It’s an investment, it’s a comsumer good, it’s a salad dressing…

I’ve been reading with interest the recent back and forth about university education (particularly education in the arts), and whether or not it’s a consumption good, an investment in your future and whether possession of a BA qualifies you for damn dirty hippie status (and whether that’s a bad thing).  And since I expect to be otherwise engaged for much of the next week, I thought I’d chime in now.  Though I’ll be addressing the issue from my preferred perspective of what government should do about education.

I think the debate so far is emblematic of one of the problems with contemporary education policy, while everyone agrees education is a good thing, people have a lot more trouble agreeing on why.  Just what is it that education does for people?  And what should it be doing for people?  Only once we have have an answer to those questions can we even begin to figure out whether the pursuit of education is a social good, and what (if any) government interventions are appropriate in encouraging it.  But education is generally discussed as if it were some magic talisman of middle-class prosperity, which is a bit frustrating.

So here’s a list of what I see as the effect education could have, and what those effect simply for ideal government policy.  Note that these are not mutually exclusive, I suspect every degree has a mix of these traits.

1: Consumption Good: University is an enjoyable experience for a lot of people.  That’s not even counting the lavish accommodation and puzzling availability of sports teams that seem to go with many American universities.

2A: Investment Good – Human Capital: This is the classic “road to wealth” story.  You go to university to get skills that let you get a better job.

2B: Investment Good – Signalling: In this story a degree doesn’t teach you anything, instead university is like a long test.  Getting a degree is passing the test, proving that you have the combination of intelligence, conscientiousness and other employer-desirable traits that are necessary to acquire a degree.  Incidentally, this explanation best predicts a world in which employers care more about the fact you have a degree than what you majored in.

2C: Investment Good – Contacts: This is the “who you know” story, going to university lets you meet people who can give you lucrative opportunities in the future.

3: Social Good: Getting a degree makes you a better citizen or in some way enhances society in a non-pecuniary way.

The major reason for the government promoting or actively subsidising an activity is positive externalities: Person A does something that benefits people other than person A.  If those other people aren’t in a position to pay person A for indirectly helping them out (remember this point, it will matter later) then person A will end up doing less of the activity than is socially optimal.  The standard solution to Pigouvian subsidy – the government subsidises the activity so Person A’s incentives are aligned with society’s interests.

So how do our stories above stack up against Pigou’s criterion?  Unsurprisingly 1 implies no need for subsidy, there’s nothing wrong with consumption, but there’s also no call to subsidise it.

What may surprise some of you is that 2 implies no need for a subsidy either, not even 2A.  This is where that point I asked you to remember earlier comes into play (you did remember to remember it, right?).  You see, if your actions benefit others, but they pay you for the privilege already then there’s no externality – the market has already taken care of it.  Doctors benefit society, but they get paid well because of that fact.  So if all a particular degree does is make the possessor richer, then the government need not get involved.  But wait, you might say.  Some careers have value that is not adequately captured in the market, what about degrees that lead to those careers?  Well, while there might be a market failure there, but the failure in in the labour market, not the education market.  The subsidy should be for hiring people in the relevant field, not studying in the relevant field.

The one area where government subsidy is warranted is 3.  If society is better off in some non-market way then the market will under-value the degree, and there’s a case for govenrment subsidy.

But this is just the start of course.  The real question is, what parts of education have this social good?  Does knowledge of the Canon, mathematical ability, an appreciation of history benefit society, and if so how much in each case?  I don’t know, but this would be an interesting discussion to have.  For my part, I’m reminded of an argument Steven Pinker made that economics, evolutionary biology and statistics were the more important things to learn because they challenge some of the native human cognitive biases.  And what could be more socially beneficial than learning how to think better?

In nay case, I think we’d all be better off if we had a more explicit discussion about what we want out of universities.  Only then can we figure out how to get it.