Friday, February 28, 2014

Three From The Trotskyist Press

Chattanooga Shoo-Shoo is the wonderful headline on top of an excellent article by Bill Onasch in the recent Socialist Action. It concerns the surprising loss in the UAW's efforts to unionize the VW plant. Mr. Onasch recites the events clearly, concisely, and (as far as I can tell) completely accurately. If you want a short intro to the saga, this is the best place to start.

So everybody expected the union to win. Indeed, almost everybody wanted the union to win. Obviously the UAW needs the dues-payers, local Democrats want the organizational capital, and even VW was rooting for the union.

VW? They wanted a "works council," similar to what they have in Germany. I can certainly see why--workers on the floor know a lot more about many details of production than anybody in management. They know more about safety, working conditions, ergonomics, and myriad small inefficiencies. A works council captures that information in a way that empowers workers to fix things and gives them an incentive to participate. It's much better than a suggestion box.

As US labor law prohibits a firm from setting up a "company union," VW invited the UAW to do this for them. The union heartily agreed, and not just because of the dues money. This could represent a value-added service they can provide. In effect, VW was asking the union to come in and help manage the plant.

So what could go wrong? Two things--first, workers rightly questioned why they should be paying union dues to improve management at the plant. The service may be important, but VW should be paying for it themselves--not the employees. I think that's why the union lost--the vote was 626-712.

And second, those evil Republicans weighed in. Tennessee is a major auto producer precisely because it is non-union. And however innocuous, a union beachhead in Chattanooga will scare away future investment in the state. As Shikha Dalmia writes,
This incensed the state’s Republican legislature, which threatened to withdraw an “incentive package” meant to keep this $1 billion facility in Tennessee if workers voted for unionization. What’s more, on the eve of the election, GOP Senator Bob Corker declared that company executives had assured him that failure to unionize would not affect their plans for SUV production, a statement they subsequently denied.
The union is suing for a new election, claiming the Republicans illegitimately influenced the vote. This, of course, assumes that the workers are a bunch of stupid dolts who vote against their own interest just because of a few Republican billboards. Actually, I think the workers voted for their best interest, and if there is a new election, the union will lose by a larger margin.

In January (somehow I missed it) The Militant published an article by Brian Williams on the administrative state. Mr. Williams makes a strong case for the Tea Party program, arguing forcefully that government (especially the federal government) has gotten to big. He cites the five-fold growth in the number of federal employees since 1939, despite only a 2.5-fold increase in population. Further evidence is the increase in the size of the federal register, and the rise in the number of executive orders. If only he'd used the words unconstitutional governance, I'd have mistaken him for a Tea Party spokesman.

Well, maybe not quite--there are a few red flags (pun intended). First, he implies that the meritocracy is a fraud. "Hand in hand with the growth of the administrative state bureaucracy and particularly its various appendages has been a social layer of self-styled 'meritocrats' to run them." Quoting Jack Barnes, he continues “Its members truly believe that their ‘brightness,’ their ‘quickness,’ their ‘contributions to public life,’ … give them the right to make decisions, to administer society on behalf of the bourgeoisie — what they claim to be on behalf of the interests of ‘the people.’"

This is standard, Trotskyist boilerplate. People are completely interchangeable. Only luck differentiates Harvard professor Larry Summers from Joe Schmoe at the corner tavern. But nobody else can believe this--Larry Summers really is a very smart guy. So are most of the other people holding top positions in government or elite institutions. I also don't believe the elites are generally dishonest or slavishly working for the bourgeoisie. But the larger point is correct--and the Tea Party will completely agree. No matter how smart they are, the elites have no right to make decisions for a people endowed by their Creator with the right to Liberty.

And finally comes Mr. Williams' astonishing claim:
Contrary to popular misconception, the revolutionary communist movement is not for “big government,” whether it’s a government representing the state power of the capitalist exploiters or a revolutionary government of workers and farmers. 
The false view has developed as a result of the massive, repressive state that was put in place in the Soviet Union following the counterrevolutionary usurpation of power by a privileged bureaucratic layer led by Josef Stalin in the 1920s.
Mr. Williams seems to suggest that big government can be made to vanish simply by getting rid of the military and law enforcement. Though how a centralized economy is supposed to work without a huge bureaucracy is beyond me.

