It’s like Kling . . . → Read More: The Cost of Signaling]]> Like this isn’t an attempt to split a non-existent hair:

The segregation model predicts that as the society gets wealthier, the dollar cost of college will get higher. The signaling model would not necessarily predict that. In fact, it would predict that the market would try to find less expensive signals.

It’s like Kling has never heard of anyone signaling their status through conspicuous spending. As anyone who has ever observed human beings can readily attest to, there are plenty of people who spend money just to show that they have money to spend. Why shouldn’t this form of signaling extend to higher education?

Let us suppose that college serves as a way for young people to be sorted into their societal roles. Those who go to more prestigious (read: expensive and/or exclusive) colleges will likely come from families that are relatively wealthy.* They will also spend a lot on their education, relatively speaking.

Signaling theory would suggest the exact same thing, for there is a) a general correlation between the cost of college and its prestige and also b) a general correlation between family wealth and college choice. That is to say, the children of wealthier parents are more likely to buy social prestige at college, and will be charged a lot to do so. Now, given the limited number of prestigious colleges and universities, it should be the case that more prestigious universities command a higher price, and that students from higher-class families are able to pay them. Thus, signaling theory predicts an outcome extremely similar to segregation theory.

What Kling neglects, then, in attempting to differentiate segregation from signaling is that some signals do not become “cheaper” over time because some signals only work because they are expensive. What Kling must prove, then, is that the signaling theory of post-secondary education is flawed because college is not a cost-driven signal. Until then, his assertion regarding the predictive ability of signaling theory is incorrect, and his attempt to differentiate between signaling and segregation is pointless.

* There are some general exceptions to this, obviously, as even impoverished minorities can occasionally make it to Harvard. But, for the most part, the people who go to pricier colleges can generally pay for them.

CAPITAL ACCUMULATION

Investing is the process of allocating . . . → Read More: Numeraire]]> The most important decision an investor can make is what to use as the numeraire. But few investors even know what a numeraire is let alone have put deliberate thought into choosing their numeraire.  With advances in technology using a reliable numeraire is easier than ever.

CAPITAL ACCUMULATION

Investing is the process of allocating capital. Capital is the result of consuming less than what is produced.

For example, if 10 pounds of corn are produced and 7 pounds of corn are eaten then there are 3 pounds of surplus corn. This 3 pounds of corn is capital that can then be allocated and produce a return.  That return can be measured using financial statements, like an income statement and balance sheet, and an accurate numeraire.

As individuals or society wisely allocate capital that generates a return then the standard of living will increase. For example, enough capital may be stored and then allocated resulting in a the farmer being able to purchase and use a shovel instead of his hands to produce more corn. Now the farmer can spend the same amount of time but produce 2-3x as much corn because of the capital that has been stored and allocated into shovels, plows, tractors, semi-trucks, etc.  This is called increased productivity.

On the other hand, if an individual or society consumes more than they produce then they begin to erode their capital. Generally, this is unwise and will lead to a lower standard of living.  Remember the old advice:  do not eat the seed corn.

Like gravity does not care whether the sentient human or inanimate rock knows their condition as they hurl towards the earth from thousands of feet in the air so likewise economic law does not care whether individuals and society can accurately measure whether their capital is being accumulated or eroded.

VALUE CALCULATION

In this process of investing an individual makes a value calculation about whether to consume or save resources.  The key role interest rates play is in regulating production and consumption over time. Generally, low interest rates encourage consumption while high interest rates encourage saving.

Individuals produce commodities because they add value.  Corn is for food, oil is for fuel, steel is for buildings and water is for drinking.  Commodities are vital to sustain life.  Consequently, accurately measuring the demand for commodities over time is equally important so that the market can provide supply and avoid consequences such as starvation, dehydration, malnutrition, etc.  The Founding Fathers understood these economic principles and with the 1792 Coinage Act answered the question:  What Is A Dollar?

NUMERAIRE

In economics, the numeraire is an item or commodity acting as a measure of value or as a standard for currency exchange.  In accordance with Article 1 Section 8 Clause 5 and Article 10 Section 10 Clause 1 of the United States Constitution the Coinage Act of 1792 provided in Section 9:

DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

However, government has strayed with unconstitutional legal tender laws and along with central bank intervention in the gold market the environment is extremely difficult, if not impossible, to accurately perform mental calculations of value. The result is a broken pricing mechanism.

Additionally, most people are completely oblivious to the importance of choosing an accurate numeraire.  More daunting is that for the small percentage of people who measure their financial vital signs few use a precise numeraire to do so.

To assist you in performing these two tasks for an example I have created The Numeraire Spreadsheet.  It functions as an example of how to implement provident living principles using an alternative numeraire.

CONCLUSION

Keeping financial statements such as an income statement and balance sheet takes diligence.  It also takes persistence and diligence to use an accurate numeraire.  But doing so will allow you to view your financial condition with improved clarity and which will likely increase your ability to perform better allocations of capital which will help you multiply your net worth.  For the New Year make it a goal to spend about 15-30 minutes per month to accurately measure and track your financial condition.

If you have an suggestions for The Numeraire Spreadsheet or any stories from using it then please leave a comment.

Specifically, just say no to this:

[U]nder my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance. Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to . . . → Read More: What Individuals Should Do About ObamaCare]]> To quote Nancy Reagan, “just say no”.

Specifically, just say no to this:

[U]nder my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance. Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers. There will be a hardship waiver for those individuals who still can’t afford coverage, and 95 percent of all small businesses, because of their size and narrow profit margin, would be exempt from these requirements. But we can’t have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees. Improving our health care system only works if everybody does their part.

To forestall immediate descent into partisan Obama bashing, a brief digression: Obama cribbed the “individual mandate” described above from “conservative” Republican Mitt Romney, who signed it into law as governor of Massachusetts and then bragged about / defended it (rather than vetoing it as he did eight other provisions of the law, including an “employer mandate” similar to the one described above) in 2006. So please … don’t try to turn this into a “left/right” thing.

The insurance companies are drooling over this, of course, and their water carriers in Congress from both major parties will support it (while quietly gutting the “unicorns and ice cream for everyone” restrictions on pre-existing condition refusal, payment caps, etc.) if they can get away with supporting it.

So, the first thing to do is let your congresscritter know that (s)he can’t get away with supporting it.

The second thing? Obey little, resist much.

It just so happens that I am, at this particular moment, insured. And while I’m glad, at this particular moment, to be insured (I have dental coverage, and that coverage is saving me about $1200 on the mass extraction/denture procedure I’m getting ready for — for those who have been following the saga, I got the molds made last week and should get the teeth yanked some time in the two to four weeks), I’ve lived a good part of my life without insurance.

If the proposal described in President Obama’s speech is passed and signed into law, I’ll be returning to uninsured status ASAP — and giving anyone who comes calling to collect a fine a close-up look at my middle finger when I hold out my hands for them to put the cuffs on.

Anyone who’s in a position to do likewise, should.