Education economists, have proposed two models of education: the screening/signaling and human capital models. It's obvious that intelligent, articulate and skillful people tend to have spent a long time in school, but it could either be that that completing an education builds one's ability, or that having innate ability enables one to complete an education. Although the human capital model is far more popular with educators and the general public, screening and signalling roles can't be entirely ruled out, and some clever economic studies, making use of natural experiments such as scholarship rule changes, support some screening and signalling functions. Inconsistent results may also mean that the importance of these effects varies by country and academic specialization.

What is the cost of education? Not just the substantial dollar costs, but the opportunity cost of having the first 21 or more years of life devoted to something that isn't itself productive. At the same time as these concerns about primary and secondary education, people have been noticing that a degree is no guarantee of a good job, and the increasing numbers of people going to college and getting degrees is reducing the value of the credential (see Higher Education Bubble). From the sorting viewpoint, this is unsurprising. The Economist periodically assesses whether higher education pays off when you consider the direct costs and lost wages. They still find a benefit, but it isn't as large as it used to be, partly because higher education costs have been increasing at well above inflation for decades.

If there is any social inequality, and educational success has any effect on access to elite roles, then education will always have a sorting function, and will be competitive. This purely competitive aspect is the “I win/you lose” logic of a Zero Sum Game. Whether competition is good or bad is another argument (see competition), but this does cast doubt on the simple story that increasing education is a win-win situation (or positive sum game). If a society encourages parents to pour their resources into education fever to help their children compete, then any overall benefits are side effects of the status competition. Education fever is more pronounced in South Korea and China than in the US (see The Hidden Cost of Education Fever), but it does exist.

Of course, a story of general benefit arising from individual competition is a common motif in economics. You could argue that the belief that there is a shortage of “good jobs” is like the Lump of Labor Fallacy. If education actually increases practical competence, then you would expect that increasing education would lead to economic growth, creating more “good jobs” for the newly educated. Yet this argument does ignore (as economists tend to) the fact that people clearly care about their relative wealth and status more than their absolute wealth (see Reasons For Valuing Relative Wealth). A rising tide lifts all boats, but the yachts are still taller than the rowboats. People will still assign winners and losers and want to the be winner.

Two economic trends that reinforce prolonged education with sorting and signalling functions are:

• Outsourcing: in paternalistic and apprenticeship systems, employers took on a risk that their investment in the practical education of an employee might not be repaid. Given higher job mobility today, employers are increasingly intolerant of any on the job learning curve. This likely explains increasing vocational higher education such as business degrees. Even though it's not equivalent to actual experience, it's sufficiently relevant that it makes sense for employers to demand it.
• Large employers are bureaucracies facing much the same problem as the Chinese emperor. That is, they also need a formal sorting mechanism to identify competent employees that isn't easily subverted by favoritism and other sorts of self-serving collusion.

Managing a premier university has notable similarities to managing a luxury brand such as Rolls Royce or Rolex. A great deal of the value of a premier degree is simply in that it is rare (a positional good), but it is important to maintain a perception that the quality is superior. A university does indeed sell to students, and this has (for example) clearly driven grade inflation and increasing student-life amenities.

However the university is also marketing its image as turning out a high-quality student product. Although this can be achieved to a large degree simply by selective admissions, it is necessary to give some attention to the educational process, especially in technical areas where some significant fraction of the subject material may actually turn out to be relevant in later life.

There is presumably room in the market for schools to differentiate themselves by how hard they make their students work, but it is also quite possible that a school might follow short-term financial incentives to admit a lot of students and show them a good time, and then blow any any reputation they might have had for the worth of their degree. That is, they have debased their brand. In luxury goods this most often happens when the item is sold too widely at too low a price, so exclusivity is lost, but it could also happen if the perception of quality is lost.

Moving away from a narrow view of brand management, the massive increase in Bachelors degrees since the 1950's has clearly debased the worth of having one. While you do still need a Bachelors to prove you aren't stupid or lazy, for many the real exclusivity is now in graduate degrees such as MBA. It may be that there is a niche in the market for an easy bachelors degree as a fun social interlude between your SATs and your GREs.

There is some conflict of short-term interest between the student (paying the bill) and the end user of the process (employer or society at large) because learning is not always fun, and young adults have other things on their minds than learning.

To understand the social function of education you need to get beyond the obvious view that people take courses on X, Y and Z because they need to know X, Y and Z in life. This is true to some degree, but leaves considerable puzzles about why we are teaching the subjects that we are.

For fundamentals, we need to look at the input/output model of a degree program. The desire is for a high quality at the output of the program. People who not only have relevant skills and knowledge, but are also smart, can communicate with others, and can structure their own time to get someone else's problems solved.

There is no denying that part of higher education is a sorting process, whether it happens in admissions or through dropouts. The people who are not admitted or drop out “contribute” to the result quality. If possible, it's better to weed out the students that “can't hack it” on admissions, because that spares them a costly failure that could derail their career, but so far as the end-user of the graduate is concerned, it doesn't much matter. For universities, selective admissions is a shortcut to adding value, but it's important for there to be unselective options, because SAT, etc. are only moderately effective at predicting further academic success.

Students who are admitted and enter the program are changed in various ways:

• In the overt curriculum, they learn how to remember various content material for days or weeks, and if the same skills come up again and again in their courses, they are likely to become enduring competencies. It is also possible that being exposed to the content and to the ways of thinking of a variety of subjects has some important “broadening” effect, even when you can't consciously recall the details.
• There is also the “hidden curriculum”, which is a very important contributor to value of higher education, especially in non-technical areas. Most importantly, students must learn to put out satisfactory levels of intellectual effort on command, with almost no direct supervision, only the looming threat of a bad grade.