allow high productivity workers to separate from low productivity workers.

What’s the upshot? First, the signaling model is not about adding skills and knowledge, it’s about revealing (or signaling) qualities a person already has. I should add that Spence in his model is not committed to this claim. The model is consistent with education both increasing human capital and signaling. Pure signaling, however, is also a possibility. And that’s the most provocative outcome. The implication of pure signaling, however, is that schooling can increase incomes even when no actual education occurs.

Secondly, both theories account for observing a positive association between schooling and wages. Again, the association can result from signaling a human capital working together. Spence’s model opens the possibility that the association results only from signaling and not at all from increasing human capital.

Third, high-productivity individuals are worse off with signaling relative to a first-best world. If everyone told the truth (assuming each type knew which type they were), then high productivity individuals would not have to waste their time and resources attaining a credential. In a second-best world, however, even though signaling is costly, it can be (sometimes) better than the world in which there is no signaling at all. That’s why I call this type of signaling efficient waste. Looked at from one direction, schooling is just a waste of resources. From another direction, though, it leaves the higher productivity workers better off. (And I should note that in Spence’s world sometimes signaling can leave everyone worse off relative to non-signaling outcomes.)

So this is a slick theory, and has numerous implications for areas outside of education.

So why the many negative responses to Caplan’s application of Spence’s model? First, and most narrowly, there are the policy implications. As I mentioned above, both theories predict an empirical association between schooling and wages.

The human capital theory suggests the more society invests in education, and the more people who receive an education, the more productivity will improve. The wages of those who are educated will increase, and social wealth will increase overall as well. Everyone wins.

In the signaling world, however, increasing the number of people with the credential beyond the high productivity type only replicates the original non-signaling world. If everyone has the credential, then it serves no function. Instead of being efficient waste, it becomes pure waste, both individually and socially.

Even this, however, does not explain the deeply negative reaction to the signaling hypothesis.

When taken seriously, the Spence signaling model, at least in its pure form, flies in the face of deeply rooted American commitments. Americans are viscerally committed to the promise that more education will improve a person’s prospects. This promise is open to everyone in the human capital model. Think of Abraham Lincoln. Think of countless immigrant stories. Think of the deep aspiration that one’s children, or grandchildren, would be the first in the family to go to college. Think of the sacrifices parents and grandparents are willing to make to realize this dream.

The signaling model is not entirely adverse to this promise, but it does lack the democratic spirit of the human capital model. In the pure signaling theory, education, or at least credentials, are more valuable, both individually and socially, when they more tightly map onto the class of high productivity workers. The very idea that the class of high productivity workers is a closed class of individuals, as opposed to an open class, is offensive to the American spirit. Whether left wing or right wing, a central component of the American ideal is that anyone can succeed if only he or she works hard enough for it, and this promise is one to everyone. The main offense of Caplan’s argument, I suspect, is the idea that the American dream is not in fact accessible to everyone. That implication, however, is built into Spence’s original argument.

Reader Discussion

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on February 14, 2018 at 16:01:22 pm

Eh.

1. Yes, American society embraces meritocracy—the idea that people deserve their station in life, and that with effort everyone can improve their station. Challenging this theory will provoke an angry response.

But pretty much NO scholar (even Caplan) embraces a pure signal theory—the idea that education provides NO human capital benefits, and 100% of its benefits result from signaling. Even Caplan acknowledges: "It's absolutely true that school makes people show up, sit down, shut up, and that these are useful skills for people to have in adulthood.”

Thus, the real dispute is about HOW MUCH of the benefits derive from signaling and HOW MUCH from human capital acquisition. And this dispute isn’t really all that threatening to the idea of meritocracy.

But, because Caplan presents the argument as if it were a choice between the theories, people get annoyed with this false dichotomy. Caplan is basically pandering to ignorant people’s sense of grievance. So, sure, that’ll piss off the rest of us.

