The Roots of Signaling Denial By Bryan Caplan

The signaling model of education fits first-hand experience. It fits the psychology of learning. It explains otherwise very puzzling facts like the sheepskin effect. There are few theories in economics harder to doubt. But many economists continue to do so. Empirical labor economists seem to be the worst offenders.

What gives? The charitable explanation, of course, is that the critics have fantastic counter-evidence. I’ve read enough of the literature to say that this simply isn’t so. 40% of the economists who criticize the signaling model conflate it with ability bias. Another 40% of the critics attack the straw man view that education is nothing-but-signaling. The remaining 20% dismiss the best evidence on implausible methodological grounds – or have standards of proof so high that no theory could possibly measure up.

If the charitable story is wrong, we have to turn to uncharitable stories. What’s the real reason why economists reject the signaling model of education? The top candidates:

1. Status quo bias. Critics, like everyone else, hate to change their minds. They’ve disbelieved in signaling for ages, and they’re not going to let anyone take their current opinion away from them.

2. Social pressure. Economists feel strong social pressure to disbelieve signaling. Even though many economists think signaling is empirically important, high-status economists don’t. And economists are very status conscious.

3. Provincialism. Signaling theory comes from economics departments. But most of the best empirics for signaling come from psychology, sociology, and education departments. Economists don’t read the research of these outsiders, and wouldn’t take it seriously if they did.

4. Liberalism. Arrow and Stiglitz – two of the seminal figures in signaling theory – have impeccable liberal credentials. But economists still tend to see educational signaling as a free-market story. After all, the signaling model suggests that massive government subsidies to the beloved education industry could actually be exacerbating the market failure of excessive education rather than correcting the market failure of insufficient education.

5. Education loving. Professional economists were almost invariably good students – if not outright teacher’s pets. They enjoyed their educational experience – or at least enjoyed it a lot more than most students. Education is a cherished pillar of their identity. Economists treat the signaling model as an affront to the institution they love.

6. Panglossianism. Many economists are Panglossian: Whatever exists, exists for a socially good reason. If massively subsidizing education is a bad idea, why does every developed country on earth do so? Even some market-leaning economists are strangely prone to this view. Some actually treat the signaling model with the same hostility as any other market failure model – even though the signaling model strongly recommends lower government subsidies.

My personal judgment:

#1 isn’t a big deal. Economists embrace all sorts of weird views.

#2 is a big deal for practicing labor economists. But most economists don’t even realize that the consensus of labor economists largely dismisses signaling.

#3 is a big deal. Economists are as guilty of the “Not Invented Here” syndrome as anyone. Maybe more so due to our superiority complex vis-a-vis other social sciences.



#4 is tempting, but overrated. If you actually talk to economists at the AEA, you’ll learn that support for massive government education subsidies is bipartisan. Mainstream Republican economists are more supportive of school choice, and less supportive of the “everyone should go to college” idea. But only hardcore libertarian economists favor significant cuts in government support for education.

#5 is a big deal. Regardless of their political views, economists were good students and love education. Even I do, in some sense. Converting such economists to signaling is like persuading them to renounce their religion.

#6 is a big deal for market-leaning economists, especially the Chicago-trained. Liberal economists are never consistent Panglossians. They constantly complain even when they’re in charge! But some market-leaning economists’ fundamental belief isn’t that markets are efficient, but that the world is efficient. Donald Wittman’s The Myth of Democratic Failure is a case in point.

Any explanations I’m missing? For the sake of argument, take “signaling is false” off the table.