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Tuesday, January 4, 2011


Whew. Who would have thought that a casual reference to the fallacy of composition would have elicited such a storm of comments? In the future, I better be careful what I refer to! But all of that is, as they say, water under the bridge. Today, I want to address directly the question originally posed to me, which was why tertiary education costs have soared and what effect that has had on the society.

Let me begin by saying that I was really taken by one part of the complex and many-sided series of comments that John C. Halasz posted. [And how nice to have someone actually put his or her name to comments. I like that.] I am going to restate in my own words the point he made that struck me so powerfully. John, if I get it wrong, please correct me.

Briefly, as I understand it, the point is this: What we refer to as prices are actually exchange ratios -- that is, they are the ratios in which goods and services exchange with one another in the market. Originally, economies used what is called commodity money. A unit of one of the many goods in the market [a cow, an ounce of gold, a pound of silver, a cowrie shell] was taken as "numeraire," or unit of money, and everything else was expressed as equivalent in value to so and so many units of that money-commodity [so many pounds sterling, as the British used to say.] If, over a long period of time, technological advances make many commodities less costly to produce [fewer man-hours, less material, etc], while one significant commodity or service does not experience a like improvement in production, the price of the unimproved commodity will rise relative to all the others. Even though nothing has altered in the way it is produced [as I noted for tertiary education], its exchange value vis-a-vis everything else will decline. It will, in short, rise in price. Think fine hand-crafted furniture [not antiques -- that is something else entirely]. Now, when this happens, consumers may respond by substituting another product that serves more or less the same purpose -- mass produced furniture for hand-crafted furniture, for example. Or, they may simply stop buying that good altogether [not the same thing as substitution.]

But suppose the good or service in question is indispensible. Then consumers may just pony up the money and pay the much increased price. Tertiary education, in and of itself, has many substitutes [reading books on your own, organizing community discussion groups, and so forth.] But in our society, the degree [not the education -- that is another thing entirely] is the admission ticket to the world of scarce and well-compensated jobs. Hence there is a continuing demand, at ever increasing relative prices.

Do I have that right, John? Obviously, one would have to crunch a lot of numbers to estimate what portion of the relative increase in the price of higher education is attributable to this cause, but I have to say that intuitively, it strikes me as really plausible. And, just to set the record straight, it had not occurred to me at all until I read John's comment.

One can use the same language and mode of analysis to explain something a good deal less mysterious -- namely, the explosion of lower cost public higher education. This is complicated, because part of the lower cost is a consequence of state and federal subsidization. But clearly, many, many students are opting for a degree from the state university, even though its value as a good job getter is inferior to that of a degree from a name private institution.

There is another factor at play, in my judgment, one to which murfmensch alluded in a comment. This is one I had planned to talk about, and I can begin, as is my wont, with a story. Each year, Harvard puts out a red-covered book listing all the people at Harvard who are classified as "Officers of Instruction." When I was a student, in the early fifties, this was a relatively slender book that listed faculty members throughout the university, with their offices and phone numbers. Many years later, on one of my very infrequent trips back to Harvard Square, I chanced upon a recent copy of the book, and was astonished to find that it had ballooned into a huge, fat volume many times the size of the original. I was surprised because I knew that Harvard had not expanded its student body significantly in the interim [save for the absorption of Radcliffe, but since Radcliffe had virtually no faculty of its own, that did not change things much.] Curious, I paged through the book, and discovered that people actually teaching students were a very small fraction now of all the folks listed. There were, it seemed, a simply endless number of Centers, Institutes, Research teams, deans, sub-deans, associate deans, assistant deans, and who knows what else. None of these people, so far as I could tell, had much of anything to do with the education of undergraduates, and precious little to do with the education of graduate students.

At my own institution, the University of Massachusetts, where a college degree is of course only a fraction of the cost of a Harvard degree, it is nevertheless also the case that administrative ranks have mushroomed in the time I have been there. I can testify from personal experience that the quality and even the quantity of administrative performance has not increased at all over that time period. I am dead certain that this expansion of non-pedagogical activities and personnel at America's colleges and universities has contributed at least some portion of the soaring relative price of a college degree.

Finally, we get to the question originally posed in the email that got all of this started: What is the effect of this increased cost of higher education on society? [And, though my correspondent did not put it in these terms, is the effect a good thing or a bad thing?]

This is a very large question, an adequate answer to which would require a book. But I would like to focus on just one small aspect of the issue, which may not have received as much attention as I think it deserves. As all of you are aware, over the last generation and more, it has become commonplace in America for college [and graduate] students to take on very large debts in order to pay for their tertiary education. "Financial aid" has come, more and more, to mean loans, not grants or scholarships. It is quite common for seniors to graduate with loan burdens of twenty, thirty, or forty thousand dollars, with even higher amounts weighing down graduates of pricey private colleges. Law students, medical students, and MBA students take on the sort of debt that someone launching a middle-sized business might assume.

