Arnold Kling  

The Creation of Ritual Goods

The Theory of Pandering... Overcoming Signaling...

Bryan writes,

If you think that entrepreneurs can easily find a cheaper way to certify worker quality, why can't entrepreneurs easily find a cheaper way to reinforce membership in the "upper and/or upper-middle class tribe"?

The context is that we are speculating on the real value of college education. The issue is that if college costs much more than the "true" value of the education provided, how does it survive competition from other sources?

I think that it is difficult for an entrepreneur to compete in the signalling market, because it is hard to establish the credibility of your signalling mechanism.

However, it is probably even more difficult for an entrepreneur to create a "status good" that every affluent parent believes is a necessity for their children. By their very nature, status goods involve network effects. You, the entrepreneur, can advertise all you want that my kids will fall behind if they don't have their own computers, but until I see my neighbors' kids with computers, I won't pay much attention.

It took several decades for private education at elite colleges to emerge as a key ritual of affluence. Most entrepreneurs don't have decades worth of capital to invest.

But within their limited resources, businesses try all the time to position their products and services as rituals of affluence. Take the credit-card ads, for example--the ones with the "priceless" theme.

I would argue that every entrepreneur's dream is to have a product or service that wealthy people deem essential for their identity. Elite colleges are in the rare position of having realized that dream.

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COMMENTS (5 to date)
Floccina writes:

Why find a cheaper way to certify worker quality when the great majority of quality workers go to Universities already. Business over consumes degrees becuase they are free to them, testing costs employers money.

I think that signaling is not the only reason for getting a degree but that it is a bigger reason than getting knowledge/training is. For example another reason people go to college is that people enjoy the time at the Universities. Another reason for going to a University is meet a mate. These reasons to the studnet are probably bigger than the knowledge/training value.

Cyrus writes:

Insofar as a good is positional, entrepreneurially producing it at a lower price will produce a profit only until its lower price destroys its value as a postiional good. If the timescale of this process is well-known from past experience with similar goods, as it is in the high-end electronics market, firms can and will ride the demand curve down from premium to commodity good, and then move on to something else.

For goods that have not before been commoditized, though, there's a lot of uncharacterized market risk, and only firms whose model revolves around large volumes at thin margin will bear the risk of the good becoming a commodity unexpectedly soon. Is there a Wal-Mart for college education?

Bruce G Charlton writes:

US higher education seems to generate quite a lot of different signals, and there is - over a decades timescale - a fair bit of movement.

For example, Harvard and Yale presumably generate a different signal from MIT and Caltech or Amherst and Wellesley.

Of the Ivy League, Brown and Dartmouth have dropped a lot in status and been displaced by Stanford and Duke.

There is a lot of relative movement in terms of achievements in scientific research as well - eg. the rise of the U of California System outside of Berkeley, or of U of Washington, Seattle, or USC - which will eventually be reflected in graduate school status, I presume.

So - I think the dynamism of US higher education (dynamism over a decades timescale) is evidence against too great an emphasis on the signalling function.

Matt writes:

Start a company near a college, creates the ritual every time.

I remember getting sandwich at the first Togo's across the street from Cal State, San Jose when I was a kid

trumpetbob15 writes:

Another issue with the signaling is in some industries, the government certification (another signal) require college education. For example, to sit for the CPA exam in most states, test-takers must have at least 120 credit hours with a certain amount of those credits being in specific accounting classes to even sign up for the test. Thus the government is mandating a college education, even if the education through a university would not prepare the student as well as four years working in a CPA firm. So in this industry, even if a CPA firm wanted to hire straight from high school, the employees would not be eligible to become a CPA and would not attempt to obtain the "cheaper" signal.

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