Bryan Caplan’s The Case Against Education lays out a strong argument that the financial returns to schooling–which have been increasing dramatically, year after year–are about 80% returns to signaling rather than returns to actual skill-building. In their new book, Cracks in the Ivory Tower: The Moral Mess of Higher Education, Georgetown University philosopher Jason Brennan and Independent Institute economic historian Phillip W. Magness carry this a step further and look into the incentive structure of higher education (I discuss it here).
With every passing day, I come to be more and more persuaded that signaling explains a lot of the return to schooling. Even if it isn’t 80%, I’m pretty sure it’s substantial–at least substantial enough to inform higher education policy. Here are three pieces of evidence from informal classroom surveys persuading me that the return to schooling is mostly signaling rather than skill-building.
Discounted Present Value. Albert Einstein is alleged to have said that compound interest is the most powerful force in the universe. People graduate from high schools around the country without understanding compound growth or its close financial cousin, discounted present value. Quite simply, a dollar today is worth more than a dollar later, and we can use interest rates to discount future payments and find out how much a future payment is worth right now. The sum of the discounted present value of future cash flows–or just future benefits, adjusted for risk–is an asset’s value.
What’s a 1040? I asked my students who remembers having filled out a 1040 as part of a school assignment. Figuring out how to do your taxes seems like a pretty straightforward skill. I was fortunate enough to have a “career” unit as part of 8th grade, and I remember filling out a 1040, looking at the parts of a W2, and other stuff. It surprises me that an enterprise claiming to provide its customers with actual skills doesn’t include a unit on taxation.
Foreign language requirements. As I have argued, and again following Caplan, foreign language requirements don’t make as much sense as a human capital model would suggest. Most Americans would have to travel hundreds of miles to find somewhere where they aren’t surrounded by native English speakers. The return on investment in foreign languages just isn’t that high, even though it is useful as a consumption good.
If schooling is signaling, then we are throwing good money after bad by subsidizing it. Signaling basically means that schooling is an arms race, which means it’s pretty easy to have too much. Schooling is conspicuous both for what schools teach and for what they don’t, and as much as I love learning, I’m pretty sure it is not a public good that is worthy of public subsidy. In preparation for a trip to Denmark, we got the fancy premium family version of DuoLingo a few months ago. The benefits almost all accrue to us, and it would be rather presumptuous to forward my DuoLingo receipt to you for reimbursement. It’s time to arrive at the same conclusion about schooling.
Art Carden is Professor of Economics & Medical Properties Trust Fellow at Samford University, and he is by his own admission as Koched up as they come: he has an award named for Charles G. Koch in his office, he does a lot of work for and is affiliated with an array of Koch-related organizations, and he has applied for and received money from the Charles Koch Foundation to host on-campus events.
READER COMMENTS
Richard W Fulmer
Mar 13 2024 at 10:29am
Unfortunately, I think that Caplan is increasingly correct. There was once a time in this country in which a high school diploma combined with a decent GPA really meant something. At a minimum, it meant that the bearer could read and write well; do basic and intermediate mathematics; had a good grasp of history, biology, and geography; and, most importantly, could be taught. Today, a high school diploma means nothing of the sort.
To distinguish themselves from credentialed incompetents, able students could obtain college degrees, which conveyed all that high school diplomas once implied.
Unfortunately, bachelor’s degrees in a non-STEM subject quickly became as worthless as high school diplomas. So, advanced degrees were required to convey basic competency.
Now, advanced degrees in anything other than STEM subjects are all but guarantees of indoctrinated toxicity.
steve
Mar 13 2024 at 12:27pm
What metrics would you offer to back this up? On international test scores the US has improved over the years. Anecdotally I am willing to testify that kids graduating from high school in the 70s arent any smarter or better educated than kids now. There were terrible schools back 60 years ago just like there are now and the same with terrible kids. Case in point, I was in the first class at my high school to have calculus offered. Only 4 of us took the course with a high school of about 3000 students. Now calculus is a pretty standard offering and lots of kids take it. Our local school also offers statistics which was not a choice when I was in high school.
Wife and I have been involved in local high school forensics for about 15 years. The kids are pretty sharp. Our country has a very nice vocational school where i have been asked to participate on panels a couple of times. They offer robotics, auto repair, welding, food prep, medical technology, child care, carpentry, law enforcement courses, etc. In my high school and everyone in my area you had shop courses that were much more limited in nature.
