Allow me to take what has historically been a complicated economic concept, and make it simple - inflation.
Say you travel into outer space and come across a whole new, but inhabitable world. "Clarey World." And in "Clarey World" the only thing of any value produced is Rumpleminze. There are no cars, paper, houses, shoes, video games, OR ANYTHING. The ONLY thing that is produced on this utopian planet is Rumpleminze. Period.
The inhabitants of Clarey World pay and exchange for Rumpleminze with "Clarey Bucks." These Clarey Bucks are made with gold, no different than the coinage of the Earth 100 years ago. So let's keep it very simple.
Clarey World produces Rumpleminze.
Clarey World uses gold "Clarey Bucks" to buy Rumpleminze.
That's it. That's all this economy is. Stop over thinking it.
So upon your intergalactic discovery of the Clarey World planet, you find that that year Clarey World produces 1 million gallons of Rumpleminze per year and the ENTIRE gold supply of the planet has been mined, resulting in precisely and only 1 million ounces of gold.
That's it. That's all there is. Stop over thinking it.
So the exchange rate in any given year will be ONE Clarey Buck to ONE gallon of Rumpleminze.
So while visiting this planet, you volunteer to work at the Rumpleminze factory, earn some Clarey Bucks and buy some Rumpleminze because...well...there's literally nothing else to do in this lovely planet. After a while you get bored and decide to fly back to Earth and spread the good word of Clarey World. You also sing the praises of the galactic quality of Clarey World's Rumpleminze, and soon people also want to fly to Clarey World to sample its Rumpleminze.
But oh no. There's a problem. How are all of these new-comers going to buy Rumpleminze!?
"No problem," your ignorant space-exploring ass says. "We'll just grab some gold here on Earth and use it to buy Rumpleminze on Clarey World."
So you and a fleet carrying 1 million people carrying 9 ounces of gold each, for a TOTAL of 9 million ounces of gold, fly to Clarey World with dreams of imbibing on the universe-famous Rumpleminze.
You guys get there, start spending your gold to buy Rumpleminze, and the economic question I ask of you is:
WHAT HAPPENS TO THE PRICE OF RUMPLEMINZE???
Some of you intuitively know "well the price has to go up" but in this incredibly controlled environment where there is NOTHING but gold and Rumpleminze, you should be able to figure out, TO THE PENNY, what will happen to the price of Rumpleminze on Clarey World.
It will go from 1 Clarey Buck (or ounce of gold) to 10.
The reason is simple division and IS THE VITAL CONCEPT OF INFLATION I (and many other Austrian economists) are trying to convey upon the masses. The total supply of gold went from 1 million ounces to 10 million ounces over night, but the supply of Rumpleminze remained at 1 million ounces, thus a ratio of 10:1.
Forget, "velocity" forget "who spends the money first." Just harken back to your "probability" math class back in the 7th grade where you put various colored balls into a bucket and calculated the "ratios" "probability" etc, of "pulling a green ball from a red bucket." "Clarey World" is no different than a bucket where you have two colored balls. Rumpleminze-colored and gold/Clarey Bucks-colored. Before the discovery of Clarey World, the ratio of gold to Rumpleminze was 1 to 1. One ounce of gold to one gallon of Rumpleminze. And just like the math problem you had in the 7th grade:
"When you add 9 more "gold" colored balls to the bucket what is
And BOOM! 10. You have 1,000% inflation. It is merely the change in supply of dollars/currency/Clarey Bucks to the amount of goods and economy or market can produce.
Of course, Clarey World is a very simple economy. It only produces Rumpleminze and it's economic infrastructure is only currently capable of producing 1 million gallons per year. But how is this any different than the US higher education system?
At any given year there are only so many
LESS.
This is perhaps the biggest misunderstanding about why tuition keeps going up, not to mention the primary cause of why it continues to do so. People, completely ignorant about economics, think flooding the higher education market with more money, more student loans, etc. etc., will help "solve the problem," but this is EXACTLY the same thing as giving an alcoholic more booze to stop his drinking problem. IT IS THE PROBLEM. And when you consider all the sources of financing a college education and how students today pay for college, you find out that tuition is overpriced by 88%, almost identical to the famous "Rumpleminze Bubble" occurring on Clarey World today.
This chart shouldn't be viewed as "How to Students Pay for College." It should read, to the decimal point, "Causes of Tuition Inflation." And while here at Cappy Cap we all love to blame the government for everything, the truth is the government is actually NOT the primary culprit in this one. It's ironically
PARENTS
and
SCHOLARSHIPS!
If parents and various scholarship-offering entities simply refused to pay for their children's tuition, that alone would lower tuition OVER NIGHT by nearly 2/3rds. I've argued for this before, where idiotic calls to "Boycott Big Oil for a Day" won't work for Big Oil, but SURE AS HELL WOULD WORK on colleges and universities! However, convincing SUV-driving-soccer-moms and Dude-Bro-turned-MBA-wage-slave-simp parents of basic economics is impossible. Also convincing crusaderist, non-profit do-gooders to end their enabling of children to pursue worthless degrees is also impossible. So we can continue to expect the higher education market to be flooded with these ignorant-billions of dollars every year and tuition costs to skyrocket.
