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Higher Education: Externalities, The Public Purse and Policy*
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HIGHER EDUCATION, EXTERNALITIES, THE PUBLIC PURSE AND POLICY· L. R. Maglen Monash University and University of London Institute of Education I. Introduction
The unprecedented growth in lhe public financing of Australian higher education over the last decade or sol has meant that, inter alia, the public subsidy per student on some courses can now rise to over firty per cent of total per-student costs (laken to include Ihe students' foregone earnings).2 In this paper a Paretian framework is used to analyse Ihe claim that the externalities (external, neighbourhood, spillover benefits) generated by higher education justify these high levels of subSidy.3 Whilst no attempt is made at quantification, this paper does undertake the important preliminary task of establishing the precise extent of the problem involved. It does this (a) by stating the precise criteria for the achievement of I'aretian optimality in the presence of spillover benefits, when a public subsidy solution has been opted for; and (b) by revieWing in an Australian context and by laking
•
All earlier draft of this paper was presented at the Firth Conference of EI,;onomislS, Brisbane, August 25~29, 1975. I am indebted to Mark Blaug, Colin Oark, Ross Parish and Yew Kwang Ng for their helpful comments.
I. The culmination of Ihis process was the takeover by the Australian Governmenl of financial responsibility for lhe bulk of the tertiury sector in 1974, aC~"OlIIpanjed by the abolition of luition fees in most instilUtions and the repla~'ernent of Ihe old seleclive Commonweallh Scholarship Schemes with lhe new univt:r:;al Tertiary [dUeDlion Assislance Scheme. 2. SinC'C lhe abolition of tuition fees the pUblic subsidy in universities and CAEs has ranged from about 15 pt:r cenl of total pcr-.~tudent cosls in hUlllanities cour~cs 10 around 40 per cent in science and engineering courses. When grants payable under TEAS are included thcsc percentage.~ have reached as high as 33 and 54 respectively. These figures are based on per-1ilUdent cost estimates for 1969, ~e Selby-Smith 134, Table II. 3. Of course economislS arc nOI the only ones who can shed lighl on the molive~ behind public budgetary decision-making, see for c~ampte I'eston [32, p.60, fn II, Morcover, lhe Paretian framework is not the only one Lhat they can ado]>1 for this purposc. For a criti
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considuably further than hithe.rto the a priori analysis of the specific spillover benefits that can be identified with higher education. 4 External benefits of higher education arc those benefits (both pecuniary and non-pecuniary) which arc not appropriated in any way by the individuals undertaking it, but which are nonetheless uniquely attributable to that higher education. It is thus incorrect to COUIll amonst them any effects that are either enjoyed exclusively by the students themselves, Or which have been generated by some other activity in society, such as compulsory education, the mass media, on-the-job training programmes. Moreover from a PareUan point of view it is incorrect to take total spillover benefits generated by higher education as the justification for existing levels of public subsidy. The achievement of Pareto optimal resource allocation (where the present value of marginal private plus marginal external benefits are equal to the present value of marginal social costs) requires that the marginal public subsidy (and hence average per student subsidy?) is equal to marginal external benefits (MEB).5 If on the one hand at current levels of enrolment it is estimated that MEB are greater than the marginal subsidy then the signal to governments is thai there is a sub·optimal allocation of resources to that part of the higher education sector, and consequently the public subsidy ought to be increased. If on the other hand the MEB are estimated to be smaller than the marginal subsidy the reverse signal is given. AI no stage do total, inframarginal and Pareto irrelevant externalities enter the calculus. 6 An important question raised is the degree to which externalities var¥ according to the particular course level, discipline and institution involved. 4. Other writers to approach this subject include B1aug /4 J /5), Bowman [10], rriedman [19], Hirsch et a/[20], Hudson [22], Peacock and Wiseman [31), \Viesbrod [37] [3&J, and West 140). They too have stopped short of the difficult task of quantification. 5. Problems arise if, as is often the case, private and social discount rates are not the same; see for example Arrow II] and LaYlHd [23J. Moreover it is by no means established that students do lake a 'human capital' view when taking educational decisions; see Blaug [7J. 6. See Culyer [14, pp. 26-27]. For a formal definition of 'inframarginal' and 'Paretoirrelevant' externalities, see Buchanan and Stubblebine [ 12]. 7. A related i~sue is that MEB may also vary between 'non-consumers' of higher education. It i~ possible that there are sy~tematic differences in the distribution of recipients of external benefits, either on a geographic basis or upon the basis of their educittional or occupational background; see Weisbrod [38], Hirsch el af 1201, Hudson [22]. To Ihe extent that there are, and these differences are significant, there is a case for it corresponding differentiation in the contributions these groups make 10 the public funds OU! of which the subsidies arc paid, that is, for a lower than national level of government having primary financial responsibility, and/or for spccial earmarked education laxes being Icvied differentially amongst the groups of recipients. Whilst this matter will not be pursued any further here, the author has examined these propositions elsewhere and concluded that no such cases can be substllntialcd;see [27,pp. 51-551.
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The answer has policy complications because it determines, on these grounds, the extent \0 which public subsidies should be varied aCrOSs the sector. Further complications arise when it is remembered that total per-student costs are far from uniform acroSS the sector; see for example Selby-Smith [34, Table I). Friedman (19, pp.86~IOOJ and others (Wiseman [43]. J}eacock and Wiseman [31, p. 991, Parish [30, pp. 288-91 J), assert, but do not demonstrate, that general education courses generate greater externalities lhan do purely vocational cour.;es. Quite apart from the practical difficullies in making such a distinction, (between levels as well as between disciplines), the foregoing analysis suggests that maybe even the opposite is the case. 8 2. The Identification of Spillover Benefits The following list compiled by Blaug of the spillover commonly associaled with education as a whole provides a useful starting point:
,. t. the income gains of persons other than those that have received additional education, 2. the income gains of subsequent generations from a better educated present generation, 3. the provision of an efficient mechanism for discovering and cultivating potential talent, 4. the means of assuring occupational flexibility of the labour force, 5. the creation of an institutional environment that stimulates research in science and technology, 6. the encouragement of lawful behaviour and the promotion of voluntary responsibility for welfare activities, both of which reduce the demand on social services financed out of taxes, 7. the tendency to foster political stability by developing an informed electoratc and compctent political leadership, 8. the emergence of 'social cohesion' by the transmission of a common cultural heritage, and 8. Alternatively it could be argued that the distinction is IlOt a valid one since higher education as a good generates externalities chiefly because of its heterogcneilY, becausc it is a conglomeration of levels and disciplines, and that to al1empl 10 as.~ess the spillovers from anyone part of it is to miu the point. This maybe, but it implies that either the cxisting distribution subsidies within higher education is optimal, or that the mixture of levcls and di.wip!ines could be varied considerably wilhuut making any significant difference to the spillovers generated. Either case would be diflicult to substantiate.
or
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9. the widening of intellectual horizons of both the educated and the uneducated, contributing to enhanced enjoyment of leisure" Blaug [5, p. 108). Blaug makes the important distinction between 'economic spillovers' (Item I - 'first-round economic spillovers', Items 2-5 - 'second-round economic spillovers'), and 'atmospheric effects', (Items 7-9). Item 6 he leaves in a class by itself; see also l4, pp. 234-2431. How important are they in lhe context of Australian higher education? Item 6. ',lie ellcouragemelll of lawfitl bellaviour . This item Blaug dismisses from the outset: 'the belief thaI the spread of education will reduce crime and stimulate private charities is simply old· fashioned sociology' (5, p. 108). I)erhaps in this he is correct. Maybe there is no significant correlation between the amount of education undertaken on the one hand and either respect for the law or compassion on the other. To claim that higher education encourages lawful (less anti-social) behaviour at least requires demonstraling that those who acquire education beyond the legal minimum are underrepresented amongst the inmates of our prisions, that they are less prone to such things as alcoholism, drug abuse, child·bashing, suicide, and are less likely to be involved in road-accidents than are their less educated fellow citizens. To do so is to imply that the rates at which these anti·social and costly activities have been increasing over the period in which the higher education sector has been growing rapidly would have been even greater had it not been for the growth in higher education. This may prove to be a difficult claim 10 substantiate.9 (But even if it can be, maybe it could be argued that a spillover cost, rather than a benefit, has been generated, if the spread of higher education has precipitated feelings of frustration and resent· ment amongst those who have not been fortunate enough to particip
9. Whal evidence there is from lhc United Stale.~ and the United Ki~dom proouce inconclusivc result$. A rccent 51udy conducted in the U.S. concluded •... the e...tent of specific crimc.~ against property is directly related 10 schooling ol/d ol/·tlle·lob 'roilling. Moreover, il i$ es."Cnl ially lhe im'QlIalitit'$ in the di$lribulion of schooling and Iraining, no, tlleir mcall 1i!I'C/S, thaI appear 10 be strongly retaled to the incidence of many crimes', (my emphasis) Ehrlich [17, page 3351. In his rcvicw of changes ill lhe rale of juvenile crime in the U.K" West ca~l find no evidence 10 suggesl thai thc growlh of I/a/e education and increases in the minimum sehoul leaving age have had a moderating innuence. Indeed, he does not rUle out the pos.~ibi1ity Ihal Ihey may have had an aggr,tv3ling effecl; 140. pp.31-391.
