In Social Limits to Growth, Fred Hirsch illustrates the psychological problem created by growth using the example of Education. Education has usually been associated with external benefits, based on the assumptions that educated people make better citizens, they are more productive, and all the resulting benefits are not captured in their own higher earnings. For example, they pay more taxes and enhance the productivity of those with whom they work. But education also has a role as a signaling device in the modern economy which may negate these external benefits.
Education's function as a screening device helps the employer sort out those who can best survive and master an educational obstacle course. The “quality” of schooling has a relative dimension in which quality consists of the differential over the educational level attained by others. Adding layers to the level to which the competition for credentials is pushed merely absorbs educational resources without adding to the productivity of the winners in the competition.
When education expands faster than the number of jobs requiring those educational credentials, employers intensify the screening process. Jobs for which a high school diploma was previously sufficient will then require some college education. Individuals who decline to join the educational upgrading will suffer a devaluation of their credentials in the job market. This means, as the average level of educational qualifications in the labor force rises, a kind of penalty is imposed on those lacking such qualifications
Additional education becomes a good investment, not because it would generate additional income but because you will not be able to maintain the current level of income if others receive more education and you do not. Thus, the utility of expenditure on a given level of education as a means of access to the most sought after jobs will decline as more people attain that level of education. ‘The race gets longer for the same prize.‘
Because ever more people reach higher levels of education (due to well meant “inclusionary” state policies), but at the same time the amount of high-level jobs remains more or less stable, both sides – the employers and the potential employees – face increasing costs of screening. The former are forced to introduce additional barriers, tests and other screening efforts to find the people who fit their needs. Meanwhile, the latter are faced with an ever longer “obstacle course” (i.e., longer education + more intense screening by employers) to get the desired high-level jobs. This clearly makes both sides worse off.
The increase in capacity of the educational sector also has probably increased the attention paid to the quality of education provided. Existing institutions that have many years track record are valued more by employers than new colleges. Not only do they convey information the employers can trust but, in addition, it enables them to buy the elite contacts of the employee. Thus, establishing new colleges end up increasing the demand for an education at existing colleges.
Even if the absolute quality of education in a particular institution is fully preserved, the previous incumbents of the superior schools would still lose their edge. This loss will force them to demonstrate their proficiency in a tougher or longer course of study. Education enjoyed in its own right is capable of indefinite extension; as an instrument for entree into top jobs, it is not. When you consider education as a screening device, the possibility of general advance is an illusion.
An “inflation” of educational credentials of this kind involves social waste in two dimensions. First, it absorbs excess real resources into the screening process by increasing the length of the obstacle course that employees require for testing for the qualities desired . Second, social waste will result from disappointed expectations of individuals and from the frustration they experience in having to settle for employment in jobs in which they cannot make full use of their acquired skills.
Considered in isolation, the individual’s demand for education as a job entree can be taken as genuinely individual wants. But satisfaction of these individual preferences itself alters the situation that faces others seeking to satisfy similar wants. Competition among isolated individuals in the free market entails hidden costs for others and ultimately for themselves. What is possible for the single individual is not possible for all individuals. This is true for all higher levels of selection: What is possible for an individual state or an individual country is not possible for all units. Hirsch writes:
‘Once again, it is a case of everyone in the crowd standing on tiptoe and no one getting a better view. Yet at the start of the process some individuals gain a better view by standing on tiptoe, and others are forced to follow if they are to keep their position. If all do follow, whether in the sightseeing crowd or among the job-seeking students, everyone expends more resources and ends up with the same position.
Hirsh is not saying that more educational resources should not be provided. The way the system is structured at present, politicians are forced to make such promises and are under pressure to keep them. As he writes, ‘If theorists of human capital fell into this trap, why expect acquirers of human capital to avoid it?’ But the investments will be a social waste that will just force you to run faster to stay in the same place. Although individuals benefit from isolated action, the sum of benefits of all the actions taken together is zero.