But what I found particularly interesting (and shameful of most students) was just how little they actually contributed to their own education. 12%. They're either borrowing money that isn't theirs, taking from the taxpayer, or completely hammocking off of their parents and charities. It's no wonder students today think they're entitled to a free education, because they're practically getting one! But the 12% number is much more important from an academic and economic perspective. It's the what the price of tuition should be. If left to pay cash for their own education and not rely on the hyper-inflation-causing outside sources of financing, the REAL price of a college education would only be 12% of what it is today. It's what an uninterrupted, untainted market would be without the intervention of well-intended, but ignorant monies from various external sources.
Of course, for this "real price" of tuition to be realized, we'd actually have to end the scourge of "progressive credentialism" where we demand everybody has a bachelors degree (though "Masters Preferred") to work an entry level job. Employers would also have to become more merocratic, allowing people to self-study, self-certify, and self-train for free on the internet, and apply for jobs without wasting 4-8 years in college. And it would also require some ballsy moves on an entire generation to say, "No, screw you Big Education, we're boycotting you for a full year and going to work in the meantime for a gap year instead." THAT right there would land a powerful one right in the groin of Big Education. But, alas, the world is filled with sheeple and such independent thought and maneuvering is beyond them. Nothings too good for American parents' "precious little children" and they'll do whatever they can so daddy's little princess or mommy's little prince can go to college and get "the college experience."
Just don't complain when Rumpleminze on Clarey World costs 400 Clarey Bucks per gallon.
___________________________
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8 comments:
`Some of you intuitively know "well the price has to go up" but in this incredibly controlled environment where there is NOTHING but gold and Rumpleminze, you should be able to figure out, TO THE PENNY, what will happen to the price of Rumpleminze on Clarey World.`
Spot on, 'cuz Clarey World == Real World. I have had a hard time convincing my peers that should the USD be supplanted as the World Reserve Currency the price of everything will triple at a minimum. A can of corn will go from a $1 per to $3 per overnight. There are twice as many USD bucks on the world stage as there is in the US alone. If USD is no longer wanted they will come flooding back inflating everything.
I have tried to explain this to people before. When the government started to guarantee college loans, that is precisely when the huge increase in college costs started, outpacing inflation by many times over. And the colleges, in competition for ever more student dollars, began to build more beautiful campuses and bigger and better student housing, pools, rec halls, etc., all to attract not the best and the brightest, but the money. Bigger football stadiums, sports complexes for all athletes, you name it, if you can dream it, they will build it. If I, a 35 year veteran of the foundry, with some college, can understand the basic principles, why can't the rest of the people get it, and do something about lowering the true cost of college? Perfect post, too bad there is no one blinder than one who just is unwilling to see.
Ahh, inflation...my favorite subject. Aaron gives a damn good simplistic explanation that really drives his point home. Excellent!
But for those needing a bit more clarification on the subject, and still want to keep it simple, may I suggest the following:
http://www.theburningplatform.com/2015/02/27/inflation-economics-in-one-easy-lession-or-how-i-learned-to-stop-worrying-and-loathe-the-fed/#more-93292
Ironically, you can probably drop $60k for a Masters program for name-value, or you could pay ~$7k for the online MS in Comp Sci at Georgia Tech. Which is about 12%.
If anyone needs evidence at how wasteful a college is, here's some math.
Oberlin College is $52,762 a year in tuition (!). Call it $5,276 per class.
$5,276 / student * 25 students = $131,900 per class, call it $132k
An adjunct professor will often cost $3k per class. Let's be generous and say $5k.
So we end up w/ $127k left over. That's enough to pay for rent in a decent part of Manhattan for FIVE YEARS. Let alone that it could pay for a house outright in many parts of America. Where's that $127k a class going, you ask? Who knows. All I know is that if it wasn't a propped up industry, you'd never see something like that; the school might pick up like 1/10th the revenues to pay for their actually needed administrative stuff, versus their associate dean of diversity and army of women's studies adjuncts.
Brilliant effing column! I love it when economics savvy dudes explain to mugs like me in simple terms how things work.
Next time I see some crappy argument for siphoning more cash into higher ed, I'll hit 'em with this good ol' inflation based KO.
There is also a reduction in quality as education expands.
Assuming teachers and lecturers are selected on some non-random basis, then the only way of increasing the numbers is to reduce the entry standards- unless you think that the average guy is twice as bright as his parents.
It's a bubble within a bubble.
That's easy to see. Difficult to know exactly when it will burst. Anyone who can do that will become rich as Soros.
Another aspect of the problem is that close on 50% of young people think they are part of an intellectual elite because they have a degree. 50% is far far too large a portion of the populace to be meaningfully called elite.
It used to be said that it was worth it to get that sheepskin, since holders of college degrees made, on average, a much greater income over their lifetime than those who didn't have that college degree. But that is not actually the case now. A skilled tradesman, such as a master plumber, master electrician, etc., can easily earn into six figures, with overtime, plus benefits. The typical college graduate takes many years to reach that level, if they ever do. And that is if their degree is in the right field.
I have seen a similar explanation as to that Medicare drove up healthcare costs.
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