The Opportunity Costs of Education

Many, many years ago, quality education is considered to be a luxury; only children from rich families are able to get education. Now, education is an essential component in our lives and considered a norm to society. The importance of education cannot be denied; our modern society revolves around the qualifications and degrees earned in order for us to pursue a worthwhile career with a handsome paycheck. For this reason alone, education has now become an industry in it own; the number of learning centers and university counselors has tripled as of this year compared to only 5 years ago. The industry of education is now full of opportunities for wealthy careers, as education continues to be valued very highly to society. Each year, hundreds of thousands of students compete against each other from around the world to apply for a possible placement in a higher education facility (i.e. University) in a brutal application process, whereas it is much more easy to get into a University 20 years ago. Parents now place education and academic results as the top priority for their children.


*"Education=Future - New Equation?": Education is valued very highly in modern society, the gateway to a desirable future.

One of the reasons why Education is so valued is because it is now much more accessible to low income groups. For the average low income family, they view education for their children as a ticket out of poverty and access to better living conditions. Also, governments view education as a merit good; something that is deemed to be socially desirable and can benefit the society. However, private firms view education to be something that would not be profitable, as rational firms aim to profit-maximize. So education will be under-provided and under-consumed in society. As a result, governments have improved the access to education through direct provision or subsidize consumers and suppliers alike. For example, La Salle college in Hong Kong gives free education to many low income families. In many places, education is free with many state-run schools, and in comparison only few private schools.

So why has education propelled to the top spot in the list of priorities of parents for their children? Firstly, as we have mentioned above, the accessibility of education. Secondly, the increase in the competitiveness of students. If I and many other high school students were to become parents in the near future, what would we be concerned about most of all? Our children's future. The society is now dominated by the desire to earn money and be positioned in a good job, as money allows people to fulfill their needs and purchase economic goods. Education in the eyes of many parents translates to a higher chance of their children being able to get a good job, hence the reason why they believe that education and the opportunity to study at a world-renowned higher education institute means a good future. Thirdly, job requirements. All firms want to recruit the best possible individuals to join their company, as high quality factors of production is very important to the success of business, whether it is increase in productivity of output. With so many people now having access to education, firms have detailed job specifications and requirements, making the parents feel that their children must have good education in order to acquire essential qualifications to have access to more job opportunities.


*"The most important piece of paper of our lives": Certificates and University Degrees are now the main requirement firms want for anyone applying for a job placement. 

Lastly, the competition between parents. Parents may not like to admit it, but it is extremely relevant to this discussion. Every parent, whether they like it or not like to boast about their children's achievements, especially the mother. My real world example would be the housewives at Pacific Club. These ladies would usually play tennis in the morning, and the first discussion, other than judging other people is to talk about their children's grades, University, subject of study etc. In this instance, we can modify 'price competition' to 'education/grade/University competition', whatever to make this easier to understand. In the eyes of those housewives, whoever's 'grade competition' is higher means that they will win, and the others will lose. Nobody likes to lose; this instinctive human response as a result of competition induces the desire for the parent's to invest in their children's education to come out as victors in the 'grade competition'. Winning and losing is part of economics, which makes this point very important.

People often express that "your children are your biggest investment." I personally agree with this viewpoint, several years back in the Hong Kong news, an average parent will spend about $40 million HKD on their children until they graduate from University. And similarly to stock markets, the success of the investment is very difficult to anticipate. One moment you are earning a fortune, the next day your stock drops like an anvil, inherently like the nature macroeconomics. If we compare the students to the stocks, we can infer that that it is difficult for the parents to anticipate whether their children will be successful or not in the future.