Which, of course, is just the point. Even now, when the payoff is diminishing, the average increased lifetime earnings stream associated with the acquisition of a higher degree makes the taking on of the loans a rational economic decision. Once again, if we take seriously the notion that education produces a form of capital -- human capital -- then paying up front for a higher degree makes as much sense as laying out a bundle for a new piece of machinery that is going to increase the productivity and hence the profitability of a business enterprise. Now, of course, just as some businesses fail, leaving their proprietors with unpayable debts, so some degrees don't result in an earnings stream sufficient to justify their cost. But that is just the way of the market in a capitalist economy. No one would suggest that businesses should not invest in new equipment, or in research and development, simply because some such investments fail to pay off.

But there are hidden consequences to this financialization of human capital investments, consequences with profound ideological implications that it is in the interest of economists and others to keep hidden from general view. To put the point simply, students who takes out loans to finance their higher education are compelled by the debt to which they are shackled to move as quickly as they can into the labor market and become docile, obedient, interest-paying, risk-averse fodder for the great capitalist machine. No wanderjahren for them; no labor organizing, no protest movements, nothing that might interfere with their ability to amortize the human capital in which they have invested. There is no need for society to harangue them with sermons about the virtues of thrift. The monthly loan repayment bill will teach that lesson quite nicely.

To be sure, the very richest schools, which flatter themselves that they are above such mundane considerations, make arrangements to allow their graduates to do good works,. Yale Law School, whose graduates exit from the ivied halls loaded with debt, actually are offered a certain amount of loan forgiveness if they shun the high paid Wall Street law firm associateships and instead go to work for non-profits. A nice touch of noblesse oblige. But the graduates of UMass, I can assure you, are offered no such soft landing. And the rightwing think tanks offer tasty internships to the worst and the brightest at salaries that allow the budding nutjobs to pay their loans while working for the cause -- a conservative version of Tom Lehrer's "old dope peddler," who was, in the words of his song, "doing well while doing good."

We have talked on a this blog on a number of occasions about what might be done to kick start some real progressive, even, revolutionary action in America. One answer, simple but totally unrealizable, is: get rid of the loan burden with which so many young people embark upon adult life.

Well, this has gone on a good deal longer than I expected. I welcome your comments [and let us not have a fight among the economists akin to what broke out in the philosopher's corner of the readership of this blog! With the Republicans taking over the House tomorrow, we will all have plenty of enemies on whom to vent out anger.]


English Jerk said...

Part of the problem is that the government insures the loans, which means that the lenders are making profits (usually huge profits, on the order of 35% or more) without having to assume any real risk. They will not give up such a cash cow without a fight.

john c. halasz said...

Actually, I just thought I was supplying the "name" for what you'd already indicated in your last post: the relative price effect or "cost disease".

And, insofar as it effects gov. expenditures too and they come under budgetary pressure, the parallel cost rise in public tertiary ed that follows are part of the great neo-liberal "risk-shift", privatizing profits and "socializing" costs.

I don't know the relation with health care and tertiary ed cost "inflation", but this chart needs to be kept in mind in considering the rise of the neo-liberal political economy:

It's not my favorite version qua legibility, just the first one I found on google, and the various versions feature slightly different absolute amounts, but the relevant slopes/trend-lines are all the same.

john c. halasz said...

I'll just add that I really detest "human capital" jargon. Why should knowledge and skill be accounted to capital rather than labor? In the olden days, such things were accounted, perhaps too naively, as "universal", public, and common "property". Granted skills and knowledge need to be learned and acquired individually, (which, er, is a kind of labor), but also can only be acquired in and through community with others. "Human capital", like "intellectual property", is just an obfuscation of the maintenance of economic rents in the name of "free markets".

(In the rear-view mirror, it's rather like the fact that ante-bellum +85% of the entire U.S. capital stock was the notional market value of slaves. But obviously slaves were labor, and though for obvious reasons, U.S. wages were higher than European standards at the time, they paid for workers' subsistence, just as slave-owners had to provide for their slaves' subsistence. So much for accounting categories!)

john c. halasz said...

The obvious counter=proposal is that education, secondary, tertiary, continuing and remedial, ought to be treated like a public good, with costs recouped through taxation on increased earnings, (and allocation through some screening for both ability and need). But then the idea that education serves only the economic function of increased productivity is itself a bit perverse. The old ideas of republican civic vocation and idealist-humanist Bildung fail to register. But then perhaps such a producer-oriented scheme might fail to produce sufficiently agile and avid consumers.

john c. halasz said...

The acquisition of debt-burdens together with educational credentials, (which debts are un-dischargeable, except through death), serve not just to enforce conformity to the prevailing political economy, but also to "justify" rents accruing to high-end professionals, as compensation not just for unrequited educational labor and opportunity costs, but also for actually incurred investment costs. MDs, for example, tend to assume entitlement to high incomes based on incurred costs, and, further, tend to acquire specializations rather than basic qualifications, on account of such costs. The result is not just that there are too few doctors,- (2.4 per thousand, rather than 3-3.6 per thousand in comparable countries)-, but also too many specialists rather than GPs. And such embedded rents are part of the conundrum of high U.S. health care costs, which are regarded as a "merited" entitlement by those subject to the regime, faute de mieux, if they could even conceive of any alternative. (Though that's just one of many rents embedded in the health care system, which makes it so "unreformable").

john c. halasz said...

The rise of administrative overhead that you note seems somewhat paradoxical, given cost pressures. Perhaps when "education" becomes a professional object unto itself, rather than the direct imparting of various skills and knowledges, it tends to spawn a bureaucracy that redoubles its efforts futilely as a result of its own failures. But also, maybe, the rise in costs itself has given rise to new management fiefdoms, analogous to the cult of management and the inflation of CEO salaries in the private sector, where the sheer size rather than the performance of the company seems to matter most. Perhaps, given the rise in costs and the withdrawal of public supports, "higher" university administration increasingly is "justified" by its fund-raising function, merging the research function of the university with the needs of its corporate backers,- and thus adopting their "ethos". It's the brave new world of the neo-liberal university!

wallyverr said...

I would defend the term "human capital". While originating in metaphor, it does make a useful economic-theory connection between investment in physical machinery, equipment, or construction, and acquisition of skills. It also highlights an individual's trade-off between working now for a lower wage and starting work later, after a period of training, for the likelihood of a higher wage.

As an aside, from the standpoint of Chicago "price theory" economists who rather enjoy teasing radicals, it has the paradoxical effect of making skilled workers into capitalists. "Every man a capitalist", as Huey Long didn't quite say.

wallyverr said...

I'm not sure I accept the thesis that college loans, i.e. debt finance to pay for higher education, leads to making graduates "docile, obedient, interest-paying, risk-averse fodder for the great capitalist machine." Quantitatively, home mortgages (once taken out) are probably greater than student loans for nearly all households. So blame the Anglo-American desire to own one's home, rather than renting in the good Continental European fashion.

More fancifully (but hey, that's one of the joys of blogging), debt can itself be a source of class formation. Max Weber agreed with Marx that in the industrial world, class conflict centred on the labor market. But he argued that in the ancient world, the key class conflict was between debtors and creditors.

charles.pigden said...

Because America is a big and important country, Americans tend to forget that there is world beyond its frontiers. This leads to two kinds of error: 1) adopting a purely AMERICAN explanation for what is an INTERNATIONAL phenomenon; and 2) adopting an INTERNATIONAL explanation for what is mainly an AMERICAN phenomenon. An example of the first kind of error is McCumber’s attempt to explain the rise of a supposedly depoliticized analytic philosophy as due to McCarthyite pressures. This won’t do because very similar kinds of analytic philosophy rose to dominance in countries where McCarthyism was either muted or non-existent. Now I don’t want to be dogmatic about this, but I rather suspect that the Wolff/Halasz explanation of the rising costs of tertiary education is an example of the second kind of error. If the explanation were correct we would expect similar rises in the costs of tertiary education in other advanced capitalist countries besides the USA. Now I may be wrong about this, but my impression is that the increases in the costs of higher education have been nowhere near as spectacular in comparable countries as they have been in America. If this is correct, Wolff & Halasz are trying to explain a phenomenon that is specific to the USA in terms of factors which are common-to-universal in advanced capitalist countries. And since in those countries these factors are not producing that effect, they can’t be responsible for the effect as it occurs in the United States

Scott said...

I agree with wallyverr

Here in Europe college education is heavily subsidized, even for the top universities, and access to university is open to everyone. I don't think that people are any less conformist over here and universal university access certainly hasn't done away with unemployment. See New Year's Day's New York Times article on the subject:

Why not instead of trying to subsidize education to death acknowledge that too many people are going to college? For most people, 4 years of undergrad is merely a signal: it shows that you were more obedient and efficient than your classmates who dropped out. It's a very expensive signal at that, one that inundates many people with debt. Shouldn't we recognize as a society that college isn't for everyone and that there are cheaper ways to signal that you're a good worker than spending 4 years studying English or Political Science or History?

Scott said...

I recommend reading Kevin Carson's thoughts on this matter: