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Sunday, March 28, 2010

"Human Capital: Literal Truth, Fairy Tale or Myth?"

Nick Rowe says "This is from my Carleton colleague Frances Woolley":

Human capital: literal truth, fairy tale or myth?, by Frances Woolley:

Part I: Education

Every undergraduate student in labor economics gets told the story of human capital. Education and experience make people more productive. The skills so acquired are called “human capital.” This explains why some people earn more than others, and why some countries are richer than others.

Is human capital theory the literal truth? There is an element of truth in it. The typing skills learnt from Mr. Darby in grade 9 make me more productive than my hunt-and-pecking colleagues. Educating girls reduces fertility rates (pdf), promotes female autonomy, and has a host of other productivity-enhancing benefits. But there are many things that human capital cannot explain.

For example, if what is taught at universities actually makes people more productive, then simply taking university courses should be enough increase earnings. In fact, to get much of a payoff from university education, you have to finish your degree (the “sheepskin effect” ). One reason education pays is that completing a degree “signals” your ability, determination, competence and general stick-with-it-ness.
Perhaps we should think of human capital as a fairy tale, a reassuring bedside story. But the power of fairy tales is that they reflect certain elemental truths about the human condition. People who teach economics may find it deeply comforting to think that their pay is justified by their high levels of human capital.

But human capital is more than a comforting story – it is a myth that shapes our understanding of the world and thus public policy. Ontario’s government is urging universities to increase retention rates, so everyone who starts university completes a degree. If the human capital theory is true, then this is sound policy: more students completing university means more human capital means a more productive economy. If, however, the value of university education is as a signal of ability, then one of the most important things that universities do is fail students. Unless some students fail, the ability to complete a university degree confers no special distinction on the graduate.

Whether or not human capital theory is true determines the best response to the demographic challenges much discussed this blog. If education makes people more productive, then more education can increase the productivity of our economy – possibly enough so that fewer workers are able to support the large number of pensioners. If, however, education is basically about sorting workers – if people are getting more and more degrees in hope of eventually capturing that one elusive stable professional job with benefits – then the best way of responding to the demographic crisis is to scale back post-secondary education. Doing so would effectively increase the size of the working age population substantially, easing demographic problems. ... [Part II: The experience part of the human capital equation]...

My case is unusual since I have a job in a university, but there is no doubt at all that education enhanced my productivity (i.e. that education was more than a signal to potential employers). If California had set tuition at just over $100 per semester at its state universities (colleges then), I'd most likely be selling tractor parts somewhere and hating it. That's what my grandfather did, that's what my dad did, and although my brother isn't in parts directly, he sells John Deere engines so he is involved in the tractor business as well (both my grandfather and my dad managed to work their way up to sales and, in my dad's case, part ownership and general manager toward the end of his career -- my brother and my dad have severe dyslexia, and they overcame much more than I did in achieving the success they realized).

I started working at the parts counter in tractor stores during high school, and I continued all through college to support myself. I hated that job, and it was all the motivation I needed to go to class every day and do my best (which did not rule out doing my share of partying -- I will be in surplus the rest of my life just from those four years...). I had a math professor who loaded his classes up in the morning, and was at the golf course by 1:00 every day (where his son was the pro). I had another who spent a lot of time hunting, fishing, and generally doing whatever he wanted with his free time. I looked at both of them, thought about the stupid tractor parts counter job I was doing and how bored I was with it -- how much I hated going there every day -- and thought "I can do that job." I can play golf every day, enjoy the outdoors, take summers off, etc. (When I showed up to work in the morning, I would write down the number 480 on a piece of paper -- that was how many minutes I had left until I could go home -- and then I'd write down and check off each minute one by one during the day. It was agonizing and counting every minute made it worse. If 15 minutes passed by without my checking off any numbers, a whole 15 minutes without thinking about getting out of there, I considered it a success. Occasionally, a whole hour might go by before I wrote down how long until the day was over, but that was rare. I remember thinking that all I wanted was a job where I wouldn't count the minutes from the time I got there until it was time to go home.) Somehow, though, during graduate school I became convinced that I was supposed to do research, not just play all day when I wasn't teaching, so I skipped the teaching jobs and took a position that required research. But I wouldn't be here without cheap tuition, the math guy who played golf every day -- I took every class I could from him and every other math class they offered that fit my schedule (when I found a good teacher I'd take every class he or she taught no matter what type of math it was), and all the economics I took from the professor who'd rather be hunting or fishing. And I certainly wouldn't be here without all the technical skills I learned (the computer science classes were very valuable). As I said, I have no doubt that my productivity was enhanced by going to college.

