Higher Education and the Stratified Society

Recently by William L. Anderson: Obama's Progressive Goal: Make Us Poorer By Any Means Possible

In a recent column, Paul Krugman called for more federal aid to college students because students are finding it hard to pay tuition. At the same time, he bemoaned the fact that many college graduates today cannot find jobs at all:

You've probably heard lots about how workers with college degrees are faring better in this slump than those with only a high school education, which is true. But the story is far less encouraging if you focus not on middle-aged Americans with degrees but on recent graduates. Unemployment among recent graduates has soared; so has part-time work, presumably reflecting the inability of graduates to find full-time jobs. Perhaps most telling, earnings have plunged even among those graduates working full time — a sign that many have been forced to take jobs that make no use of their education.

College graduates, then, are taking it on the chin thanks to the weak economy. And research tells us that the price isn't temporary: students who graduate into a bad economy never recover the lost ground. Instead, their earnings are depressed for life.

While I doubt that Krugman would be able to appreciate the irony of his statements — that taxpayers should be forced to pony up to finance sending more young people to college even though they cannot find work afterwards — there is a larger economic lesson here that most people don't understand. Higher education in modern times has been a massive malinvestment that cannot be sustained.

I say this as a college professor (and I suspect I will get a few thousand emails pointing out that fact) whose livelihood depends upon more and more students showing up on campus each year, but I also am an economist and an Austrian economist at that. While I find myself to be part of a Grand Malinvestment, nonetheless I made the choice to be part of it and if I am caught up in a greater liquidation down the road, I bear the consequences of my choosing.

Several months ago I was having some work done on my car, and as I watched the mechanic do work on my auto's tailpipe, I realized that the economy needed a lot more people like him than people like me In fact, as Austrians point out, government intervention has created a number of huge structures of malinvestment in the economy, which means that there also is an imbalance of workers in various occupations. Austrians note that an economy is a complex structure in which the choices by consumers for consumption goods will determine what factors of production should be used in production and where they should go.

The Austrian Business Cycle Theory holds that when governments through central banks attempt to expand credit and force down interest rates below market levels, the new money created by the monetary and banking system tends to go into lines of production that cannot be sustained. Sooner or later, these malinvestments are exposed and a crisis ensues and these worthless "investments" must be liquidated or directed to other uses compatible with the choices and time preferences of consumers.

What does that mean regarding higher education, and why do I mention a stratified society? After all, according to Krugman and others, sending more young people to college means that they can find higher-paying jobs, so college always should be a good deal for society, right? Not right.

When one says that college graduates go into higher-paying work than people who just finish high school, what is meant is that the factors needed for the particular work require someone with certain credentials, and the payment to these factors is higher than are payments to factors of labor without such credentials. Now, in a free-market economy consumer choice ultimately would decide the value of factors of production, including labor services.

Instead, however, it is the "credentials" of the laborer that decide the value of the labor in the modern, government-regulated marketplace, not the actual ability of the labor in question to satisfy what Carl Menger and Ludwig von Mises described as "human needs." While some describe higher education as the enhancement of "human capital," nonetheless we need to draw a distinction between actual occupational learning that is meaningful and actions that simply involve the "punching of a ticket" in the activity of someone gaining legal credentials.

Many of these credentials are gained in the process of one's earning a certification that comes from a government board (which usually is dominated by members of the profession or people whose employment is in the education process by which one gains certification). Furthermore, many of these particular professions have limited access in order to help maintain the high incomes of those who are seen fit to qualify for a particular license.

People like Krugman immediately would object here, claiming that the licensing boards and the necessary credentialing that goes with it serves as a "quality check" on a particular line of work. After all, they would argue, would someone want a butcher to be a surgeon?

While the rhetoric sounds good, one should remember that incompetent surgeons already exist, along with incompetent people in every licensed profession, which means that a lot of people are able to slip past the supposed "quality control" apparatus that governs numerous professions. But it goes even further than that.

The other day I was driving past an oil-changing shop where they also do brake work. I have fixed the brakes on my own car, including changing the rotors and pads and doing repairs to the slide bolts and brackets, something that would be costly at a shop. Yet, just because I can fix brakes does not mean that any shop that fixes brakes would be willing to hire me because they can find people who can do what I do in their sleep. (The first time, I helped John Sophocleus do brake work and learned a few tricks of the trade from him.)

Occupational licensing and other state-sponsored "quality" checks would have nothing to do with their hiring practices. This shop would need someone who was competent if for no other reason than if they were not done right and the mistake was responsible for an accident, that the shop and its managers would be hung on the line. In part, it is the fear of the ancient tort system that helps drive quality control there, not government credentialing. (I am not sure how the government of Maryland is involved in such matters, as I believe that shops need to be licensed, but not individual repair workers.)

So, if an auto repair shop is concerned about the quality of its repair personnel, why does one think that a hospital or surgical group would hire the first clown that walked through the door? In fact, I suspect that without the fig leaf of a government board license, the medical firms that would be hiring someone might be tempted to look more closely into an applicant's background than they do now, if for no other reason than the government no longer would be doing the background checks.

