Education is a credence good

There is a bad idea that comes up time and time again that I’m sure I have argued against before. But there it was, in The Australian this morning:

“The current financing system gives universities a large financial incentive to enrol students who academically ought not to be there, and by failing to impose any accountability for whether or not these students actually receive any benefit from their studies,” [economist Andrew] Stone writes.

Put unis themselves on the hook, in part, for students debts. HELP loans would become joint loans, under Stone’s plan. Universities would be required to pay an annual interest charge on loans that weren’t being repaid. This would focus the minds of university administrators on the quality of their courses and the wisdom of enrolling students who are likely to benefit little from them.

Andrew Stone is a former economic adviser to Tony Abbott and son of John Stone. His book is available here.

Okay. So. Bad idea.

Universities cannot and should not ‘guarantee’ their students subsequent performance. In fact, the article in The Australian sets out exactly why that is the case:

Sure, students with degrees tend to earn more than those ­without them, but that has little to do with what they have actually been taught at university.

University education is just one of many factors that determine future success. Dare I say it, probably not the most important factor either.

So in detail:

Economic goods and services can be categorised three ways:

  1. Information goods – these are goods and services where all the features and characteristics of the good can be provided in advance of consumption.
  2. Experience goods – these are goods and services where some (perhaps all) of the features of the good can only be provided though actually consuming the good.
  3. Credence goods – these are goods and services where all the features of the good or services cannot be known even after consumption of the good.

It is possible for an experience good to become an information good. This is often the case with repeat purchases. I know what a glass of my favourite wine tastes like because I have tasted it before. It is not possible for a credence good to become an experience good or an information good.

Education is a credence good. Now to be clear – going to university can be an information good or an experience good.  A university can specify in advance what subjects students will have to do, and what materials students will be exposed to, and broadly what sorts of assessment tasks student will have to undertake. That is trivial. Similarly going to university can be an experience good. It is only while at university that students discover if their attempts to consume large amounts of alcohol, fornicate, and pass exams is successful or not.

Whether a student was actually educated and whether that education played any role in future success is less clear. As much as universities would like to claim causation, at best they can claim correlation. Having a high performing alumni says as much about entry standards as it does exit standards.

Education is jointly produced by the university and the student. The university puts together a program of study and surrounds that program of study with policies and procedures.  The student undertakes that program of study and complies with the policies and procedures. All the university can say about graduates is that they performed to some arbitrary standard (usually 50% as a minimum pass mark) and complied with the policies and  procedures to the best of their knowledge.

At best a university can claim: graduate X was exposed to information Y, and assessed in process Z.

That is a lot less than many readers would be comfortable with – it is lot less than many university administrators would like.

My argument, moreover, is two-fold. Not only can universities not make a stronger claim, it would be socially undesirable to have universities have “skin in the game”.

Putting skin in the game would make universities less risk tolerant. Even risk averse.  If educational success is defined as students future financial success universities would have an incentive to select those individuals whose future financial earnings were higher as opposed to lower.

What’s wrong with that some might ask?

Well, lots.

Let’s have a look at pay data. On average men earn more than women. On average taller people earn more than shorter people. On average good looking people earn more than not-good looking people. On average white people earn more than non-white people. On average native born people earn more than immigrants. And so on.

Now we can quibble – many of the wage gaps that we observe are statistical artefacts and have underlying causes and so on. Okay – but ask yourself, why would a university that would be financially penalised for graduating lower earning graduates over time – for whatever reason – not select taller, white, good-looking, native born, men over anyone else?

Now when I ask my colleagues who think ‘skin in the game’ is a good idea they always always answer with “no, we would never do that” or “there are not enough taller, white, good-looking, native born, men to sustain the system” and so on. But why even go there?

Right now universities select on past performance and an expectation of future educational performance. Future employment performance is something universities cannot control.

Long story short:

  1. Given the economic nature of  education it cannot be done.
  2. Given human nature it should not be done.
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43 Responses to Education is a credence good

  1. Mark from Melbourne

    Having a high performing alumni says as much about entry standards as it does exit standards.

    This.

    So “skin in the game” could be just as simple as measuring exit standards (no matter how that might be done) and then ensuring that, to continue to get funding (however defined) any Uni that failed on the exit standards must raise the entry standards.

    Pretty much how quality control works.

    If you allow shit inputs, you get shit outputs. If for whatever reason you can’t accurately measure the inputs, then measure the outputs and adjust inputs accordingly.

    Grand idea. I’m all for it.

  2. Herodotus

    I went to uni when entrance was very competitive and failure was a real option, exercised with little compassion. Oh, and you or your parents had to pay up front, no HECS.

  3. John Brumble

    Agree, Mark. Sinc used an awful lot of words to say “we shouldn’t have to be marked on performance”.

