By Jerry Davis
This post is part of an Aspen Institute Business & Society Program conversation series exploring ways to align the incentives of business and the capital markets with the long-term health of society. To learn more, visit www.aspenbsp.org.
Is a college degree a worthwhile investment?
The conventional view is clear: College graduates on average earn substantially higher wages and experience lower unemployment rates than those without the degree. Our system of higher education is based on the view that college pays off.
Yet dissenters are growing louder. A recent article in the New York Times noted that many of the most prominent high tech entrepreneurs were dropouts, including Bill Gates, Steve Jobs, Mark Zuckerberg, and the founders of Twitter and Tumblr. Two years ago Peter Thiel, co-founder of PayPal, started a fellowship program to pay young entrepreneurs $100,000 to drop out, giving a nudge to a budding anti-college movement.
So who's right? And how can we know?
Work Hard and Play By What Rules?
College is just the first of many steps on the traditional to-do list for a comfortable middle-class life:
(1) Study hard and attend the most prestigious college you can;
(2) Major in something practical, like engineering or computer science;
(3) Get a job with a name-brand corporation in an industry with good growth prospects;
(4) Put your retirement savings into a diversified mutual fund;
(5) Buy the biggest house for which you can get a mortgage;
(6) Retire to Boca in comfort.
For most of the post-War era in the U.S., these rules for success were underwritten by a stable corporate economy. The transition from college to an entry-level job at Eastman Kodak or Westinghouse was the first step on a reasonably predictable path. Companies lasted longer than the careers of individual employees, so it was possible for people to make long-term plans.
The Rules Have Changed
But since the turn of the 21st century, we have entered a post-corporate age. Many of the pillars of the post-War economy are long gone, and although business gurus laud the dynamism of "creative destruction," it's not obvious that the Zyngas and Groupons of today will ever grow up to replace the Eastman Kodaks and Westinghouses of old.
The rules of this new game are inscrutable, and the old rules now seem downright perverse.
Stretching to buy a house appears foolhardy, as upwards of one-quarter of mortgages are underwater. Putting retirement savings into a diversified mutual fund may have made sense in the 1990s, but the S&P 500 has yet to return to its level from early 2000.
Career advice is also tricky. Growth industries for well-paid jobs are effectively impossible to identify. In the U.S., the Computer and Electronic Products industry, which would have seemed a promising choice circa 1999, has lost 750,000 net jobs since then, while employment in Information Services (including telecommunications and data processing) has shrunk by over one million jobs.
What about companies? A recent survey of college graduates under 40 showed that the most preferred employers were Google, Apple, and Facebook. Good luck: Google has 32,647 employees and receives two million job applications per year. Apple has 63,000 employees, but most work in its retail stores with jobs paying roughly $12 per hour. And Facebook has 4,000 employees, about as many as a dozen Walmart Supercenters. You're about as likely to get a job at Facebook as you are to get a job in the NBA.
If you can't pick a winning industry or company, there is always self-employment -- say, writing apps for the iPhone. Plenty of people are doing this, but how many people are actually making a living writing apps? The Bureau of Labor Statistics projects that total employment for "Software Developers, Applications" will increase from 521,000 in 2010 to 665,000 in 2020 -- not bad, but hardly a sign of endless opportunity.
The Powerball Economy
The problem is that we now live in a Powerball economy. A handful of individuals strike it rich for reasons that are effectively random -- say, buying and selling a house in Florida at just the right time, or writing a good-enough app in the early months of the iPhone that becomes a best-seller, or making a goofy music video in Korean that inexplicably goes viral -- while most of us plod along and hope for the best.
Of course, people don't like to believe that the world is random, even when it comes to Powerball. Even in a random draw, we try to infer rules. How many kids are skipping class to sit in their dorm room working on the next Facebook after viewing The Social Network? And how many people are skipping college to follow the examples of Steve Jobs or Peter Thiel?
Recent statistics show that perhaps 40% of four-year college students do not graduate within six years of entering. In other words, there are millions of non-billionaire dropouts; the odds of becoming a successful high-tech entrepreneur after dropping out are about as good as the odds of winning the lottery.
Business Can Help
Until we find a replacement for the post-War system that attached mobility, health care, and retirement to corporate employers, trying to figure out the rules of our Powerball economy is likely to be an exercise in frustration, like coming up with a sure-fire way to win the lottery.
What can business do? There are still a few employers that seek to provide career stability, but their numbers are dwindling. Some of the notable islands of stability are companies in which employees own a substantial stake and have a voice in the business. And if companies can't provide the same benefits they did in the post-War era, they can support policies that will reduce risks for individuals through rationalizing health care and income security.
So what about college? Perhaps we have been thinking about this the wrong way. Seeing higher education as an "investment in human capital" that should be evaluated on its pecuniary payoffs reflects the same mindset that sees homes as financial assets, or children as an investment in "social capital." It's not clear that this mindset served us well in the mortgage market -- is there any reason to believe that college-as-investment will help us make good choices about education?
Jerry Davis is the Wilbur K. Pierpont Collegiate Professor of Management at the Ross School of Business and Professor of Sociology, The University of Michigan. Davis received his PhD from the Graduate School of Business at Stanford University.