We should remember that the emphasis upon credentialing has not arisen because of issues of quality control or continuing trends toward more incompetence, but rather has come about through the legacy of the Progressive Era. During that time, Progressives believed that in order to create more "respectability" for various lines of work, having government set lofty requirements through licensing would mean that practitioners of the profession would be able to be trusted and competent.

Nowhere is this more apparent than in medical care, and much of the current emphasis upon using the state as a quality control device originated with the 1910 Flexner Report. Murray N. Rothbard wrote:

…the roots of the current medical crisis go back much further than the 1950s and medical insurance. Government intervention into medicine began much earlier, with a watershed in 1910 when the much celebrated Flexner Report changed the face of American medicine.

Abraham Flexner, an unemployed former owner of a prep school in Kentucky, and sporting neither a medical degree nor any other advanced degree, was commissioned by the Carnegie Foundation to write a study of American medical education. Flexner’s only qualification for this job was to be the brother of the powerful Dr. Simon Flexner, indeed a physician and head of the Rockefeller Institute for Medical Research. Flexner’s report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.

The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, “allopathic” medicine: particu larly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.

Thus through the Flexner Report, the AMA was able to use government to cartelize the medical profession: to push the supply curve drastically to the left (literally half the medical schools in the country were put out of business by post-Flexner state governments), and thereby to raise medical and hospital prices and doctors’ incomes.

In all cases of cartels, the producers are able to replace consumers in their seats of power, and accordingly the medical establishment was now able to put competing therapies (e.g., homeopathy) out of business; to remove disliked competing groups from the supply of physicians (blacks, women, Jews); and to replace proprietary medical schools financed by student fees with university-based schools run by the faculty, and subsidized by foundations and wealthy donors.

When managers such as trustees take over from owners financed by customers (students of patients), the managers become governed by the perks they can achieve rather than by service of consumers. Hence: a skewing of the entire medical profession away from patient care to toward high-tech, high-capital investment in rare and glamorous diseases, which rebound far more to the prestige of the hospital and its medical staff than it is actually useful for the patient-consumers.

As Dale Steinreich noted, the "reforms" put into place post-Flexner severely limited individual access to medical care while at the same time enriching physicians. Not surprisingly, medical schools were able to charge higher tuition (with for-profit medical schools being legislated out of business) with the end result being that today medical schools essentially "capture" the economic profits of individual physicians, as most come out of med school carrying hundreds of thousands of dollars of debt.

Furthermore, doctors and their state-enforcement bureaus will protect their territory at all costs, even if that protection harms people who need medical care. One example was the prosecution of Jesse Maloney, the wife of a mine worker in eastern California and a licensed practical nurse. The area where the Maloneys lived was very remote and the one doctor under whose supervision she worked only came to the various towns sporadically, as he had to travel by his own private, single-engine plane.

Maloney was the person called when there were medical emergencies and she ran the doctor's office, and at times gave "prescription" medicine to people who needed care. The people of her town thought her to be a godsend, but California authorities had her arrested and put on trial. A jury acquitted her, much to the delight of people in her community. (I suspect that today, a jury would convict because prosecutors and judges would order them to do so and everyone knows that government regulations always result in higher quality. The affair was made into a movie starring Lee Remick. Not surprisingly, the highly-Progressive Los Angeles Times, which rarely meets a government regulatory edict with disapproval, didn't like the movie.)

Unfortunately, occupational licensing and state-ordered credentialing are not limited to medical care. Progressives long have dreamed of "professionalizing" nearly everything, which means that in order to find work that is legal, people need to impose all sorts of costs of education upon themselves.

Even the vast coercive power of Progressives, however, cannot overturn laws of economics, and even with all of the education requirements needed for modern employment, an economy in depression cannot employ people whose skills are not needed by consumers. Thus, Krugman and others of his ideological stripe have a plan: have governments "create" new positions within the bureaucracies and pay for these jobs with newly-borrowed or printed money.

At the same time, Krugman demands that taxpayers pony up to pay even for tuition for students while simultaneously funneling more tax dollars to colleges and universities. Why? Well, college costs are increasing and Krugman and others believe it is unfair that given the stratification of our economy due to various state edicts, more students cannot go to college.

If one finds a disconnect in the "logic," that is because there is a huge disconnect. As in medical care, third-party payments along with increased federal regulation placed upon colleges and universities have driven up costs, so Krugman essentially is claiming that the "solution" to putting out the fire is throwing more gasoline on it.

Moreover, when a highly-decorated economists believes that creating more "jobs" in the bureaucracy via the "magic" of inflation somehow is good for the economy, it tells us just how out-of-touch with reality mainstream economics has become. The U.S. economy does not need more bureaucrats; it needs fewer bureaucrats and more entrepreneurs seeking economic profits.

Instead of creating opportunity, Progressives through their forcing people to gain education that they don't need have created a stratified society that destroys opportunity after opportunity. Such policies lay burdens upon people that are reflected in the huge post-education debts that have risen to the trillion-dollar mark.

Not only is this madness, but it is unsustainable madness at that. In the name of creating economic opportunities, Progressives like Krugman destroy the very thing they claim to be saving: our economy.

May 12, 2012