Saturday, October 1, 2011

The value of an education

intellectual_coward asserts:
The common experience of many of the protesters is that of being crushed by an outrageous burden of high interest student loans. Today it is common for graduating seniors to carry $50,000, $75,000, or even $100,000 of debt.
Of course it's frightening to start your career deep in the red. But is it really "outrageous"? I'm not so sure. If there really is a free lunch to be had by getting educated, then in the long term, more people will do so, until there is no longer an advantage to doing so - when the expected lifetime income increase matches the increased cost of tuition (as more people seek a commodity, the cost of providing it rises).

An education has value, but who should pay for it? We might like others to pay for our own - that is the rational if selfish desire that seems implicit in the comment quoted above. But why? Why should my tax dollars make you rich by paying for your education? That does not seem fair either, does it? (A justification of such a subsidy might include second-order making-the-cake-bigger-rather-than-the-slice arguments.)

But why would an education cost $100,000? Back in the late 1990s when I got my university education, the tuition fees did not come close to that - the total might have been of the order of $15,000 (and included a change of direction when I realized biochemistry + physics was not a good career for me). A state subsidy would also have applied, but nothing like $100,000 worth of it. [1]

Perhaps part of the problem is that some sections of society have forgotten about applying capital cost-effectively. Maybe their universities need to learn to do more with less.

A politically incorrect counterargument is that not everyone has the same aptitude for a higher education. It certainly matches my anecdotal observations. If some people are born with a built-in advantage over others, it is natural that they would, in aggregate, earn more over their lifetime than those whose lack of talent consigns them to perform only undifferentiated labour - which anybody could provide, should they choose to. This may not be fair, that the genetic lottery determines one's prospects in life. It is, though, economically efficient - and stable.

[1] A University, particularly a private one, may want to pursue "profit" (by whatever name suits their mandate). A reasonable return on capital invested would be fair - but this return should be related to the prevailing interest rates. I don't imagine education as a particularly risky industry, so its return on capital should be fairly low. (Otherwise there would be more schools, until the return again matched the borrowing rate + (low) risk premium.) Keep this in mind when comparing what an education costs the school to provide, with its price to the student.

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