Education, Signaling, and Bubbles

Is there an education bubble?

Raphael’s ‘School of Athens.’ Source: Wikipedia

Everyone talks about the impact of education on the economy. Somehow, teachers who have spent a lifetime studying PID flow-control or population externalities or quantum optics can affect kids’ lifetime earnings expectations by hundreds of thousands of dollars. It’s not that reading and writing and math aren’t important. They are. But the (linear) assumption seems to be that if some education is good, then more education must be better—always and everywhere.

Here’s how the University Model of job preparation is supposed to work:

1. Professors (and graduate students) lecture on various topics.

2. Students study and learn the material.

3. Magic.

4. Students become better managers, salespeople, lab technicians, etc.

You might think that kids who get through college are learning good work habits, but that claim isn’t credible. Real jobs don’t tolerate the absenteeism and insubordination that colleges put up with. Is it a case of schools teaching “how to think vs. what to think?” But exams don’t test students on research methods. And – honestly – how difficult is it to google “superconductivity” and read through the results?

The answer is that college degrees provide signals. Employers reward educational success because of what it shows. Good students tend to be smart, hard-working, and follow the rules. It’s no surprise that good workers show the same characteristics. What students study and what skills they acquire aren’t as important as their ability to learn what they need to know on the job—and to be a good influence on their work environment.

FIRST Robotics Competition. Source: US Navy

As an investor, I don’t believe in magic. I don’t think that spending four years studying art history of astronomy or classics can transform student lead into worker gold. Signaling works—but the signals are relative to those of other job candidates. We can measure intelligence and sociability pretty easily, but we’ve chosen to farm that function out to four-year institutions that often teach a lot of less-desirable skills as well.

Don’t get me wrong: I love education and learning new things. I think that there is a unity to human knowledge that, if we apprehend it, makes us all richer. But economically, we’re devoting expending a lot of resources to generate employment signals. And if there’s an education bubble, eventually, it will pop.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:38+00:00 November 7th, 2016|Global Market Update|0 Comments

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