Neil Kay's claim (Letters, THES, June 4) that the Dearing report's calculation of the rate of return to higher education is fundamentally flawed is itself in error.
The purpose of the exercise was to determine if the flow of graduates should be increased. This requires comparing the expected gain in output made possible by an extra graduate with the costs entailed. As Kay points out, profit-maximising firms hire labour until the cost of another worker equals the value of the output they produce. So, the premium paid to graduates reflects the economic benefit of a marginal expansion in numbers. In this, Dearing's methodology is correct. It turns out that student numbers are about right.
What is true is that the total contribution of graduates to gross national product is more than their total pay. Kay seems to conclude that firms should pay some of the costs of higher education. However, it is also true that the total return to capital is less than its contribution to GNP, as is that of every factor of production. Applying the Kay principle, workers should be required to pay part of capitalists' investment costs. Of course this is ridiculous. Neither equity nor efficiency would be served by either kind of subsidisation policy.
David de Meza
Professor of management, LSE, and professor of economicsUniversity of Exeter