                 
*"Turn out which way?": Child's success and future is extremely difficult to anticipate

Next, let's look at the student's response to education. Question yourself this, do you like to go to school every morning, dressed in uniform (casual for University and possibly high school seniors) sat down in a room full of other students while the teacher bombards you with knowledge? Not really, no. While the governments and society think that education is beneficial to society, to us students, education is not exactly pleasurable. As human beings, we want to do things that will maximize our benefit, for example leisure, going on a vacation, gaming, hang out with friends at Theme Parks etc. Education does not go into that list, not now, not never. How many times have you heard your friends curse the IB, SATs, teachers or anything school-related? Many times is what I had experienced, and our school produces some of the best results in the world. If we don't like education, then why do we still do it? Do students want to get into University simply for the fact that they want to study at a higher educational facility? Firstly, education has developed into a essential good for job access into many industries. Secondly, education is now a social norm and requirement. Thirdly, and this is very much related to myself, respect and recognition gained through education  It is a human instinct and desire to want to be respected by other people by being better than them in any competition, whether athletic or academic. Education is the perfect medium to accomplish this. I know this seems more psychology than economics, but economics has deep roots in psychology as it is a study of human behavior (social science). So because education is now easily accessible to everyone, it has changed from a want, to a need.

What about the University themselves? The admissions process can be one of the most frustrating and cruel stages students need to undergo through their academic careers. So how do Universities decide who are the able applicants and those who are not? We hear about the American's "holistic approach" and others think that its subjective. This is a job mainly for the students to do. If we imagine that each of us are particular firms with our own unique brand name and identity, we have to "differentiate" ourselves to get noticed, as we are competing for limited University spaces, who act as the consumer, hence this is similar to "product differentiation." Ever understand why our parents make us learn musical instruments and participate in sports? The main reason is that they want us to be different from other students so that we could effectively "sell" ourselves to the Universities. Furthermore, if we were to represent the students as a market, then the market structure would be monopolistic competition. We are heterogeneous goods since we differentiate ourselves; each of us have a "price setting" ability since we can control over how we value ourselves as products by which Universities will consider. To a large number of Universities, we are imperfect substitutes for each other, and extreme competition between every student affect the degree of differentiation. Switching roles now that we students are the consumer and the University the firm, then we are subjected to "Price Discrimination". Price Discrimination is a practice by which firms charge different prices to different consumers for identical goods and/or services. The market segments in this case are local students and international students, where international students have to pay more to 'subsidize' the local students, as international students are often wealthy. Universities are able to do this because they each have 'monopoly power', they are able to prevent the resell of the good/service since applications identify particular students, and are able to separate different market segments.

*"Masked elegance and beauty": Prestigious Universities in appearance, a plethora of economic activity going on the inside.

University rankings have indirectly taken the role of market share to a certain degree. I recently opted to do a survey of Hong Kong students. When I asked them, "which Universities do you know or have heard of?" 100% have heard or knows about the top 3 Ivy League Schools (Harvard, Princeton and Yale), 100% knows about Cambridge and Oxford. 90% of the students know the top 10 Universities in the world, but 17.6% do not know anything about the courses or anything specific about the top schools including location. Unsurprisingly, only about 5% know about the Seven Sister Colleges (Bryn Mawr, Wellsley, Mount Holyoke, Vassar, Smith, Radcliffe and Barnard), and 0% have even heard of Rensselaer Polytechnic University located in the US. To understand the extent of the problem, someone from my school, King George V School, thought that Harvard was in the UK!

     
*The Thinker: "Harvard in the UK?", John Harvard: "No! What person would think that!?" : Universities are recognized by their name first, before getting information about the institution.

To be honest, if one does not know whether Harvard was in the US or UK then that already explains the problem doesn't it? Only the best Universities get recognized; implying that its admissions officers are going to be drowned in applications. From this, we can see that there are a few Universities that dominate the market, since they have the greatest ability to attract students.

Economists always use a simple but fundamentally important process when making decisions, unlimited wants, limited resources, scarcity and opportunity costs. Opportunity cost is the value of the next best alternative foregone after an economic decision is made. Decisions regarding education have many factors to consider: the University you wish to attend, what subject you want to study, what career paths and choices do your subject give you access to, the high school course you should take, whether to focus on SATs or the school curriculum etc. Let us consider some simple examples where opportunity costs play a role in influencing the choice we make.

• University - Cambridge or Harvard? UCL or Imperial College London? Choosing between such top Universities can be a real headache for students, considering that offers are given. Imagine the students as consumers and the Universities the firms. Assuming that the prices to attend each University are equal, this means that each University will compete against each other with non-price competition. The types of non-price competition include the name of the University (of course), their place in the rankings, the types of courses they offer, the employment figures upon graduation, the student experience, the location, the food etc. Usually, the brand name of the University and the ranking plays the largest role in the student's choice. For example, one of the teachers from my school got an offer from both the University of Michigan and Columbia University to do her masters degree in Mathematics. She preferred the rigorous course at UMichigan, but in the end opted for Columbia University because she wanted that brand name and qualification from a well-reputable Ivy League School.

• Subject Choice - this factor very much relates to the one above. Let the student in this example be from Hong Kong. He had received offers to study Economics at the University of Cambridge and Medicine at the University of Hong Kong? If he were to choose Economics at Cambridge, then the opportunity cost would be to study Medicine in Hong Kong. The opportunity costs include: being with his parents in his home, having a sense of security in a city he has lived for all his life, paying less expensive school fees, nearing 100% employment (since HK has an insufficient supply of doctors), having a high social ranking occupation, lacking language barriers, staying with familiar friends, eating familiar food etc. On the other hand, if he were to choose HKU Medicine, then the opportunity costs include: the once-in-a-lifetime experience studying at one of the most internationally recognized Universities in the world (2012 Ranked #1: QS World University Rankings), learning to be independent, having freedom from parents, making new friends, staying in a place with a favourable timezone for Premier League and Champions League Matches, countryside experience away from the polluted city, Fish & Chips! etc. Very hard indeed, but the final decision depends on what you personally like, since everyone's desires and what benefits them are different. Moreover, different subjects have different types of opportunity costs, or advantages and disadvantages. For example, if one chooses medicine to study at University, then there is guaranteed employment, high pay if successful and higher social recognition, but it is a life long commitment to continual knowledge enrichment; it does not stop after graduating from medical school. Next, if one chooses to do Fine Arts, then it should be comparatively easy to study, but the modern society's demand for Fine Art students is considerably weak as opposed to a 100 years ago, so it is difficult to find jobs as it is not very popular in many industries.

• Undergraduate, Masters or PhD? - The opportunity costs with these are usually related to time and the career path. Doing Masters Degree or PhD will require a lot more time, therefore the opportunity cost is finding a job and starting to earn money earlier. Another opportunity cost by studying a Masters Degree or PhD is job mobility. As we become more professional in a particular field of study, our job mobility declines, hence we become only tailored to a specific career path. Alternatively, choosing to only have an Undergraduate qualification means that you become less competitive against other students who have better qualifications, and with the population of students continuing to increase, an Undergraduate Degree may not be enough.

The best way to evaluate opportunity costs are consideration into the short term and long term gains, with long term usually being the more favourable one. For example, eating junk food everyday; you get short term pleasure through the taste, but you then experience long term build up of cholesterol and the possible arise of health problems. Similarly, you work hard and focus on studies in the short term, in the long term you do well in exams and get into a top University. Of course, the notion of success through prowess in education has elements of uncertainty.

Having brought that up in the above paragraph consider this: "Is education really worth all the money and effort?" An individual's education does not completely decide what career path he/she follows and success. For example, the most popular Japanese comedy duo, Downtown. The boke (funny man) Matsumoto Hitoshi san (松本 人志) and tsukommi (straight/rational man) Hamada Masatoshi san (浜田 雅功) both did not attend University and are high school drop outs. Yet, they are arguably the most successful and well-known comedians of their time and revolutionized manzai (traditional style of stand-up comedian in Japanese culture) forever. Additionally, there have been many people who are graduates from top Universities but have entered the television industry, for example comedians Ben Miller, Simon Bird and Joe Thomas have all studied at the University of Cambridge in Physics, English and History respectively. It may seem ridiculous to go into comedy after studying at Cambridge, but consideration of the opportunity costs may indeed favour the comedy career path.