Still, this is a very novel thesis for a Trotskyist. We've been promised a Party convention in March--somehow I don't think that's going to happen. But if this is the political direction, then Trotskyism is going off in some strange and wondrous directions.

Finally, Solidarity publishes a plea to save the job of Dr. Anthony Monteiro. Never heard of him? Me neither, but he comes well recommended from the Educators for Mumia Abu-Jamal. Dr. Monteiro is an associate professor of African-American Studies at Temple University. Contrary to what his title implies, apparently he does not have tenure. The university has chosen not to renew his contract after 10 years of service.

The article is obviously only one side of the story, and I find it completely unconvincing. It claims that the dean of liberal arts, Theresa Soufas, fired him because she's a racist. This is completely unbelievable--she has been dean at Temple since 2007, and before that served for more than 20 years on the faculty at Tulane University. This is a distinguished career in politically-correct academe, and not one achieved by a racist. As evidence, the article reports "Dean Soufas has said publicly to the Department, 'I do not see a Black Community.'" This sounds like a quote taken totally out of context. It is revealing that the department chair has not come out in support of his colleague. Is he a racist, too?

Two things bother. First, they ding the dean for offering no reason for her action. Absent tenure, the university has a right to terminate contracts for any reason. Further, she is prohibited from discussing it in public. So she's just doing her job.

Second, the article says that not having his contract renewed is a violation of academic freedom. Nonsense--there is nothing in academic freedom that guarantees one a job at Temple University.

And finally, I'm always astonished by the hypocrisy of these groups. Untenured faculty get dismissed all the time. But none of these people ever come to the defense of chemistry or nursing or business faculty. They only speak up for the politically-correct departments, and then only for the trouble-makers.

I'm with the dean on this one.

Further Reading:

Friday, February 21, 2014

Book Review: Arnold Kling's Macroeconomics Book

Psst! The Wizard is powerless!

So claims Arnold Kling in his deeply subversive little book formally entitled Memoirs of a Would-be Macroeconomist, but known in Mr. Kling's blog simply as "my macroeconomics book."

He should know, of course. He worked for the Fed from 1980 to 1986 during the reign of Paul Volcker. He was a worker bee in a very busy office, collecting data, analyzing reports, coding FORTRAN, and doing other things staff economists do. He was close enough to the Wizard to know what was going on, and yet apparently had no position of any power. It's what I'd call the perfect fly-on-the-wall appointment.

So with all that effort, the Wizard stood behind his curtain, tweaking the carefully calibrated dials, turning knobs, pulling on levers and pushing buttons. The monetary machinery creaked and groaned, serviced by the army of economists including Mr. Kling, who oiled it for greater transparency and efficiency. Yet still, despite their best efforts, great clouds of irrational obfuscation issued forth.

Mr. Volcker is widely credited for ending the inflation of the 1970s, but Mr. Kling doesn't give him much credit. He writes
I might argue that it was not Volcker who made the difference [in inflation]. ...What I am suggesting is that the high inflation of the late 1970s may have been self-correcting. It resulted in weakness in the stock market and in housing, which then created severe recessions--remember, the unemployment rate climbed over 10 percent in the second half of 1982. Yes, most economists say that was due to monetary tightening, but I am suggesting that it was due to financial dynamics that were playing out regardless of what the Fed was doing.
Contrary to mainstream thinking, Mr. Kling argues that (short of the full Zimbabwe), inflation is not very susceptible to either monetary or fiscal policy. Expectations control inflation more than most economists acknowledge--as the money supply is increased, the market automatically corrects by reducing the velocity, and vice versa.  Mr. Kling's opinion is that QE, tapering, and Fed-speak are mostly if not entirely irrelevant.

That differentiates him from the folks (charlatans?) over at ZeroHedge or Occupy, who believe that the Fed is actively malign. But powerlessness implies an inability to do evil as much as good. Besides, Mr. Kling has a great deal of respect for his former bosses--he credits them with good intentions, and even for a few good deeds. In his list of economists who have led "interesting lives," (that he himself might like to have lived) Mr. Bernanke comes in for special praise, but mostly for his research rather than his chairmanship.

