Here are the powerpoint slides (.pdf format) for my CEA Presidential Address "The Political Economy of University Education in Canada":
The talk will be written up for the November issue of Canadian Journal of Economics, and I'll sketch out some of the main ideas here. Universities do two things. First, they produce knowledge. I say "knowledge" rather than "research" because some things that don't count as "research", such as blog posts, still add to what is known about the world, while some things that do count as "research" add little to knowledge. Second, universities do something to students that usually generates higher earnings - call it learning, sorting, teaching, whatever.
I argue that the university sector is, at present, characterized by x-inefficiency, that is, resources are not used as effectively as possible, and also by allocative inefficiency, that is, the mix between knowledge and learning/sorting does not maximize social welfare. But this present state of affairs is becoming increasingly unsustainable. Demographics, technological change, and other factors (such as the feminization and politicization of university education) are creating momentum for change. But will change be for the better? There are reforms that might do some good, and there are reform that are possible to implement, but it is not clear that there are a lot of reforms that are both effective and also have low barriers to implementation.
The basic problem is one of imperfect information. It's a bit like the underpants gnomes, as seen in South Park. The underpants gnomes have a great business plan. Phase 1: Collect underpants. Phase 2:.... Phase 3: Profit. Higher education is a bit like this. Phase 1: Attend university. Phase 2:.... Phase 3: Higher Earnings. The question is: "What's phase 2?" The mechanisms by which universities improve the future earnings of their students is not fully understood.
That's not to say we know nothing about how attending university translates into higher earnings. Roughly speaking, attending university does three things. First, it builds human capital - skills and knowledge that make a person more productive in the workplace. So, for example, in university, one might acquire better communication and time management skills. Second, universities are a sorting mechanism - universities sort more able students from less able ones, and sort students into fields of study that are a good match for their abilities. Third, universities are places to build social capital in the form of networks and connections, and getting a job is a function of who you know as well as what you know. For example, a recent paper by Mara, Davis and Schmidt argues that fraternity membership has a positive impact on earnings and a negative impact on grades - even after controlling for the tendency of sociable, hard-drinking people to join fraternities. (Social capital might also be thought to include learning the speech and habits of the middle/upper middle class). The sources of on-going debate are about the relative importance of these various factors. Is university mostly about signalling, as Bryan Caplan argues, or is there a larger role for human capital? This paper by Heckman, Humphries and Veramendi, which has just come out in the Journal of Political Economy, is a reasonable starting point to think about this literature.
Yet even if we could break down the value of university education into signalling and human capital, we still wouldn't know much about how universities actually create these things. Do students learn by listening to professors lecturing? Or do professors create value by telling students "there's an exam on all of this on Friday and if you don't know this material you will fail" - thereby incentivizing them to work hard and learn? How much of an impact do things like, say, the quality of the library's collection on student learning?
Now in a competitive market it doesn't matter so much if producers don't understand the nature of the production process. The original McDonald brothers might not have known how or why their cooking methods produced crispy and delicious fries. But it didn't matter, because people could experience the yumminess of the fries. The line-ups outside their hamburger stand gave the McDonalds a clear signal that they were doing something righ. But education is far from being a competitive process. Students know that the quality of their education matters, but how do they figure out which programs are the best?
Over the next few days I will add additional explanations, references and so on. In the meantime, I would very much appreciate hearing any thoughts or comments you might have. If you'd rather not comment here, please do send me an email.
Acknowledgements: Giving this talk was a joy, because every time I glanced up at the crowd, trying to make eye contact with the audience, I saw a good friend. The Canadian economics profession is truly a community. I'd also like to recognize all of the people who helped me prepare this talk. Scott Irwin's FaKe LaTex paper gave me back hours of my life. My Carleton colleagues showed up en masse for a very preliminary and unpolished rough cut. The Centre for the Study of Living Standards allowed me to share ideas with a small but acute audience. Nick Rowe listened to the penultimate version and insisted upon the underpants gnomes being kept in. I'm grateful to Alice Woolley for long conversations, and to this blog post on law schools which talks about some of these ideas from a more legal point of view. C, K, Rachel, Lois and Peter have been my strongest supporters. David Long has been by my side through a whole lot of rough times this past year. Without him nothing would be possible.