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anti-social ar.:tivities).10 The claim that Ihe spread of higher education fosters private charity and thus less dependence upon tax-funded redistributive measures may also be dirlicult to substantiate. Equally, there could be the reverse effect. The marc arnuent the society (with the spread of higher education presumably contributing 10 thaI arnuence), the more public concern there appears to be for the less fortunate members of that society (and the rest of the human race), and consequently the greater the public pressure Ihere is for concerted systematic pUblic social security programmes, I I
The Atmospheric Effects
Item 7. 'Ille lelldellc)' 10 [osier polilical slabililY, , , ' Item R. 'Ilie el1lergellce Qfsocial collesion . .. ' [telll 9. 'Ille widellillg of il/lelleclualllorizOlls . As Blaug's tCllll suggests these effects constitule the most nebulolls lenst quantiliable form or spillovers. In a paper such as this therefore little should be said about them, except 10 emphasise: (a) that many of these effects can be and are claimed as spillover effects of a wide range of other resource competing activities in society; (b) that of those that call be uniquely dassif· ied as spillovers of higher education, only those effects at the margin are relevanl to Ihe determination of the optimal marginal subsidy; and (d that lhe importance of many of these effecls is a mal tel' of subjective judgemcnt. Opinions will diller; what is considered a significanl spillover benefit by some will. by others, be regarded as of lillie importance, and by yet others as a spillover ":OSI; sec I'eston [32, p. 471.
10.
II.
Furlh~'r indication of lhe ~'omllte\il)' uf this retaliuliship is given in a ren'nl AUS1· r;lliall swdy, sec Wilson anu Brown [4:!1. Thdr evidell<:c Sll!!4:!csls lhal lhose I\ho hav\' ulld~rlaken tertiary ~'dul'ation in I;\'neral lend more IO\lards tcniem:~' in Ih~' Ir~'aI11lenl of a \\ide ranl!l' of criminal offenders, lhan do olher lIlembers of Ilw ~·uml1\unit}'. (sn' llP.4:!, 67 and 711. I\l"l"ording 10 lhdr survey, lhos~' who h;nl 1I1ldCriaken hi.'!her Cducllion arc more pronc 10 he I'iclims of l'ril11e, cspccially ,'rimes againsl lhe person. The ~u!!gcsliotl is 11l,,1 tl1l'ir kllu\\"led.'!~' or lh~' law l'nabtes Ihel11l1lorc e'lsil)' 10 rCl'oJ;nill" Ilhl'n Ih... t;1\1 has Ill'l'll brokl'n.tscl' pagl' 84).
1\ ilhill a sol·i... l)"s social SCl'uril)' sySIl'm lh~' rnon: ~-dll~'al ...d individu;lls more Iikl:!)' Iher an' Itl bl' awar... of theil rights and e11litlcnwl1Is under lhal system. thus Illl'fl';\sing ralhl'r lhan diminishing thcir l"I;lirns upon i1.
~lorl'oV('r ;HI' lh~'
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The Economic Spillovers
(a) Second-Round Spillovers Item 2. 'the income gains of subsequem generations . ... It must be remembered that the concern here is with the efficiency of
reSOurce allocation, and not with the equity questions raised by this item. Nevertheless it may well be the case that higher education obtained by one generation raises the level of earnings of the next generation. However, what also appears to be true is that the children of the higher educated themselves have a greater chance of acquiring a higher education, and thus of enjoying its considerable private benefits; see for example Bowles [9]. Fagerlind [18]. As such a large part of what are claimed as spillover benefits may not be. especially if the consideration of these inter-generational benelits enter into the original decision by parents to undertake higher education. It certainly does not provide grounds for public financial intervention; see Nerlove [29, pp. 5193-5196]. On the other hand, if the future earnings of those whose parents had not undertaken higher education are raised as a result of present expenditure on higher education, this would constitute a spillover benelit. Such would be the case if present higher education leads to increased productivity not only amongst those who acquire it, but also their workmates, and when this in turn leads to increased per-capita incomes over time for the whole of society. This, of course, is the second-round or multiplier effect of item I in the above list of spillovers. What value one can place upon this effect, even the first round of it, remains to be seen. There is possibly another way of looking at item 2. Present higher education is the chief source of supply of trained educators, and hence is the major factor ensuring that higher education is a continuing process. Part of the output of the present higher education system becomes an input into the system in the future. It could be argued that a public contribution to costs are necessary in order to ensure that the future generations are not inhibited in their acquisition 0 f higher education because of shortages of this input, a situation that perhaps could occur if higher education was left in the hands of the market. This is an argument for ensuring competitiveness in the market for teachers, rather than for publicly subsidising their supply.12 In any event the claim begs. the question, for it says in effect that even if spillovers arc not important at present, they most likely will be in the future, at any rate one ought to prepare for them by subsidizing present higher education. 12. Of course in Australia large scale direct subsidisation of the training of teachers exi~l.S.
over and above lhe general public contribution to higher educalion.