    Of course, if it’s about the experience, that’s fine too – just take away the government funding for that bit.

  4. Elderly White Man From Skipton

    Sinclair does not see himself as a public servant. Yet, confronted by an argument for performance based pay, he flees to the ivory tower.
    Unfortunately the truth is that a very large proportion of university students are seeking a vocational benefit. So it makes sense that the teachers are judged on that basis.
    Sinc: accountability is knocking.

  5. mem

    If you allow shit inputs, you get shit outputs. If for whatever reason you can’t accurately measure the inputs, then measure the outputs and adjust inputs accordingly.

    This presumes that the butter churn (uni) doing the processing is operating at peak level. Unfortunately the university butter churn hasn’t been operating at peak level for some time mostly because learning/teaching runs subsidiary to administration. Administrators are paid far more than the academics and the academics are spending an increasing proportion of their time doing clerical activities that should be done by the administration (which now thinks clerical work is beneath them).

  6. Mark from Melbourne

    This presumes that the butter churn (uni) doing the processing is operating at peak level.

    No, it assumes that the churn is operating at a roughly constant level.

    Measuring outputs enables you to tweak the inputs and – less likely – tweak the churn.

    Better milk, not a better milkmaid, as it were. Even if both are desirable, the former is nearly always easier to control, in my experience.

  7. Crossie

    Okay. So. Bad idea.

    Universities cannot and should not ‘guarantee’ their students subsequent performance. In fact, the article in The Australian sets out exactly why that is the case:

    In that case they should demand upfront fees for the courses that have had poor employment stats. Those students of woke courses that are really good can convince foundations to give them scholarships or the universities themselves can offer those scholarships.

  8. Crossie

    Elderly White Man From Skipton
    #3352534, posted on March 11, 2020 at 8:36 pm

    Unfortunately the truth is that a very large proportion of university students are seeking a vocational benefit. So it makes sense that the teachers are judged on that basis.
    Sinc: accountability is knocking.

    What’s even more unfortunate that an equally large proportion of academics are contract staff with no power whatsoever. They do not design the courses, they are only employed to teach them. The school/faculties and the tenured staff themselves are the culprits.

  9. Sinclair Davidson

    Yet, confronted by an argument for performance based pay, he flees to the ivory tower.

    More than happy for my performance to be measured.

    1. I destroyed the argument for FuelWatch.
    2. I destroyed the mining tax.
    3. I played a large role in destroying the carbon tax.
    Those three things alone saved Australians billions in taxation.

  10. Entropy

    I confess I had forgotten your role in those. Deserving of worship just for that.

  11. Sinclair Davidson

    I confess I had forgotten your role in those.

    Sad face.

  12. Entropy

    On this there is still the vexing issue of old ladies doing courses on HECS they never intend to pay back; hordes of foreign students doing a variety of subjects on the visa degree to the extent locals with an actual interest in the subject are crowded out (for example, I have heard of lectures and tutorials delivered in mandarin because the majority of students are Chinese (cough Griffith).

  13. Sinclair Davidson

    locals with an actual interest in the subject are crowded out

    I have never actually seen that. No smart VC would do that – it’s easier to scam the Australian government and collect HECS than earn the fee of a foreigner.

    I have heard of lectures and tutorials delivered in mandarin because the majority of students are Chinese

    That is an easy to fix problem – government should conduct an exit English exam before allowing a visa application to proceed. John Stone does recommend something along those lines and I think that is a good idea.

  14. 2dogs

    why would a university that would be financially penalised for graduating lower earning graduates over time – for whatever reason – not select taller, white, good-looking, native born, men over anyone else?

    Because that is simply illegal.

    Their situation is the same as employers selecting employees that would need on the job training: they could gain by adopting the same approach if it were legal for them to do so. In the distant past, when it was legal, they did.

  15. Entropy

    I have heard of lectures and tutorials delivered in mandarin because the majority of students are Chinese

    That is an easy to fix problem – government should conduct an exit English exam before allowing a visa application to proceed. John Stone does recommend something along those lines and I think that is a good idea.

    Pretty lecturer and the students could all speak English, it is just with only a handful of locals, well, the majority were more comfortable in mandarin, and bugger the minority.

  16. 2dogs

    Having a high performing alumni says as much about entry standards as it does exit standards.

    Yes, but entry standards also contribute to the value of the degrees produced. Universities produce value not just in improving of human capital, but also in certifying it. This is an essential part of their job and they should not shirk their responsibilities in this regard.

  17. Sinclair Davidson

    Dover – are you in Melbourne or the US?

  18. Infidel Tiger

    More than happy for my performance to be measured.

    1. I destroyed the argument for FuelWatch.
    2. I destroyed the mining tax.
    3. I played a large role in destroying the carbon tax.
    Those three things alone saved Australians billions in taxation.

    Yeah but what have you done for us lately?

  19. Driftforge

    Aside from the requisite appeal to leftism as justification, this seems reducible to ‘Should the government carry the debt of students as a general cost, or should the government (through its tertiary education arm, universities), carry the debt of students as a specific cost?’

    Or – does carrying the costs as specific costs reduce the likelihood of those costs spiraling to match available debt capacity?

    Clearly the system in the US is about as screwed up as such a system can be, where education costs increase to match the available debt capacity. Not ideal.

    Clearly students (often still minors at commencement) aren’t at a stage in their life where they have the capacity to fully consider the consequences of such debt.

    Clearly full fee paying international students in combination with government funded local students lead to a decay in academic standards.

    Seems like a construct where the cost / debt fell on the parents would work better, as they at least are adults and have an interest, a relationship, and the capacity to pull the pin when needed, and are often the main driver toward further education.

    But that then place the whole structure into fee paying mode, which would put further pressure on standards.

    Who benefits from an strong university, or suffers when it is weakened?

    Should an employer be able to sue the university for certifying someone as fit for task when they are not?

    Complex issue, probably more than should be dealt with this late at night.

  20. BorisG

    Because that is simply illegal.

    Their situation is the same as employers selecting employees that would need on the job training: they could gain by adopting the same approach if it were legal for them to do so.

    It is illegal but hard to enforce. Age discrimination in employment is also illegal but practiced widely.

  21. BorisG

    Sinc you are argument look reasonable but what is your alternative solution ?

  22. Diogenes

    The fact that many occupations have a university degree as a barrier to entry, that makes them information goods.

    Think policing, nursing, teaching (including Child Care Manager), computing, engineering, journalism, project management, and even law, turning many universities into “super TAFEs”.

    Many/most of these professions were once handled through apprenticeships & traineeships. Seriously how many of these really require a degree, at least for 80% of the practitioners?

  23. jupes

    Seriously how many of these really require a degree, at least for 80% of the practitioners?

    I would say engineering, law and teaching. Possibly project management however a tradie should be able to do it with enough experience (depends on the project).

  24. Archivist

    Everything you say is true, Sinclair.
    But this bad suggestion is an attempt to address a real problem.

    University education has become a joke, standards have dropped, and an increasing number of degree programs offer little in the way of either career opportunity at the end. Increasingly, y0ung people are wasting their time there, and the government is wasting its money.

    We can dismiss the situation as one that markets will correct, but there’s an ongoing social and financial cost while it continues. What’s the cause? Is it caused by funding arrangements that distort supply and demand? Some people think so.

  25. Archivist

    1. I destroyed the argument for FuelWatch.
    2. I destroyed the mining tax.
    3. I played a large role in destroying the carbon tax.

    You rock.

  26. Gibbo

    In today’s edition of “it’s not a rort in you’re in on it”…

    This is not your best work Sinclair, please try harder.
    🙂

  27. Elderly White Man From Skipton

    Sinclair: Mitch Hooke owes you a lot of money! (Seriously, you don’t believe that stuff do you? And in any case, why would taxpayers fund you to do that when you’re supposed to be teaching bean counters?)

  28. Bruce

    Old engineering adage:

    “If you can’t measure it, you can’t make it”.

    Try building a house without a tape-measure, spirit-level and squares. People did it for millennia, BUT, precise and with interchangeable fittings and fixtures, they most certainly were not.

    Try building an audio power amplifier without a multi-meter and an oscilloscope and don’t forget the dummy loads, even using ‘best quality” components.

    “Tolerance-stacking” will get you every time.

    You can fabricate or assemble “a thing”, but will it be, within stated tolerances, to specification and will it perform to the design brief?

  29. Sinclair Davidson

    why would taxpayers fund you to do that when you’re supposed to be teaching bean counters?

    We’re all in luck then aren’t we.

  30. thefrollickingmole

    I can see Sincs point, however what existing mechanism would stop the proliferation of greivance course studies?
    Especially when many find the only thing their degree is good for is ticking the “university qualification” box in a public service job application.
    There is a lot of damage done to the broader community by allowing such courses to be treated the same as “hard” courses.

  31. Elderly White Man From Skipton

    Sinc: I think you might be out of luck actually. My impression is that employers are restive about the education system in general and specifically its suitability to contemporary vocational demands. I suspect there’s going to be some re-ordering and some performance testing in the not distant future.

  32. Sinclair Davidson

    Elderly White Man From Skipton – Employers have been bitching for decades about the quality of graduates. My view on this is very simple: You don’t pay, you don’t say.

    I suspect there’s going to be some re-ordering …

    I hope so – I have views on how that re-ordering will play out.

    … and some performance testing in the not distant future.