Mr. Kling's alternative to standard macroeconomics is something called patterns of sustainable specialization and trade (PSST). He describes it nicely in his book. For a more scholarly account you can download a pdf here. I will summarize it in two sentences:
Entrepreneurs, mostly by trial and error, will look for ways to maximize value from existing resources. In response to change, new economic patterns will evolve over time that optimize the consumer surplus.
As Mr. Kling generally rejects mathematical models as unrealistically simple, mainstream economists obviously dislike his view. He's basically telling them that they've wasted their professional lives for the past thirty years.

There is a view that is more charitable to the mainstreamers. One can accuse PSST of being untestable and unhelpful. In discarding econometric models, Mr. Kling essentially throws up his hands in despair and asks us to abandon all hope of messing constructively with the economy. This is a rather depressing conclusion that people of good will prefer to reject.

But I think PSST allows for some predictions. In particular, I think it renders the two recent books by Tyler Cowen (the world's most overrated economist?) wrong. In The Great Stagnation Mr. Cowen argues that technological change has come to a (temporary) halt, and we've already consumed the benefits from electrification, the IC engine, etc. Thus economic growth is in decline, and this accounts for the declining wages, unemployment, etc.

But this doesn't square with PSST. Absent technological change, the economy should be stagnant. That means that the optimal patterns of specialization and trade would already be in place, with consumer surplus maximized. Thus, rather than there being unused resources, all resources would be used to maximum extent. Of course the "boom" wouldn't really exist--consumer surplus would never grow. Indeed, it might gradually shrink, and despite the full employment we would all be getting steadily poorer. (Think of it as an economy with no additional labor-saving devices.)

That doesn't describe our current economy. Instead of stagnation we have crisis. That means there is rapid change occurring that renders existing patterns non-optimal. I think that change is fairly obviously technological, so the great stagnation theory is wrong.

Mr. Cowen's second book, Average is Over, contradicts the stagnation thesis, arguing that rapid technological change in the form of computer automation will put huge numbers of people out of work. He suggests that, despite marvelous new technology, up to 80% of us will be in absolute terms poorer than we are today. (You can't win with this guy--technology or no, we're all gonna get poorer no matter what.) But PSST says this can't be true, at least not in the long term. Entrepreneurs are not going to leave 80% of human capital sitting on the table collecting no return--that is clearly not an optimal pattern. So while almost everybody agrees that in the short term new technology will be highly disruptive, in the longer term new patterns will evolve that utilize the existing human resources. New technology will eventually show up as added consumer surplus.

My claim is that Mr. Kling's book is subversive. Of course it undermines mainstream economics. It also diminishes the Austrians, Austerians, NGDP, DSGE, neo-Keynsians, and the doomsters over at ZeroHedge. I like PSST because I think it correctly predicts that new technology will make us richer. I've argued along similar lines in my post here.

The second way Mr. Kling is subversive is his status in the profession--he has none. He occupies no faculty chair, nor has he ever served as a policy maker in government. Following his fly-on-the-wall stint at the Fed, he held a similar position at Freddie Mac. He then went on to start an Internet company, which made him financially independent. I understand that his day job now is teaching high school, undoubtedly done as a labor of love. (Lucky students!) The title of his memoir gives it away: Memoirs of a Would-be Macroeconomist.

Third, Mr. Kling writes a professional memoir rather than a scholarly article. That makes it much more interesting to read, and it also lets him draw on his extensive and relevant experience. But this is not the typical way that academic research proceeds. Rather than just the in-crowd, Mr. Kling is addressing readers like me--interested laymen curious about economics. (I'm a rank amateur, with no formal economics education whatsoever.) Of course I prefer that approach, but apparently the cognoscenti do not. The book has not been widely reviewed. I don't believe the book is mentioned on Tyler Cowen's blog at all. This is discouraging.

Finally, and related to the third point, Mr. Kling obeys Trotsky's First Law, which states that the value of a scholarly article is inversely proportional to the height of the paywall, that judged not just by the subscription fee, but also the time and effort required to read it. Mr. Kling accordingly values his work very highly--it is an enjoyable (if not always easy) read, only 120 pages long, and is available for FREE.

