Education: Investment Versus Spending
Bypassing market feedback.
Thousands protested in London last week against a proposal to reduce subsidies to education. The plan, part of the austerity measures by David Cameron’s Conservative government, would raise the cap on university tuition from roughly £3,000 to £9,000, or from about $4,700 to $14,000. The measure passed by a small margin.
Under the new law the maximum tuition a British student attending Cambridge or Oxford would have to pay beginning in 2012 would be about $14,000. By comparison an American student attending Harvard today pays over $35,000 in tuition. (Having recently put a son in college, I can tell you that figure is fairly representative of selective liberal-arts colleges in the United States.)
Human Capital
This is my 25th year as a college professor, but I’m still idealistic about what a college education represents. I’m disappointed when a student, particularly a good one, is motivated to study because she wants to get a good-paying job after graduation. Of course, having a regular income is important for happiness, but as one of my respected colleagues once said to me, “A liberal-arts education gives you something to think about when you’re not working.” Indeed, I try to tell my students, especially the freshmen and sophomores, that they should try as much as possible to study and do things in college that are highly impractical because most of them will have to spend the rest of their lives being very practical. (A friend of mine recently told me of a Stanford MBA who said the most valuable course he took in college was art history.)
At the same time, I recognize that the market for skilled labor, like the market for anything else, is a matter of supply and demand. The choice of whether to major in chemical engineering or Renaissance literature or economics has to take into account not only what you love to do and are good at (these typically overlap), but also what you are willing or not willing to give up to do those things.
As the great Austrian economist, Ludwig von Mises, often pointed out: “There is only one efficacious way toward a rise in real wage rates and an improvement of the standard of living of the wage earners: to increase the per-head quota of capital invested.”
So investing in capital, in this case human capital, is essential to promote one’s material well-being. But, as Mises well knew, the capital invested has to be appropriate to the particular circumstances of time and place.
Appropriate Investment
There are many horror stories of where it wasn’t. Jane Jacobs relates how, for example, in the early 1960s the Rockefeller family tried to build a factory in India to produce “intrauterine loops” for birth control. There were at least two things wrong with the project, however.
First, as Julian Simon tirelessly argued, human intelligence is the “ultimate resource” and the fountainhead material progress. Thus instead of investing in birth control, it might have been better if the Rockefellers had bolstered their investments in things that boost the production of food, housing, and medicine.
Second, and Jacobs’s main point, the Rockefellers tried to build this factory in a rural area. Their intent was to create jobs and alleviate poverty outside the large cities. However, in the countryside such things as the proper tools, electrical and other infrastructure, and the knowhow to repair equipment were hard to find. Many small things went wrong because they lacked the local knowledge of the communities they were trying to help. Eventually, after trying for a year and spending a lot of money, they moved the factory to a large city, where it was up and running in six weeks.
As a largely a private humanitarian venture (although it had the blessing of the Nehru government), it had something that a government program usually doesn’t: a relatively hard budget constraint. Even though the benefactors were Rockefellers, competition for scarce investment capital meant there was a bottom line. Without it, there is no telling how long the factory would have languished in the Indian countryside.
Inappropriate Human Capital
So, returning to our subject, when is investment in education “inappropriate”? Well, one might say when it moves some to acts of violence against the innocent. (I understand, however, most of those protesters in London were less violent.)
But State subsidies, even those that use taxes to cover the difference between tuition and the expense of running a university, are not really investments at all. They are expenditures. And what guides political spending on education or housing or just about anything else is usually expediency. Politicians consider rate of return on investment when making spending decisions about as often as they consider moral principles: rarely.
Some could argue that from an economic point of view, subsidizing education is not as disruptive to the market process as, say, monetary manipulation or price controls. But on this point a recent story from the New York Times caught my eye – “China’s Army of Graduates Struggles for Jobs”:
In 1998, when Jiang Zemin, then the president, announced plans to bolster higher education, Chinese universities and colleges produced 830,000 graduates a year. Last May, that number was more than six million and rising.