Steve
Richard W Fulmer
Mar 13 2024 at 1:23pm
The federal government’s National Assessment of Educational Progress:
https://nces.ed.gov/nationsreportcard/
john hare
Mar 13 2024 at 6:02pm
To illustrate your point a bit, I repeat my story. I dropped out of the sixth grade in 1969. I went back to night school in 1976. I took four classes in four nights with 20-30 other students that had dropped out of 10th, 11th, and 12th grades. Most had been in class within the last three years against my seven years from being in class. I was ahead of all of them and passed a GED before finishing that semester. To your point, this was 48 years ago that around 100 high school dropouts were behind one that had dropped out of elementary school.
I thought that meant I was smart, possibly brilliant and it took years for me to realize that I wasn’t that smart and that I was just in class with people that had been warehoused instead of taught. To repeat, this was 48 years ago that I was in class with high school dropouts that were partially to actually illiterate. Partially to actually innumerate, and with little sense of history or geography.
So this is not a recent phenomenon.
steve
Mar 13 2024 at 6:31pm
My link goes to the log term NAEP scores. AS I noted, I assume you didnt actually read the report, it shows that scores have improved markedly from what they were 50 years ago. There has been a recent drop probably due to covid but that is expected to revert.
https://www.nationsreportcard.gov/ltt/?age=9
Let me add numbers to the calculus claims since arguing by assertion is always weak. In 1970 a total of 14,000 students in total took the advanced AP AB and BC tests. In 2018 it was 450,000. The AP statistics exam didnt even exist until the late 90s. Also note that the calculus exam is now more difficult since everyone now has graphing calculators so the tests didnt need to be as process oriented as they were in the 60s and 70s.
https://opus.govst.edu/cgi/viewcontent.cgi?article=1000&context=theses_math
Richard W Fulmer
Mar 13 2024 at 7:58pm
You’re right, the downturn is COVID and post-COVID. Reading scores have been somewhat flat, though (with the exception of COVID) upward, while the improvement in math scores has been more marked. So, good news.
diz
Mar 13 2024 at 11:27am
The question at some point becomes “what are you signaling?”
I think in certain regions of the country and in certain professions an Ivy League degree may make you a less desirable hire than a candidate from a nearby state school. If you add certain coursework, activities and pronouns even more so.
As the admissions processes of “elite” institutions become less merit-based and A grades get handed out like candy on Halloween the signal of “this is a person of exceptional merit and achievement” is made even weaker.
steve
Mar 13 2024 at 11:30am
I dont know the percentage signaling should have either but I am not sure why it is seen as such a negative. I need my people to have actually learned stuff in school but I just as much or more know that they have some discipline and can continue to learn. I need to know that they have some ability to work with others. I also know that a certain amount of life experience makes for a better employee. So if they dont go to school for 4 years after K-12 they need to do something similar which will give me the same signals, while also acquiring some needed science, math and writing skills.
Steve
Kevin Corcoran
Mar 13 2024 at 5:01pm
It’s viewed as a negative because signaling (or competition for distinction more generally) is a zero sum game. X reliably conveys a signal to the degree that X is not widespread – and if X is universal, then it no longer serves any ability to distinguish one person from another. If college degrees are rare, knowing that Bob is a college graduate says a lot. If everyone has a college degree, knowing that Bob is a college graduate doesn’t provide any useful information. More importantly, status and distinction are zero-sum games. In most areas of the economy, competition is good because competition is taking place within a positive sum game (trade, market economics, etc), but in a zero sum game, competition is socially wasteful, in a way Thomas Frank described as The Darwin Economy. Trees compete with each other for sunlight by growing taller than the surrounding trees – and if all the trees expend a ton of energy to grow twice as tall as they currently are, the end result is that every tree is in the same position they were in before, and all that energy was just pure waste. In the same way, if everyone spends twice as much effort trying to make their credentials twice as shiny to send a better signal, the end result is that everyone is in the same position they were in before, and all that effort that was sunk into the pursuit of the credentials is pure waste.
Over the last several decades, policymakers noticed that people with college degrees had better outcomes than people who didn’t. And, unable to distinguish between metrics and reality, they decided from this that if everyone had a college degree, then everyone would get the same improved outcomes. But making degrees more widespread only serves to lower the value of any given degree, while pushing the degree-requiring barriers to various careers even higher. Bryan Caplan touched on this in his interview about his book in Vox:
Kevin Corcoran
Mar 13 2024 at 5:05pm
Re: The Darwin Economy, it was Robert Frank, not Thomas Frank. Clearly I need more coffee (he says, as he continues to look for any excuse to drink more coffee).
steve
Mar 13 2024 at 6:45pm
If every e went to the same university/college, then this makes some sense. They dont. Not everyone graduates. Not everyone graduates in 4 years. So as an employer signals are layered, and at least for me and others with whom i have talked over the years, pretty useful. So, did they go to college, did they graduate, how many years did it take, which university did they attend and then what did they major in and how well did they perform. If you are lucky you get good reliable personal recommendations.
