Caplan has no illusions that his argument will be widely embraced. Most people have heard all their lives that spending more on education is the best way to improve the futures of our children and the prosperity of our country, and they serve as Baptists in the political process for the well-organized bootleggers who profit from education spending.
Politicians and organized groups, including educational professionals, routinely justify government support for activities benefiting them by claiming they create positive externalities: social benefits that are not captured by those providing them. Thus educational professionals argue that, without government support, less education will be provided than is socially desirable. Unfortunately, even when there is a positive externality, it is often used to justify government spending that creates a more-than-offsetting negative externality: social costs that are ignored by those benefiting from the spending. Caplan’s case against the existing level of educational spending is that it creates negative externalities by motivating people to increase their education even when the social costs exceed the social benefits. The book makes this case more effectively than it has been made before, by considering the theoretical and empirical implications of applying the concept of signaling to education.
Signaling / Signaling occurs when an individual’s actions communicate useful, if only probabilistic, information about himself that is not otherwise apparent. For example, how people dress, the conspicuousness of their tattoos, and whether they support the arts signal information about them to others, such as potential employers. The amount and difficulty of the formal education a person has acquired is obviously such a signal and was mentioned by the Nobel Committee in 2001 when announcing Michael Spence’s Nobel Prize in economics for his work on signaling.
Caplan considers whether an individual benefits from the signal a good education sends to prospective employers, and whether that signal is an accurate measure of the social benefit of that education. He provides plenty of evidence that getting a good formal education yields the educated person a very attractive financial return. For readers interested in how to make the best use of educational signaling to increase their financial payoff, his Chapters 4 and 5 are worth the price of the book.
But Caplan also wants to know whether this individual benefit also benefits society. The answer depends on how much it contributes to a student’s productive characteristics as opposed to how much did those characteristics preexist his education and contribute to his educational achievements.
Economists and educators have always recognized that productive characteristics both facilitate and are facilitated by education. The widely held view, according to Caplan, is that the dominant direction of educational cause and effect runs from education to productive ability. He refers to those who hold this view as “human capital purists.”
Contrary to the purists, Caplan argues that empirical research supports the alternative view that education is more a signal of the productive characteristics students bring to their education than of the productive abilities they develop because of their education. The most obvious characteristic students bring to school is their intelligence, which most agree cannot be increased much, if at all, by education. Obviously, the more intelligent can compile an impressive educational record that sends a useful signal to employers on both their intelligence and what they have learned in school. But except for strongly applied studies such as accounting, engineering, and pharmacy, employers are more interested in prospective employees’ ability to learn rather than in what they have already learned. One might argue that, this being the case, a lot of time and money spent on education could be saved by simply giving prospective employees an IQ test.
However, Caplan notes, there are legal limitations on requiring potential employees to take IQ tests. More importantly, intelligence is not the only thing employers are looking for. They are also interested in a person’s willingness to work hard and to adhere to prevailing social norms. Completing a degree also signals information on these characteristics. A person may have an IQ of 150, but if he doesn’t go to college, his apparent lack of diligence and unwillingness to do what is expected of highly intelligent people are red flags to employers. This explains why high-school graduates earn more than dropouts, even if the latter pass the tests necessary to earn a General Equivalency Diploma. As Caplan says of the GED, “Its chief function is to signal employers, ‘I have the brains but not the grit to finish high school.’ ” There is a “sheepskin effect” to education signaling seen in a sharp income increase from staying in school long enough to receive a diploma. Tenacity and “fitting in” may not be as strongly determined by heredity as intelligence, but by the time a person reaches high school it is unlikely these characteristics will be improved by forcing unmotivated students to sit through hours of what they consider boring lectures.
Caplan recognizes that education signals useful information to employers on the productivity of potential employees. That information, in turn, will affect those workers’ salaries. He finds, however, that most of the productivity signaled by formal education is not the result of the education itself but of the characteristics students bring to their high school and college experiences. He illustrates his argument with the analogy of a sculptor and appraiser:
The sculptor raises the market value of a piece of stone by shaping it. The appraiser raises the market value of a piece of stone by judging it. Teachers need to ask ourselves, “How much of what we do is sculpting and how much is appraising?” (Caplan’s emphasis.)
Teachers do some sculpting and appraising, but careful and multiple empirical approaches point to what Caplan labels “a reasonable estimate of 80%” as the “share of education’s effect on earning and employment [that] stems from signaling” or appraising. That leaves 20% as education’s sculpting contribution.
Negative externalities / Without using the term, Caplan gives an example of the type of negative externality educational signaling motivates with the following:
The person who gets more education, gets a better job. It works; you see it plainly. Yet it does not follow that if everyone gets more education, everyone gets a better job. In the signaling model, subsidizing everyone’s schooling to improve our jobs is like urging everyone to stand up at a concert to improve our views. Both are smart for one, dumb for all.