Many Chinese parents did make financial sacrifices for their children’s education, so universities are not entirely state subsidized. But was the education appropriate to market demand? There have been unintended consequences:
It is a remarkable achievement, yet for a government fixated on stability such figures are also a cause for concern. The economy, despite its robust growth, does not generate enough good professional jobs to absorb the influx of highly educated young adults.
Graduates migrate to Beijing looking for opportunities that match their aspirations but are increasingly disappointed. Ironically, workers with traditional skills have been doing better:
Between 2003 and 2009, the average starting salary for migrant laborers grew by nearly 80 percent; during the same period, starting pay for college graduates stayed the same, although their wages actually decreased if inflation is taken into account.
Like all other goods, the demand curve for education slopes downward. Artificially lowering the price – in China, the United Kingdom, or the United States – is bound to create an excess demand for a university education now and surpluses of increasingly disappointed graduates in the years ahead. If the violence in London (as well as in some parts of California where students were also protesting tuition hikes) is an indicator, the future is not bright.
Comment by Gene Callahan on 14 December 2010:
“Indeed, I try to tell my students, especially the freshmen and sophomores, that they should try as much as possible to study and do things in college that are highly impractical because most of them will have to spend the rest of their lives being very practical.”
Sandy, you are an Oakeshottian when it comes to philosophy of education!
Comment by libra on 14 December 2010:
if our educators were required to take more core credits and fewer impractical electives our educational system would vastly improve. too many students take huge student loans, live nicely and drive nice cars and then with a degree in hand that really prepares them to do nothing–they default. too often–things that come easily mean nothing.. it is the struggle to attain higher education that makes what one attain’s far mor valuable. the nice cushy jobs with union representation will be disappearing as homeschooling and school vouchers become the norm.
Comment by Bullseye on 14 December 2010:
“they should try as much as possible to study and do things in college that are highly impractical”
Knowledge is an economic good. One pursues knowledge if the benefits exceed the costs. The problem colleges have is in demonstrating value beyond money benefits. If students don’t see value beyond money coming from their Education, maybe there isn’t very much.
Nearly all of the important knowledge I’ve accumulated has come from sources other than formal education, like this website. Mark my words, the internet will make much of college superfluous.
On the internet:
1) You get the knowledge you want
Nearly all knowledge is accessible, now even on our phones
2) You’re NOT forced to waste your valuable time temporarily consuming knowledge you DON’T want
3) It’s available everywhere
4) There’s no need to go anywhere, drive anywhere, pay to park, or sit anywhere
5) You’re not forced to suffer the egos of professors that have no interest or skill in teaching and who couldn’t get a productive job if their lives depended on it
6) The knowledge is nearly free
7) You can study from the best minds on the planet at your pace
9) There is no state interference with the curriculum
10) The internet is not forcibly subsidized with taxes
11) Sources of knowledge must compete
12) Teaching styles must compete and we can learn a subject from multiple teachers
13) Knowledge is indexed and searchable by Google
College is an massively expensive monopoly whose days are numbered.
Comment by A Liberal in Lakevew on 15 December 2010:
Sandy of SUNY, please consider: If a college education is frosting on a cake called “formal education”, and it is, then the distortions wrought by “artificially lowering the price” is not inconsistent with the manner in which the layers were prepared before the frosting was applied.
Even bakers’ ovens, and whole kitchens, are subsidized. Foolish parents make so great a fetish of college that the cake is now almost all frosting on account of the feedback mechanism which puts college educated people in control of primary and secondary schooling.
You wrote that “[t]his is my 25th year as a college professor, but I’m still idealistic about what a college education represents.”
Well, it’s time suspect that your idealism is something that you project on to a nightmare. The typical person who is 22 y.o. and just graduated from Thisorthat College has finished a period of education as follows:
Kindergarten: 1 yr.
Primary Schooling: 8 yrs.
Secondary Schooling: 4 yrs.
College: 4 yrs.
Total: 17 yrs.
Yes, SEVENTEEN YEARS of full-time schooling, and perhaps there was another year, in pre-K, too. Most of that time, if not all of it, has been in big, expensive buildings erected at the behest of politicians and bureaucrats with a vested interest in maintaining and extending the established constitutional (read: collectivistic) order, in which most businesspeople, too, have a vested interest. The expense has been enormous, and we must also take into account something called opportunity cost, a theme to which I will return.
