A follow-up on college and signaling

The other day I wrote a Bloomberg post about the fad of describing all communication and information extraction as "signaling" even when a Spence-style signaling model doesn't apply.

Some people have been telling me that this Garett Jones tweet is a reply to my piece. Garett writes:

Emoteconomist: One who is sure competition would eliminate inefficient diploma discrimination, but not inefficient gender discrimination.

Personally, I would apply the term "emoteconomist" to a much wider array of economists, but that's beside the point. I highly doubt this tweet is aimed at me or my piece. Garett knows that I have often written in support of Gary Becker's idea that economic competition decreases inefficient gender discrimination. He also of course knows the difference between preference-based discrimination (as in a Becker model) and signaling (as in a Spence model). So Garett's tweet is almost certainly not directed at my piece.

However, this Bryan Caplan post most certainly is a reply to my piece. At first I intended to rest my case, but Bryan has decided to delay our Bloggingheads debate two years (to coincide with the planned release of his book on the topic), so I might as well make some short reply.

Bryan does agree with a few of my points. For example, he agrees that college is unlikely to be important as an intelligence signal. But he disagrees strongly with my contention that college is not needed as a signal of working ability and temperament. In my piece I wrote:

So is college a way to signal conscientiousness and willingness to work? Maybe. But an even better way to signal that would be to actually work at a job for four years. One would think that if young people needed to do some hard work to signal their work ethics, some companies would spring up that gave young people real productive work to do, and provided evidence of their performance. Instead of paying through the nose to send a signal of your industriousness, you could get paid. But we don't see this happening.

Bryan replies:

Like most economists, Noah needs to be more sociological.  In a cultural vacuum, working four years might be a great signal of work ethic.  But no human being lives in a cultural vacuum.  We live in societies thick with norms and expectations. And in our society, people with strong work ethics go to college and people with bad work ethics don't.   

Disagree?  Just picture how your parents would react if you told them, "I'm not going to college.  I'm just going to get a job."  In our society, your parents definitely wouldn't respond, "That makes sense, because you're such a hard worker."  Why not?  Because in our society, most hard-workers choose college.  If a hard-working kid refuses to copy their behavior, people - including employers - understandably treat him as if he's lazy.  Because lazy is how he looks.

Actually, when I think about the college-as-signaling hypothesis, I do often think sociologically. But, as so often, the society I think of is not the United States - it's Japan. In Japan, it is taken as a given that college students don't work hard at their studies. College is even nicknamed "moratorium". Japanese college kids are expected to enjoy themselves and not work hard - in fact, when I ask Japanese young people why they don't consider going to America for college, they usually tell me that American students work too hard. And yet, top Japanese employers all require a college education (usually a Japanese college education) as a precondition for hiring.

But to be honest, Bryan is right that I don't think very sociologically. I don't really know much about sociology. Does he? Perhaps we should call in a sociologist. I will do so on Twitter.

Anyway, Bryan then writes:

Noah overlooks another key trait that education signals: sheer conformity to social norms.  In our society, you're supposed to go to college, and you're supposed to finish.  If you don't, the labor market sensibly questions your willingness to be a submissive worker bee. 

I agree that college, in America and also in Japan, is a hallowed cultural institution, and that there is a lot of social pressure on people to do it. But this seems like part of college's consumption value, not its value as a costly, Spence-style signal.

Next, Bryan quotes this part of my post:

There are many other reasons to doubt the signaling theory of college. A more likely explanation for college's enduring importance is that it provides a large number of benefits that are very hard to measure -- building social networks, broadening people's perspective, giving young people practice learning difficult new mental tasks and so forth. 

He replies:

I'm glad to hear this.  Noah inadvertently grants one of my key points: Most of education's labor market payoff is unrelated to the material your professors explicitly teach you.  Once you accept this heresy, you're stuck with some combination of my multidimensional signaling story, and Noah's amorphous, evasive "large number of benefits that are very hard to measure" story.  If that's the choice, my story will end up with the lions' share of the mix.  Noah is welcome to the leftovers.

Ah, but wait! College most certainly does provide some direct and obvious skill-based human capital benefits: reading, writing, working in groups, communicating, arguing, doing math, programming computers, etc. My point about non-obvious forms of human capital - human networks, cognitive broadening, emotional growth, exposure to new career ideas, sexual maturity and marriage - was in addition to the obvious benefits of coursework and instruction. And a third big chunk of college's value is consumption, which Bryan basically ignores.

After those three big bites, it is Bryan's "conformity signaling" that is left to hunt for the table scraps!