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Item 3. 'the propMon of 011 efficient mechanism for discovering and cultivating potential talent' This is the 'screening hypothesis' or 'theory of credentialism' that has altracted to it a growing number of writers in recent years; see, for example, Arrow [2], Layard and Psacharopoulos [25], Blaug 17]. However, it is not at all certain whether this item should even appear in a list of spillover benefits from higher education. If higher education did not perform this service, it would be necessary for prospective employers and other agencies in society to do so. But one would have to conclude that this would only be at a greater cost, for if it was assumed that they could provide it at the same cost, then this could not be used as grounds to favour higher education with pUblic funds over any of these other agencies, and if it was assumed that they could provide it for less then a social cost, not a benefit, is entailed in leaving it in the hands of higher education institutions. An economic benefit therefore must be assumed. But who does benefit from this discovery and cultivation'! If it is only those who are discovered and cultivated then it will be renected in greater private benefits to them, and no spillovers will be gcnerated at all. If, on the other hand, it is society at large then the spillovers will manifest themselves either as economic spillovers or as atmospheric effects, or both. In other words, item 3 would not be a spillover benefit per se, rather it would be one of the reasons spillover benefits are generated. Item 4. 'tile ",eallS of assurillg occupational flexibility . .. ' This item could really be just one aspect of item 1, or it could manifest itself solely as a private benefit to the higher educated. If higher education does lead to greater occupational mobility amongst its graduates then one would expect that this would be renected in their earnings, since opportunity costs of their employment rise as a result. In any event, for this item to be also claimed as a spillover benefit it would have to be demonstrated that the less educated members of the labour force have their earnings raised also, either through their own mobility and hence opportunity costs being increased as a result or the greater occupational nexibility of the more educated, or through productivity in their existing jobs being raised when higher educated personncl work alongside them. Both of these innuences are included under item I. The evidence that is available regarding the occupations nexibility of those who undertake higher education is inconclusive. Quite apart from the question or whether the intrinsic nature of their studies leads to a greater range of occupational options, (but see Dare [161). there are two reservations Ihat can
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be expressed regarding the institutional character of the markets they may enter. The first concerns the widespread restrictive practices employed by professional associations. These practices have as their aim the reduction of competition within the markets for some types of highly lrained manpower, and are applied at least as assiduously as any found in other areas of the labour force. The second concerns the existence of 'internal labour markets' with infer alia their characteristically low turnover rales; see Doeringer and I)iore 115). There is some evidence available from the United Kingdom to suggest that these can extend beyond blue·collar into white-collar markets, including those for highly trained scientific and engineering manpower; see Mace and Taylor [26]. Even so, if occupational nexibility is generally greater amongst those who have undergone higher education, then a social benefit can be claimed in as much as the cost of subsequent retraining has been greatly reduced. In effect, what this means is that higher education has a "retraining" or rather a 'retraining forstalling' clement built into it. In principle therefore one could breakdown higher education into two elements - 'training' and 'retraining', and compare the efficiency of higher education institutions as alternative places wherein Ihis retraining can take place. As their retraining is anticipatory and general it is perhaps not as effective as the later reactive specific retraining it largely does away with. However, the practical problems involved in such an exerdse would make it a difficult undertaking. What is suggesled, however, is that formal highcr education and on·the-job training arc substitutes. In view of this it is interesting to note the results of some of the studies conducted in the United States and the United Kingdom. Several of these have shown thai typically there is a lower degree of observed obsolescence of skills amongst the more educated members of the workrorce, Ihal they arc more able to maintain and even to continue to add to their earning over the whole of their working lives than are Ihe less educated workers; see Layard e{ 01 [24], Selby-Smith 1341. Apart from the greater durability of the extra skills they at:quir~, two other factors may be at work here. The first is that the more-cdu..:ated members may in fact have a greater likelihood or receiving additional on-the-job training than their less·educated colleagues: see Mincer 12X), also Chapuy t 131, Wolfe 144]. To that extell\ on-the-job training is wmplemelllary to and not a subslilUtc for formal edu..:ation, and so some of the increased occupational nexibility attributable to higher education may indeed be due to the extra on-the-job training associated with il. This weakens the retraining element implicit in higher education. The second ra..:tor is that there has been an increasing tendency for employers, both in private and the public sc..:tor, to advertise vacancies for supervisory
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and managerial posts with the stipulation that applicants should have a certain minimum level of educational qualifications. Frequently, however, this has been the result of upgrading by the employers, 'to stay in line with current trends in the labour market', and has had little to do with the actual requirements of the jobs in question. II is quite possible that in a large numb· er of these instances, the job could be filled adequately by any number of individuals with qualifications below the minimum arbitrarily set by the employer, but who are not ~ven taken into consideralion because of the stipulation. In these cases the insistence upon educational screening may be because employers lack proper job-assessment and candidate..evaluation procedures; cf Berg [3, pp. 92-94J. It could be that employers believe that performance in formal education is a good predictor of 'trainability'; see Arrow [2], Blaug [6J [7], cr Wiles [411. Or it could simply be lhal the employers are indulging in conspicuous consumption. In any event it is not at all clear what sort of externality, if any, is being generated. Item 5.
'lite crealion of an imlitulionol ellviro/'lme1l1 thai slimulates research . ..•
This item is somewhat different from the others in this calegroy, in the sense that it is an externality in production rather than in consumption that is being claimed. It arises out of the well·established association of research with teaching in universities;)] indeed, the two activities have come to be regarded as the joint products of these institutions; see Nerlove [291. However, this joint production presents all sorls of complications when one comes to consider its financial implications, and several qUalifications must be made before the association can be included amongst the spillover benefits of higher education. Firstly, it must be kept in mind that, especially in this country, it really only applies to one sector of higher education, the univers· ities, for it is only in these institutions thai research is formally associated with teaching on any large scale, and even here it is usually only associated 13. The idea of universities as major centres of research is only a comparatively recent phenomenon. 'Another mythology, which Ashby describes as "Ihe academic Arian heresy" (E. Ashby. Tedlllology and (lie U"il'ersilies, MacMillan, London, 1958, page 4), came from Germany in the nineteenth century. /1 was '''~ conc~pr of Ihe ullil'en'ilY as a r~sear(:h illslilllu (my emphasis). Whatever the eITects of this idea on social institutions in Germany. it was imitated by some British academics and became almost a felish. [I devalued Ihe imaginative excitement of learning' Titmuss (36, p. 301·
elf Bragg III J, Uowden and Matheson 181.
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with post-graduate level teaching. This being so, item 5 can hardly be taken as a major reason for public financial intervention in all sectors of higher education. A much more important qualification, however, is that teaching and research are not joint products in the same sense as are, say, meat and hides, for either can be 'produced' without inevitably involving the other. That is to say, university level courses can be and are taught in colleges of advanced education, where no fonnal research links exisl, and research of the type conducted in universities can be and is carried out either in separate institutions, as in the C.S.I.R.O. and the A.C.E.R. for example, or in association with other activities by such bodies as private firms and government deparlments. 14 To claim this item as a significant spillover benefit of higher education, and therefore as an important reason why higher education ought to attract a public financial contribution, it must be established that research is in some sense better when It is associated with teaching than when it is divorced from iL I5 But in what way better? Research as a separate 'good' does generate spillover as well as private costs and benefils, irrespective of where it is conducted; see for example Hirscheifer [211. What is being sug14. In 1964-75, for example, the estimated tolal expenditure on re~arch and development in Australia was $196 million, of which S30 million, or roughly only 15 per cent was by universities. See Slubbs [35, Table 2.3. page 24 J. 15. The view that research does bencrit from being conducted in the environs of univcrsities was cxpressed by Sir Lawrence Bragg, Australia's firsl Nobel I'rize· man: 'Ccntralisation of research in institutions devoted to some one special branch is attractive because it is often a spectacular succes.~ at fir~t. Men who have ideas which they wish to develop and are irritated by the demands made upon their time by teaching and administration are naturally attracted by the prospect of devoting their unhalllpered energies to research. But they afC not created, lhey are merely moved frolll one place to another . . . In contrast to the now of keen young research students through a UniversilY, a central research institution has a comparatively static staff and there is considerable danger of fossil isation. As would be expected, this tendency is much more noticeable in llie later stages; it is hardly likely to appear withillthe first decade of an institution's existence.. It is dOUbtfUl, to say the least of it, whether the advancemellt of pure scicnce is fostered by taking men from universities and setting lhem 10 work in a central research institution devoted to some special branch, however fine ilS buildings and equipment. The necessary stimulus appears somehow to be losl. A curious fatality attends the conscious planning of sdcnce ... A far richer return has been reaped from the money which has bcen judiciously sl>ent in aiding promising researchers and research at universities, than thaI spenl in bUilding, equipping and staffing institutions deyoted to some special field of investigation' Bragg III J. (I am indebted to Colin Clark for supplying this reference.)
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gested is that any extra spillover benelits rrom research that are generated as a result of it being associated with teaching really ought to be attributed to that teaching and not to the research at aIL (The same would apply to the private benelits; however these are only likely to be small since in the main the research undertaken in universities tends to be pure research, which can be classified as a public good). If it cannot be established that the association is beneficial in this way, grounds for public contributions to the costs of setting up and running institutions of higher education could still be found in the spillovers generated by the research they do conduct. But this support would be for their research activities only, and if any appropriation was made to teaching out of these funds, it would, in this context, represent a misJllocation of public money_ Again, support is not given to this claim when it is pointed out that higher education institutions are the major source of supply of research personnel, that modern research would not be possible without the services of highly educated individuals. Of course this is true irrespective of where the research js conducted, but the contributions that these people make will either register as private benefits to themselves, as spillovers of the type included under item 1 in Blaug's list, or as spillovers more appropriately attributed to the research erfort itself, and as such they do not constitute additional grounds for public financial intervention in higher education. One further point can be noted. To put the alternative case, that teaching in higher education institutions benefits from the association with research, is to claim that the association results in a spillover benefit to research not leaching, and that it is their research activities not their teaching that ought to be subsidized as a consequence. But by whom? Ir teaching is improved, thell those that benefit rrom Ihis improvement ought to contribute, that is, the students themselves and society as a whole. This suggests that inter alia students' rees ought 10 be adjusled to make some contribution to the costs of research conducted within their institutions. There is yet another way of looking at the relationship between higher education and research. One could claim that the quantity and quality or the nation's research effort tend to increase when marc resources arc devoted to higher education, because expansion in the number or highly educated individuals in the community creates the sort of conditions under which research can flourish. This is a broader claim than that contained in item S, and it refocusses altention on the consumption spillover efrects or higher education. It rests on the assumption that individuals who have undergone higher education are beller able to develop and apply the fruits of these
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activities, to the greater benefit of society as a whole, than are their lesseducated fellow. It follows from this that the more highly educated individuals there are in society the greater and better will be its research activities, and thus it is in the interests of society that higher education ought to receive public subsidies, irrespective of where the research is conducted. This claim appears to be more persuasive than the former, but on closer inspection its force tends to diminish. There are two ways of approaching it. Firstly, we can take it in its general fonn, that is, we can view higher education as prOViding a citizenry that is aware, tolerant and appreciative of research and the benefits that can flow from it. and who are therefore prepared, either collectively or privately, to sponsor it. In this form, the claim belongs more with the other atmospheric spillovers in Blaug's list than with the economic spillovers, and in as much as it does, suffers from the same limitations. Being extremely difficult if not impossible to quantify. one has to resort to subjective judgements as to how important it is, and so may be of little use as a criterion for making marginal decisions. Secondly, we can take it in its specific fonn; we can view higher education as proViding the individuals who are capable of actually initiating, assessing, developing and applying specific research activities; cf Welch (39) .In this form ifnot all then most of the benefits can be seen either as being trapped as private benefits by the particular individuals involved, as manifesting themselves as spillovers of the type included under item I of Blaug's list, or as being more appropriately spillovers from the research activities themselves. Very little remains Ihat can be properly regarded as a unique separable spillover from higher education.
(b) First Round Spillovers Item 1. 'the income gains Of persons other than those that have received
additional education' It should be apparent from the above discussion that the real substance of the spillover benefits of higher education is contained in the first item on Blaug's list. How do these benefits come about? The process seems to be twofold; firstly. and more importantly, the inclusion of higher educated personnel in a work team may raise the productivity, and hence the earnings, of all of the members of that team irrespective of their own levels of education attainment, and secondly. the earnings may be raised as a result of increased labour mObility. However, the difficulty lies in isolating the spillover effect on people's earnings from those that are directly due to their own level of education.
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Blaug summarizes the problem in the following manner: "Are the earnings of less-educated people actually raised by the additional schooling of the better educated in other than a purely relative sense'? The qualifying phrase is essential: the larger the proportion of an agegroup that stays on in school to prepare themselves for entry into higher education, the greater the relative scarcity of school leavers with no education beyond the legal minimum age. Everything else being the same, this raises the wages of the less educated relative to the belter educated. In short, the diffusion of more education in an economy tends to narrow
skill differentials. However, this tendency of skill differentials to narrow has nothing to do with the spillovers of education. It is the result of changes in the relative rupplies of people with various amounts of education, whereas external effects (spillovers) have to do with changes in the productivity of individuals other than the 'educated' which is then renected in the relative demonds for such people. Since the relative earnings we actually observe are the outcome of both demand and supply forces, how do we begin to sort out one from the other?" [5, p. IlU].
Nevertheless, what is reqUired if a value is to be placed on this spillover benefit, for it to be of any use in determining the extent of the public can· tributions to higher education costs, is that it must be separated from the other influences on earnings differentials, from changes in the relative suppl· ies of individuals with varying educational altainments (and from changes due to productivity shifts brought about by capital accumulation and tcchnological progress). For this, cvidence must be found to show that the pres· ence of higher educated workers not only increases earnings all round, but also widens earnings differentials associated with the extra education, the opposite of the tendency exhibited when relative supply factors alone are at work. As Blaug puts it, 'it appears that the examples we are looking for involve changes in the relative dcmands for people with different educational qualinc
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3. Conclusions Only tentative conclusions can be drawn from the above discussions. It would appear, on a priori grounds that there are very few effects of higher education that are not (a) appropriated in some way by its recipients, (b2 in· extricably shared with other resource competing activities in society,l or (I;) likely to be inframarginal in character and hence irrelevant to Pareto optimising criteria. In the absence of any actual valuation being placed upon lhem, sufficient reservations can be expressed about the magnitude of the remaining external effects to cast serious doubt, from this point of view, upon the appropriateness of the present levels of subsidies, and hence the amount of public reo sources currently being devoted to higher education in Australia.
16. Thtl existence of Ulese effects at besl provides a justification fOr distribution of public runds amongst aff such activities.
1lI1
arbitrary
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Economic Analysis and Policy
(II
Vol. 06 No. 04, September 1976
Arrow, K.J., 'Criteria for Social Investment', Readings in the Economics of Education (UNESCO, Paris, 1971), , 'Higher Education as a Filter', Journat of Political Economy,
[2] July, 1973. [31 [41
Berg, I., Education and Jobs: The Great Training Robbery, (Praeger, New York, 1970). Blaug, M., 'The Rate of Return on Investment in Education in Great Britain', 1965.
TheMallche~·terScllOol.Vol.33.No.3,
IS]
, An IIJ/roductioll 10 the Economics of Education, Allen Lane, The Penguinl'ress, London, 1970).
[61
, 'The Correlation Between Education and Earnings: What Does It Signify?', Higher Education, February, 1972.
[71
, 'The Empirical Status of Human Capital Theory: A Slightly Jaundiced Survey', JOUfIJ/ll ofEconomic I.iterature, September, 1976.
[81
Bowden, Lord, 'The Universities', and Matheson, J.A.L., 'Commentary', Tertiary t:dl/{'atioll in Australia (A.l.I>.S., Angus and Robertson, Sydney, 1965).
19]
Bowles, S., 'Schooling and Inequality from Generation to Generation', Journal ofPo/itical Economy, Vol. LXXX, No.3, May/June, 1972.
1101
Bowman, MJ., 'Social Returns 10 Education', International Social Science Journ· aI, Vol. XIV, No.4, 1962.
111]
Bragg, Sir Lawrence, Lecture at Royal Institution, London, 26th March, 1942, Proceedings of the Royal Illst itution of Great Britain, 1942.
1121
Buchanan, J.M., and Stubblebine, ,W.C., 'Externality', Economica, November, 1962.
1131
Chapuy, M., 'In-Career Training of Highly QUalified Personnel in a Large Public Enlerprise', Policy Conference on Highly Qualified Manpower (O.E.C.D., Paris, 1966).
1141
Culyer, A.J., The Economics of Social Policy (Martin Robertson, London, 1973).
115]
Doeringer, I'.H., and Piore, M.J., Imenlall,aboUT Markets and Manpower Analysis (Heath Lexington Booh, Lexington, Mass., 1971).
1161
Dare, H.P., 'Human Capital Thcory, The Diversity of Societies and the Problem of Quality in Education', Higher Edla'alion, 5, 1976.
[171
Ehrlich, I., 'On the Relation Between Education and Crime', in Justcr, F.T. (ed.), Education, Income and Human Behal'iour (McGraw Hill, New York, 1975).
118]
Fagcrlind, I., Forlllal l:,(iucation and Adull Earnings, (Almquist and Wicksell International, Stockholm, 1975).
119]
friedman, M., Capitalism alld Freedom (University of Chicago Press, Chicago, 1962), Chapler VI, pp. 85-107.
POl
Hirsch, W.Z., Segelhorst, [.W" and Marcus, M.J., Spi/fol'er of Public Education Costs and Bellcfil~' (Institute of Government and Public Affairs, University of California, Los Angeles, 1964).
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[211
lIirschleifcr, J., 'The Privale and Social Value of Informalion and the Reward to Invenlive ActivilY', Americall Economic Uel/jew, Vol. LXI, September, 1971.
112)
lIudson, H.M., 'Regional Economic EffeclS of Higher Education Instilutions', Socia·Ecollomic Plall/ling Sdellce, Vol. 8, pp. I H1-194.
(23)
Layard, P,R.G., 'Economic Theorie.~ of Educational Planning', in Peslon, M., and ('orry, B. (cds.), Essays i/1 HOI/our of !.ord RobhjllS (Weidenfcld and Nicolson, London, 1972).
124)
, Sargan, J,D .. Agcr, M.E., and Jones, OJ., Quolified MOllpowcr and Ecollomic Perfo/'/Ilom'e (Allen Lanc, The I'en~uin Press, London, 1971), especially paris 3 and 4.
1251
, and Psacharopoulos, G" 'The Screening Hypolhesis and Returns 10 Education', JUllnIa! ofPOlilh:ol Ecullomy, September/Oclober, 1974.
(26)
Mace, J,D" and Taylor. S.M., 'The Demand for Engineers in British Industry: Some Implicalions for Manpower Forecasting'. B/";/isll lOl/mol of Indlls/riol Relotiolls, July, 1975.
127]
/o,'lag1cn, L. R., TIl(' Rol(' of Swdelll I1ss;s/oIlCC Schemes in Ih" Fit/onC"il/it of II igller (Unpublished Reporl 10 the Australian Government Deparlmenl of Eduloulion, 1973).
f.(JllcOt;O/l
j2H]
f..linl'cr, J., 'On-the-job Training: ('os IS, Returns, and Some Implicalions',lo/lfllal of Po lith'a! Ecollomy, Vol. LXX, Ol'lober 1962, part 2,
[291
(30\
Nerlovc, M., 'On Tuition and the COSISof lIigher Edul:
AustroliollS
(311
Peal'Ock, A., and Wiseman. J., 'Economic Growlh and Ihe I'rinl'iptes of Eduealional Finallcc in Devclopt-'
[32 J
I'eston. M., PlIhlic' Goodl> ol/(l/lIe Pu/llit' Sec'lOr (Mal'lllillllll Studies in ECOn01111l:S, London, 1972),
[331
Rowley, C.K .. alld Pe;ll'Ol'k, A,T.. 1II('/}or(' E('ollomil'S: A l.ih('ro/ ReSlo/l'lI/c'/It (Marlin Robl'rtson.london, 1975).
(341
Selby-Smith, C .. 'Rates of Return to l'osl-Sel'Ollll;lry Edlll'atioll in Auslralia', l::ml/omit' R('c'Ord, December. 1975.
[351
Stubbs,!'., 1111101'01 ioll amI Re)'('o/"('!I (Cheshirc. \Ielbollrne, I 96H).
136]
Titlll\IS~,
[37]
Wcisbrod, B.A" 'I~d Ill',ll iun and Invcst1l1l'1I1 in I-Iullla n C"pital'. JOIIl"llol of Po/il it'a/ Ecol/omy. SupplcllIt'nl. Ol·tober. 1962, pp. 106 - I 23.
[381
. Ewcrl/ol Bellt'f/ts of Public' Edt/co/ioll: All ECYnlOllIit' .4l1o/ys;1> (Prim'clon U.P., Prim'eloll, 1964), Welch. r .. 'Edm';lIion in ProdIlClion·. JOIfI'llO! of Politic-a! Eevl/ol/1,1'. Januar)'1 Fcbruary. 1970.
(391
R.M .. COIIIJllilm",1I
fO
hldfar/:' (Unwin Unilll'rsity Books. London, 196K).
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Vol. 06 No. 04, September 1976
E.G., Edm'atioll alld 'he Stat/! (Institute of Economic Affairs, Second E.dition, London, 1970).
140I
We.~I,
(411
Wiles, P., 'The Correlation Between Education and Earnings: The External-TestNot-Contenl Hypothesis (ETNC)', Hix/,er Edllcation, 3, 1974.
142J
Wilson, 1' .• and llrown, J., Crill1e alld Comlllllllity (University of Queensland Press, Sl. Lucia, 1973).
1431
Wiseman, J 0' 'The Ef..'Onolll ics of Education', Scottish Journal of Political t:COI/amy, Vol. 6, No. I, 1959.
1441
Wolfe, J.K., 'Continuing Education for Engineers and Scientists, Policy Confer· mce 011 Hijlhly Qualified Manpower W.E.CO., Paris, 1966).
Economic Analysis and Policy
Vol. 06 No. 04, September 1976
HIGHER EDUCATION, EXTERNALITIES, THE PUBLIC PURSE AND POLICY· L. R. Maglen Monash University and University of London Institute of Education I. Introduction
The unprecedented growth in lhe public financing of Australian higher education over the last decade or sol has meant that, inter alia, the public subsidy per student on some courses can now rise to over firty per cent of total per-student costs (laken to include Ihe students' foregone earnings).2 In this paper a Paretian framework is used to analyse Ihe claim that the externalities (external, neighbourhood, spillover benefits) generated by higher education justify these high levels of subSidy.3 Whilst no attempt is made at quantification, this paper does undertake the important preliminary task of establishing the precise extent of the problem involved. It does this (a) by stating the precise criteria for the achievement of I'aretian optimality in the presence of spillover benefits, when a public subsidy solution has been opted for; and (b) by revieWing in an Australian context and by laking
•
All earlier draft of this paper was presented at the Firth Conference of EI,;onomislS, Brisbane, August 25~29, 1975. I am indebted to Mark Blaug, Colin Oark, Ross Parish and Yew Kwang Ng for their helpful comments.
I. The culmination of Ihis process was the takeover by the Australian Governmenl of financial responsibility for lhe bulk of the tertiury sector in 1974, aC~"OlIIpanjed by the abolition of luition fees in most instilUtions and the repla~'ernent of Ihe old seleclive Commonweallh Scholarship Schemes with lhe new univt:r:;al Tertiary [dUeDlion Assislance Scheme. 2. SinC'C lhe abolition of tuition fees the pUblic subsidy in universities and CAEs has ranged from about 15 pt:r cenl of total pcr-.~tudent cosls in hUlllanities cour~cs 10 around 40 per cent in science and engineering courses. When grants payable under TEAS are included thcsc percentage.~ have reached as high as 33 and 54 respectively. These figures are based on per-1ilUdent cost estimates for 1969, ~e Selby-Smith 134, Table II. 3. Of course economislS arc nOI the only ones who can shed lighl on the molive~ behind public budgetary decision-making, see for c~ampte I'eston [32, p.60, fn II, Morcover, lhe Paretian framework is not the only one Lhat they can ado]>1 for this purposc. For a criti
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considuably further than hithe.rto the a priori analysis of the specific spillover benefits that can be identified with higher education. 4 External benefits of higher education arc those benefits (both pecuniary and non-pecuniary) which arc not appropriated in any way by the individuals undertaking it, but which are nonetheless uniquely attributable to that higher education. It is thus incorrect to COUIll amonst them any effects that are either enjoyed exclusively by the students themselves, Or which have been generated by some other activity in society, such as compulsory education, the mass media, on-the-job training programmes. Moreover from a PareUan point of view it is incorrect to take total spillover benefits generated by higher education as the justification for existing levels of public subsidy. The achievement of Pareto optimal resource allocation (where the present value of marginal private plus marginal external benefits are equal to the present value of marginal social costs) requires that the marginal public subsidy (and hence average per student subsidy?) is equal to marginal external benefits (MEB).5 If on the one hand at current levels of enrolment it is estimated that MEB are greater than the marginal subsidy then the signal to governments is thai there is a sub·optimal allocation of resources to that part of the higher education sector, and consequently the public subsidy ought to be increased. If on the other hand the MEB are estimated to be smaller than the marginal subsidy the reverse signal is given. AI no stage do total, inframarginal and Pareto irrelevant externalities enter the calculus. 6 An important question raised is the degree to which externalities var¥ according to the particular course level, discipline and institution involved. 4. Other writers to approach this subject include B1aug /4 J /5), Bowman [10], rriedman [19], Hirsch et a/[20], Hudson [22], Peacock and Wiseman [31), \Viesbrod [37] [3&J, and West 140). They too have stopped short of the difficult task of quantification. 5. Problems arise if, as is often the case, private and social discount rates are not the same; see for example Arrow II] and LaYlHd [23J. Moreover it is by no means established that students do lake a 'human capital' view when taking educational decisions; see Blaug [7J. 6. See Culyer [14, pp. 26-27]. For a formal definition of 'inframarginal' and 'Paretoirrelevant' externalities, see Buchanan and Stubblebine [ 12]. 7. A related i~sue is that MEB may also vary between 'non-consumers' of higher education. It i~ possible that there are sy~tematic differences in the distribution of recipients of external benefits, either on a geographic basis or upon the basis of their educittional or occupational background; see Weisbrod [38], Hirsch el af 1201, Hudson [22]. To Ihe extent that there are, and these differences are significant, there is a case for it corresponding differentiation in the contributions these groups make 10 the public funds OU! of which the subsidies arc paid, that is, for a lower than national level of government having primary financial responsibility, and/or for spccial earmarked education laxes being Icvied differentially amongst the groups of recipients. Whilst this matter will not be pursued any further here, the author has examined these propositions elsewhere and concluded that no such cases can be substllntialcd;see [27,pp. 51-551.
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The answer has policy complications because it determines, on these grounds, the extent \0 which public subsidies should be varied aCrOSs the sector. Further complications arise when it is remembered that total per-student costs are far from uniform acroSS the sector; see for example Selby-Smith [34, Table I). Friedman (19, pp.86~IOOJ and others (Wiseman [43]. J}eacock and Wiseman [31, p. 991, Parish [30, pp. 288-91 J), assert, but do not demonstrate, that general education courses generate greater externalities lhan do purely vocational cour.;es. Quite apart from the practical difficullies in making such a distinction, (between levels as well as between disciplines), the foregoing analysis suggests that maybe even the opposite is the case. 8 2. The Identification of Spillover Benefits The following list compiled by Blaug of the spillover commonly associaled with education as a whole provides a useful starting point:
,. t. the income gains of persons other than those that have received additional education, 2. the income gains of subsequent generations from a better educated present generation, 3. the provision of an efficient mechanism for discovering and cultivating potential talent, 4. the means of assuring occupational flexibility of the labour force, 5. the creation of an institutional environment that stimulates research in science and technology, 6. the encouragement of lawful behaviour and the promotion of voluntary responsibility for welfare activities, both of which reduce the demand on social services financed out of taxes, 7. the tendency to foster political stability by developing an informed electoratc and compctent political leadership, 8. the emergence of 'social cohesion' by the transmission of a common cultural heritage, and 8. Alternatively it could be argued that the distinction is IlOt a valid one since higher education as a good generates externalities chiefly because of its heterogcneilY, becausc it is a conglomeration of levels and disciplines, and that to al1empl 10 as.~ess the spillovers from anyone part of it is to miu the point. This maybe, but it implies that either the cxisting distribution subsidies within higher education is optimal, or that the mixture of levcls and di.wip!ines could be varied considerably wilhuut making any significant difference to the spillovers generated. Either case would be diflicult to substantiate.
or
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9. the widening of intellectual horizons of both the educated and the uneducated, contributing to enhanced enjoyment of leisure" Blaug [5, p. 108). Blaug makes the important distinction between 'economic spillovers' (Item I - 'first-round economic spillovers', Items 2-5 - 'second-round economic spillovers'), and 'atmospheric effects', (Items 7-9). Item 6 he leaves in a class by itself; see also l4, pp. 234-2431. How important are they in lhe context of Australian higher education? Item 6. ',lie ellcouragemelll of lawfitl bellaviour . This item Blaug dismisses from the outset: 'the belief thaI the spread of education will reduce crime and stimulate private charities is simply old· fashioned sociology' (5, p. 108). I)erhaps in this he is correct. Maybe there is no significant correlation between the amount of education undertaken on the one hand and either respect for the law or compassion on the other. To claim that higher education encourages lawful (less anti-social) behaviour at least requires demonstraling that those who acquire education beyond the legal minimum are underrepresented amongst the inmates of our prisions, that they are less prone to such things as alcoholism, drug abuse, child·bashing, suicide, and are less likely to be involved in road-accidents than are their less educated fellow citizens. To do so is to imply that the rates at which these anti·social and costly activities have been increasing over the period in which the higher education sector has been growing rapidly would have been even greater had it not been for the growth in higher education. This may prove to be a difficult claim 10 substantiate.9 (But even if it can be, maybe it could be argued that a spillover cost, rather than a benefit, has been generated, if the spread of higher education has precipitated feelings of frustration and resent· ment amongst those who have not been fortunate enough to particip
9. Whal evidence there is from lhc United Stale.~ and the United Ki~dom proouce inconclusivc result$. A rccent 51udy conducted in the U.S. concluded •... the e...tent of specific crimc.~ against property is directly related 10 schooling ol/d ol/·tlle·lob 'roilling. Moreover, il i$ es."Cnl ially lhe im'QlIalitit'$ in the di$lribulion of schooling and Iraining, no, tlleir mcall 1i!I'C/S, thaI appear 10 be strongly retaled to the incidence of many crimes', (my emphasis) Ehrlich [17, page 3351. In his rcvicw of changes ill lhe rale of juvenile crime in the U.K" West ca~l find no evidence 10 suggesl thai thc growlh of I/a/e education and increases in the minimum sehoul leaving age have had a moderating innuence. Indeed, he does not rUle out the pos.~ibi1ity Ihal Ihey may have had an aggr,tv3ling effecl; 140. pp.31-391.
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anti-social ar.:tivities).10 The claim that Ihe spread of higher education fosters private charity and thus less dependence upon tax-funded redistributive measures may also be dirlicult to substantiate. Equally, there could be the reverse effect. The marc arnuent the society (with the spread of higher education presumably contributing 10 thaI arnuence), the more public concern there appears to be for the less fortunate members of that society (and the rest of the human race), and consequently the greater the public pressure Ihere is for concerted systematic pUblic social security programmes, I I
The Atmospheric Effects
Item 7. 'Ille lelldellc)' 10 [osier polilical slabililY, , , ' Item R. 'Ilie el1lergellce Qfsocial collesion . .. ' [telll 9. 'Ille widellillg of il/lelleclualllorizOlls . As Blaug's tCllll suggests these effects constitule the most nebulolls lenst quantiliable form or spillovers. In a paper such as this therefore little should be said about them, except 10 emphasise: (a) that many of these effects can be and are claimed as spillover effects of a wide range of other resource competing activities in society; (b) that of those that call be uniquely dassif· ied as spillovers of higher education, only those effects at the margin are relevanl to Ihe determination of the optimal marginal subsidy; and (d that lhe importance of many of these effecls is a mal tel' of subjective judgemcnt. Opinions will diller; what is considered a significanl spillover benefit by some will. by others, be regarded as of lillie importance, and by yet others as a spillover ":OSI; sec I'eston [32, p. 471.
10.
II.
Furlh~'r indication of lhe ~'omllte\il)' uf this retaliuliship is given in a ren'nl AUS1· r;lliall swdy, sec Wilson anu Brown [4:!1. Thdr evidell<:c Sll!!4:!csls lhal lhose I\ho hav\' ulld~rlaken tertiary ~'dul'ation in I;\'neral lend more IO\lards tcniem:~' in Ih~' Ir~'aI11lenl of a \\ide ranl!l' of criminal offenders, lhan do olher lIlembers of Ilw ~·uml1\unit}'. (sn' llP.4:!, 67 and 711. I\l"l"ording 10 lhdr survey, lhos~' who h;nl 1I1ldCriaken hi.'!her Cducllion arc more pronc 10 he I'iclims of l'ril11e, cspccially ,'rimes againsl lhe person. The ~u!!gcsliotl is 11l,,1 tl1l'ir kllu\\"led.'!~' or lh~' law l'nabtes Ihel11l1lorc e'lsil)' 10 rCl'oJ;nill" Ilhl'n Ih... t;1\1 has Ill'l'll brokl'n.tscl' pagl' 84).
1\ ilhill a sol·i... l)"s social SCl'uril)' sySIl'm lh~' rnon: ~-dll~'al ...d individu;lls more Iikl:!)' Iher an' Itl bl' awar... of theil rights and e11litlcnwl1Is under lhal system. thus Illl'fl';\sing ralhl'r lhan diminishing thcir l"I;lirns upon i1.
