For Ye Have Signaling Always With You
Many economists assume that market forces will somehow figure out a way to make signaling costs disappear. But as far as I can tell, they never explain why signaling costs would be easier to eliminate than any other costs. And on reflection, the truth is precisely the reverse: Signaling costs are especially hard to eliminate. Why? Because when you make signaling cheaper, agents’ natural response is to signal more intensely or on another dimension.
Let me illustrate my claim with a prediction: The typical engagement ring will always cost several weeks’ income. If industry figures out how to cheaply synthesize gold and diamonds, we’ll start making engagement rings out of something else – platinum and rubies, or ivory and T-rex teeth. Why? Because one major function of engagement rings is to signal commitment with an expensive gift! To separate the sheep from the goats, the signal has to be expensive enough to convince the goats to give up.
The same goes for signaling generally. Once students can download perfect Latin from a computer with a single click, employers will no longer be impressed by students with good grades in Latin. So how then will students manage to impress the employers in this brave new world? By excelling in subjects that remain difficult to learn. And if necessary, schools will respond by inventing challenging new hoops that make Latin look useful by comparison.