BTW, the Caplan quote is funny. There were a ton more manual labor jobs available in 1945. Of course you would prefer 1945. It is fascinating that Caplan knows moore about hiring people than we who actually do the hiring.
Steve
Kevin Corcoran
Mar 13 2024 at 8:02pm
All of these things and their implications for the signaling model are discussed in significant detail in Caplan’s book. But that aside, even if all of these things had the implications you seem to think about the signaling model (though they don’t), none of what you said actually addresses the point I was making, which is about how competition in a zero-sum game like signaling is useful in individual instances, but the overall process is still socially wasteful. Saying that you’ve found it useful in individual instances is just being a step behind in the conversation.
Again, you missed the point. The point is that jobs that would have been easy to get as a high school dropout or with a high school degree are now almost impossible to get without a college degree. That’s why the comparison Caplan makes isn’t focused on manual labor jobs, it’s on things like nursing. Scott Alexander made similar observations:
So it’s not about how there was lots of manual labor in the past. Back then, jobs like nurses, firefighters, and police officers were also easily available to people without degrees – and now, because so many more people have degrees, that’s no longer the case. Saying “but there were more manual labor jobs back then” completely fails to engage the actual point.
First, where did Caplan claim this? Second, I’ve done a fair bit in the hiring space myself, and what he says absolutely rings true with my experience as well. But your mileage may vary.
steve
Mar 13 2024 at 9:07pm
Alexander’s comment and what you are talking about are two different things. You could be a nurse in 1945 without much education because you didnt need to know much and there wasn’t much you could actually do. There were no ICUs, no invasive procedures, IV infusions were rare. Nurses changed beds, dressings and gave a few pills, that largely didnt do much. This not only engage the point, it is the point. There was no need for any kind of advanced education. That’s much different than now where we have all of those things and nurses are often in situations where they need to make critical decisions independently.
Caplan seems to want us to hire 18 y/o kids right out of high school and just skip university/college. He seems to assume that all employees are in on a big conspiracy where we decided to ask for college degrees without any reason for doing so. I think its rather that employees have found that signaling useful.
What Alexander says is absolutely true. People who have shown they can do the work should be rewarded whether or not they have a degree. However, when you are hiring if you have two people with no work history then the one who went to the trouble to get a degree sends a better signal than the person who did not. It’s not a guarantee but if you dont have the time, money or energy to keep hiring until you find the right person in many jobs you increase your odds by hiring the person with the degree.
“if you subsidise everyone’s signals, you haven’t changed any relative signals”
But everyone doesnt go to the same school. The signals are all different.
Steve
robc
Mar 14 2024 at 10:39am
Apparently that is starting to happen again with the SIGNAL of being accepted to a top school. Apparently some IT positions are starting to get resumes from 18-19 year olds with “Accepted to MIT” or “Accepted to Harvard” as a qualification mentioned.
It is shorthand for “I am smart enough to go to MIT, but instead of spending $200k on a useless diploma I would rather just start working for you immediately.”
It will be interesting to see how strong that signal is.
john hare
Mar 14 2024 at 7:25pm
It would be interesting to see the results from an independent credentials agency. By which I mean an agency that does not teach, but tests and verifies a persons’ actual ability in a subject. Businesses specify the particular skill series they need, and individuals learn enough to pass the tests for that requirement. Roughly as a GED signifies (supposedly) that one is educated to high school level without actually going to high school. Or Underwriters laboratories as a model for individual skill vouchers.
Credibility would be critical. Also a strong legal team due to pushback.
Matthias
Mar 13 2024 at 8:17pm
Signalling is useful to individuals, yes. That’s why they are willing to pay for it.
But signalling is a relative game, so if you subsidise everyone’s signals, you haven’t changed any relative signals and just wasted a lot of time and money.
Furthermore the gains from signalling all accrue to the individual, and the effect on other people is negative. So if anything, we should tax these activities, instead of subsidising it.
