Education as a Luxury Good

Lambda School is growing fast. If you haven’t heard of it, I suspect you will in the next few years. Bryan Caplan, an economist at George Mason University, argued that education is “grossly overrated,” as did Nassim Taleb in Antifragile. Peter Thiel famously paid students to quit school to start startups. The list goes on.

In the signaling theory of education, a university is an elaborate sorting mechanism. Under this view, schools provide value only by extracting information about students from the admission and graduation process. The value is delivered in the form of a stamp, which means “this student passed through our proprietary vetting process.” Employers attach value to the stamps according to their perceptions of different vetting processes.

Some conceive of education as a means of turning students into skilled workers. Their view is that, once finished with a degree, a student will transition relatively seamlessly into the work environment, save for some adaptation to the quirks of a particular workplace. This assumes classroom learning translates to the workplace in a relatively straightforward way.

If these two views are the only alternatives, the signaling theory has more evidence on its side. I think there is another perfectly good view, though, which is that education is a luxury good.

Collectively, wealthy societies decide to allow their children to write off 4 or more years of their lives. Everybody is in on this. When I purchase education, I’m really buying a bundle of things:

1. A stamp
2. Personal enrichment opportunities
3. Protected time
4. Social opportunities
5. Living amenities

These things aren’t necessary, or basic human rights. They are just nice. Rich people want their kids to have them. There are ways to get some without the others and reduce the cost, though the surge in demand for item 5 in particular has made this harder.

If you want a cost-effective program for developing relevant workforce skills and maximizing earning power in a short time, the traditional university path isn’t the best, or even all that good. The truth is most people don’t want that. The dialogue I see online (mostly Twitter) leaves this point out.

On a plane to Japan recently I read all 204 pages of the complaint against parents who paid to get their kids into universities. This got me thinking about the different schools parents targeted. The data aren’t really representative, so I can’t make general conclusions, but there is a surprising lack of insistence on particular schools. I mean, if you’re paying to cheat your way into a university, why not at least raise the issue of going to Stanford, MIT, Harvard? One parent did, in fact, go for both Stanford and Harvard. Most, however, were happy with USC. I suspect this is mostly due to a higher chance of success at USC, since the scammer had a reliable scheme with an athletic administrator there. However, it might also be because these kids, the kind who couldn’t get in the usual way, wouldn’t have felt comfortable at Stanford. To take this a bit further, of the 22 students in the Parchment database who got into both Stanford and USC in the 2012–13 academic year, 20 chose to go to Stanford. Is it possible the quality of education is a bit different even among good schools?

Austen Allred, cofounder of Lambda School has this to say on the matter:

While I think this misses a lot, it leads us to item number one on our list.

Stamps

This is the signaling idea, mentioned above, and it’s really getting press these days. As long as you attach yourself to a brand, you’ve got it made. The vetting process for admission is everything. Once that is done, you pay up, sit through loads of meaningless speaking for the next four years and get a ticket to the upper-middle class.

The most compelling evidence I’ve seen is from Bryan Caplan, reference above. He points out that almost all of the wage premium from college comes in the last year. So if you dropped out in the middle of senior year, you would lose the majority of the gains from going to college.

Another angle which I’ve always liked comes from Rory Sutherland, who suggests that the stamp is as much for the student who receives it as for employers. Education is partially a big placebo to boost confidence. Paradoxically then, the idea that education prepares you for the workforce is only a lie if you perceive it as such.

Personal Enrichment Opportunities

Study abroad, sports and music lessons, reading great literature, attending lectures on interesting topics by researchers. These are all things people often pay for in contexts outside of universities. College life is stuffed full of them. Are they economically valuable? Well, on the one hand, they are about as valuable to your job as attending a classical music performance. Yet, they are enjoyable and stimulating, and they come more or less bundled with education.

My hope isn’t to justify the place of enrichment opportunities in the college experience. But those opportunities are there, part of the price, part of the package, and it seems most people want them, even if they don’t say so.

This is also where I place economically beneficial learning. A note on this point: people downplay the amount they learned in school, but there is a natural bias to doing so. It’s very difficult to remember exactly when or how you learned something pivotal. Knowledge typically accumulates slowly and relatively continuously, not in big obvious measurable chunks.

Protected Time

I’ll go to Paul Graham for a moment:

It’s no coincidence that Microsoft and Facebook both got started in January. At Harvard that is (or was) Reading Period, when students have no classes to attend because they’re supposed to be studying for finals. The empirical evidence suggests that if colleges want to help their students start startups, the best thing they can do is leave them alone in the right way.

This is actually sort of a bad example, since here Gates and Zuckerberg took time away that was protected for something else. It still makes the point that protected time is valuable. My claim is that university students have a lot of it, especially relative to those who go through skills training and then directly to the work force. Ask yourself: if you could have your undergrad schedule again, would you do it? I certainly would. Again, this is about luxury. It is a luxury to grow up slowly.

Social Opportunities

Opportunities for friendship and dating. How much do I really need to say here? Go to the rating website Niche and type in your favorite university. The criteria include ‘Party Scene.’ How important is that to Niche’s ranking system? How much should we care about this random website? Well, I don’t know, but its mere presence on the list is informative, isn’t it?

Also, social capital. Ask someone with an MBA about what they took away from it, and most say the same thing: “the real value is the network.” If you are at a university, your peers will enter a wide array of occupations. If you attend a skills-focused institution, other people who do your job will be your peers. That’s totally fine, but also redundant. All the socioeconomic capital offered by your friends is the same as what you have.

Education is a social club, and it’s almost engineered to have economic spillover later in life. One of the more interesting papers I ever read suggests that when male college students join fraternities, their grades go down but their expected earnings go up: social capital.

I feel like after three short paragraphs I’m beating this to death. You read this and wonder why I’m still talking about the social component of college. I wonder too, but I come back to the fact that I don’t see it in the discussion enough. Social opportunities are a big deal. I would say they rival the stamp value of education, and in fact the two things stack. The better the university stamp value, the more valuable the network attracted, the more valuable the stamp gets, and so forth.

Living Amenities

Campus life hinges fairly heavily on how good the campus is. If you are a bro, you really do need a mirror in your recreation center for doing those deadlifts. You need treadmills, the climbing wall, the indoor track, the tennis and squash and basketball courts. You need a good student union building, and performance hall, and classrooms with natural light, and an inviting library, and good computers, and so forth.

If you wanted to stay at a hotel embedded in a complex like this for 4 years, you’d pay a lot of money for it. And who can blame you for wanting this stuff? Of course it has an impact on tuition and fees, but it’s spread pretty thin across students and people want it. They want it a lot.

There is a nuance, which is that it needs to have heritage. This is like the perfect retro cars: appears to be old but performs like new. Students want time honored, iconic buildings and architecture, but they don’t literally want to sit in a stale old stone basement to learn math. This is a pretty costly mix: old land, old bones, new interiors, new conveniences.

Proportions

Now comes the controversial part where I make a guess about how much each aspect comprises of the whole college bundle. This is both in terms of value and in perspective, from the view of students and their parents. Controversial because I’m pulling numbers out of my hat. I don’t really know.

30% stamp value, 30% social opportunities, 20% protected time, 12% enrichment (economically valuable learning is in here), 8% living amenities.

According to my estimation, which I just now conjured into being and based solely on my relatively uninformed opinion, the stamp value narrative misses 70% of the story. Could I be so far off in my estimate that all the takeaways are qualitatively and categorically different? It’s possible, but I doubt it.