Bubbles were thought to only occur in Securities, Commodities and Art. We now know that to be false, but it has been revised to say that bubbles cannot occur with services or non-durable goods, but only with goods that can last long enough to be resold. Could this be false too though?
The underlying reasoning never changes: a product is bought not for its inherent value, but for its potential resale price. In other words, you don’t purchase a stock, or house, or a tulip, for what it is worth to you, but for what you think it will be worth to others in the future. If you have enough people doing this for the same good, you have a bubble.
So when you see this article by Glenn Reynolds about Higher education’s bubble bursting you can discard it automatically, right? Not really. Behavioral Economics introduces us to a phenomenon called ‘signalling’. Applied to education, signalling occurs when a student obtains a degree not for the inherent value of it (the education and what she will be able to learn), but for the higher price she can command once she enters the job market (the higher salaries that can be earned with extra letters after one’s name).
We are also seeing students get into more and more debt in order to do this. This recent recession has made many people want to go back to school, thereby avoiding a precarious employment situation while also increasing their net worth. Of course, with so many students doing the same thing, our next bubble could be expanding right under our noses.