Counterfactuals and Signaling: the Local and the Global

This is an interesting post on signaling v.s. human capital argument.

The post above mentioned asks a counterfactual question: Would you have achieved as much as today if you have failed all the courses the content of which you have almost completely forgotten today? By answering “no”, the blog author stands up for signaling theory as opposed to the human capital theory. (of course, assuming that he, as a top economist, is a winner of life.) If we follow human capital theory, the answer would be “yes”, because it makes no difference to the human capital stock.

But from a policy point of view it would be more interesting if we move from a “local” perspective to a “global” perspective: What if I frame the question in a different (and probably the opposite) way: Would you have achieved as much as today if all your cohort(including you) have failed all the courses the content of which only you, among your cohort, find very helpful in work today? If you following signaling theory, then probably the answer is still a “no”, because everyone failing means no differentiation, and no differentiation means that you cannot send out an effective signal.But you will achieve better than in the scenario of the original question, because no advantage means no disadvantage either. If you support the human capital theory, then the answer is “yes”, because it does not change the human capital stock.Under a signaling model, ability and skills are positional, while in human capital model they are not.

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