WELFARE CRITERIA Witih ENDOGENOUS PREFERENCES: the ECONOMICS of EDUCATION*

iNTERNATIONAL ECONOMIC REVIEW Vol. 15, No. 2, Jtune, 1974 WELFARE CRITERIA WITIh ENDOGENOUS PREFERENCES: THE ECONOMICS OF EDUCATION* BY HERBERT GINTIS1 1. INTRODUCTION "BY ACTING on the external world and changing it," Karl Marx once re- marked, "[the worker] at the same time changes his own nature." [18, (197-98)] Much of Marxist theory is a development of this basic observation. The special position in Marxist theory of economic structure, its conception of materialism, of ideology, of classes and of social change, hinge on this connection. Indeed, again to quote Marx, "the whole of history is nothing but a continual transfor- mation of human nature" [19, (160)]. It is less than happenstance that the major competitor to Marxist theory, the tradition culminating in modern neo-classical economics, is grounded firmly not merely in the abstraction from, but the negation of this insight. The Marxist observation, translated into neo-classical terminology, holds that individual preference structures are products of economic activity. Or more precisely, individual preferences develop and change according to variables endogenous to the economic model: prices, quantities, and availabilities of consumption goods, jobs, and the social institutions conditioning the supply of labor. Neo-classical theory starts from the contrary position: the Walrasian system takes preferences as either fixed, or changirngonly in response to variables external to the model. In positive economics, the formationi of preferences is relegated to sociology or social psychology; and in welfare economics, preference structures are amonig the fundamiiental,unexplained data. In the words of Harrod [13], The method of procedure is to take certain elements of the structure as given-namely the preference lists of individuals for goods and services, the terms on which they are willing to contribute their assistance to production and the current state of technologyy... The object of this procedure would be to provide means of showing how changes in the fundamental data, desires, etc., will govern the course of events. To the confirmed neo-classicist, taking preferences as given is a sign of ethical neutrality [25]. To the Marxist, however, this approach incorporates the ma- terialist bias of capitalist society [12]. Because psychic development in capitalist society is merely instrumental to the growth of marketable goods and services, so the theoretical justification of capitalist institutions requires that we suppress consideration of the human outcomes of economic activity. To assume individuals as fixed or developing independently froin economic activity means * Manuscript received December 11, 1972; revised December 3, 1973. 1 This paper owes its present form to the insights and constructive criticisms of Samuel Bowles, James Cox, and Duncan Foley, to whom I owe a large measure of gratitude. 415 This content downloaded from 192.12.12.245 on Mon, 25 Jan 2016 20:55:12 UTC All use subject to JSTOR Terms and Conditions 416 HERBERT GINTIS mnerelythat we do not evaluate, in a normative analysis of economic activity, the way they got to be the way they are-and the way they change. Neo-classical economics has not been oblivious to this weak but crucial link in its chain of reasoning. Numerous attempts have been made to justify it, with varying degrees of sophistication and success. While none stand up to close scrutiny,2 cross-paradigm disputation has never produced decisive victories nor weakened the social power of a dominant theory. De principiis non dis- putandum. But social theories do have the uncanny propensity to generate their own refutations in the course of their internal development. This paper treats one such apparent contradiction in neo-classical theory, involving the "economics of education." Neo-classical welfare economics employs, as a summary indicator of economic progress, a measure of Gross National Product. In the late 1950's, however, a number of studies [1], [28] indicated that historical increases in this indicator of output could not adequately be explained by increases in the supplies of labor and capital as conventionally measured. In response to this anomaly and spur- red by a growing concern with "poverty," an entire field developed: the economics of education. Denison [6] demonstrated the importance of changes in the "quality of the labor force" alongside of capital accumulation and technical change in the sources of economic growth. Schultz [27] illustrated the formal equality of human and material factors of production in the theory of capital. Minicer [20] and Becker [3] showed education as a central variable in the theory of the wage strtucture. And in developmiieniteconomics, the crucial role of edti- cation as a variable in general "modernization" policy, came to the fore [4]. But education is a prime example of a conisciousattempt to change preferences, or more broadly, individual personalities. Through schooling, individuals be- come what they were not. Individual psychic development is molded in the in- terests of productive participation in the economy. Hence the following problem: Neo-classical theory justifies market institutions on the basis of their contribu- tion to growth and allocational efficiency. The norms of growth and efficiency are in turn justified on the basis of the exogenous-preferences assumption. In view of the empirically-determined importance of education in changing preferences to generate an adequate labor force, the theory then appears involved in a contradiction: the adequate performance of the institutions it recommends requires the invalidation of the assumptions on which its recommendations rest. An obvious counter-argument comes to mind. Does not education have direct "cconsumptionvalue" to the individual? Indeed, if the preference change oc- curring through education has 'positive utility' to the individual, then the neo- classical evaluation will simply underestimate the benefits of the institutions it recommends. This defense is scarcely neo-classical, as it requires ethical standards to evaluate differences in preference structures. Yet even the admission of such comparisons, and according to "widely accepted" normative standards, does not provide relief for neo-classical theory. Description and lament of the authoritarianism. pettiness, and repressive atmosphere of American education 2 For an extended discussion, see [7, (Chapter 1)]. This content downloaded from 192.12.12.245 on Mon, 25 Jan 2016 20:55:12 UTC All use subject to JSTOR Terms and Conditions ECONOMICSOF EDIJCATION 417 have dominated enlightened discussioni from John Dewey to the present. More- over, empirical analysis of the operation of schools has by and large confirmed the more descriptive surveys.' If education is in the service of creating the 'liberated' individual, with mature control over his or her life, it seems to have failed. Here the defender of neo-classical theory may argue that whatever the actual state of education, it remains that the specifically economic strictures on the educational system are compatible with ethically desirable educational patterns. Deviations from such patterns are thus not the concern of economic theory as such. The dominant form of this argument is based, explicitly or implicitly, on the notion that the increased earnings of the more highly educated worker are due to his or her increased level of cognitive development,which is at worst welfare-neutral. Yet several investigations indicate that only a minor portion of the association between schooling and earnings can be accounted for in terms of increases in the level of cognitive functioning [5], [8], [11], [15]. Nor is the association between education and occupational success economically irrational. Rather, an analysis of social relations of formal education and the personality traits rewarded in schools shows they conform admirably to the needs of a system of production characterized by the hierarchical division of labor, the heart of the modern capitalist enterprise [5], [81. This paper investigates some of the more imumediatedistortions iilducecl ill the neo-classical econiomics of educatiotn through the assuLmptiolnsof exog,enoLus preferences. These distortionis take on particular imyiportanlcewheni preference structures most conductive to individual well-beinig anid those requisite to effec- tive job performance in the hierarchical organization of production implicitly "Crecommenided"by neo-classical tleory in fact diveige. But the genieral tlheo- retical propositions will be independent of this assertion. In Section 2, I will investigate the basic welfare axioml expressing that an individual is "better off" if enabled to reach a position higher on his or her order of choice. This premise is used to justify market-mediated price and quantity determinations, while these determinations in turn invalidate the premise. Thus this assumption is pr-ima facie untenable. In Section 3, I introduce a multi-period partial equilibrium model, and introduce a theorem restoring, at least in part, the acceptability of the axiom in assessincgwelfare change. I argue that the conditions under which this theorem holds are quite stringent and generally untenable. At any rate, the admissibility of the fundamental premise of welfare economics, far from being "intuitively obvious," can be seen to be highly prob- lematic. In Section 4, I investigate the Pareto-efficiency and optimality of a general equilibrium model with endogenous preferences,

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