Truck and Barter: Echo Chamber Post: Education and Growth

August 16, 2004

Echo Chamber Post: Education and Growth

By Ian

Boy, do I wish Marginal Revolution had comments enabled. Since they don't, I'll just take advantage of the whole Trackback thingy -- ain't technology grand?

Tyler Cowen raises some points in service to a skeptic's take on whether or not education is actually a significant contributing factor to economic growth. Rightly, he focuses on the tenuous relationship inherent in the word "cause".

But what interested me enough here was the argument from the Spiked essay here. The article goes to great lengths to highlight the problems with the notion that education causes growth.

I see a general problem in the whole debate, however. Comparisons across education systems aren't entirely useful. The issue is more about who is being educated, rather than how much is being spent by the state on education. Highlighting South Korea as compared to Egypt doesn't account for the fact that the kind of spending was massively different.

Spending that simply increases the number of people in school (whatever grade it might be, though I think primary education like reading and writing a native language has been proven incredibly useful so this tends to focus on education beyond basic life functions) will invariably draw people for whom more education is useless. Making school cheaper (and more beneficial through the benefits of being in school, like meals or health care) pulls people out of pursuits they may have been more suited for, simply because school becomes the easier alternative.

Perhaps better would be a review of requirements to move on to each grade, entry requirements to higher education, or the amounts of "academic" versus trade schooling that is available. Naturally, some people will be better at economics, while others really ought to be mechanics. Massive spending by the state in an attempt to fatten the school rolls will obviously distort the distribution of abilities in school.

Spiked doesn't take its use of human capital theory far enough. The article mentions the "individual", but seems to skip by the implications it brings up. Yes, in simplification human capital is a measure of worker skill, but its also largely concerned with returns on various personal investments. There is a return on education that may increase skills, but this is certainly not uniform across all people. (Also, depreciation of capital is considered in human capital theory, so the fact that skills are lost is accounted for.)

You could put me in a chemistry class, with all the tutors I could ask for, access to the world's best laboratory equipment, and a stockpile of money to do what I like with it, and you'll never get a chemist walking out the door at the end of the day. I'm bad at it, and I don't particularly care for it. But a friend of mine went to bed at night dreaming of molecular chains and fluid dynamics. More power to her, I say. While we were free to pursue our own paths, indiscriminate state spending will have a hard time sorting the two of us out.

Which is precisely the problem with using Britain as an example. That country's high spending on education is in an effort to make sure native Britons don't face high tuition costs. Trouble is, it is those high costs that tend to weed out those people who will see a high enough return on the time and effort in education to mitigate them. Lower the entry costs a bit, and the marginal person is likely to be induced into attending University, rather than entering the work force right away. (NB: This effect tends also to have a negative impact on the population for whom higher costs would be no deterrent. Classes become overlarge, perhaps, or are changed to accomodate less competent students, making the experience less useful for those who would naturally get a higher return. Ironically, keeping tuition low or free has been a way to fight the flight of students to other countries, when in fact it may well be a factor causing those students to leave.) The number of years in schooling will the be inflated, since it makes more sense to stay in school than to leave it for that marginal person, despite the individual having gotten very little out of it.

There's another issue to be considered with more people in school: it dilutes the value of the signal attained in whatever education was completed. If more people are graduating from a program, the value of the diploma is that much decreased since it loses some prestige (the resource is far less scarce and thus less valuable). Then there's the negative reputational effect of having people with a certain degree underperforming as compared to someone else with the same degree. Since entry was easy, there will be much greater variance in skill level upon graduation. A company might like that you have a University of Chicago degree, but since they recently hired me, and I've performed barely above the level of a drunk monkey even with my very own University of Chicago degree, the value of your achievement is thus dragged down, no matter how well you might perform. More practically, the problem is this: it means nothing to have more people graduating from high school in Egypt if those people have little skill to show for it, and could have been better off in some other pursuit.

I suppose I have to agree that the causal link between education and growth is murky; but I do so because I think the question is over simplified. Mixtures of educational opportunities (vocational schools, competitive academic institutions, part time education, etc.) might indicate an ability for people to find the level of education that is most usefu to them. In the aggregate, then, higher levels of education may contribute to growth much as more efficient allocation of productive resources contributes to the health of a company.

UPDATE: Merits of pay schooling versus free schooling in Ireland is over at AtlanticBlog.

Posted at August 16, 2004 10:18 AM

Comments

You have brought up many, many good points, but they are all irrelevant.

Look, by any measure, Egypt has raised the educational achievement of its population. The Law of Diminishing Returns runs in one direction, so if education brings economic growth, even small changes to the number being educated should bring SOME increase in economic growth.

Even if all Egypt did was increase the number of people who can read the Koran, THESE PEOPLE CAN READ. One has to think that basic literacy gives the biggest bang for the economic buck.

The moral of the story is that OTHER THINGS matter more than education. I look to economists to figure out what those OTHER THINGS are (I will bet good money that it is economic freedom).

