Friday, 14 September 2012

Tax education

Wednesday's post was an introduction to the idea of signalling, especially "costly signalling". Here comes an application. The following draws on an idea put forward by economist Michael Spence, which is also the stuff of Bryan Caplan's upcoming book The Case Against Education.

Consider two possible ways in which university education may benefit those who get it:
  • Human capital: University education confers marketable skills to students, which they can then use to achieve higher income.
  • Signalling: By completing university education, you signal to potential employers that you have certain desirable qualities.
The distinction might not be entirely clear at first, but as we unpack this a bit we will see that those two accounts of why people get university education have some very different implications.
Obviously, your university diploma may signal to employers that you have the desirable quality of having acquired marketable skills through education, but that's not what is meant by the signalling account. Rather, the idea is that going through the whole process of university education is a way of signalling qualities to others that you had all along.

Intelligence is probably the most obvious one. The fact that you've completed a course proves that you were smart enough to do so. Consider, however, that there are much cheaper and quicker (and actually more reliable) ways of assessing a person's intelligence. Then again, prevailing moral sentiments around intelligence testing have lead to legal restrictions on its use by employers.

Conscientiousness is a clearer case. Pen and paper intelligence tests for recruitment purposes make sense because it is impossible to fake a great score, however it is extremely easy to lie on a personality test. On the other hand, the less conscientious you are, the more costly it is for you to make it through a university course (all else being equal). The cost here is in terms of effort and perseverance. Thus people with a university degree are likely to be more conscientious than people without one.

A third quality that Bryan Caplan argues education serves to signal is conformism. Is that a quality you want? Well, I think you can easily see why it would be desirable to most employers. Employees should be able to get along with others and play by the rules without questioning them all the time. So, for signalling purposes, the fact that university education tends to be highly ritualised and ridiculously inefficient in its imparting of knowledge and skills might actually serve a function, namely that of filtering out those too unwilling to put up with it.

An essential point here is that, in order for education to serve its signalling function, it doesn't need to have any intrinsic value. An employer might hire a highly educated person not because he values their education, but because of their qualities that their education indicates they had all along.

The different implications of the two accounts can be expressed in terms of externalities: If the function of education is mainly to build human capital, then it can be argued (not that I would) that education has positive externalities, i.e. benefits incurred by people other than those who pay for it. To the extent that its function is for people to engage in competitive costly signaling, however, education actually has negative externalities, i.e. costs incurred by people other than those buying the education. As people acquire more and more education to signal to employers that they're better than the competition, more and more education becomes necessary to confer the same signal. And if education is wasteful, this translates to more and more waste.

Externalities lead to market inefficiencies. In the case of a positive externality, the fact that you can benefit from something without being the one to pay for it disincentivises people from paying as much for it as they would if the benefits were exclusive to the buyer; hence less of it is bought; hence less of it is supplied. Conversely, the quantity of goods and services with negative externalities that is bought will tend to be higher than would be efficient.

So then the government steps in... The standard answer to externalities problems in Western mixed economies is for the government to subsidise positive externalities and to tax negative externalities. Since people collectively buy less of a positive externality than they collectively want, the government can threaten violence against people to force them to buy more of it; and since people buy too much of a negative externality, the government can increase its price from the consumers' perspective by forcing them to fork over that extra amount.

There's bound to be problems with this approach. One problem is that the government doesn't have any good way of determining what quantity of a good with externalities it would be efficient to aim for, in other words what the size of the subsidies or taxes should be.

Education may well be an extreme example of this, where government's level of adjustment is not merely off, but headed in entirely the wrong direction. If education is mainly about costly signalling, then we already have a runaway process of increasing wastefulness on hand, and governments' subsidies serve only to exacerbate it. While subsidies for education make economic sense if education's externalities are positive (and I don't think this would even follow if the human capital account was really all there is to it), if education is mainly about costly signalling, then it would make a lot more sense for government to tax it.

Wednesday, 12 September 2012

An intro to signalling

(Consciousness shall wait. I will be shuffling topics and kinds of posts around for a while and we shall see what sticks. Also, I've promised Joss a post on the idea of signalling earlier today :) )

Suppose these 3 assumptions hold true:
  • People vary in the extent to which they possess some desirable quality (intelligence, wealth, perseverance...).
  • It is difficult to directly observe to what extent people have said quality.
  • The extent to which you have said quality strongly affects how much it costs you to engage in some observable activity - the more of that quality you have, the less the activity costs you. (Not necessarily in monetary terms).
Example: Wealth. Suppose you are very wealthy, and it benefits you if other people know this about you (you may assume all the stereotypes about how women dig rich men, for example). You could tell people how rich you are, but how do they know you're not lying? If wealth is a desirable quality, then people have an incentive to overstate their wealth.
However, one thing that less wealthy people can't easily fake is how much they can afford to spend - especially on patently useless stuff. So you can wear expensive suits, sport expensive watches, buy people expensive drinks, collect expensive art... While everybody has an incentive to "signal" to others that they're wealthy in any available way, the less wealthy you really are, the more disincentive you have to publicly burn through a lot of your own money - which is precisely what makes this such a credible way of signalling how wealthy you are.

The practice of spending money on useless stuff (aka luxury goods) to display economic power is called conspicuous consumption.

Signalling is a very useful concept to be familiar with, as it can be used to explain many puzzling behaviours. Do people get tattoos simply because they think they look good? Other kinds of body art have the advantage of being reversible and of not being so painful to acquire, but maybe the irreversibility and the pain are part of the point!