Psst! I think Mr. Kling has written a very important book. Pass it along.

Further Reading:

Sunday, February 16, 2014

Affirmative Action, IQ & Liberals

This post is a riff on a Slate piece by Tanner Colby entitled The Massive Liberal Failure On Race (Part I and Part II). In Mr. Colby's view, the Republicans are unequivocally the Evil Party--racist, greedy, selfish. The Stupid Party is the Democrats, and not just in the trivial sense of needlessly throwing elections. He accuses his own party of almost criminal negligence in the cause of affirmative action. They confused integration with desegregation, and suppressed the Black community's desire for agency over their own kids' education by busing Black students to white schools merely to meet statistical quotas. The whole busing thing wasted billions of dollars with no positive effect whatsoever on either educational outcomes or racial harmony.

After the 1967 race riots in Detroit and elsewhere, some bargain had to be made with Black America for the sake of public order. While Mr. Colby tendentiously attributes the terms to President Nixon's racism, his description of the bargain is generally accurate.

  • The government instituted affirmative action programs for Blacks in public employment. This led to the dramatic increase in African-Americans working in the military, the post office, police and fire departments, and to lesser extent, in public schools and universities. Millions of Blacks were pulled into the middle class by these programs.
  • On the other hand, the high crime rate had to be lowered. Crimes (then and now) were disproportionately committed by Black teenagers. Between draconian drug laws and much more aggressive policing (or some other reason), crime was brought under control. The cost was the high incarceration rate, especially for Black men.
The result has been generally successful. Black people are richer and more integrated into the American economic mainstream. Everybody (whites and, especially, Blacks) are safer--the crime rate continues its descent from the 1970s high. These days people (mostly Republicans) are beginning to discuss lowering the incarceration rate.

The problem is that this grand bargain is breaking down. Even liberals such as Mr. Colby understand that affirmative action can't work anymore, and Republicans realize you can't just lock everybody up.

Back in 1994 Charles Murray and Richard Herrnstein published the controversial book The Bell Curve. I read it many years ago, but recall it as an excellent book, probably still well worth reading. But as with many other readers, some things bothered me. Notably, they never gave a very good definition of IQ.

Whatever IQ is, Murray and Herrnstein show that it correlates very strongly with income. Indeed, some claim (not necessarily convincingly) that if you correct for IQ then education makes essentially no difference in economic outcomes. You can read that whole debate on your own--I'll just point you to a game-changing article by Ron Unz. He quotes another to emphasize his main contention: 
Allow me to repeat the concluding sentence of the Abstract of this peer-reviewed academic article: 'These observations suggest a causal direction from GDP and education to IQ.'
So that leads me to this definition of IQ: IQ measures those mental traits that were most useful in the late 20th Century economy. Then by definition there is a correlation between income and IQ, but who knows which way the causal arrow goes?

So African-Americans are relatively poor, and thus do poorly on IQ tests. Affirmative Action managed to fudge that outcome by increasing their income by fiat. But this doesn't mean Blacks are stupid--it just means their skills aren't easily monetized. Or more precisely, their cultural talent is mostly in winner-take-all professions. I'm listening to Art Tatum as I write this--I think he died a poor man. But the richer sorts--Oscar Peterson, Count Basie, Duke Ellington--all worked in winner-take-all markets where wealth was not widely distributed. Similarly for sports. Likewise, African-Americans have played a hugely disproportionate role in our political life, on all sides of the spectrum from W.E.B. DuBois to Martin Luther King to Herman Cain to Ray Nagin.

My definition suggests that IQ may become less important in the 21st Century, and I do indeed think that will happen. White people have not been proportionately as successful as musicians, preachers, entertainers, or even politicians. Instead they've concentrated on more mathematical, analytical pursuits--endeavors that have been much more lucrative for more people. Their median income has been correspondingly higher.

But here's the rub. Computers will steal white jobs long before they get to Black jobs. Computers can do math better than you can. Math skills will always be important, but they will increasingly lead to winner-take-all jobs. The very best computer programmers will be millionaires, the average will be shlubs, and the below average unemployed. And similarly for most other, white-dominated STEM professions.

