Undercover Economist

Are universities worth it?

Last week the British university system offered a record number of places. That sounds like good news — but do we really need more people to go to university? For that matter, does the world need more universities?

 The answer feels like it should be yes. Education is good, is it not? But everything has a cost. Education takes time. We could insist that everyone study full-time until the age of 45 but that would surely be too much. And if that’s too much, perhaps half the population studying until they’re 21 is also too much. As for universities, they consume financial and intellectual resources — perhaps those resources might be better spent elsewhere.

My own personal bias is strongly in favour both of going to university, and of simply having universities around. Since the main skill I learnt at university was to write about economics, and I use that skill every day of my professional life, even an abstract education seems practical to me.

But these are samples of one. Many people do not find themselves using the skills and knowledge they accumulated at university. And Oxford’s dreaming spires aren’t terribly representative of global universities as a whole. New York University is a fine institution but, according to TripAdvisor, it’s the 263rd most interesting attraction in New York City. (Nine of Oxford’s top 10 attractions are university-related.) If the London School of Economics were to be bulldozed and replaced by a hotel and apartments, social science would feel a grievous loss but I am not sure that many Londoners would notice the difference. Warwick University is a superb seat of learning but it attracts no visitors to Warwick, since it is neither attractive nor in Warwick.

So the case for building more universities needs to rest on more prosaic grounds. A recent research paper by Anna Valero and John Van Reenen of the LSE takes a statistical look at universities around the world, asking whether they seem to boost their regional economies. (Examples of a “region” include Quebec, Illinois, Wales, and New Zealand’s North Island.)

There are several reasons that they might. Universities produce well-qualified young people, many of whom stay in the area when they have finished their studies. Universities often produce useful inventions. Some innovations are borderless — penicillin was discovered in London, developed in Oxford and is available anywhere — but many research ideas stay local, at least for a time. Silicon Valley grew up around Stanford, and it hasn’t moved. And there’s the simple fact that universities funnel central government money through staff salaries, student loans and other sources of local spending.

Valero and Van Reenen find that universities do indeed seem to boost the income of their region. Double a region’s count of universities — say from five to 10 — and GDP per person can be expected to rise by 4 per cent. Double the university count again, from 10 to 20, and that’s another 4 per cent on GDP per person. Neighbouring regions also benefit. This is not a trivial effect.

Valero and Van Reenen are fairly confident that causation doesn’t run the other way — it’s not simply that regions build universities because they expect future growth. But they can’t be sure that there isn’t some third factor at play: perhaps, for example, strong and capable regional governments produce both prosperity and universities.

A more sceptical view comes from Bryan Caplan, an economics professor who, ironically, is the author of a forthcoming book The Case Against Education. Caplan points out — not unreasonably — that many students seem to learn nothing of any obvious relevance to the workplace but, on graduation, they’re rewarded with much better career prospects than non-graduates. Why?

Caplan’s answer is that education is a signal. If employers have no way to tell who is smart and diligent, a student can prove that she fits into that category by excelling in, say, Latin. The Latin is like a peacock’s tail: costly and useless in its own right but a necessary investment.

To the extent that Caplan is right, undergraduate degrees have no value to society: they enable employers to pay higher wages to smarter workers, but lower wages to everyone else — and in order to enjoy these higher wages, smart people must waste time and money going to the trouble of acquiring a degree. Everyone might be better off if the whole business was abandoned.

Who is right? My heart is with Valero and Van Reenen. But Caplan strikes an important note of discord. Collectively, we have allowed university admissions and examiners to become gatekeepers for a successful career. Is that really wise?

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