In the long run, the clear winners from competitive market processes operating reasonably well are consumers. One need look no further than what it costs to obtain the most basic goods and services today as compared to even a generation ago. For example, the laptop I am writing this on has 4GB of RAM, 700 GB or hard disc space, an Intel Core i7 processor, terrific speakers, and so on – it is basically 10 times better than my previous desktop machine – a machine I paid $1,600 for and this laptop cost something in the $700 range. This is not the exception, but rather the rule.
Why should we expect the gains to accrue to consumers? Because consumers are the “fixed” factor in most markets. The way the entrepreneurial discovery process works is that once producers find out a “sure thing” they will very quickly bid to access the resources in order to supply that “sure thing.” So, if people go ga-ga over laptops, then potential entrants will bid for silicon chips, metal components, workers and supporting infrastructure. The wages and rents paid in those areas would increase just as the prices at the consumer end would be falling. What happens in each of these cases? The bidding for the factors used to make computers would continue until it was no more profitable to be involved making laptops than whatever the next best use of those resources would be. And so long as the markets for those factors of production (e.g. the labor markets, metals markets, etc.) are competitive, you would not find it any more profitable to be selling those factors than it would be to be engaged in other factor markets.
If there are outsized gains to be had in this bidding process, it would be those that accrue to owners of factors that are fixed. For example, who benefits the most from Corn Ethanol subsidies? It is not the farmers. Nor is it likely to be the consumers. It is likely to be the owners of the land upon which that subsidized corn is grown. We call those “outsized” earnings “rents.”
Which brings us to today’s post. Scott Winship (I don’t have the link immediately, as I am posting offline for now) has recently demonstrated that among young Americans education debt is not increasing at rates that would be commensurate with the rhetoric, particularly of the OWS crowd. For example, he cited Federal Reserve data that did show that over the last 25 years the share of households that had education related debt doubled from 1 in 6 to roughly 1 in 3, and he also showed that among these households the real value of their education debts increased from roughly $5,000 to $13,000 (if I recall the piece correctly). However, at the same time the assets of these families has been increasing. In fact, as a share of the net worth of young households, the share of debt to their overall net worth is the same today as it was 50 years ago.
The rates of return to going to college have not fallen over this time period (even as folks argue that median wages have stagnated), with the annual premium a college graduate should expect to earn over an otherwise qualified high school graduate in the 60% range, adding up to an expected additional $1 million in earnings over an entire working life.
Clearly the value of a college education today is at least as large as it was 40 years ago. But it is also clear that students (as consumers) are not experiencing the massive gains in education that they regularly enjoy in almost all other phases of their consumer lives. This might be because the thing that we call “college” is not the same good as it was in the past (after all, the health clubs are nicer than they used to be, and you can find a free ice-cream social on most weeks of the year) or it might be because there are other “rentiers” who are enjoying the gains accruing to the fixed factors of production that they hold onto. Much like the fact that ethanol subsidies benefit not farmers but land owners (assuming they are different people) if there have been gains to anyone in the higher education sector, they have accrued to the “landholders” here. What are those fixed factors of production? In my view they are related to any part of the enterprise that holds the accreditation keys, the diploma keys and the course transfer keys. If higher education were merely comprised of instilling a set of simple facts and ideas, the gains by now would have been totally dissipated by potential rentiers and ended up in the pockets of the students. However, the credential is important, the “badge” is important, and it is the folks that monopolize access to those badges that gain. Look no further than all of us pampered faculty members – who if we applied the same “capacity utilization” metrics that we applied to the manufacturing sector would show an appalling under-utilization of “resources.” We gain at the expense of the consumers – and the forces preventing competition eating our rents away are pretty powerful. We’ll cover that in another post. Who else gains? Take a look around and marvel at the armies of support staff at a modern university. There are as many administrators are there are instructional staff, and we have Deans for everything from brushing teeth to washing our cars in an ethically appropriate way.
What I find more than a bit ironic is that if you queried many of the intellectuals on campus who benefit from being the gatekeepers of the degree, and asked them about “land reform” in the developing world, they’d be all for it. Why? Because it is thought that many current land claims are either illegitimate or unfairly distributed based on various historical events. In other words, the value created in those countries in need of reform are being “unfairly” captured by the influential land-holders. Fine. Sure. For the sake of consistency, I’d like to see these same folks promote the same kind of “land” reform in higher education. I can assure you that any number of my senior undergraduates could do 80% of what I do, assuming that what I do is the right way to conduct a college economics experience. But there are a lot of reasons why we’ll never see super-talented undergrads take over for me.
There are other possible explanations for why the consumers in higher education have not seen the gains that their consumer counterparts have enjoyed elsewhere – too many to cover here. For example, students are not only consumers of higher education, they are producers too, and this changes the way (perhaps) that we think about the gains from trade in this sector.
Stay tuned, we’ll be blogging a bit more about higher education (my original graduate field of “expertise”) in the coming weeks.
How refreshing, I wonder how many of your colleagues will join the chorus. Now that is true “whistleblower” courage, admitting quite candidly that you are one of several beneficiaries of these rents. As opposed to theives who are acclaimed as honorable (your prior post regarding the Heartland Institute).
I also appreciate the summary of rents and how it applies here, very useful, another arrow for my quiver.
Good piece, WC, and a good comment from jb.
Having been “long” on land, relatively speaking as an easterner, and having rented rich flat fields to undercapitalized ignorant folks who fancied themselves as farmers, I disagree that being a landed rentier is the bonanza, even with the ethanol program. Net, ethanol is a loser, because the whole scheme misdirects resources. I know WC and jb understand this, and do not mean to suggest otherwise.
However, given the practicalities of real estate taxes and even assuming corn would sell for $10 per bushel for ten years, it would be hard to rent our ground to recoup the taxes, let alone get much to live on. Maybe the big winner in the game is John Deere, assuming they are not strangled from legacy cost.
WC knows I am not arguing for feudalism, where the Prince and his friends, supported by a loyal army, own all the land, or some of the faculty in the Princeton economics own all the land, meting out benefits to the happy serfs.
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