The jobs of the future will be jobs that computers can't do, e.g., entertainment, preaching, politics, and music. Computers will raise the relative value of Black culture in the labor market. And none too soon, as the traditional sources of Black employment are drying up. The post office is increasingly automated, and shrinking in any case. The military no longer needs grunt manpower. And the government sector is (thankfully) getting ever so slightly smaller.

Here is an example of the jobs of the future: the street entertainers in New York City. Those guys (almost all Black) are very, very good, and are a major tourist attraction. Once, on a small side street in Lower Manhattan (undoubtedly chosen for its acoustic properties), I spent almost an hour listening to an a capella quartet singing old rock songs. They had a huge crowd around them and were making money like nobody's business. No microphone, no overhead, no instruments--just absolute, raw, undiluted talent. No computer can ever reproduce the human-to-human immediacy of serendipitous, live music. And likewise for preaching, politics, and athletic skill (street-side gymnasts are another NYC draw).

I think Blacks will do relatively better in the 21st Century. And new, updated IQ scores will eventually reflect that.

Blacks do need to get their propensity for crime under control. They're not deprived, nor are they depraved. But there clearly is something wrong, and unless they get it fixed the mass incarceration strategy looks set to continue.

Further Reading:

Thursday, February 6, 2014

Turkish Politics From Socialist Action

I really enjoyed Yasin Kaya's article on Turkey's crisis in the current issue of Socialist Action. I've been following the Turkey situation from the business pages--interesting, but it lacks political insight. I surmise that Mr. Kaya speaks Turkish, which means he actually knows something about the country (more than, say, Larry Kudlow). He also writes well in English.

Mr. Kaya sees the crisis as a falling out among Islamists. The ruling Islamist party (AKP), headed by prime minister Erdogan, has relied on support from the Gulen Movement. The latter is a devoutly religious group (sect? cult? party?) led by Fethullah Gulen (correct spelling here), a 72-year-old cleric living in self-imposed exile in Saylorsburg, PA.

I've been trying to come up with an American analogue to the Gulenist Movement (Wikipedia articles here and here). Wikipedia compares it to the Catholic Opus Dei movement, but that won't ring a bell for many Americans. Its semi-secretive, conservative nature suggests something like the Mormons. But the Mormons are heretical, whereas the Gulenists are stolid traditionalists. Some accuse the Movement of being a cult, rather like Scientology--but I don't think that's accurate.

The closest I can come up with are the Southern Baptists. They're probably not as secretive as the Gulenists, but their insistence on solid doctrine, religious education, and moral rectitude is a good match. With that analogy, the American politician most like Fethullah Gulen is Mike Huckabee--a dyed-in-the-wool, charismatic, Christian pastor and political leader.

So Mike Huckabee isn't president of the United States, and neither is Mr. Gulen prime minister of Turkey, which I suggest is for similar reasons. Mr. Huckabee, an honorable, honest and charming man, holds opinions that are simply too far out of the mainstream. Accordingly, he lost the Republican nomination to the more protean John McCain. Likewise, Mr. Erdogan, a politician first and foremost, views the Gulenist principled insistence on religious dogma increasingly as a handicap. Hence the divorce.

But what a breath of fresh air to learn about a fundamentalist Islamist who isn't a Jihadi. Mr. Gulen is no more a bomb-thrower than Mr. Huckabee. The Gulenists run schools and business, not terrorist cells. Mr. Gulen's exile refuge is Pennsylvania, not Waziristan. He believes in inter-faith dialogue with "People of the Book," i.e., Christians and Jews. (His tolerance does not extend to atheists, though he certainly does not advocate their murder.) Accordingly, he's met with Christian prelates and Jewish rabbis. Mr. Kaya accuses him of being "pro-Zionist." I'm not sure about that, but at least he's not a raving anti-Semite. I don't know his opinion on the Israel-Palestinian question.

The Gulenist Movement borrows heavily from Sufism--if anything, they're pacifists. Jihad, for them, is a spiritual struggle.