Everyone standing up at a concert is a commonly used example of a prisoner’s dilemma, in which all are worse off when each does what is in his best interest. It is also an example of the negative externalities each creates when trying to increase his benefit by imposing an uncompensated cost on everyone else. The result is everyone ends up worse off in futile attempts by each to become better off.
In the case of education, the higher salary from getting one more degree makes it financially attractive for students, even though the social cost of the additional education is greater than the social value it contributes by increasing productivity. This can motivate wasteful spending on education even if students or their families are paying the full cost. It is a larger problem when government is paying for much of the cost, which motivates more students to get—or attempt to get—a higher degree to signal qualifications greater than justified by their natural abilities and what they learn in school. As more people try to signal their productivity with more education, employers will find the signals becoming less impressive and students will find it less beneficial to send them.
Yet this doesn’t reduce the appeal of additional education, even to weak students. The student who doesn’t try for the extra education is now signaling to employers that he cannot even send a weak signal. So more weak students try for degrees they don’t complete, which means the signal they send is even weaker. Furthermore, those with the ability to earn an extra degree find that the signal they now want to send requires education beyond that degree. As in Caplan’s prisoner’s dilemma example of standing at the concert, as educational signaling motivates students trying to get the edge on other students by getting relatively more education, it takes more years in school for all students to maintain the value of their signaling. Yet dropping out of this educational race would be the equivalent of sitting down at the concert while others continue standing; by sitting, a person would no longer be imposing a negative externality on others, but the harm imposed on him by those still standing would be greatly increased.
Caplan recognizes that there is social benefit from signaling information on students’ natural abilities that are otherwise difficult to observe. But he also recognizes that even a large total social benefit from educational signaling doesn’t indicate much, if anything, about its marginal benefit. If Caplan is correct that “employers’ knowledge of worker quality would be essentially identical if everyone had one less degree,” then he is also correct when saying that “in economic jargon, the marginal social benefit of signaling is roughly zero, even though its total social benefit is substantial” (Caplan’s emphasis). The “roughly zero” is a hedge, but not a troublesome one. Before the marginal social benefit of educational signaling reaches zero, it is sure to be less than its marginal social cost, in which case reducing that signaling by spending less on education is socially beneficial.
As more people try to signal their productivity with more education, employers will find the signals becoming less impressive.
The marginal cost of providing this signaling is enormous. Government spending on education in 2010–2011, including federal assistance to individuals (and removing double counting), was over $960 billion, significantly higher than the $700 billion in the military budget. According to Caplan, “If half [of that] is wasteful signaling, we are wasting [almost] half a trillion dollars a year.” Even with this optimistic assumption on signaling waste, taxpayers end up paying $960 billion for $480 billion worth of education. That education does create some positive externalities, which are continuously being used to justify the $960 billion paid in taxes. But those benefits are not worth anywhere near the $480 billion needed to cover the negative externalities on taxpayers plus those on large numbers of students. As he writes:
My own calculations incorporate multiple positive externalities. What low and negatives returns show is that standard pro-education arguments are incomplete…. Counting everything that counts, industrial policy for education has clearly gone too far. The United States—and probably the rest of the world—is overeducated.
Conclusion / He ends the book by reemphasizing what few people have considered, much less accepted:
Academic success is a great way to get a good job, but a poor way to learn how to do a good job. If everyone got a college degree, the result would not be great jobs for all, but runaway credential inflation. (Caplan’s emphasis.)
From the very beginning of his book until the end, Caplan makes it clear that he believes the net social benefit from education would be larger and the world would be a wealthier place if we would “cut the subsidies” to education or “slash government subsidies” to education. And government subsidies are not the only way the cost of education has been reduced for students. Although he does not mention grade inflation, it has greatly reduced the study time required by students to send what used to be an impressive academic signal, but one that has been significantly reduced in value. In other words, teachers are failing at their most important job: accurately appraising student performance.
Caplan devoted six years to making a powerful case for significantly reducing the money spent on education, even though this would threaten the career he loves. Why did he do this? Because of a “blend of idealism and cynicism.” He says he is “duty-bound to blow the whistle on my industry’s vast, ongoing abuse of the taxpayer.” But he is also convinced that “even the most intellectually compelling arguments won’t convert the typical voter to distasteful conclusions.”
Having written The Myth of the Rational Voter in 2007, he sees no threat from voters. But there could be a threat that he has not considered from private markets and rational voters. The Wall Street Journal ran a recent article on the rapid growth of one-year private alternatives to college that focus on vocational training. Expanding such opportunities could find students voting for them with their feet, a means of voting that encourages rational consideration of competing alternatives.
This should not worry Caplan, however. Even if his educational recommendations were implemented fully, there would remain academic positions for individuals with his intellectual ability, not to mention his willingness to work hard. The only concern he might have is his inability to accept the prevailing wisdom on an increasing number of topics.