~lorl'oV('r ;HI' lh~'
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The Economic Spillovers
(a) Second-Round Spillovers Item 2. 'the income gains of subsequem generations . ... It must be remembered that the concern here is with the efficiency of
reSOurce allocation, and not with the equity questions raised by this item. Nevertheless it may well be the case that higher education obtained by one generation raises the level of earnings of the next generation. However, what also appears to be true is that the children of the higher educated themselves have a greater chance of acquiring a higher education, and thus of enjoying its considerable private benefits; see for example Bowles [9]. Fagerlind [18]. As such a large part of what are claimed as spillover benefits may not be. especially if the consideration of these inter-generational benelits enter into the original decision by parents to undertake higher education. It certainly does not provide grounds for public financial intervention; see Nerlove [29, pp. 5193-5196]. On the other hand, if the future earnings of those whose parents had not undertaken higher education are raised as a result of present expenditure on higher education, this would constitute a spillover benelit. Such would be the case if present higher education leads to increased productivity not only amongst those who acquire it, but also their workmates, and when this in turn leads to increased per-capita incomes over time for the whole of society. This, of course, is the second-round or multiplier effect of item I in the above list of spillovers. What value one can place upon this effect, even the first round of it, remains to be seen. There is possibly another way of looking at item 2. Present higher education is the chief source of supply of trained educators, and hence is the major factor ensuring that higher education is a continuing process. Part of the output of the present higher education system becomes an input into the system in the future. It could be argued that a public contribution to costs are necessary in order to ensure that the future generations are not inhibited in their acquisition 0 f higher education because of shortages of this input, a situation that perhaps could occur if higher education was left in the hands of the market. This is an argument for ensuring competitiveness in the market for teachers, rather than for publicly subsidising their supply.12 In any event the claim begs. the question, for it says in effect that even if spillovers arc not important at present, they most likely will be in the future, at any rate one ought to prepare for them by subsidizing present higher education. 12. Of course in Australia large scale direct subsidisation of the training of teachers exi~l.S.
over and above lhe general public contribution to higher educalion.
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Item 3. 'the propMon of 011 efficient mechanism for discovering and cultivating potential talent' This is the 'screening hypothesis' or 'theory of credentialism' that has altracted to it a growing number of writers in recent years; see, for example, Arrow [2], Layard and Psacharopoulos [25], Blaug 17]. However, it is not at all certain whether this item should even appear in a list of spillover benefits from higher education. If higher education did not perform this service, it would be necessary for prospective employers and other agencies in society to do so. But one would have to conclude that this would only be at a greater cost, for if it was assumed that they could provide it at the same cost, then this could not be used as grounds to favour higher education with pUblic funds over any of these other agencies, and if it was assumed that they could provide it for less then a social cost, not a benefit, is entailed in leaving it in the hands of higher education institutions. An economic benefit therefore must be assumed. But who does benefit from this discovery and cultivation'! If it is only those who are discovered and cultivated then it will be renected in greater private benefits to them, and no spillovers will be gcnerated at all. If, on the other hand, it is society at large then the spillovers will manifest themselves either as economic spillovers or as atmospheric effects, or both. In other words, item 3 would not be a spillover benefit per se, rather it would be one of the reasons spillover benefits are generated. Item 4. 'tile ",eallS of assurillg occupational flexibility . .. ' This item could really be just one aspect of item 1, or it could manifest itself solely as a private benefit to the higher educated. If higher education does lead to greater occupational mobility amongst its graduates then one would expect that this would be renected in their earnings, since opportunity costs of their employment rise as a result. In any event, for this item to be also claimed as a spillover benefit it would have to be demonstrated that the less educated members of the labour force have their earnings raised also, either through their own mobility and hence opportunity costs being increased as a result or the greater occupational nexibility of the more educated, or through productivity in their existing jobs being raised when higher educated personncl work alongside them. Both of these innuences are included under item I. The evidence that is available regarding the occupations nexibility of those who undertake higher education is inconclusive. Quite apart from the question or whether the intrinsic nature of their studies leads to a greater range of occupational options, (but see Dare [161). there are two reservations Ihat can
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be expressed regarding the institutional character of the markets they may enter. The first concerns the widespread restrictive practices employed by professional associations. These practices have as their aim the reduction of competition within the markets for some types of highly lrained manpower, and are applied at least as assiduously as any found in other areas of the labour force. The second concerns the existence of 'internal labour markets' with infer alia their characteristically low turnover rales; see Doeringer and I)iore 115). There is some evidence available from the United Kingdom to suggest that these can extend beyond blue·collar into white-collar markets, including those for highly trained scientific and engineering manpower; see Mace and Taylor [26]. Even so, if occupational nexibility is generally greater amongst those who have undergone higher education, then a social benefit can be claimed in as much as the cost of subsequent retraining has been greatly reduced. In effect, what this means is that higher education has a "retraining" or rather a 'retraining forstalling' clement built into it. In principle therefore one could breakdown higher education into two elements - 'training' and 'retraining', and compare the efficiency of higher education institutions as alternative places wherein Ihis retraining can take place. As their retraining is anticipatory and general it is perhaps not as effective as the later reactive specific retraining it largely does away with. However, the practical problems involved in such an exerdse would make it a difficult undertaking. What is suggesled, however, is that formal highcr education and on·the-job training arc substitutes. In view of this it is interesting to note the results of some of the studies conducted in the United States and the United Kingdom. Several of these have shown thai typically there is a lower degree of observed obsolescence of skills amongst the more educated members of the workrorce, Ihal they arc more able to maintain and even to continue to add to their earning over the whole of their working lives than are Ihe less educated workers; see Layard e{ 01 [24], Selby-Smith 1341. Apart from the greater durability of the extra skills they at:quir~, two other factors may be at work here. The first is that the more-cdu..:ated members may in fact have a greater likelihood or receiving additional on-the-job training than their less·educated colleagues: see Mincer 12X), also Chapuy t 131, Wolfe 144]. To that extell\ on-the-job training is wmplemelllary to and not a subslilUtc for formal edu..:ation, and so some of the increased occupational nexibility attributable to higher education may indeed be due to the extra on-the-job training associated with il. This weakens the retraining element implicit in higher education. The second ra..:tor is that there has been an increasing tendency for employers, both in private and the public sc..:tor, to advertise vacancies for supervisory
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and managerial posts with the stipulation that applicants should have a certain minimum level of educational qualifications. Frequently, however, this has been the result of upgrading by the employers, 'to stay in line with current trends in the labour market', and has had little to do with the actual requirements of the jobs in question. II is quite possible that in a large numb· er of these instances, the job could be filled adequately by any number of individuals with qualifications below the minimum arbitrarily set by the employer, but who are not ~ven taken into consideralion because of the stipulation. In these cases the insistence upon educational screening may be because employers lack proper job-assessment and candidate..evaluation procedures; cf Berg [3, pp. 92-94J. It could be that employers believe that performance in formal education is a good predictor of 'trainability'; see Arrow [2], Blaug [6J [7], cr Wiles [411. Or it could simply be lhal the employers are indulging in conspicuous consumption. In any event it is not at all clear what sort of externality, if any, is being generated. Item 5.
'lite crealion of an imlitulionol ellviro/'lme1l1 thai slimulates research . ..•
This item is somewhat different from the others in this calegroy, in the sense that it is an externality in production rather than in consumption that is being claimed. It arises out of the well·established association of research with teaching in universities;)] indeed, the two activities have come to be regarded as the joint products of these institutions; see Nerlove [291. However, this joint production presents all sorls of complications when one comes to consider its financial implications, and several qUalifications must be made before the association can be included amongst the spillover benefits of higher education. Firstly, it must be kept in mind that, especially in this country, it really only applies to one sector of higher education, the univers· ities, for it is only in these institutions thai research is formally associated with teaching on any large scale, and even here it is usually only associated 13. The idea of universities as major centres of research is only a comparatively recent phenomenon. 'Another mythology, which Ashby describes as "Ihe academic Arian heresy" (E. Ashby. Tedlllology and (lie U"il'ersilies, MacMillan, London, 1958, page 4), came from Germany in the nineteenth century. /1 was '''~ conc~pr of Ihe ullil'en'ilY as a r~sear(:h illslilllu (my emphasis). Whatever the eITects of this idea on social institutions in Germany. it was imitated by some British academics and became almost a felish. [I devalued Ihe imaginative excitement of learning' Titmuss (36, p. 301·
elf Bragg III J, Uowden and Matheson 181.
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with post-graduate level teaching. This being so, item 5 can hardly be taken as a major reason for public financial intervention in all sectors of higher education. A much more important qualification, however, is that teaching and research are not joint products in the same sense as are, say, meat and hides, for either can be 'produced' without inevitably involving the other. That is to say, university level courses can be and are taught in colleges of advanced education, where no fonnal research links exisl, and research of the type conducted in universities can be and is carried out either in separate institutions, as in the C.S.I.R.O. and the A.C.E.R. for example, or in association with other activities by such bodies as private firms and government deparlments. 14 To claim this item as a significant spillover benefit of higher education, and therefore as an important reason why higher education ought to attract a public financial contribution, it must be established that research is in some sense better when It is associated with teaching than when it is divorced from iL I5 But in what way better? Research as a separate 'good' does generate spillover as well as private costs and benefils, irrespective of where it is conducted; see for example Hirscheifer [211. What is being sug14. In 1964-75, for example, the estimated tolal expenditure on re~arch and development in Australia was $196 million, of which S30 million, or roughly only 15 per cent was by universities. See Slubbs [35, Table 2.3. page 24 J. 15. The view that research does bencrit from being conducted in the environs of univcrsities was cxpressed by Sir Lawrence Bragg, Australia's firsl Nobel I'rize· man: 'Ccntralisation of research in institutions devoted to some one special branch is attractive because it is often a spectacular succes.~ at fir~t. Men who have ideas which they wish to develop and are irritated by the demands made upon their time by teaching and administration are naturally attracted by the prospect of devoting their unhalllpered energies to research. But they afC not created, lhey are merely moved frolll one place to another . . . In contrast to the now of keen young research students through a UniversilY, a central research institution has a comparatively static staff and there is considerable danger of fossil isation. As would be expected, this tendency is much more noticeable in llie later stages; it is hardly likely to appear withillthe first decade of an institution's existence.. It is dOUbtfUl, to say the least of it, whether the advancemellt of pure scicnce is fostered by taking men from universities and setting lhem 10 work in a central research institution devoted to some special branch, however fine ilS buildings and equipment. The necessary stimulus appears somehow to be losl. A curious fatality attends the conscious planning of sdcnce ... A far richer return has been reaped from the money which has bcen judiciously sl>ent in aiding promising researchers and research at universities, than thaI spenl in bUilding, equipping and staffing institutions deyoted to some special field of investigation' Bragg III J. (I am indebted to Colin Clark for supplying this reference.)
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gested is that any extra spillover benelits rrom research that are generated as a result of it being associated with teaching really ought to be attributed to that teaching and not to the research at aIL (The same would apply to the private benelits; however these are only likely to be small since in the main the research undertaken in universities tends to be pure research, which can be classified as a public good). If it cannot be established that the association is beneficial in this way, grounds for public contributions to the costs of setting up and running institutions of higher education could still be found in the spillovers generated by the research they do conduct. But this support would be for their research activities only, and if any appropriation was made to teaching out of these funds, it would, in this context, represent a misJllocation of public money_ Again, support is not given to this claim when it is pointed out that higher education institutions are the major source of supply of research personnel, that modern research would not be possible without the services of highly educated individuals. Of course this is true irrespective of where the research js conducted, but the contributions that these people make will either register as private benefits to themselves, as spillovers of the type included under item 1 in Blaug's list, or as spillovers more appropriately attributed to the research erfort itself, and as such they do not constitute additional grounds for public financial intervention in higher education. One further point can be noted. To put the alternative case, that teaching in higher education institutions benefits from the association with research, is to claim that the association results in a spillover benefit to research not leaching, and that it is their research activities not their teaching that ought to be subsidized as a consequence. But by whom? Ir teaching is improved, thell those that benefit rrom Ihis improvement ought to contribute, that is, the students themselves and society as a whole. This suggests that inter alia students' rees ought 10 be adjusled to make some contribution to the costs of research conducted within their institutions. There is yet another way of looking at the relationship between higher education and research. One could claim that the quantity and quality or the nation's research effort tend to increase when marc resources arc devoted to higher education, because expansion in the number or highly educated individuals in the community creates the sort of conditions under which research can flourish. This is a broader claim than that contained in item S, and it refocusses altention on the consumption spillover efrects or higher education. It rests on the assumption that individuals who have undergone higher education are beller able to develop and apply the fruits of these
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activities, to the greater benefit of society as a whole, than are their lesseducated fellow. It follows from this that the more highly educated individuals there are in society the greater and better will be its research activities, and thus it is in the interests of society that higher education ought to receive public subsidies, irrespective of where the research is conducted. This claim appears to be more persuasive than the former, but on closer inspection its force tends to diminish. There are two ways of approaching it. Firstly, we can take it in its general fonn, that is, we can view higher education as prOViding a citizenry that is aware, tolerant and appreciative of research and the benefits that can flow from it. and who are therefore prepared, either collectively or privately, to sponsor it. In this form, the claim belongs more with the other atmospheric spillovers in Blaug's list than with the economic spillovers, and in as much as it does, suffers from the same limitations. Being extremely difficult if not impossible to quantify. one has to resort to subjective judgements as to how important it is, and so may be of little use as a criterion for making marginal decisions. Secondly, we can take it in its specific fonn; we can view higher education as proViding the individuals who are capable of actually initiating, assessing, developing and applying specific research activities; cf Welch (39) .In this form ifnot all then most of the benefits can be seen either as being trapped as private benefits by the particular individuals involved, as manifesting themselves as spillovers of the type included under item I of Blaug's list, or as being more appropriately spillovers from the research activities themselves. Very little remains Ihat can be properly regarded as a unique separable spillover from higher education.
(b) First Round Spillovers Item 1. 'the income gains Of persons other than those that have received
additional education' It should be apparent from the above discussion that the real substance of the spillover benefits of higher education is contained in the first item on Blaug's list. How do these benefits come about? The process seems to be twofold; firstly. and more importantly, the inclusion of higher educated personnel in a work team may raise the productivity, and hence the earnings, of all of the members of that team irrespective of their own levels of education attainment, and secondly. the earnings may be raised as a result of increased labour mObility. However, the difficulty lies in isolating the spillover effect on people's earnings from those that are directly due to their own level of education.
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Blaug summarizes the problem in the following manner: "Are the earnings of less-educated people actually raised by the additional schooling of the better educated in other than a purely relative sense'? The qualifying phrase is essential: the larger the proportion of an agegroup that stays on in school to prepare themselves for entry into higher education, the greater the relative scarcity of school leavers with no education beyond the legal minimum age. Everything else being the same, this raises the wages of the less educated relative to the belter educated. In short, the diffusion of more education in an economy tends to narrow
skill differentials. However, this tendency of skill differentials to narrow has nothing to do with the spillovers of education. It is the result of changes in the relative rupplies of people with various amounts of education, whereas external effects (spillovers) have to do with changes in the productivity of individuals other than the 'educated' which is then renected in the relative demonds for such people. Since the relative earnings we actually observe are the outcome of both demand and supply forces, how do we begin to sort out one from the other?" [5, p. IlU].
Nevertheless, what is reqUired if a value is to be placed on this spillover benefit, for it to be of any use in determining the extent of the public can· tributions to higher education costs, is that it must be separated from the other influences on earnings differentials, from changes in the relative suppl· ies of individuals with varying educational altainments (and from changes due to productivity shifts brought about by capital accumulation and tcchnological progress). For this, cvidence must be found to show that the pres· ence of higher educated workers not only increases earnings all round, but also widens earnings differentials associated with the extra education, the opposite of the tendency exhibited when relative supply factors alone are at work. As Blaug puts it, 'it appears that the examples we are looking for involve changes in the relative dcmands for people with different educational qualinc
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3. Conclusions Only tentative conclusions can be drawn from the above discussions. It would appear, on a priori grounds that there are very few effects of higher education that are not (a) appropriated in some way by its recipients, (b2 in· extricably shared with other resource competing activities in society,l or (I;) likely to be inframarginal in character and hence irrelevant to Pareto optimising criteria. In the absence of any actual valuation being placed upon lhem, sufficient reservations can be expressed about the magnitude of the remaining external effects to cast serious doubt, from this point of view, upon the appropriateness of the present levels of subsidies, and hence the amount of public reo sources currently being devoted to higher education in Australia.
16. Thtl existence of Ulese effects at besl provides a justification fOr distribution of public runds amongst aff such activities.
1lI1
arbitrary
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(II
Vol. 06 No. 04, September 1976
Arrow, K.J., 'Criteria for Social Investment', Readings in the Economics of Education (UNESCO, Paris, 1971), , 'Higher Education as a Filter', Journat of Political Economy,
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