All academic economists should read UCLA's Gene Block's recent editorial.
Below, I provide some quotes from his piece and my thoughts. Chancellor Block appears to reject some of Milton Friedman's logic
on the benefits of ruthless pursuit of self interest. Dr. Block's piece raises key issues including; where do our preferences come from? Do market prices signal where scarce resources (i.e talented undergraduates) should be allocated? and How do we evaluate the effectiveness of universities?
Given that a national debate is now taking place concerning the role of universities in civic life and what is a fair price for attending such schools, Chancellor Block's piece provides an excellent opportunity to debate some key issues that our society must confront. There is great wisdom in his piece and I have often thought about the themes it touches on.
1. Is Greed Bad? Gene Block on volunteering at UCLA.
"It's a backlash, perhaps, to the 1980s individualist mantra that "greed is good." The dramatic Wall Street downturn five years ago was also a stern warning to graduates that such a mantra cannot be sustained."
I love the UCLA boosterism here but I'm not sure that too many young people are going to Wall Street. Don't forget the The Separation Theorem. Gene Block appears to reject this theorem. This theorem states that in choosing your financial portfolio, you choose what companies to invest in to maximize your expected risk adjusted rate of return. Once you have earned this income, you can spend it on anything you please. Think of Bill Gates. He was a ruthless monopolist at Microsoft and made a fortune and now wants to save the world. Economists have argued that it is wise to ruthlessly pursue expected income maximization and then to devote your resources through charity to those causes you want to pursue.
Perhaps Dr. Block is voicing a theory of endogenous preferences that young people's priorities can change due to the experiences they have. If a person goes to Wall Street, do they become a "ruthless Republican Romneyite"? If this same person had gone to Berkeley to volunteer, would this person evolve into being a very different person who "better serves society"? Economists do not believe that our preferences are so shaped by experience. This is a testable hypothesis and I would be happy to write a paper with the Chancellor on this topic.
2. Does society need more altruists?
"The world works best when people remember that we're all in this together. While it is hard to correlate the benefits of a college education to societal well-being, never in my 35 years in higher education have I seen a more pronounced and sustained effort by young people to choose careers that serve society."
Economists have been teaching the free rider problem for decades. Should this "evil idea" be banned from our curriculum because it encourages cynicism?
Is the Chancellor's fact that more young people are choosing careers in public service due to supply or demand? Is the Chancellor saying that it is a good thing that the private sector isn't hiring right now because this encourages more people to seek out jobs that better serve society?
Many economists including myself have worked on compensating differentials. This is the simple idea that dates back to Adam Smith that many people sacrifice income for psychic benefits a different job may offer. Many people do not choose the occupation that maximizes their PDV of income because there are other features of jobs that people value. An economist may turn down a Wall Street job because of a love of conducting research and mentoring young students. Chancellor Block celebrates volunteering and jobs that may not pay well in the short run.
The rugged pursuit of self interest has made the U.S the world's greatest nation. Mark Zuckerberg produces social benefits and pleasure for billions when he narrowly pursues his goals. Volunteer work should be celebrated but the private sector must continue to attract our best and brightest.
In my environmental economics class,
I argue that we can solve most environmental externality challenges even if individuals solely focus on their narrow bottom line (i.e profits and income). The key is getting incentives right.
3. Measurement Error and bad data makes it challenging to calculate a University's PDV of future earnings
"Such data can be highly misleading. A graduate's income in the first few years after college is a poor barometer of earnings potential later in life. Students might join the military, Teach for America or the Peace Corps and then go on to higher salaries in their 30s or 40s."
Joe Tracy and Joel Waldfogel addressed this issue a long time ago when they ranked MBA programs.
4. Was Hayek Wrong?
Economists have taught generations of students that the capitalist price system directs scarce resources to their highest use. If being a dentist offers an annual income of $400,000 while being a urologist offers an annual income of $265,000 then the price system is nudging young people to become a dentist. This is a "scarcer" field that requires more entrants. This quote below suggests that my Chancellor disagrees.
"Universities, particularly those supported with public funds, exist to serve society. Asking students to choose a future based on a salary scale does not serve society and, often, does not serve the individual. Students need freedom and encouragement to find their passions and strengths. Framing decisions about college as a cost-benefit analysis will not encourage the creativity and risk-taking that has made this nation great."
5. Universities as bundles of investment, consumption, and exploration
The Chancellor is 100% correct on this point. There is no unique correct path for every student. The modern university must be flexible enough to direct different students along different paths. At UCLA, I see many students studying (investment), and having fun (consumption). Chancellor Block must be worried that there is a tradeoff that if students narrowly pursue fields with the highest financial rate of return that they will be later be bored by their irreversible choice. The key to solving this potential problem is to encourage students to experiment and try different activities so they can learn about their talents and interests and find a good employer to match with.