2. True, there are many expensive ways to educate people (e.g., the residential four-year college), and the US leads the world in employing these methods. And the US is the richest country in history. Coincidence?

No—but perhaps the causation runs in the other direction. That is, for families who are sufficiently affluent, college is seen as a rite of passage. It’s a form of CONSUMPTION. And no, acts of consumption may not register strongly in measures of productivity. But that doesn’t mean that they generate nothing of value--just nothing of value of Caplan.

3. Finally, Caplan appears to embrace a pure market model: Education is supposed to exist purely to promote the productivity/wealth of the student. If education generates social benefits rather than individual benefits, Caplan seems to regard this as a fraud on the student.

But if you subscribe to the view that education is supposed to generate social benefits, then you may not regard this outcome as fraudulent, even if it does not result in the student demonstrating greater productivity as an individual.

Maybe education makes people more humane; I’d be curious to see statistics comparing violent crime rates and educational attainment. Maybe it helps sustain democracy; I’d be curious to see stats comparing social stability and rates of educational attainment. Maybe it provides a vehicle for financing research that would otherwise not occur. Maybe it’s a dating service—after all, the US still procreates at a higher rate than the rest of the developed world.

In short, I’m not as mercenary as Caplan.

That said, it’s certainly worth exploring what benefits we think education CAUSES, and whether we could achieve those benefits in a cheaper or more equitable manner. After all, if college is really an act of consumption engaged in by people destined for the upper end of the income scale, it may make sense to stop subsidizing it.

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nobody.really
on February 14, 2018 at 16:21:58 pm

"...it may make sense to stop subsidizing it."

Uh Oh!!!! You are bound to piss some people off with comments like that, my friend. after all, how are the low productivity types going to "bootstrap" themselves. Better hunker down somewhere - someone is coming to *re-educate* you.

As for making people more humane, it is arguable that education, at least the modern conception of it with its emphasis on exposing all manner of deficiencies in the regime, may indeed make people LESS humane whilst they zealously attempt to make immanent the new MORE HUMANE world they have seen on offer at university.
As an example, the latest trend in SJW thinking / proselytizing is to compel "White Feminism" to repent for it's disempowerment of people of color. In short, these more humane, or in GHW Bush's formulation, "kinder, gentler" credentialed types are going after "White Womanhood":

https://pjmedia.com/trending/womens-march-organizers-now-targeting-white-womanhood/

Better to send these folks off to vocational schools - no student debt, no mushy thinking, but you can get some good plumbers, carpenters, electricians and a respectable wage.

BTW: JUST HOW many professions REALLY require a degree?

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gabe
on February 14, 2018 at 16:31:19 pm

"Americans are viscerally committed to the promise that more education will improve a person’s prospects." A great many Americans also rely on the industry of education for employment outside of the business world, AND, for some of them, for a different type of signaling: that they are not mere workers in business, not "productive" in that sense. To imply, or to state outright, that the education industry needs reform, perhaps even challenging-to-drastic reform, sounds like a threat to a lot of them. It's a variation on the "way of life" problem of the government industry...reform would mean change, which might threaten a way of life for many employees. One of the things education doesn't seem to cultivate in us is a sense of our own nimbleness and mobility, and the changes we can hazard.

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aez
on February 14, 2018 at 21:11:24 pm

Gabe—

I think you really have to take all the horror stories with a heavy grain of salt. I am not saying they don’t happen. But neither do they come close to capturing the entirety of university experience for most students (or faculty). I have lots of conservative students. Lots of my students are religiously observant. Most of my students are pretty serious about improving themselves.

You have a standing invitation to come to JMU and see for yourself. It’s just not anywhere near as bad as you imply here. Come judge for yourself?

