This document summarizes Bryan Caplan's argument that much of education serves a signaling function rather than building human capital. It notes that while standard estimates find high returns to education, most classes do not teach job skills. It then introduces the signaling model of education, where schooling shows qualities like IQ and work ethic rather than increasing productivity. The signaling model implies education can have negative externalities that offset claimed positive externalities, suggesting government may subsidize wasteful signaling behavior. It answers objections that signaling is implausible by arguing the model explains otherwise puzzling facts even if actors do not understand signaling is occurring.

1. The Case Against Education
Prof. Bryan Caplan
Department of Economics
and Mercatus Center
George Mason University
bcaplan@gmu.edu

2. Education: Immortal Beloved
• “Education” is one of the Holy Trinity that
everyone is supposed to want more and better
of (other two: health care and the environment).
• It’s also a rare example of an issue where
economists and the public agree that we’re not
“investing” enough.
• Standard return to education estimates are
pretty high. Economists assume this proves that
education “builds human capital.”
• Rate of return estimates don’t even count the
positive externalities that economists think that
education has to have.

3. The Big Puzzle
• When you actually experience education,
though, it’s hard not to notice that most classes
teach no job skills.
• What fraction of U.S. jobs ever use knowledge of
history, higher mathematics, music, art,
Shakespeare, or foreign languages? Latin?!
• “What does this have to do with real life?”
• This seems awfully strange: Employers pay a
large premium to people who study subjects
unrelated to their work.

4. The Signaling Explanation
• It’s easy to explain these facts, however, using the
signaling model of education.
• Main idea: Much schooling doesn’t raise productivity; it’s
just hoop-jumping to show off your IQ, work ethic, and
conformity.
• Key assumptions:
– (1) differences are hard to observe
– (2) differences correlate with the cost of an observable activity.
– (3) higher productivity workers have lower costs of performing
observable activity
• In signaling models, the market rewards people who
“show their stuff” even if the display itself is wasteful.

5. Why Signaling Matters
• Beauty of the signaling model: It works
even if students, workers, and employers
don’t understand it.
• Who cares? Signaling models imply that
education actually has negative
externalities. These can balance out any
positive externalities, or even imply that
government is subsidizing waste.

6. What’s Wrong With Education
• Question: Who cares if education builds human
capital or just signals it?
• Answer: Signaling models imply that education
actually has negative externalities.
• Concert analogy.
• These negative externalities can balance out
any positive externalities, or even imply that
government is subsidizing waste.
• Social return versus private return.
• Note: Signaling ≠ “education bubble.”

7. Objections Answered
• Signaling models are widely dismissed on a priori
grounds.
– “We’d just do IQ tests instead.”
– “Employers know true productivity after a few months.”
– “There has to be a cheaper way.”
– “Learning how to learn.”
– “Character formation.”
• Signaling explains some otherwise very puzzling facts,
and the a priori objections only apply to the most simple-
minded versions of the theory.
• It’s rhetorically easier for libertarians to join the pro-
education chorus, then insist that the free market will
give us more and better education. But the truth is more
complicated.