As an aside, it is very important that Americans do not vilify all Muslims. However much we may differ from the Gulenists in politics, religion or culture, they are our allies in the war against Islamofascism. I think that people such as Robert Spencer, Michelle Malkin, and the late Oriana Fallaci (a superb writer) carry their passion too far.

The split between the government and the Gulenists has led to a purge of police officers, civil servants, and cabinet ministers, presumably because they're somehow associated with Gulenism. Prior to that, Mr. Kaya accuses them both of human rights violations, including the violent suppression of demonstrators at Taksim Gezo square. He writes,
Such undemocratic underpinnings sustained the corrupt neoliberal economy. This meant unprecedented profits for domestic and foreign financial capitalists and their conglomerates on the one hand, dispossession and pauperization for workers and peasants on the other.
What he doesn't mention is that Turkey has run up large current account deficits. That's what forces them into the hands of the "foreign financial capitalists." The country has to borrow money just to pay its bills. It has been able to do that (according to some commentators) because of the Fed's Quantitive Easing, which sent investors abroad in search of higher returns. But in the current risk-off environment, that capital is now fleeing Turkey in favor of US government securities. The days of cheap, easy money from the credit card are over.

The underlying cause of Turkey's economic difficulties is the country is bankrupt--just like Detroit, Puerto Rico, Greece, California, Illinois, Spain, etc., etc. It is bankrupt because it has been misgoverned for many, many years, by governments that have promised a higher standard of living than they can deliver. Turkey's problem is worse than many other jurisdictions because its debt is owed to foreigners rather than its own banks. (The contrast is China, also hopelessly in debt, but its debt is owed to its own citizens in its own currency. China has had a current account surplus for many decades, and can easily pay off foreigners.)

Mr. Kaya describes three other political currents in Turkey. First are the Kemalists, the founders of the modern, Turkish state, who are now using social democratic language to appeal to voters. Of course this is a recipe for disaster--social democracy simply promises more goodies without offering any way to pay for them. It won't work when the credit card is tapped out.

Second, he discounts the secular Left, which "is still fragmented and lacks the ability to organize public dissent, although its ideas are enjoying a revival." It's fragmented because today's Left is incoherent. I doubt it's undergoing much of a revival. The Left, after all, is the Party of Baathism.

Finally, Mr. Kaya mentions the Kurds. He thinks they've sold out. Frankly, if there is one faint glimmer of hope in Turkish politics, it is the rapprochement with the Kurds.

Mr. Kaya doesn't mention the war in Syria, which alone renders Turkish politics unstable. Twenty percent of the population is Alevi, a Shi'ite sect closely related to the ruling Alawi group in Syria. Kurds also live on both sides of the border. The Gulenist's relationship with the Syrian rebels has to be complicated, at very least. Turkey shares borders with Iran, Armenia, and (across the Black Sea) Russia, along with the European Union. Cyprus is a thorn in everybody's side. The country is a member of NATO. Turkish politics is an unforgiving mess.

Mr. Kaya's suggestion for Americans is just silly: "Our slogan should be 'Imperialist Hands off the Middle East!'” Who knows what that means?

That notwithstanding, Mr. Kaya's article is helpful. But I still have absolutely no clue what is going to happen next. It probably won't be good.

Further Reading:

Saturday, February 1, 2014

College: Signal vs. Substance

I really would like to agree with Bryan Caplan.

A debate rages about the importance of signaling in higher education. On this theory (in the extreme formulation) employers either can't or don't want to determine how good an employee you will be, and hence they judge entirely by a quasi-relevant signal: education. Thus somebody with a high school diploma will be hired over a dropout. A baccalaureate degree holder will win over a high school graduate, and a masters degree will trump both of them. Never mind that nobody learned anything relevant to their job--only the signal counts.

Evidence cited by signalers includes the growth in the number of jobs that now require a bachelors degree. Increasingly, baristas have college educations these days. A high school diploma, formerly the entree into the workforce, now counts for very little. The whole education system is nothing but an arms race, where each contestant tries to be better educated than his neighbor. It's like the two campers running away from a bear: "I don't need to run faster than the bear," says one. "I just need to run faster than you."