So, what does the 22 y.o. know about existence?
Basically nothing.
In fact, for the last four years she has devoted herself to a dilettantish cramming for this or that midterm or final exam of classes that last just three to four months. Once she passes each class, she promptly moves on to the next one, certain to forget within a few years, if not a few months, most of what she’s just crammed into her head, which has been cleaved such that she’s difficult to reason with. She’ll become far more difficult to reason with if she gets a job in marketing or an economics department, almost certain to be Keynesian, or as a government bureaucrat, perhaps pushing greenpreneurship, which is motivated by a desire to treat the symptoms of problems caused…by statist governments. (Subsidized roads, airports, coal fired plants, etc.)
In fact, how is it possible that a person could get even as far as the thirteenth year and still know basically nothing about the brute facts of existence and not be trained to ask the questions which would motivate investigation? For examples: Is there a god or not? Is materialism true? How can relativism be true unless it’s an absolute? Why do so many people think that Christianity is a philosophy of freedom and salvation even though it’s clear that Joshua was a murderer and a plunderer, and Yeshua, a clever knave who solicited homicide in the environs of Jericho, a site of Yoshua’s crimes? Is the physics textbook, which was written to be practical, correct to claim that “the force of gravity” is directed “downward”?*
Worse still, most people who have finished only high school haven’t the least clue how to proceed systematically on any of these questions. Still less do they have the capacity to support themselves in a very complex world that punishes those who are suspicious of the status quo…and seek to alter it.
Now suppose that when our 22 y.o. graduate of Thisorthat U. was only 20, she began to realize that she doesn’t know much about the world, and, in fact, doesn’t really know what she wants to do or should do for a living. So she thought to herself,
“I’ll go to law school!”.
Yes, Sandy, the demand curve for education slopes downward, but it’s illicit to slant the debate through the juxtaposition of the words “college” and “education” and “university”, as if the middle term is entailed by either of the other two. Bullseye understands quite rightly that it does not. When statist government stops sponsoring and subsidizing colleges–like yours–they will shrivel by virtue of their own incoherency, corruption, and uneconomic character. Minds will seek and develop better means for discovery.
Now, Bullseye is wrong to suppose that college holds a monopoly on the vanguard of knowledge. Bullseye’s own list is sufficient to show the idea unfounded, although perhaps this conclusion would be undermined somewhat if most of Bullseye’s sources are colleges and the output of people who worked for colleges.
And “On the Internet…Sources of knowledge must be complete”? Ha! Few sources such as those found via Internet as as likely to be so biased and incomplete. The “People’s Physics Book”, just published in 2010, is an example. Also, the Internet has been subsidized by the borrow and spend racket of government since the days when its germ cells were developing. Even now Uncle Sam is a major sponsor of carriers’ revenues, as I first discovered while working in business development at MCI, and, following an acquisition, at WorldCom.
Still…
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*Consider three situations:
(i) You standing on the surface of Earth, where gravitational acceleration has a magnitude of 9.8 m/s/s, even when you are standing still, as you are in (i).
(ii) You standing in Einstein’s space elevator, which is accelerating like a rocketship at 9.8 m/s/s in a direction which from inside the elevator seems like “up” in the usual manner of an elevator.
(iii) Standing inside a space station shaped like a wheel and which is spinning, to make it feel like you’re on Earth, such that the vector of centripetal acceleration, which is directed toward the hub, has a magnitude of 9.8 m/s/s for objects at the rim of the wheel.
In each case the sensation of force is the same. Same magnitude. Same direction. It’s directed up through your feet to your head. Also, I wrote “the force of gravity” to emphasize another popular absurdity. If “the force of gravity” is called weight, and if objects of different mass have different weights when measured at a given point on Earth, then how can it not be true that there are multiple forces of gravity on Earth?
If mg is the same for all objects, which we know is not true, then F/g = m must be a constant for all objects, for we know that g is a constant. Something’s gotta give.
So, the notion of “the” force of gravity is badly misleading as used in the typical people’s physics book. Just to make sense of the concept referred to by the term gravity one must explain how it is that the force of gravity just happens to be tailored to each object such that gravitational acceleration is the same for all objects, such as your body, my body, and the bodies of unemployed coffeeshop college grads in China whose bitterness will motivate recidivism to Maoism and Marxism.
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Liberalism is the philosophy of freedom, and a person who harbors the philosophy of freedom is a liberal.
Comment by A Liberal in Lakeview on 15 December 2010:
Let’s not make the philosophy of freedom a freedom to change the spelling of words without explaining why the variation is warranted.
Comment by A Liberal in Lakeview on 15 December 2010:
Sandy also wrote,
Reads like a blanket condemnation of SUNY. And, OK, some of the protesters were “less violent”, but why help them to clean their reputations? Those reactionary conservatives in London and California were protesting to maintain a redistribution racket by which the schools are financed. They hardly deserve your scrubbing.
They remind me of ___ ________, genteel co-owner of the _______ ____ baseball team. ___ ________ is an investment banker who is trying to get the State of ________ to underwrite bonds to finance renovation of _______ _____, of which ________ is a co-owner.
_________ LLC
http://www._________.com/About__________/Management.aspx
Fixed Income Expertise. Market Leadership.
Innovative. Insightful. In_______
Maybe those angry protesters, too, will learn to be genteel, to be meek, one day, thereby discovering an approach to getting what they want from government without setting off too many alarms among the flagwavers. But let’s hope not, at least until they give up their collectivism.
At any rate, in London those kids were another example of the old adage that the customer is not always right. And they are customers, indeed. I wish that I could attribute the next statement to Clarence B. Carson, but, alas, I cannot:
COMMUNISTS SEIZE PRIVATE PROPERTY TO ACHIEVE CAPITALISM.
Comment by Robert on 19 December 2010:
Where to start…hmmm. Of critical importance to the discussion is a common defintion of “education”. I turn to a classic liberal meaning of education which certainly provides a distinction with a difference between “education” and “training”. I recommend “The Theory of Education in the United States” by Albert Jay Nock, as the point of departure for discourse. That compilation of Page-Harbour Lectures, delivered at the University of Virginia in 1931, provide a framework for first understanding the problem, then providing ideas for remedy.
Economics aside – the economic value of F = ma is unknowable – one must first come to grips with the distinction between education and training, as argued by Nock. Only then can the discussion proceed toward proposed remedies to a system of “education”. State sponsored literacy training (aka K12) is not education; not all humans are educable, therefore matters of epistemology worthy of preservation should not reside in the hands of the mob (reality TV anyone?).
Nock gives classical liberal education and vocational training their due in his lectures. His ideas are clear and his observations regarding the distinctions, quite cogent. Education is the means to develop civilization…training is the means to develop material well-being. There is certainly some point of intersection between the two concepts, however true “education” is necessary and sufficient for forward progress of the human condition.
Material well-being may act as an accelerant to education of a larger percentage of able human beings. Believing that every human being is educable and that, by natural law, has rights to resources, at no cost, is a classic fallacy of collectivism. The tragedy of the commons has no better example than this failed social experiment called “public education”.
Read Nock, if you dare understand the fallacies of public education. Read Dewey if you dare understand the machinations of our modern indoctrination camps. Discussion of “investment versus spending” is useful only if the assertion “more is better” can be proven true, particularly for the uneducable.
Comment by Drik on 10 January 2011:
If the price is going down, that is probably appropriate since both the quality and value seem to be also.
Used to be that the real value of the advanced education was the chance, for a relatively short period of time, for the exposure to a ready collection of really bright minds and a few with wisdom. An education actually trained a person on how to think.
Now the advanced degree is almost duplicated by the deluge of information on the internet and the training for filtering out the chaf and garbage is almost non-existant. Hard sciences train a person how to function in their field. The softer ones, how to regurgitate the info.
Both are our loss.
Comment by Sandy Ikeda on 21 January 2011:
CORRECTION: According to my friend, a class in the Art History department was the most memorable course the MBA student took in graduate school, not in college.