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It is tragically ironic that the suicide of Princeton economist Alan Krueger was announced roughly at the same time as news broke of a cheating and bribery scandal in college admissions. Krueger had done research on how much a degree from an elite university adds to lifetime income.

All this is at the core of the admissions brouhaha, but there is even more economics involved, some simple and some nuanced.

The simple economics start with the the question: Are people rational about the economic actions they take? The assumption that people are rational underpinned economic theorizing for two centuries.

The nuance starts when we evaluate the economic, social and cultural value education has taken on in society. What has become viewed as somewhat of a universal right now seems a tool to advance the elite regardless of any negative effects on the rest of society. 

Why are so many people offended about parents cheating and bribing to get their kids into a handful of elite colleges? After all, while many want their children to attend as good a college as possible, many also realize that only a fraction of a percent ever end up at a Harvard or Stanford. So why all the outrage?

One answer is that perceptions of fairness do matter. Even if people know that they, themselves or their children, have little chance of going to an elite university — either because of prohibitive costs or poor grades and test scores — their happiness is harmed by the knowledge that someone lost an opportunity because of cheating. And people’s sense of well-being hangs on a sense of living in a just society.

Note here that college is an unusual “good” in the economic sense. A “private good,” such as an onion or T-shirt, benefits only the person buying and using it. A “public good,” such as tornado warnings, national defense or cancer research, benefits myriad individuals across society. No single individual has incentives to spend on it because they cannot retain all the benefits. Without some government or other collective action, we won’t get the goods.

Education is a “mixed good.” Having an education can give one a better life in both monetary and non-monetary ways. However, some of the benefits of education spill over to society as a whole. Basic universal literacy makes an economy more efficient. Getting nearly everyone through grade and high schools adds even more. More goods and services are produced with the same set of resources. Everyone can potentially have more, regardless of how far they were educated themselves.

Universities don’t just teach. To train scientists and new university-level teachers, they must do original research. That got little government support until the same post-war period. The Manhattan Project that developed the atomic bomb together with other military technology showed that government funding of basic science research had tremendous spillover benefits to economic productivity and national security.

Few would assert that the price of Manhattan penthouse apartments is a matter of public concern. Nor does anyone tsk-tsk about the prices of Mercedes cars. So why should anyone get upset about Yale admitting children of people who give large sums of money or whose parents and grandparents went to that school?

Private universities are private bodies with charters and boards of directors. Why dictate their branding and pricing?

Understand that colleges engage in “price discrimination.” This is the practice of charging different prices to different groups. Discounted matinee movies, senior-citizen discounts, sharply higher prices for first class airline seats and different fees for “in-network” and “out-of-network” health providers are other examples. The practice is ubiquitous because it is a way of maximizing revenue.

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Legacy admissions increase brand loyalty and foster greater levels of alumni donations. And legacy admittees pay full-load costs.

Universities need really smart students to graduate and do well in careers and life. This strengthens the brand. Legacy admittees, such as Al Gore and George W. Bush, may not be the sharpest toothpicks in the shaker, but their families don’t balk at shelling out. So take their money and also find poorer kids with near-perfect SAT scores or exceptional athletic prowess to perpetuate the brand. Woo them with scholarships.

Things are complicated by the fact that, like new combines for farmers, college education of one’s children is a “consumption good” as well as an “investment good.” 

A farmer’s new combine gets the beans out of the field faster. A Stanford degree increases your child’s income-earning potential. But the new combine also gets you envy at the cafe on Main Street just as saying “Caitlin was admitted to Stanford” gets you cred at a dinner party. Hence, the market demand for admissions counseling services, cram courses, cheating and bribes.

Cheating and bribes are illegal. Institutions have an incentive to stamp them out. In the real world, moral sentiments of fairness count.

We live in a new gilded age when the wealthy have disproportionate economic and political power. Many people, even those still with comfortable incomes, feel that the deck is stacked against the non-elite. Not only cheating and bribing, but legacy admissions or tickets to Wharton or Princeton for children of big donors seem yet another example of this unfairness.

This is just the tip of a much larger phenomenon of how real world economics is driving — and dividing — U.S. and European politics, including the emergence of populists, such as Donald Trump, the Brexit stalemate in Britain, and the yellow-vest protesters in France.

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St. Paul economist and writer Edward Lotterman can be reached at bismarck@edlotterman.com.

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