Finally, Bryan mentions the "sheepskin effect":

Final challenge for Noah: If education's rewards stem from this "large number of benefits that are very hard to measure," why on earth would the payoff for graduation vastly exceed the payoff for a typical year of education?  My explanation, of course, is that given the vast social pressure to cross educational milestones, failure to graduate sends a very negative signal to the labor market, leading to discontinuous rewards.  What's Noah's alternative?  Do schools really delay "building social networks, broadening people's perspective, giving young people practice learning difficult new mental tasks and so forth" to senior year?

I have no ready explanation of sheepskin effects - perhaps they are used by employers to extract a signal of how well one actually learned things in one's college courses. But signal extraction does not imply Spence-style signaling. Spence-style signaling must be costly, and for students who have done enough to graduate, collecting that sheepskin is simply not costly.

So I don't need to explain the sheepskin effect in order to rule out Bryan's explanation. Bryan views the sheepskin effect as evidence of signaling, but since it implies that much of the college payoff comes without cost, I view it as clear evidence against the signaling model of college.

Anyway, I think that about takes care of Bryan's points. As a final note, Bryan wants me to be more sociological, but I think he should be more psychological! If college really is wasteful, costly signaling, as Bryan posits, then people who complete it should view it as a wasteful, unnecessary chore. It should be something they wish they didn't have to do. But I bet a substantial majority of college graduates, if you ask them, will speak quite highly of their time in college, and will not wish that they had been able to go directly into the workforce instead.


P.S. - If you don't understand that signal extraction does not imply signaling, just contemplate the following sentence: "Fire doesn't emit smoke in order to prove to observers that it's really a fire."

Guns don't kill people. Labor kills people.

Arthur Chu, Jeopardy champ extraordinaire, tweets:

"Capitalism made your iPhone" 

No, LABOR made your iPhone. Labor makes things under any -ism. The -isms just determine who gets paid

He's right that "-isms", in econ terms, are about distribution of resources (though he should broaden his definition of resources to include control, not just payment).

But is he right that "labor made your iPhone"?

Consider the following two situations:

A) I make fire by rubbing two sticks together.

B) I make fire by using a butane lighter.

In both of these situations, you can say "labor made the fire". But in the first situation, there was a lot more labor for the same amount of fire. Saying only that "labor made the fire" leaves out this important fact.

Now suppose I want to make fire with no tools. No matter how much labor I apply - the labor of millions of people over millions of years - I will not be able to make fire. 

So saying that "labor makes fire" also leaves out this important point - the necessity of having tools.

Labor is a necessary input into producing an iPhone. But there are other necessary inputs - machines, buildings, land, natural resources, vehicles, tools, etc. And labor is not a sufficient input for making an iPhone - without the right tools and the right organizational system, no amount of labor will get the job done.

But didn't labor "make" the machines, buildings, etc.? Since labor is necessary to create any intentionally produced good, you can say "Labor is what makes everything" if you want to. But you know what else is necessary to create those goods? Electromagnetism, gravity, and the strong and weak nuclear forces. So I could reply to Arthur Chu by saying "Labor didn't make your iPhone. Physics made your iPhone." Now who's right?

The basic point here is that our language, and our intuitive way of thinking about causation, views everything as perfect substitutes. A + B = C. If A + B = C, then you can determine how much of C is due to A, and how much is due to B.

But in reality, things are only partial substitutes. You more often have stuff like
(A^a)(B^b) = C. When you have complementarity, it doesn't make sense to ask how much of C is due to A, and how much is due to B. But we always do it anyway. Arthur Chu's tweet is one example. The slogan "Guns don't kill people, people kill people" is another example. A third example is the perennial debate over whether humans have "free will."

Our intuitive concept of causal attribution is simply wrong and useless in most cases.

Steve Williamson is right that I am confused

In a post for Bloomberg View, I wrote about the history of the sticky-price revolution of the late 1990s and early 2000s:

In 1994, economists Greg Mankiw and Lawrence Ball wrote an essay for the National Bureau of Economic Research entitled “A Sticky-Price Manifesto.”...[T]he essay heralded the beginning of a macroeconomics mini-revolution. It was a direct threat to the line of research that had been dominant in the 1980s, which tried to explain recessions without sticky prices... 

The economic establishment reacted harshly to the upstarts. “Why do I have to read this?" fumed Robert Lucas, the dean of macroeconomics. "This paper contributes nothing.” He went on to accuse the sticky-pricers of being opposed to science and progress. 

But Lucas fumed in vain. During the following decade, the sticky-price models went from strength to strength. New math was developed to make them easier to use. Possible reasons for price stickiness were investigated -- for example, “menu costs,” in which the seemingly trivial costs of changing prices add up to a big problem across the broader economy. 