I just took some training last week that was taught by an Egyptian born engineering PhD. He makes a good living here. Why is he here and not over there?

Comment by Eric Krieg at August 16, 2004 11:20 AM | Permalink

Well, I tend to disagree with the idea that they're irrelevent. A lot of the work I've read (meaning, of course, that there is likely to be a large literature of which I am woefully unaware) that asks if education is a factor for growth glossess over the issues I wanted to bring up. That is, the item they include in regressions are things like mean years of school, possibly with variables for men and women, the income for each marginal year of schooling, etc. My point is that this oversimplifies things, especially in the cases where increasing spending on education is the crux of the matter (which, I think it's fair to say, is generally the policy advice given when people cite studies on the benefits of education to economic growth.)

If the line between education and growth isn't clear, then it's not use basing policy off it, since we ultimately won't be able to say why it worked or failed in some place. The disparity between returns to education between countries brings up this very notion: why is spending in one place more effective than in another? My suggestion, weak as it might be, is that the study asks too-simple questions to be of use. Perhaps investigating the kinds of education one is able to avail oneself of is more important.

Also, I did mention in the post that I think the question of certain life basics is more settled: a population is better off if more people can read, do basic sums, write their names, etc. Their ability to use the system in which they live being just one of them (that is, knowing their rights, reading a contract, etc).

My point has little to do with diminishing returns. The question of relative levels of return on an investment. I'll grant that Egypt has improved its yearly education attainment (I have no real knowledge of it, and so left it out of the original post), but this has certainly not resulted in overall economic growth. Perhaps, I suggest again, finding that -- all else being equal -- education is or is not a contributor to growth is questionable in and of itself because of the problems inherent in lumping education into too-large a bucket.

No one's saying other things matter more or less than education. Personally, I think it's the institutions that matter the most, an educational system being just one of them. The original MR post, and the article at Spiked, bring up the question of whether Education is or is not a contributor. Not whether it is the most important one.

Comment by Ian at August 16, 2004 12:40 PM | Permalink

Oh, and as for the question about that Egyptian fellow is here and not there: again, returns on investment. Work need not be restricted to the country in which education comes from. (Though, mobility tends to increase in certain professions when more education is attained.) Regardless of where the man got his PhD, he's apparently been able to find better compensation for it here, clearly.

The relevence here, however, is about why he got a PhD in engineering, and didn't become a more tradesman-oriented worker like an electrical engineer. My answer would be returns on investment in education. He was good enough, or thought his prospects good enough, to forego the income he could have been making while in school in order to keep studying. He faced certain trade-offs in cost to do so. Lower the costs, and you'll have more people doing it. Increases in spending on education (by the state, I'm assuming, since none of these seem to be tallying the amount of tuition paid by an individual as part of the "spending" on education) make it more attractive for some to enter higher schooling. But these people might not be any good at it, or only passably good, using up the academic resources that might be better devoted to those students who excel.

Years of schooling attained, to me, has to be reviewed in connection with type of schooling, and thus state spending.

Comment by Ian at August 16, 2004 12:49 PM | Permalink

I think that you are making too strident a case. There isn't a big enough difference between, say, a liberal arts education and a trade school education to result in NO economic growth in the former and LOTS of economic growth in the later. Again, the LODR tells us that a little education should go a long way.

If that is true, then what's up with Egypt?

Here's an idea: the brain drain from these countries to the US is fierce. Egypt is educating our engineers. We get the economic growth, and they get the bill!

Comment by Eric Krieg at August 16, 2004 02:53 PM | Permalink

Actually, there's a pronounced difference in kinds of education when it comes to things like income per year (one of the measures discussed in the articles). Robert J. Lalonde has a working paper that looks at the difference in returns to various CLASSES (let alone broad categories of educaiton), and the difference is remarkable. Even with the actual degree, those people who took "hard" classes (sciences, math, etc) do much better than those who took "softer" classes. Writ large, this could be a clear indication that types of education matter for personal growth, and thus growth in the aggregate.

But that's sort of tangential. The issue I raised proposes that access to various forms of education (something missing in Egypt) allows people to sort themselves into those kinds of training that will do the most for them. Taken together, this might mean people end up in vocations better suited for them than when you simply have lots of people moving through a single education system that does nothing particularly well except expand the rolls of people "in school".

Comment by Ian at August 16, 2004 09:34 PM | Permalink

I'm sure that paper is correct. Starting salaries for graduates of the "hard" sciences are very high.

Nonetheless, when we are talking about a third world country that is emerging from ignorance and illiteracy, I would think that 1) the education system IS more skewed towards the hard sciences and 2) just developing a basic literacy should give you a huge bang for the buck.

I would be wary of applying a working paper that focueses on the first world to the third world.

Outside of the US, engineering is a very prestigeous profession, and is the one most likely to be aspired to. I am sure that the Egyptian education system is just as skewed towards engineering as the South Korean education system is.

Comment by Eric Krieg at August 17, 2004 09:20 AM | Permalink