Best wishes,
Kevin

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Kevin Hardwick
on February 14, 2018 at 21:23:34 pm

A quick follow up. Only a tiny percentage of students will ever at any point in their education come up against the infuriating silliness you describe in your post. Most students are preprofessional and vocational—my students are preparing for careers in nursing, or accounting, or kinesiology, or speech pathology, or any of a bunch of similar careers. I agree with you that as a society, we over credential. But it does mean that the overwhelmingly vast majority of students never get exposed to the kinds of academic silliness that we read about in the blogosphere. For better or worse, those academic debates just don’t speak at all to the experience of most university students in institutions like JMU. No body taking a standard class in, say, anatomy, or accounting, is going to spend time talking about the inadequacies of hetero-white feminism.

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Kevin Hardwick
on February 15, 2018 at 12:14:28 pm

Kevin:
Agreed "that the overwhelmingly vast majority of students never get exposed to the kinds of academic silliness..."

Perhaps, it is merely a question of "the squeaky wheel gets all the [ink or air time].

Still, there is, or may be, a subtle effect upon those young students who are not *directly* exposed to the infuriating silliness exhibited by a number of students and faculty. There is, at least to my observation of a good number of young students, and particularly affecting those whose backgrounds may be deemed more traditional, a sense among them that they must endure a "compelled deference" to the received wisdom (lunacy?) of the day. In response, they take a rather sensible stance: they avoid both contact and interchange with the loonies; fair enough. Yet, i detect in these young people a longing for something more - an engagement, perhaps. Or maybe, an understated defensiveness concerning their own worldview / belief systems.

Words, unlike fists, have import over distance. The incessant verbal barrage infuses the atmosphere with the stench of criticism / accusation and disapproval. Does it cause, like the poor infantry soldier subject to artillery fire, the student to seek cover? does it cause the student to constrain his / her own actions / expressions.

The sense I have from my own experience with young students is that it does. They may shrug it off but they do not "combat" it as it appears pointless to them to do so.

I contrast this with my own university experience. We argued about everything and everyone. Point - counterpoint and on and on. There was value in this. Not so much now.

Anyway, i am happy that your school appears to be well functioning and not so affected by the present push for a pain (and offense) free world.

take care

gabe

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gabe
on February 15, 2018 at 12:34:51 pm

Boy, If I had even HALF a brain, I would have known of the phrase "The Overton Window" - that is what I was getting at in my comments above.

Here is an interesting piece on it from NRO:

http://www.nationalreview.com/article/456418/divided-america-liberal-radicals-move-country-left-right

Oh well, Live AND Learn

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gabe
on February 16, 2018 at 11:13:36 am

There is, at least to my observation of a good number of young students….

i detect in these young people….

The sense I have from my own experience with young students….

Just curious--what IS your experience with young students?

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nobody.really
on February 18, 2018 at 06:15:46 am

Nowadays the notion of meritocracy is severely weakened in the western world. It has been sacrificed for the dogma of equal distribution of profits and a rigid payscale elsewhere which has nothing to do with a person's core attributes. Meritocracy is antithetical to 'progressive' tax rates and to the need for connections. In turn, connections are conditioned on adulation and political correctness.

In many fields, education is certainly attainable at little-or-no cost thanks to the Internet, libraries, and the abundance -or indeed redundancy- of printed material. Although there are exceptions (such as medicine and subjects where praxis depends on having access to complex facilities), the vast majority of subjects now are amenable to self-teaching. Thus, in the vast majority of fields there is no reason to keep supporting the white elephant called 'remnants of oral tradition'.

University education is largely sought for the "success" that the credential promises. MBA programs and Juris Doctor degrees are the two most expensive and futile cases of 'pooling', as the term is used in this post.

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Iñaki Viggers
on September 20, 2018 at 05:47:25 am

[…] sure, an authoritarian ruler might use courts to engender Spence-like costly signaling (what I term efficient waste). This would not entail the ruler cease to be an authoritarian to observe courts ruling against the […]

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Judicial Independence, Authoritarian Politics, and Blame Shifting

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.