*Pictured above: Comedy Duo Downtown's Matsumoto Hitoshi (Left) and Hamada Masatoshi (Right)

To conclude, education is a necessity in the modern society through the increase in competition between people for scarce job opportunities and money. Often viewed as something that would determine success in careers, education's importance is undeniable, but is not strictly true. Consideration of the opportunity costs, short term and long term gains, and general economic analysis, we have shown that education is not as simple as we may first think. In actual fact, it is very complex. The value of education is the highest as it has ever been, and its only going to go even higher.

Invisible Money Part II: Artificial Consumption

If you have not read the previous article, then you can read it here. If you have read it, then just a quick summary of the Invisible money. You should know that Invisible money is an issue to all our economies in terms of using invisible assets to pay for real assets, the illusion of an equivalent exchange of goods for money. Other issues include the formation of a bubble economy and the quick deterioration of both investment and commercial banks' money supply. Now, lets examine part two of the problem.

If we refer to our original example of an individual who earns $10,000, yet is able to purchase many things of a monetary value above that of his/her income. This is attributed to the wealth of the person, who has invisible assets; this is a reason for why many people are able to purchase well above their income levels. Here is the exact problem: since our purchasing capability is so much greater than our actual income, then this must also mean that we are consuming at a level above our income level. When we purchase goods, most of the time we do not exchange real money for real goods, in reality, we exchange invisible money for real goods. Invisible vs. Real? I'm sure we know what the problem is now: We are consuming at a level that does not reflect the overall income of our economies, hence the term artificial consumption.


*"What?? I didn't buy my laptop?": Invisible money allowed us to purchase goods that we couldn't buy with real money, creating a purchase illusion.

Computers, television sets, books, a lot of what we own, that a lot of us do not realize is actually a luxury that we might not even have in the first place given our income. At first, it may seem ridiculous to think that the capital, electronic or expensive goods in general that we buy are not paid for with physical money. Each good or service is assigned a monetary value that changes with the price mechanism; the forces of demand and supply. But when we purchase notably expensive goods, then we use credit cards. Effectively, we are using future finance through borrowing money from the banks. So the banks help us pay the firm and we get to pay back in small amounts until the debt is paid back in full with interest.

The main problem with artificial consumption is that we are consuming at a much higher level than our income allows us. If we were to only use physical money to purchase goods, then this means that we may not be readily able to buy a place to live, laptops, smartphones etc. But since we are able to, that means that we are consuming at an artificially high level beyond the money available in the whole economy. If we relate this to prices we see today, since the world aggregate demand is abnormally high, wouldn't this induce demand pull inflation so that every good or service should be priced much more than it is currently? As this is not the case, then this must suggest that there is an illusion of cash flow, alluding people to think that they are wealthy, but in reality are much poorer than they believe. Also, it would be troublesome in the current social environment to suddenly increase the prices of goods as governments would like to prevent social unrest and riots that is an example of market failure; causing unwanted costs to the society. Furthermore, the social and moral dangers of invisible money means that we are using our resources at a much greater, unsustainable rate than our money supply allows us. China now purchases 40% of the world's copper supplies and that the BRIC developing countries (Brazil, Russia, India and China) will consume 3.7 million more barrels of oil a day in 2012 than they did in 2008. The main consequence? Increasing rate of Global Warming and environmental destruction.


*"Please help me!": A result of us humans demanding and consuming at an artificially high level; the rate of Global Warming is much faster than expected.

Credit is the main cause of artificial consumption. The concept of being able to borrow a vast amount of money from a creditor, then return the money little by little is majorly flawed. Not only is the bank putting themselves in danger to borrow money for perceptibly small returns given the enormous figures in an average banker's paycheck (if it is even real money at all!),  Personally, the existence of credit has its benefits of making the cash flow around the economy more efficient. But in the long term, it could well be the biggest problem that lies in the economies of the 21st century, and there is no going back...