But I want to take on the basic premise that the purpose of an education is to enhance productivity, to prepare students for the workforce. That's part of it, certainly, though that is much more the case in professional schools that are attached to universities than in the universities themselves. I didn't just get technical skills from college -- math, computer science, etc. -- I got a liberal arts education (or, at least as much of one as you can get at a state institution charging $100 tuition). I learned things about the world and about ideas that I would not have learned elsewhere, things that helped me to think about and evaluate the world around me from new, different, and valuable perspectives. Even if I'd ended up back at the tractor store, and that was certainly a possibility since I got into graduate school by luck -- I only applied two places, Berkeley and Stanford, and got rejected at both places. (I didn't know how hard it was to get there from Cal State Chico and thought my grades/GRE/math training/letters would be enough, I was pretty naive at that time. I can still remember reading the letters on my front porch and feeling crushed.) A professor I was working for at the time helping with medical consulting (pricing of pharmaceuticals for Medicare) got me into Washington State with support after deadlines had passed. If that had not happened, and it was a bit of luck that it did, I wouldn't have gone to graduate school.

However, even if I'd ended up selling tractor parts, what I learned at Chico is something nobody could have ever taken away from me. We often forget about the education part of education and focus on the vocational training aspect, but to me the broad-based liberal arts education is one of the more valuable parts of the education I received. I tended to focus on economics, mathematics, and computer science. I only took courses outside those areas when I was forced to, and I am so glad they made me to take other courses. I loved geology even though I thought I'd hate it, psychology was surprisingly good -- I read the entire text after the course was over, I read most of the books for my undergraduate courses cover to cover at some point -- cultural geography was a surprise (lots of economics). Now that I think about it there were only one or two courses I didn't like and that was mostly because of the instructors.

I didn't always appreciate it at the time, but the general education part of the degree was of great value. That's one of the main reasons I wish I could have afforded to go to a better school than Chico. I doubt the technical training would have been any better, I made a conscious effort to cover all those bases and a motivated student could get what was needed without too much trouble, but the liberal arts part of the education would have likely been much better (and the opportunities for graduate study would have been considerably enhanced -- there are places you can't get to from Chico). I still have lots of holes in history, philosophy, the arts, religious studies, and so on that were left unfilled growing up in a small farming community with parents who never graduated from college. There were so many things I didn't even know I didn't know (though there are also insights that come with such an upbringing that cannot be learned in college or anywhere else, I think I understand things other people sometimes don't, so I don't mean to put down growing up in a small, farming community, not at all). However, even though Chico probably wasn't the best place in the world for a liberal arts educations, for me it was a great leap forward.

Given my background, and the near certainty that it was only the cheap tuition that saved me from a life I would have hated, I am very sad about what is happening to educational access in California and elsewhere. When I think of all the people stuck in their version of the job at the parts counter, people that could be doing so much more if the path were open to them, it makes me both sad for them and very, very appreciative that the state made it possible for me to find a way out.

I know there are many of you who don't see education the way I do -- as a ticket to someplace better and the only real chance I had -- but I believe education is the key to a better future and I will not give up trying to increase access to as many people as possible. I don't care at all if if dilutes the signal to employers, they'll just have to figure out some other way to cull the herd. The value of an education to an individual goes far beyond training for a job, and I see no reason to deny those benefits to anyone who has done the work required to prepare themselves for college level work.

    Posted by on Sunday, March 28, 2010 at 01:11 PM in Economics, Productivity, Universities | Permalink  Comments (55)


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