Evolutionary biology and economics cross-polinate a great deal (Charles Darwin was very explicit about the role that Adam Smith's work had played in his developing the theory of evolution), and a line of theoretical investigation in evolutionary biology that emerged in the 70ies is now known as signalling theory.
The prototypical example of signalling is the peacock's tail. The size and extravagance of male peacocks' tails is puzzling, as it doesn't serve any apparent function - in fact, their tails make them more vulnerable to predators and are therefore a handicap! But biologist Amotz Zahavi proposed that such handicaps could work just like conspicuous consumption (another good phrase to remember: the handicap principle). The signal conveyed by such a handicapping trait would then be "I'm tough enough to survive in spite of this".
Such handicapping traits could then become more prevalent and more extreme over the generations through the mecanism of sexual selection: some portion of females desire that trait, which makes having the trait advantageous for males - which makes it advantageous for females to prefer that trait! (Their baby boys will likely share it...) As the trait becomes more prevalent among males, the competition gets fiercer, and the males that pass on their genes will tend to be those who are highest on that trait. This kind of runaway process through which non-adaptive traits become more prevalent is called a Fisherian runaway.

It's easy to go overboard with this and start overconfidently diagnosing all sorts of phenomena as instances of costly signalling. Whether the above explanation for the peacock's tail is correct is not at all clear. Another domain of costly behaviour for which signalling accounts are being controversially discussed is religion. Likewise, signalling is believed by many to play an important role in art, another classic example of an evolutionarily puzzling human phenomenon.

Evidently, what stands out about signalling is how frickin wasteful it is. Scenarios in which competition leads to ever costlier signalling are, indeed, examples of market failure - cases in which the self interested actions of individuals lead to an inefficient allocation of resources, in the absence of any coercion.
More precisely, one individual's costly signalling, while advantageous to that individual, has a negative externality, i.e. a cost that is incurred by people other than the individual engaging in and benefitting from it. Why is that? Well, by engaging in this costly signalling, he has made the competition tougher for others, meaning that they will now have to engage in even costlier signalling in order to get the same benefits.* So while everybody individually benefits from their own signalling, everybody is worse off than if nobody had engaged in it at all.

More on this last point shall soon follow.

* Note that a crucial point here is that the signalling behaviour is wasteful, and thus the competition between signallers engenders more and more waste. Somebody who accepts to work for a low wage also makes the job market a bit tougher for other job-seekers, however since no resources are wasted, this is not a case of market failure.
Economics is hard :)

Monday, 10 September 2012


Having felt quite sick for much of this first day of my experiment in obligatory blogging, I am now under some time pressure to churn out a post before bedtime. Therefore consciousness. Diz be ye topic of this post, or at least diz post be related to it.

Some say consciousness is the last big mystery of the Universe and that we haven't even begun to understand it yet, and others accuse those who say this of mysterianism. But whether or not you think consciousness is inherently mysterious, I would think that anyone who gives the issue some thought should agree that it's certainly confusing.

After all, the natural sciences have already carved out an impressively detailed account of all things material in this Universe, from the Big Bang to the present, including, in particular, the willy-nilly processes that lead to randomly occurring replicators constrainedly mutating their way into ever greater refinement in the unintentional art of survival and replication, majorly transitioning into replicating coalitions of smaller replicators, all the way up to the "gigantic lumbering robots" from the unforgettable last paragraphs of chapter 2 of The Selfish Gene - namely, us; complete with all the information processing and behavioural patterns that evolutionarily informed cognitive science at least provides a great framework for understanding and tracing back to their evolutionary origins; and yet - nothing in said narrative seems to provide any clue as to why those lumbering robots should be conscious. Why there should be anything it's like to be one of them, that is, to use Thomas Nagel's formulation, or why they shouldn't "simply" be Zombies, i.e. lumbering robots identical to us in material constitution and behaviour, but without that strange add-on of conscious experience.

And not just "why", but "how" - how does it work? What is consciousness made of? Magnets??

At this point, people seem to fall into very different philosophical camps. I would wonder whether, much like with moral questions, this falling into one of either camp tends to happen right away on an intuitive level, with all the rational arguments given for that choice of camp being elaborated after the fact (like a lawyer defending whatever position he's commissioned to defend), rather than our stance being the result of arguments we find convincing.

Some people, then, seem to feel quite strongly that it is clear that this most essential aspect of our lives - the very stuff our lives are made of so to speak - completely eludes our scientific understanding, and that any denial of this shortcoming of current materialistic science can only stem from a naive stubborn overestimation of the familiar scientific programs that we're already engaged in, or of the range of subjects it can elucidate.

Others may feel equally strongly that it just can't be anything more than that we just tend to get very confused about consciousness, much like other things that we now have perfectly good materialistic explanations for used to confuse us into invoking ghost-like forces and other products of mentalisation, and that any call for a new science, nay, for a new kind of science to deal with such matters as consciousness has got to just be an overreaction to things being counter-intuitive and confusing.

I shall leave things here for today. Until my next obligatory blogging-day on Wednesday, I leave you all with the task of guessing which of those two camps I am in. Everyone of you who guesses right shall have one of my Minecraft cows named after them. And let me know which camp you're in, too, if any.

Sunday, 9 September 2012

Blogging announcement

I'm starting a blogging experiment tomorrow. I will be blogging on Mondays, Wednesdays, and Fridays from now on, regardless of whether I think I have anything particularly interesting to write about that day. This is because I think I generally set the bar far too high, and that a lot of good might possibly come from "forcing" myself to lower it. Since I generally don't even start writing anymore, it's been a very long time since I've last had the experience of seeing my thoughts evolve as I'm writing them out, taking me somewhere I didn't expect at all when I sat down to write.

The rules provide that when time barely permits me to write on a given day, I shall write an extremely short post rather than not write one at all. I might have very little time tomorrow, for example. And I have no idea what I'll be writing about yet :P

I hope it fun :)