    We already have performance testing – at the individual level (measures such as what I pointed to above and others) and institutional level measures (income statements and balance sheets).

  33. max

    Time to Abolish Universities
    sending a child to a university is irresponsible.
    these intellectual brothels, cost big money.
    By sending our young to college, we are impoverishing them, and ourselves,
    Besides, the effect of a university education can be gotten more easily by other means.
    If you want to expose the young to low propaganda, any second-hand bookstore can provide copies of Trotsky, Marcuse, Gloria Steinem, and the Washington Post.

    The university has always been a place of debauchery. It is debauchery in the broadest sense, by which I mean spiritual and intellectual debauchery. From the very first university, which was a specialized law school, the University of Bologna, the state has had a stake in the operation of the curriculum. The state took the graduates of the colleges and put them in charge of the state’s multiplying bureaucracies. The students could read, and they could handle arithmetic, which made them excellent bureaucrats.

    The university has been a bureaucracy of the statist typology from the day that professors stopped being supported by the voluntary contributions of their students (which was normal in the twelfth century). With the advent of tenure, closely followed by state financing and Federal grants, the college professor has become a bureaucrat so safe that only the functionary of the larger tax-exempt foundations can claim to be more insulated from competition. This is equally true of the professor on the private campus, given the financial position of tax-exempt endowments.

    American corporations are more and more involved in sales to the state, and therefore they begin to adopt the control characteristics of the statist bureaucracy. They need people to staff their posts. Thus we find the overwhelming number of graduates from our universities going into three main areas of employment: government service, college or public school teaching, and large corporations. That is what they have been trained to do; that is what the state pays for and the large corporations want.

  34. Elderly White Man From Skipton

    Sinc: suggest you keep an eye on the reviews under way. I doubt they will meet your exacting criteria of performance.

  35. Sinclair Davidson

    Sinc you are argument look reasonable but what is your alternative solution ?

    So my colleagues and I have a theory of the university as a platform economy that is somewhat different from the diploma-mill view that dominates public discussion (and the thread above). With that view of the university what happens when you add technology and blockchain? So the first question is: What is it that universities actually do? Turns out that teaching and research are second order answers to that question.

    So hopefully in about a year’s time all these questions – and more – will be answered when you buy “So you want to be a university president” – that’s the working title.

  36. EllenG

    More than happy for my performance to be measured.

    1. I destroyed the argument for FuelWatch.
    2. I destroyed the mining tax.
    3. I played a large role in destroying the carbon tax.
    Those three things alone saved Australians billions in taxation.

    Sinclair: most of think these were the efforts of quite large, well funded lobbies. Notably Mitch Hooke and the mining council. Not entirely clear that your personal credit was as described here.
    Second. I thought most people were rather keen to see unis get back to good teaching or clear, tangible research.
    Remains unclear how the tax payer gets value by funding lobbying. Isn’t that kinda what the whole swamp thing is about??

  37. Squirrel

    The move of the tertiary education sector towards a demand-driven model, underwritten by taxpayers, was one of the more fiscally egregious policies of the Gillard government – and the failure of the then Opposition to question that, and propose alternatives, was disappointing, to say the least.

    Happy (enough, up to a point….) to see increased real public funding for education, but it would be easier to feel comfortable about that if the results, however measured, matched the increased funding.

    In the case of post-school education, the increased funding, and increased participation rates, seem to have done nothing to reduce the claims of skills shortages from employers (and not just in relation to difficult to prepare for spikes in demand – as in the peak of the mining boom).

  38. Elderly White Man From Skipton

    Sinc: I suspect that you might be surprised by the outcome should you insist that it’s not your job to teach or research. I’d go further and say that the next generation will be mostly about teaching and research funding will be highly contestable around the likelihood of valuable outcomes. Vocational learning looks like being a primary function except in quite few highly specialised research centres.

  39. Archivist

    Employers have been bitching for decades about the quality of graduates. My view on this is very simple: You don’t pay, you don’t say.

    Totally.
    Employers and government need to change the mindset that universities train people for work. They don’t, never have, and never will. They’re not built that way.

    The best training for the workforce is work, including in specialised and technical fields. Australian regulations have been making it harder and harder for workers and employers to figure out how to skill people up on their own, without assistance from the government, colleges, and universities.

  40. Sinclair Davidson

    Sinclair: most of think these were the efforts of quite large, well funded lobbies. Notably Mitch Hooke and the mining council. Not entirely clear that your personal credit was as described here.

    If you say so.

    Second. I thought most people were rather keen to see unis get back to good teaching or clear, tangible research.

    Luckily my teaching scores are very high. For clear, tangible research see point one above.

    Remains unclear how the tax payer gets value by funding lobbying. Isn’t that kinda what the whole swamp thing is about??

    Didn’t you just say you wanted clear, tangible research?

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