Consumption preferences and human capital formation.

• Author: Moosa, Suleman A.
• Position: Report

The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare, all this and more is written in its fiscal history.... He who knows how to listen to its messenger here discerns the thunder of world history more clearly than anywhere else (Capitalism, Socialism and Democracy, 1954).

Joseph Schumpeter

1. INTRODUCTION

   The standard prescription of neo-classical theory for increasing long run growth is "more saving and more schooling." We know that the rate of saving is significantly influenced by socio-cultural preferences as they affect the rate of time preference (Fisher 1907). But, could it be that there are some common factors affecting both saving and schooling? Alternatively, could the low U.S. saving rate and poor educational performance have some common determinants? If so, what is the behavior of educational organizations since schooling takes place in organizations? Why and how are universities in particular responsible for the poor U.S. educational performance? This paper seeks to provide a unifying economic framework for analyzing these questions. To that end we examine some socio-cultural, political and economic factors influencing the rate of human capital formation in general, how they affect U.S. university policies and practices in particular and their ultimate effect on the quantity and quality of education delivered. We also provide some empirical evidence to support the consumption related grade extortion hypothesis. In doing so we also shed some light on the empirical structure of education related lifetime wage earning profiles and on the role of human capital in the evolving debate stimulated by the new growth theory.

   Much of the literature focuses on the relative performance of public and private schools. This paper expands the focus by examining some common factors bearing on the absolute and relative international performance of all schools.

2. AN ANALYTICAL FRAMEWORK

   2.1 Social and Educational Preferences: It is assumed that the educational system is not immune to fundamental socioeconomic forces. It is intrinsically endogenous. Faculty not only teach students but they also provide the pool from which administrators, the bureaucrats/politicians of universities, are drawn. Each group is concerned about the employment and career opportunities provided by business and government. All of them vote and they all directly or indirectly benefit in various ways from the loans, grants and contracts of government and business. Often, students are seen as customers and faculty and administrators operate as entrepreneurs frequently following a narrowly defined "profit motive" as they smooth the path to mutually beneficial hiring, placement and consulting opportunities. This corporate ethos increasingly blurs the line between "the business of education and education as a business." Many would also have government run in this manner. For example, Clark Kerr, president emeritus of the University of California, argues that "Today's faculty members have more outside allegiances to agencies that fund research, to outside employers .... Alma Mater is, for some faculty members, a plural personality" (Kerr 1994). Finally, whether businessman/woman, government official, politician or academic, they are in the end all parents that bind the social fabric with varying degrees of efficiency.

   There is thus a quadrangular interaction between society, business, government and the educational system in the production of the quasi-public educational investment good.

   [FIGURE 1 OMITTED]

   The schematic presented in Figure 1 is used to illustrate the chain of linkages in our analytical framework--the intermediating institutional dynamics connecting the socio-cultural foundations of educational preferences on the one hand and the ultimate educational performance on the other. They together influence the propensity to invest and the rate of return on that investment.

   This is a story about individual, social and organizational nurturing holding nature constant. The middle two lines illustrate the assumption that educational preferences are derived from social preferences. The main socio-cultural variables that drive educational preferences and influence the rate of human capital formation are: the state of the family including its values and virtues (for example, Hanushek 2008, and references therein), society's attitude toward (and tradeoff between) individualism and social responsibility, and the level of impatience (time preference). Since education is assumed to be a quasi-public investment good the quantity and quality produced involves a tradeoff between individual rights and social responsibilities in each setting, largely to present groups in the first two instances and to future groups in the third.

   Family: Expenditure on physical investment not only adds to current demand but also to future supply. It thus becomes our link to the future. Children, being another of our links to the future, perform a similar role in the case of human capital. Thus, the state of the family has become a matter of considerable concern, as reflected, for example, by the continuing public debate about "virtue" and "family values." If not the most pampered, American children are almost certainly amongst the most pampered in the (industrialized) world (Marano 2004). This has given rise to some unease. Does how they are raised and cared for augur well for the future? The Duke of Windsor is said to have observed a long time ago that "The thing that impresses me most about America is the way parents obey their children." The U.S. also has one of the highest divorce rates in the world, ranks twenty second in the world in infant mortality and sixteenth in life expectancy. Their is now persuasive evidence on the relation between the state of the family and educational performance (see, for example, Kelly-Jaggia 1994, and Rounds 1994). I argue below that the relatively low U.S. saving and physical investment rates and relatively poor high school performance are not mere coincidences.

   Individualism: The United States is at times referred to as the "Land of Jefferson." It stands out in the world as a beacon of freedom and a haven for individual rights and liberties. Is it, however, having too much of them? What are the opportunity costs? Have they been rising? For example, Alexis de Tocqueville described American individualism "with a mixture of admiration and anxiety." "Rights are liberating; duties are oppressing" (Wilson 1983). Stiglitz (1989) makes the point that the "Public Good is a public good" and Baumol (1989) argues that capitalist societies may have a built-in tendency to...