Kevin Corcoran
Mar 13 2024 at 8:39pm
Yes, this is exactly the point. Steve, for some reason, is writing as if Caplan’s argument was that college degrees don’t provide a reliable signal, so in turn he’s going on and on about how such signals can be reliable. But nothing about Caplan’s argument says college is an unreliable signal – that’s totally beside the point! It’s also true that trees growing taller is a reliable way for them to get more sunlight, but to just repeat that simplistic observation in various ways doesn’t do anything to the argument that the process of competition for height among trees is zero sum and overall wasteful for trees in general.
Also, peacock feathers.
johnson85
Mar 14 2024 at 10:42am
Another indication that he is missing the point is that he uses nursing as an example. Nursing school teaches actual skills. It’s basically a vo-tech program. Requiring completion of nursing school to be a nurse is a little different than say requiring a degree, any degree, to be a salesman.
steve
Mar 14 2024 at 9:22pm
My original question was asking why signaling is taken as a negative. So even if it is a zero sum game (I can sort of see that argument now) , it is still useful for both the person going to school and for employers.
“requiring a degree, any degree, to be a salesman.”
The world has changed a bit. We expect that the salespeople for major devices be able to communicate on the same level as the engineers we have working in biomed or my docs in charge of capital purchases who have engineering degrees. When making big purchases they usually meet this need by sending at least one sales engineer plus a tech in the relevant area, say a respiratory therapist when buying ventilators. Sales engineer doesnt actually have to have an engineering degree but they need equivalent knowledge. When the sales engineer isn’t actually an engineer we often call the engineering department directly to clarify details.
Steve
john hare
Mar 15 2024 at 3:56am
Pure signaling is more of a negative sum game. Effort spent on developing the signal is not effort spent learning useful skills or doing productive work.
Monte
Mar 14 2024 at 4:07am
A strong case can still be made for continuing to invest in K-12, but Caplan’s assertions regarding the waste of public funding on tertiary education are compelling. I grudgingly agree with him that those resources should instead be diverted towards vocational training and, I would argue, apprenticeships. Caplan put it succinctly:
BC
Mar 14 2024 at 5:29am
“Signaling basically means that schooling is an arms race”
There is another interpretation of the claim that the higher education premium is 80% signaling. It could mean that universities are rating and evaluating students’ employability, much like a credit agency rates borrowers’ creditworthiness. In that case, schooling would not just be like an arms race. One could not just keep buying more credentials. The arms race phenomena is a product of grade inflation. Inflation devalues the underlying degree/diploma so that one must obtain a degree with a higher nominal value to get the same real value. But, grade inflation is a separate issue from signaling.
If schools just admitted, even to themselves, that their main function was signaling, then they wouldn’t engage in grade inflation because it would harm the quality of their actual product, which is research about each student, just like the product of credit agencies is credit research about borrowers. Also, it’s unclear whether schools should or should not be subsidized if their main function is signaling/research. If research about, say, physics is worth subsidizing as a public good, then why not research about individual students? The knowledge produced about individual students’ qualities is valuable to many potential employers, and it may be economically inefficient for each potential employer to perform their own research. Society as a whole benefits when people are well matched to their jobs and labor markets are more efficient when employers are well informed about applicants’ qualities. Admittedly, one could make an argument that the society-wide benefits are not that great and that the research benefits could be excludable so that universities could be funded by selling research to employers. I say “could be excludable” because excludability would require some mechanism for preventing students/graduates from disclosing their degrees and transcripts to employers on their own.
I think the biggest implication(s) of the signaling model for higher education are that (1) perhaps research about students could be done much more cheaply and in shorter time, (2) courses/tests could be restructured to more efficiently differentiate students’ skills, abilities, and relevant characteristics, and (3) schools should zealously guard the credibility of their research about students, e.g., by avoiding grade inflation. Schools would look a lot more like (a possibly extended version of) the NFL Combine.
Monte
Mar 14 2024 at 2:29pm
Aren’t they intrinsically linked? Grade inflation (Gi), it seems to me, is a signaling device and a negative externality that imposes a cost on above-average students arising from a free rider problem. Gi also has a cascading effect – what some economists have characterized as a “contagion of easy grades” defined as strategic complements among competing universities – and one that elite institutions are plausibly more susceptible to than their lower tier counterparts.
Ron Browning
Mar 14 2024 at 7:02am
Griggs vs. Duke Power Co.
johnson85
Mar 14 2024 at 10:45am
Low key possibly the most socially destructive case ever decided by the Supreme Court.
At least with Dred Scott, there was a question of what would happen if they had taken a moral stand. They could have fomented war earlier or caused the supreme court to stop being relevant if there wasn’t the political will to enforce their ruling and it set a precedent of just ignoring the courts.
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