Even more telling, sticky-price theorists proved that you didn’t need a lot of price stickiness to mess up the smooth working of the economy. Even the tiniest dash of stickiness would turn all kinds of theories on their heads. Economists Susanto Basu, John Fernald, and my doctoral adviser Miles Kimball, for example, showed that when prices are even a little sticky, bursts of technological progress actually hurt the economy for a short while, by causing a burst of deflation, before eventually boosting growth. Over time, the addition of various other economic mechanisms, like labor search, has further reduced the amount of price stickiness required to cause major recessions. 

Sticky-price models have become the dominant models used at central banks. The smoothly adjusting, flexible-price models of the 1980s are basically not used anywhere, by anyone, for anything. 

Even some of the biggest skeptics of sticky prices are coming around. In 2004, economists Mark Bils and Peter Klenow looked at how businesses changed prices, and found that the changes were too frequent to be consistent with the sticky-price story. But in 2014, they reversed their stance, looking at evidence on the adjustment of markets in recessions and concluding that “sticky prices...deserve a central place in business cycle research.” Meanwhile...Patrick Kehoe...long-time [opponent] of the mainstream sticky-price models, nevertheless wrote a paper in 2010 entitled “Prices are Sticky After All.”... 

The moral of the story is that if you just keep pounding away with theory and evidence, even the toughest orthodoxy in a mean, confrontational field like macroeconomics will eventually have to give you some respect.

Steve Williamson wrote a response to my post, and for the life of me I can't tell what he's trying to say. He calls me "confused". Well, after reading his post, I am confused.

Williamson takes some potshots at Ball and Mankiw:

The "Sticky Price Manifesto" is in part a survey of the menu cost literature, but it reads like a religious polemic... 

Why should we care what Ball and Mankiw think is going on in the minds of their staw-men opponents, or in the classrooms of those straw-men? Why should we care what Ball and Mankiw "believe?"... 

Noah seems to think that Lucas was being unduly harsh [in his response to Ball and Mankiw], and that he was somehow feeling threatened by these "upstarts." It's pretty clear, actually, that Lucas just thinks it's a bad paper - religion, not science - and that Ball and Mankiw could do a lot better...

He then asserts that New Keynesian models don't have anything to do with the stuff Ball and Mankiw were writing about:

Noah is more than a little confused about the genesis of sticky-price New Keynesian (NK) models. In particular, he thinks that Ball and Mankiw's "Sticky Price Manifesto" was a watershed in the NK revolution. Far from it... 

Where did NK come from? Which of the three threads in post-macro revolution Keynesian economics - coordination failures, sunspots, menu costs - morphs into Woodfordian NK models? To a first approximation, none of them. Perhaps NK owes a little to the menu cost approach, but it's really a direct offshoot of real business cycle theory. Take a Kydland and Prescott (1982) RBC model, eliminate some bells and whistles, add Dixit-Stiglitz monopolistic competition, and you have Rotemberg and Woodford's chapter from "Frontiers of Business Cycle Research." Add some price stickiness, and you have NK. So, NK basically leapfrogs most of the "Keynesian" literature from the 1980s. It's much more about RBC than about Ball and Mankiw.

(For a brief intro to Mankiw's contribution to the New Keynesian research program, see the Wikipedia page for New Keynesian economics. See also the Wikipedia page for Steve Williamson.)

Williamson then tries to claim ownership of New Keynesian models for Chicago/Robert Lucas/RBC/His Majesty the King of Spain/I'm not sure:

[I]t's worth noting that Mike Woodford, the key player in NK macro, was at the University of Chicago from 1986 to 1992, the latter 3 years in the Department of Economics with - guess who - Bob Lucas. Indeed, they wrote a paper together. It's about - guess what - a kind of sticky price model with non-neutralities of money. Later on, Lucas wrote about sticky prices with Mike Golosov. So, I think we could make the case that the influence of Lucas on NK is huge, and that of Ball and Mankiw is tiny.

He then goes off on a long tangent about how central bankers might use sticky-price models to think about financial stability (which, apparently, he thinks is now the main priority for central banks).

It's kind of funny to see Williamson trying to wrest historical credit for New Keynesian models from Mankiw & co., since just in his previous post he had this to say:

Mike Woodford can correct me on this, but my impression is that he came out of graduate school with a specific goal in mind, which was creating a version of Keynesian economics that would fit into modern macro. Ed Prescott's project left central bankers scratching their heads about what they were supposed to be doing, and Woodford and others stepped into the void. Interest and Prices is, I think, intended as a handbook for central bankers. There was a lot of effort put into marketing the whole NK project to the world's central banks. This is ongoing, and has been institutionalized[.]

So NK was reverse-engineering of Keynesian ideas. But actually it was just RBC. But it succeeded because it was promoted via a slick marketing campaign. But actually Lucas was one of its founders.

Also, microfoundations are important. But Mankiw's efforts to microfound sticky prices with menu costs was totally unimportant to the creation of sticky-price macro models.

Got that?

Damn, I guess I am confused.