Bryan Caplan on the Signaling Theory of College

Bryan Caplan is a popular blogger and economist at George Mason University. Caplan was recently interviewed on EconTalk about the value of a college education. Short version: a college education doesn't have much intrinsic value. I'm simplifying a bit, but only a bit. Caplan argues that higher education is more important for sorting out the smart and hard-working from the rest than in teaching anything specific.  Of course, I might very well say that. I skipped out on grad school and went into the workforce precisely because I was convinced that more school wouldn't make me any smarter, or teach me anything useful. Of course, I also hated academia.

The signaling theory of education is nothing new to me. I've certainly pooh-poohed American higher education on multiple occasions here. However, it is easy to go too far. Caplan is too careful to say one learns nothing in college. What he is saying is that overall, and for the most part, specific skills are less important than intelligence, the capacity to work hard, and a willingness to play by the rules. These are the things college selects for. These are also correlates of success in America and similar societies.

On the other hand, I can certainly point you to plenty of disgruntled college graduates who cannot readily find work because they have the wrong degree. So there is a sense in which college functions in this signalling fashion that Caplan posits, but there is another sense in which employers, particularly in the much-vaunted STEM fields, really do expect college graduates to know things, very specific things. Personal experience suggests to me that this tendency is perhaps somewhat stronger than necessary to ensure competence, but one needs to understand the difference between ability and skill, or potentia and actualia. Since Caplan is an economist, perhaps he can look at the opportunity cost of hiring an able but unskilled graduate.

[Caplan] The human capital story says that you go to school; they actually teach you a bunch of useful jobs skills; you then finish and the labor market rewards you because you are now able to do more stuff. The signaling model says, no, no, no, no; that's not what's going on. What's going on is that people go to school; they don't actually learn a lot of useful stuff; however, the whole educational process filters out the people who wouldn't have been very good workers. So people who are lower intelligence, lower in work ethic, lower in conformity--those people tend to not do very well in school. They drop out. They get bad grades. And that's why the labor market cares. It's not that the school actually transforms you to a good worker from a bad worker. It's that the schooling, the school puts a little sticker on your head--you know, Grade A student, Grade B student, Grade C student.

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[Interviewer] I have a natural skepticism about it. And I think a lot of labor economists do as well. And the reason is that it's an extremely expensive signal. So, you are saying, for 4 years, I give up the chance to work; I pay this tuition, whether it's $5000 or $10,000, or $30,000, or $40,000--at a private university. And for that enormous amount of money, I prove that I am a good worker and I get a sticker on my head. Wouldn't there be an easier, cheaper way to get the sticker? If all it's doing is measuring ability, this 4-year slog that's extremely expensive? That's the best way that people have come up with to get the sticker?

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[Caplan] Yes, it's an arms race. And the fact, if it is a fact, the private return is high is really a very bad argument for pouring more money on. Now, the other point, as we were saying, the return that you should be looking at in terms of this argument of not being able to borrow against your future earnings--what you are looking at is return for the marginal people who are just on the edge of going or not going. And as we've seen, the return for those people is actually not, is actually quite mediocre. And then finally if you adjust for ability and everything else, really I would say that once you appreciate signaling you realize that, so we have subsidized education way past the point of [?] returns. So by my calculations, actually, the social return to education is now quite negative. And it would be a much better policy to drastically scale it back, so rather than encouraging more people to go, I think it's better to discourage them from going or at least to encourage them less. So in fact--so, the biggest policy implication that's going to come out of my book is we just have way too much education. I call this the white elephant in the room. There are way too many people going to school, maybe not from their own selfish point of view, but certainly from a social point of view to go and pour more money on this really is just throwing gasoline on the fire. And we need to do less of it.

h/t DarwinCatholic