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Education's Economics Of Scarcity

All across the United States, nay all around the world, the message about higher education is uniform: More people should go to university. President Obama has repeatedly stated on record that "by 2020 America will once again have the highest proportion of college graduates in the world." The Lumina Foundation is working to increase the proportion of Americans with degrees to 60% by 2025. That would be a huge increase because currently less than 30% of adults in the United States have a degree. The demand is not limited to the United States alone: According to UNESCO, India could build a new campus every two weeks until 2025 just to account for the demand.

During the short seven months I spent at college, I, like so many other college freshman, took Economics 101. I may not be able to explain a giffen good, but I do recall one thing about the economics of scarcity: As you create more of a commodity it becomes less valuable.

Gold is valuable because it's scarce. Remember when we humans used to use seashells as currency? We stopped doing that because someone discovered they could just walk down to the beach and get more shells. Once the commodity was abundant it lost value.

Colleges are beaches. People are walking and picking up degrees like seashells. As we hand out more and more degrees, each degree becomes less and less valuable. I'm amazed no one has pointed this out.

A few countries are starting to catch on. The Economist reports that South Korea's president is now discouraging young people from going to college. In South Korea, over 82% of high school seniors go on to college—the highest rate in the world. Just as in America, students in South Korea go to university expecting a job to be waiting for them upon graduation. Then, like many graduates here, they find themselves unemployed. The president is pressing South Korean firms to hire people without degrees—two South Korean banks are taking this seriously and reserving 13% of new jobs for those without degrees.

Of course, less than 30% of American adult have a college degree, so the market isn't quite saturated. But if 60% have degrees by 2020 or 2025 we'll have to reevaluate the meaning of saying "I'm a university graduate." Many business use diplomas as a screening tool—and that won't work when 60% of adults have college degrees. The more people who go to college, the higher they raise the bar. Pretty soon you'll need a PhD in burger-flipping to work at McDonald's.

I'm exaggerating, but your employability does depend on the subject of your degree: The unemployment rate for nursing graduates is 2.2% while clinical psychologists face a 19.5% unemployment rate.

China has a solution: The Wall Street Journal reports they are cancelling degree programs in which 60% or more of the graduates fail to find employment within two years. What's interesting is that China is doing this before they experience a glut of graduates: Only 8.9% of adults in China have a college degree. This Chinese hand is not invisible, but it is certainly one Adam Smith would recognize.

What does this mean for students in college? Unless you're in China, don't expect your art history department to close down, but do realize that your college degree is worth less as more college graduates walk the stage. This reality is not cause for alarm: Degree holders will likely have an edge over their credential-less peers for another 10 years. But if we meet Obama's goal and 60% of adults obtain degrees by 2020, don't count on your degree to get a job, or even your foot in the door. You'll have to prove that you're more than an important-looking piece of paper.

Dale Stephens was homeschooled and then unschooled. Now he leads Perigee/Penguin will publish his first book about hacking your education in early 2013.

[Image: Flickr user aigle_dore]

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  • 2postcomments

    Some markets enjoy network effects where more participants create greater value.

  • #ar!

    Hey Dale, I am trying to apply for the Thiel fellowship. But i have neither published any articles nor any articles were published about me. But, I guess I have what it needs to be, to become a successful entrepreneur. So, can you tell me whether or not having any publications will affect my chances for this fellowship??

  • Scott Turley

    The author is looking at this in completely the wrong way.
    "Colleges are beaches. People are walking and picking up degrees like
    seashells. As we hand out more and more degrees, each degree becomes
    less and less valuable. I'm amazed no one has pointed this out. "
    If getting a college degree makes a person more productive,
    and if more people on this planet are becoming more productive, the end
    result is that we have the capacity to create more wealth for everyone. 
    The ultimate result is an increase in our collective living standard.
    Think of it this way. If you build more factories with the capacity to
    create more widgets, does this make your factories less valuable (less
    scarce?), maybe, but now everyone has more widgets. They are less
    expensive, but that's a good thing. When we invented
    fertilizer, for another example, we had the capacity to produce more food. It made food less
    valuable, but ummm, that's exactly the point because it also makes food more affordable and available to everyone.Why shouldn't the same thing hold true for labor? If we
    produce more architects, then the cost of hiring an architect to
    design your custom house goes down, more people can afford custom houses
    - we have the opportunity to enjoy better cities and neighborhoods. This is deflation induced by an increased supply which makes everyone richer.  Currently, we're facing deflation through lower aggregate demand, and that simply makes everyone artificially poorer.
    A world with more capacity to produce, where everyone is brilliant,
    where creating art is nothing special since everyone is doing it, a world where
    I can go down the street and listen to my neighbor playing music that blows my mind. That's a world I want to live in.It's true that the individual artist loses relative prosperity.  They can't use their degree to show they are extra special - that they deserve more money than everyone else, but in the end, we all benefit when we all are producing at the limits of our potential and beyond.

  • Chris Schwass

    A college degree won't become a commodity as long as it's differentiated.  The day that a Harvard BA earns the same salary and opens the same doors as University of Phoenix, a college degree will be like a seashell.  Until then, the ability of different institutions to offer unique value will create competitive advantages. 

    I agree with the author and commentors who scoff at the goal of a 60% college-educated population, but not because the value of the education will drop - because the quality of the education will drop.  Some colleges will participate in the race to the bottom for the crop of unmotivated, uninspiring students subsidized by the government effort.  They will differentiate on low price and volume of students, like a Walmart, and participate in the commoditization of their services.  Other colleges and universities will continue to differentiate.

  • Marc Thibault

    One of the reasons a degree is useful is that it offers evidence of a 3-digit IQ. Obama's 60% goal requires granting degrees to a lot of people of below-median intelligence (at least 20% of the graduates).

    I wonder if he's clever enough to understand this. If so, why does he want to devalue higher education to the point that it's less evidence of competence than a library card?

  • Camila

    There is one simple premise this article doesn't explicitly tackle. Is getting a (better) job the only reason for pursuing higher education? Shouldn't we aim for more people to be educated, even if it means degrees will be worth less from a market point of view?

    The article seems to suggest some people should be content with less instruction and low qualification jobs just so others can have a more valued diploma. And it doesn't sound morally justifiable. Aren't we getting this all wrong?

  • Louann Oravec

    My husband has three degrees, working on his Bachelors degree now. He is a maintenance man, wants to teach electronics. He has loved this field for years, and would make a great teacher. 

  • atimoshenko

    A 'good job' (in the sense of a job that in which one can create a lot of value and therefore resulting in high salary and satisfaction from having a significant impact on the world) is a job which allows one's efforts and talents to be significantly amplified through the exclusive use of significantly above average pools of capital (economic, political, social, etc.). A reasonably smart person who, for instance, wakes up one morning to find himself somehow in charge of a factory would be able to generate much more value than he generated the previous day.

    This means two things. First, capital will tend towards centralisation as having access to capital makes it easier to keep the capital-less competitors at bay (even if they are equal in all other regards). Second, since people retire and die these centralised pools of capital will need to be passed on to other individuals. In order for these pools not to lose the advantages they confer (and therefore their desirability), they would have to remain concentrated and so accessible to only a small number of people. The question then becomes simply what filter to use to keep ~90% of everyone out of consideration. When only 10% of the newly-entering workforce had a Bachelor's degree (as in the 1950s-1960s), college education was a good filter and could thus be seen as a 'gateway' for good jobs. When 80%+ of the newly-entering workforce will have a college degree, obviously it will no longer be a useful filter, so something else will be used.

    This is all a long way of saying that as long capital centralisation is maintained during the transfer of this capital across generations, the number of 'good jobs' will be limited, and the gateway to those jobs will keep on being adjusted to make sure that only a small number of people qualify. The function of tertiary education today is as a filter, not as a 'knowledge imparter' –  the vast majority of knowledge we use at work we also learn at work.

  • thecleverevolutionproject

    I envision a future where everyone will have multiple "degrees". We could have had free world class education for everyone since the advent of videotape.The reason we don't is due to the "capitalist" economy which discourages "sharing" and pits everyone against one another. As for Jays comment lets hope that in 20 years anything akin to mcdonalds will be largely automated.
    I truly hope no one is hoping to deny education to others to up the value of their own education. That kind of thinking is ZERO as in 20th century. Come into the ONE of the 21st century and lets all share, prepare and prosper, together :)

  • Tracey Zimmerman

    The question is whether further education via degree seeking programs and innovation positively correlated.  If they are, a better educated population will create more opportunity, and the view outlined above (and that one China) will prove to be a limited one.

  • Jay Worley

    I agree with Jamila. It's been pointed out before. Moreover, as more and more people populate the earth and technology begets ever increasing productivity gains, well your analogy about having a PhD to work at McDonald's might not be so off the mark in about 20 years or so. As for China, all it seems like their doing is moving towards a glut in other fields that much quicker. Sounds kind of like the only one child control of big brother over their in China.

  • Jamila Akil

    " As we hand out more and more degrees, each degree becomes less and less valuable. I'm amazed no one has pointed this out."

    This has been pointed out, but unfortunately the powers-that-be don't care. They have an agenda and will not veer from it.