Thursday, 5 November 2015

How Come So Many Students & Politicians Are So Ignorant About Value?

It astonishes me when something so simple and obvious is misunderstood by so many people. This doesn't happen as infrequently as one might expect - and in the case here, I'm talking about the notion that if you don't have tuition fees then vast swathes of important information about value is lost. Alas, the people causing civil unrest in London because they want a 'free' university education are not only blockheaded louts with a crass and arrogant sense of entitlement, they are unapprised of some basic economics - namely, that there is no such thing as a 'free' education, and that if you try to do away with the price of a university degree by passing it onto the taxpayer you distort the essential signposts to value.
Unsurprisingly, Jeremy Corbyn (backed by many of his Labour party affiliates) has come out in support, encouraging the angry mob to carry on protesting until university education is 'free'. It's worrying that so many of our students and politicians are this confused about value - not to mention prices, information, and supply and demand. Here is the reality that they are missing.

In proposing to artificially lower tuition fees people are showing contempt for the notion of pricing education at its value. The value of higher education is this. University fees should amount to exactly what it costs to obtain a degree, and fees (prices) should match demand, whereby the right number of people are getting degrees. How do we know what the right number is? This is down to a utilitarian efficiency, which is measured in terms of what we might call practical economic utility. What is meant by 'efficient' here is that an efficient transaction occurs when the overall increase in utility is greater than the overall decrease in utility. In other words, when degrees are priced at their true value - a value that measures costs associated with supply and demand - you have the right number of people doing degrees, and you have the right people paying for them, which is, it won't surprise you, the people actually doing the degrees.

When fees are too low, people will study even though the cost of going to university is greater than the benefits of a university education. When fees are too high, people will be put off studying, which means there'll be too few university graduates. A few of the low-fee protagonists have argued that a decline in applicants would be evidence that the fees are too high. It would not be; it would be evidence of less educational waste, with those no longer doing degrees being the people for whom the cost of going to university is greater than the benefits of a university education.

The current tuition fees system is pretty much the fairest system imaginable: the government loans to those who need the money to obtain a degree, and it only asks for payment when the post-graduate can afford to repay with a small proportion of their earnings. Anyone who thinks that that is unfair has a pretty peculiar idea of unfairness. What you have to realise is that nothing comes for free in education. If tuition fees are scrapped, then the cost of obtaining a degree is then picked up by the taxpayers. Tax that goes on to subsidise higher education amounts to lots of tax paid by low earners to subsidise people better of than themselves. We know this because we know that two thirds of working people do not have a university degree, and we know that on average obtaining a degree boosts one's life earnings by 60%.

Tuition fee subsidies do something else as well - they artificially ramp up demand for places, which has all sorts of negative spillover effects on how people value university education. Labour, under the Blair years promoted the ludicrous idea that they wanted to encourage 50% of school leavers to go on to further education. I assume they never bothered to consider that too many people would end up going to university. Similarly, people averse to tuition fees have presumably never bothered to consider whether too many people might go to university at a reduced rate, and that the lower fees might increase demand to an unhealthy or unmanageable level. As for the fact that however much you increase demand you will not increase the universities' capacity for more students than they can take....nope, there probably wasn't even a mention of that.

The irony is, instead of worrying too much about rising tuition fees, what should be considered is that putting up tuition fees, or demoting some degrees to college level qualifications, might actually be a good thing for the country overall. There's no doubt that higher education brings about huge financial benefits to the county, but there's also no doubt that having too many graduates devalues graduation in the labour market, and that in a state of diminishing returns the financial benefits would no longer bring about such efficiency. We know that currently around 20% of post-graduates are doing a job that doesn't require a degree (this figure might actually be higher) - which is indication itself that there is a surfeit of degrees in a labour market with too few degree-level jobs.

There is another very good reason why value is so important - if degrees are valued commensurate with the landscape of both supply and demand, and of the labour market, there is a better chance of the number of graduate-level jobs matching the number of graduates. For example, the future job market is going to see many current graduate-level jobs replaced by computer technology, but it will also see an increase in other graduate-level jobs that look likely to grow in number. Only a proper market-based further education system can be optimally responsive to a rapidly changing labour market environment, particularly with the proliferation of service-industry jobs.

As I often say on here, prices are the market's method of signalling how much of a good is available against the level of demand for that good. An expensive good (like a degree) costs resources (time and money) but those costs signal that those who value degrees most will get them. The abolition of tuition fees would mean that universities have no way of signalling the true scarcity and value of university places to prospective students, particularly as through a taxpayer-funded system high and low demand opportunities are going to be similar if not equal in price. Students, like people in general, make much more informed decisions in life when signals accurately match supply and demand.