Signal to Noise Ratio

Will Wilkinson takes a walk on the dark side. He agrees with Bryan Caplan that education is mostly just a signal that you are already talented and suggests that there is “a huge entrepreneurial opportunity for whomever can come up with an alternative scheme of credible human capital certification”

My longstanding objection to the signaling hypothesis is two fold

1) The market abhors unclaimed profits. That is, it is hard to imagine that individuals in the economy are spending vast resources on something which is largely useless and that profit maximizing firms are rewarding them for doing so!


2) There is little to no evidence for the signaling hypothesis. The evidence shows that when we control for ability the return to college goes up, not down. For me this explains why nerds tend to find school useless. It was useless for them. That doesn’t mean that it’s useless for everyone.

My own theory is that the human capital formed in higher education is the ability to solve problems, manage time, work independently, seek out assistance, communicate your ideas, form and in some cases direct teams. These skills, not knowledge are what employers want.

Traditionally education focused on the classics for the same reason that athletes run hills. They’re hard. It’s not that your ability to run hills signals your ability as a football player or wrestler. It makes you a better football player or wrestler.

Now in athletics there was a revolution in “sport specific training.” That is, some people said “hey why don’t we have these kids train in ways that are actually related to the sport they are playing.”

It made a difference but not a huge one. The key factors of strength, speed, motivation, endurance, emotional self-discipline and tolerance for pain where sometimes better honed under conditions that had nothing to do with the actual sport.

Education, I believe, operates mostly the same way. The skills needed to direct an engineering project are sometimes best honed by slogging your way through purposefully near impossible homework assignments. The understanding of unintended consequences needed for white space thinking in big business may come best from analyzing why it is that none of your favorite economic policy proposals work out the way you thought. The communication skills needed to lead a company through restructuring my first come from writing and rewriting an essay that can persuade a stern professor that Hume is properly considered an atheist, not a deist.

In each case it is the skill set that is important. The knowledge is relatively unimportant.

hat tip to Kling

What Are We Paying These Professors For

A few days back Bryan posted on more evidence for the signaling hypothesis, that is the notion that the only reason to go to college is to prove to the world how smart you are. Exhibit A is the fact that you only have to pay for classes that you are getting a grade in. Sitting in the back and listening are free.

Well, first off sitting in the back and listening is not free. There are the usual opportunity cost arguments but I’ll bring up a more fundamental point. I have been kicked out of lectures that I didn’t pay for.

Being an Aspie and hence an economist since birth I realized I could get a free education early on. So long as I didn’t interact or say much I was fine. However, once the professor noticed that it was a little snot-nosed kid speaking up they were quick to ask me “Are you a student at this school??”

I think the reason that you can get a free education is that the monitoring costs are high compared to the number of people who want to steal education. Now, why is it that more people don't try.

Well, for one historically the actual cost of tuition is low compared to the opportunity cost. The cost of devoting enough time not only to the lectures but to homework and studying were much higher than tuition.

Two, the grading and advising process do serve a function. We can talk about hyperbolic discounting or constrained rationality but the bottom line is that self-control is a serious issue. The fact that you are faced with a grade motivates you to do the work.

As a side on this the best advice that I can give for young students is show up. Go to class. Go to see your professor. Your natural sense of shame will take care of the rest. As long as you can get yourself into that classroom on a regular basis you will be too embarrassed to slack off – that much.

Three, embarrassment is a serious cost to most people. I am amazed at the opportunities that people pass up because they are afraid of embarrassment. Even if there was no formal sanction, simply having someone point out that you are a free rider would mortify many people.

For these reasons most people pay for their education. The interesting question is whether or not the percentage of free riders has risen as the cost of education has gone up.

On Infant Industries

Why shouldn't developing economies protect their fledgling industries so that they might develop a comparative advantage over time?

This is the infant industries argument. Africa will never develop a steel industry if foreign steel producers can use their superior technology, infrastructure and capital to undercut African producers.

There are some extremely sophisticated reasons why this might be true. Perhaps I’ll have time to sketch them at the end. The basic intuition, however, is misleading.

Why?

Well because everyone has a comparative advantage. You don’t have to develop a comparative advantage. It comes straight out of the relationship between two countries, communities or people.

So what’s the developing world’s comparative advantage? By and large it’s the cost of living. If you travel to third world you will notice this immediately. Food costs less. Clothing costs less. Shelter costs less. This means that factory workers in the third world can survive on what would be below subsistance wages in the US.

There are some things that US consumers simply couldn’t have if it weren’t for this cost of living difference. An example that comes to mind is those new florescent bulbs, the kind that are made to replace regular incandescent bulbs. Those bulbs are twisted into a little ice cream cone like shape.

It turns out that we haven’t yet figured out how to get a machine to twist glass that way. For all of the great technology, education and capital stock of the United States we can build a machine that can twist glass in just the way it needs to be twisted to make those florescent bulbs.

We could pay a person to do it but it takes a long time to make a perfect twist. Wages and the cost of living are so high that it would make the bulbs outrageously expensive. No one would buy them.

The cost of living in rural China, however, is much lower. There a man can work all day twisting bulbs for cents on the hour and still have enough to feed his family. The man has an advantage over every single worker in the US. That advantage is that he lives in a place where the cost of living is fraction of what it is here.

