I talked about education and positive externalities in a recent post. In that post, I took for granted that education has positive externalities, and that subsidizing education is an appropriate role of government, according to standard economic theory. However, as is often the case, there’s more to the story. Things that have positive externalities can simultaneously have negative externalities as well. It’s not a foregone conclusion what the net effect will be, even in the case of education.

However, there’s also a subtle fallacy of equivocation we should avoid falling into. The fallacy of equivocation happens when we use the same word, but that word refers to different things at different stages in the argument. For this discussion, it’s important to distinguish between education, by which I mean the general process of gaining knowledge and skills, and the education system, by which I mean the system of schools, accreditation, degrees, and so forth.

The education system is often referred to as just education, but they’re not the same thing. For example, Bryan Caplan’s book on the topic would probably have a more accurate (if less provocative) title if it had been called The Case Against the Education System, rather than The Case Against Education.

Education has positive externalities – my neighbors being smart and well-informed benefits me as well in addition to the benefits it provides them. But the fact that education has positive externalities doesn’t entail that the existing education system ought to be subsidized. These are different things, and arguments about one can’t simply be copy-pasted onto another.

A negative externality that exists with the education system comes from the idea of what economists call positional goods. A positional good is when somethings value for you to possess depends on the fact that it’s not possessed by others. As that good becomes more widely possessed, it becomes less valuable to you. For example, a sandwich is clearly not a positional good – the value of your lunch doesn’t go down just because other people also have a sandwich to eat at lunchtime. But the education system produces positional goods – the value of the degree you gain becomes lower as more people also acquire the same degree.

How many times have you heard some variation of this lament?

It’s getting harder and harder for people to keep up these days. Not too long ago, it was possible for someone to go straight out of high school into a career that would let them buy a house and support a family, and graduating college was a surefire ticket to the upper class. But now, you need a college degree just to have a chance to be middle class, and people who never graduate college have almost no hope at all of building a decent middle-class life.

Part of this is due to the positional goods nature of degrees. Rates of both college and high school graduation only a few decades ago used to be much lower than today – and because of that, having a high school degree or a college degree used to be worth much, much more. Sometimes people suggest that the apparent necessity of getting a college degree to secure a good job means we should more heavily subsidize the education system so more people can get college degrees, but this is a self-defeating approach. If by waving a magic wand we could make bachelor’s degrees as common among people now as high school degrees currently are, the result wouldn’t be to secure the financial future of everyone who magically gained a new bachelor’s degree. It would be to basically wipe out the market value of everyone’s bachelor’s degree, and going forward it would take a master’s or PhD just to get the same benefit on the job market as is currently gained by an undergraduate degree.

It’s important to not confuse the signal with the underlying reality the signal is meant to reflect – and to recognize you can’t change the underlying reality by simply changing the signal. In the beginning of the Great Depression, after worldwide tariffs were employed, food prices in America collapsed as export markets were restricted. A program was put into place prevent new food from being grown, or destroy currently existing food, to try to drive the price back up again. The thinking seemed to be “When the economy was strong food prices were high, so if we can make food prices high then the economy will be strong again.” But that approach got things all wrong – it mistook the signal for the reality.

In the same way, many people have argued that since people with college degrees make more money than people without college degrees, if we can just make it so more people have a college degree by subsidizing the education system, then everyone will make more money. But that, too, is wrong. It’s also mistaking a signal for the reality – and it overlooks the positional goods aspect of the education system. Increasing the number of college graduates doesn’t necessarily give the current benefits of college to more and more people. It may instead only dilute the value of a college degree to those who have it, and further block the upward mobility of those who lack a degree.