On the signaling theory, college attendance, while good for individuals, from society's standpoint is a complete waste. Most employees would perform just as well if they'd never gone to college at all. Thus the signaler's goal is to defund higher education and dissuade as many people as possible from going to college. Champion signalers are Peter Thiel and Bryan Caplan.

The opposing view is held by people who argue that college is an investment in human capital. In extreme form, these folks hold that every moment spent in any college classroom is time irreplaceably well-spent. Your career and life will be worth infinitely more if you go to college--something that everybody should do. The entire college-industrial complex has bought this line to the hilt, and they invent increasingly silly terminology to justify their case.

Critical thinking skills is a term that gets my goat--if you think at all critically about it, it dissolves into complete meaninglessness. And yet mult-year long, general education programs are devoted to this mirage. Any otherwise useless class is justified because it enhances "critical thinking skills." Conversely, nothing remotely practical does any good. In reality, critical thinking skills are just a synonym for the classes that the faculty want to teach.

At least two issues complicate any analysis. First is ability bias, i.e., smart students go to good colleges and get good jobs. The latter two are correlated because both derive from the student's innate ability. But it seems to me ability bias is just signaling in disguise--smart students signal their ability by going to a good college. They don't necessarily learn anything there.

The second issue is rent-collecting using a credential. For example, one can't be a lawyer without a law degree--so the money lawyers earn has less to do with ability or signal, but rather because they own a credential. Rent collecting is a serious problem caused by government licensure and regulation, but is beyond the scope of this post.

In the post linked above Mr. Caplan claims the value of education is 50% ability bias, 40% signaling, and only 10% human capital investment. As said, I think ability bias and signaling are almost the same thing, so what he's really saying is that only 10% of the "value" of education comes from actually learning something. I think that estimate is too low. I'll provide three examples.

First, in my old age I aspire to be an amateur economist. I have no formal education in the discipline. Unlike my professional colleagues, I read what I want and don't read what I don't want. That means I see only those bits of the discipline that interest me, and indeed, may grossly misunderstand parts of it. Not getting systematic feedback is a major handicap. So formal education in economics is worth something--certainly more than 10%. (That said, we amateurs are unpolluted by the fads and fancies of the in-crowd, which I suppose gives us an advantage.)

Second, my daughter has an English degree. She has a job where she uses her degree. I have pressed her repeatedly on this issue: Do you really use anything you learned in school? Her answer is always "yes." If she hadn't read good literature and written term papers, it would have been impossible for her to do her job. Yes, in principle she could have learned on the job, but her employer wouldn't have had the patience for that. (That said, she got the job because her boss is an alum of the same school. That fact made her resume stand out. So perhaps signaling got her the job, but it didn't make her successful at it. There was a real capital investment.)

Third, I have former students who say that the most important stuff they learned in college was general chemistry. Again, there is some capital investment going on--it's not all signaling. (That said, this feedback dates mostly from the 1990s. I think general chemistry is much less useful today than it was back then--those old jobs are being automated. Today it's more about signaling or credentialing.)

So I don't agree with Mr. Caplan. There is more to education than signaling--certainly more than 10%. In his emphasis on signaling Mr. Caplan misses two big problems with higher ed.

First, there's some debate these days about what is capital and what isn't. The concept of human capital is particularly fuzzy, especially since the return is paid as wages. So think about it this way. Suppose the value of labor is $10/hour--that's what a cleaner or a fast-food worker makes. Any reasonably competent worker can get a job at that wage (give or take).

People with bachelors degrees often make considerably more than that, my daughter included. The extra derives from some human capital investment--in this case education. Signaling may be useful in getting a job (cf. my daughter), but it won't make you successful at it. As wages these days approach market rates, the signaling effect washes out, but the capital return remains.

Second, the problem with college isn't signaling, but rather irrelevance, making it an increasingly poor investment. This is partly caused by technological change. There is little in the general chemisty class, for example, that a computer can't do better than you can. Many fewer students need to study general chemistry these days. This effect is accentuated by the tenure system which enshrines old ways of doing things. My colleagues and I are still preparing students for the class of 1995.

So I don't agree with Mr. Caplan's signaling thing. But I do agree with his prescriptions. College needs to be cheaper, and taxes have to be lower. Government should disinvest from higher ed.

Further Reading: