Economists: Drop the Signaling Fad

Not every human action sends an economic message.

Just to be clear -- this is a signal.

Photographer: Thomas Koehler/Photothek/Getty Images

There’s a fad in the economics world that annoys me. The fad is to describe every human action as “signaling.” This has to stop, people.

First, a brief explanation. Signaling, basically, is jumping through hoops in order to prove yourself in some way. There are lots of situations where information is asymmetric -- maybe a dealer knows a used car runs great, but the buyer is worried it might be a clunker. This information asymmetry leads to rational distrust, which can cause markets to break down.

There are many ways to get rid of asymmetric information. You could have a mechanic check out the car. You could look up a dealer’s reputation online. One ingenious way to bridge the information gap, first conceived by Nobel-winning economist Michael Spence, is called “signaling.” A dealer who really wanted to prove that a car runs great could offer to drive the car on a cross-country road trip. The customer wouldn’t have to come along -- just knowing that the dealer completed the road trip would send a clear signal that the dealer believed in the quality of the car. The road trip, in this case, is called a “costly signal.”

Spence realized that there is a lot of information asymmetry in the job market. Employers want employees who are smart, conscientious, hard-working and team-oriented. But they can’t tell most of those things from an interview or two. So prospective employees might prove themselves by getting some credential -- completing some difficult educational program -- to prove they have what it takes. Thus was born the signaling theory of education.

Talk to economists, and you’ll find a large number who believe that college -- that defining institution of America's privileged youth -- is mostly signaling. It makes sense, after all -- don’t most people go to college because they think it will get them a job? And honestly, when was the last time you actually used any of the things you learned in college at your job?

Possibly the biggest promoter of the signaling theory of education is George Mason University’s Bryan Caplan. Caplan believes so passionately in the model that he’s writing a book about it, called “The Case Against Education.” He has already written enough blog posts on the topic to make a small book!

Caplan’s message is bound to appeal to people who dislike the institution of college, whether because they think it’s too politically leftist, or they’re worried about high tuition and student loans. But there are some big holes in the case. Caplan’s GMU colleague, Tyler Cowen, is rightfully skeptical of claims that college is mostly signaling. Let me add my voice to the skeptical chorus.

First, intelligence isn't that hard to spot. Performance on any mental task -- a standardized test or even a high school chemistry class -- will give an employer an immediate general idea of ability. No need to waste four of your prime years on a signal that can be generated in two hours.

So is college a way to signal conscientiousness and willingness to work? Maybe. But an even better way to signal that would be to actually work at a job for four years. One would think that if young people needed to do some hard work to signal their work ethics, some companies would spring up that gave young people real productive work to do, and provided evidence of their performance. Instead of paying through the nose to send a signal of your industriousness, you could get paid. But we don’t see this happening.

When you think about it this way, the whole idea of college-as-signaling becomes a little absurd. People’s careers last for 35 to 45 years.  But after you’ve been working for a while, prospective employers can look at your work history -- they don’t need the college signal anymore. Caplan’s theory therefore is that many young people are spending four years -- and lots of tuition money -- on something that will only affect the very beginning of a career.

There are many other reasons to doubt the signaling theory of college. A more likely explanation for college’s enduring importance is that it provides a large number of benefits that are very hard to measure -- building social networks, broadening people’s perspective, giving young people practice learning difficult new mental tasks and so forth.

But the “signaling” meme has spread beyond the idea of education. It’s become fashionable in the economics world to label any and every human social interaction as a form of signaling. The most enthusiastic promoter of this way of thinking is GMU economist Robin Hanson. Fashion isn’t self-expression -- it’s signaling. Leisure isn’t about fun -- it’s about signaling. And so on.

The problem is, this notion of “signaling” isn't really what Spence had in mind. Spence’s signaling model was about proving yourself by doing something difficult -- something so difficult that someone who didn’t have what it takes wouldn't even bother. But most of what Hanson is talking about is just communication, not Spence-style signaling. Even if hipsters wax their moustaches in order to prove their hip-ness, that doesn’t mean there are a whole bunch of wannabe hipsters out there who just didn’t have what it takes to wax their moustaches. Communication, like signaling, is costly. But it’s not a matter of jumping through hoops to prove yourself.

So let’s give the signaling fad a rest. Spence’s theory was brilliant and cool. But casually applying it to anything and everything doesn’t yield much additional benefit.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.