His comparative advantage gives him and job and gives us those ice cream cone shaped florescent light bulbs. It also gives the man the resources to let his sons and daughters go off to school, rather than spend their adolescence working the farm.

When we look at the countries that have escaped poverty over the last 25 years they have done it by trading more, not less. Typically, at first they produce “cheap” goods with low wage labor. They reinvest the profits, however, into capital and education that helps then produce more sophisticated goods.

The sad thing is that today many poor countries have their natural comparative advantage in agriculture. Yet, trade barriers from Europe and United States prevent them from selling their crops here.

Others suffer from more fundamental problems such as corruption, lack of property right or rampant disease and war. While these problems put those countries at an absolute disadvantage it is hard to image how limits on their ability to trade on their comparative advantage could make matters better.

I hesitate to mention the more sophisticated arguments for fear that I will cause more confusion that clarity. I, however, ask this two part question:

1) Is the marginal product of an input higher in situations where there is a little of it or when there is a lot of it?

2) Do computer programers move to Silicon Valley or away from Silicon Valley?

How can we reconcile the answers to these two questions?

My Answer to Bryan's

Query on his on selection bias.


I think those who spend their lives in academia will tend to underestimate the return to education.

As Card points out the return to education is higher for those who have limited access. Moreover, academics tend to enjoy the education process and will seek education beyond the point where the marginal pecuniary return is exceeds the marginal cost.

This will lead academics to conclude that education doesn't pay.

Indeed, I felt this way myself until leaving academia to make my fortune on the Internet and subsequently losing it all. My stint in working class America lead me to believe that if anything the return to education is smaller for those with talent than those without. Indeed I suspect that the standard OLS measures may underestimate the return average return.

That is marginal benefit falls with increasing talent but 'disutility' falls faster causing the talented to seek more education and downwardly biasing the estimates.

Why Are We Teaching These Kids?

The first page from Byran Caplan's new book summarizes a position he is stated many times about education - that it is mostly a waste of time. There are several points I'd like to make relating to the economics of Bryan's assertion and how he arrived at it. To maintain the reader's interest I'll address the juicer ad hominem points first.

First, Bryan says that education, for him, was mostly a waste of time. I would say much the same about my classroom education. Yet, in my case, and I suspect Byran's, this wasn't because there was too much learning going on but too little.

I could absorb material much faster than the teacher taught it. So much faster that I was better off simply to read the book and struggle with it myself rather than waiting for the class to come along.

This problem, however, exists for a small minority of children. Most children actually tend to lag behind the school systems highest expectations. Just because the best could do better on their own doesn't mean that most could.


Secondly, Bryan confesses that he has never really worked outside of academia or even spent much time outside of the education sector. This, I suspect, is the real culprit. Byran doesn't realize just what it means to be uneducated because he has not worked closely with uneducated people.

Its one thing to think that obscure memorization of multiplication tables or facts about rivers basins is useless. Its another to try to build a creek side patio with someone who doesn't know these things.

You don't often use much of the trivia you learn in grade school but when you do it can be vitally important.

Perhaps, if we were all perfectly specialized in our occupations and could predict what we wanted to do from an early age it wouldn't matter. You could just learn what you needed on the job. There would be no need for a generalized education.

Yet, when the demand for new houses rises, reminding a group of new apprentice carpenters what right triangles are and teaching a bunch 30 year-old guys who have never heard of an angle are radically different.

Ironically, when you work in the knowledge economy it can be easy to forget just how important knowledge can be. In jobs where knowledge aquistion is the goal, intellectual horsepower has a greater return than possesion of the very knowledge you are working to make obsolete. In most other feilds intelligence matters but well established empirically verified knowledge matters more.

Third, from a economics prospective its hard to reconcile the notion that there is too much schooling with the literature showing that the returns from schooling are high. I am not talking about simple minded studies that show educated people make more money. More careful examinations conclude that the causal effect of education on earnings dominates most of the return.

Indeed, at the margin education seems to be most important for groups that are disadvantaged in their ability to obtain it.

Lastly, there is the market test. If education is so useless why is the market so incapable of finding an alternative. Fast track programs are common in finance, consulting and now even retail. Shouldn't it pay to snag brilliant 16 year-olds and put them to work in I-Banking before they waste time in high school and college.

Despite the severe shortage of talented labor no one has thought of a way to do this?

What are we teaching these kids

Some time ago Garth asks if anyone out there is smarter than a fifth grader. Appearnatly a new TV show asks adults fifth grade science, math and history questions. Most adults seem not to know, leaving Garth with the impression that fifth grade is full of useless trivia that it soon forgotten.

While I do think that education hasn't yet caught up with technology - why teach how meany tablespoons in a teaspoon when Google can answer instantly - I must note that most education uses the overteaching method. We cram way more facts than you need to know into your head in the hopes that you will remember at least a few of them.

I do think, however, that in this day an age to much time is spent on basic facts at a young age. Real math and science need to come earlier so that we can make way for important facts at the end. For example, the percentage of American's who understand what a Corporation actually is appaulling low, depsite the fact that vitually all Americans have strong opinions about them.

With our shrinking personal savings rate number of Americans who understand how compound interest works is shamefully low as well. Of all the "factual" subjects that one needs to know personal finance seems well near the top.

Of course a dose of general economics would be a bad thing to toss in as well.