Grade inflation can devalue students' achievements but there is an economic explanation as to why this happens. Assessment of service sector output is omnipresent. But with school exam results, following this years admirable A level results, executive pay continually rising and audit standards falling, can it always be regarded as objective?
One of the growth businesses of the market place today is that of the measurement and verification of performance. The process of monitoring and assessing service sector output has become a ubiquitous aspect of modern business in both the public and private sectors. Assessing the performance of our services creates an institutional structure that gives rise to the notion of 'grade inflation' as standards, be they exam scores, executive remuneration or health service performance, appear to rise ever upwards.
Product Types and Information Costs
In the service dominated world we now inhabit, we are no longer trading in the tangible goods; the 'widgets' we had with manufactured products. Economically, manufactured goods are associated with lower information costs. With manufactured goods we know what we are buying. This means that tangible products can be seen and easily assessed. Such goods would be described as 'search goods' as we can easily see and appraise their size, taste and appearance by immediate inspection alone.
As quality becomes more of a feature of the products we buy, information costs increase as 'experience' becomes key to our choice. In this situation the durability and reputation of the product matters, this involves a higher cost of appraisal to ensure that the product is what we want. Beyond experience goods, information costs can increase still further as the costs of product appraisal grow.
Credence goods describe aspects of our consumption of goods that might depend on matters that we are unable to see directly at all. In this situation the customer has to make choices based on trust and belief alone. One of the industries that best embraces all three types of information costs is textiles. An item of clothing initially conveys most visual 'search' characteristics such as size, colour, style and fit. The experience and durability elements are conveyed in the quality and dependability of, for example a pair of jeans; time and prior experience are often involved. Finally the high information cost 'credence' elements are conveyed in aspects that relate to the fashionability of the clothing. This credence element involves a complex, high information cost aspect of product appraisal excellently illustrated by Hans Christian Andersen's, The Emperor's New Clothes, where visual inspection and experience could not identify the quality or merit of the alleged clothing.
The Importance of Service
Trade and business is more dependent on 'Service' nowadays and perhaps the least easily identifiable aspect of modern exchange has been the measurement of 'service performance'. The 'performance' of a service has become the growth industry of the professional services sector today. The assessment of performance has become commonplace in modern transactions between businesses. Here is the latter day Credence good, where belief is all. This is when groups of competent individuals sit in judgement on the performance of others. The 'objective' measurement of their performance is, in this exchange, the product being sought by the purchaser. Progressively today, economic agents or individuals need to seek verification or confirmation of their worth. Those individuals being 'measured', in effect, employ their 'assessors' in this process.
This development is now an inevitable feature of business and can give rise to a number of potential consequences. When individuals sit in judgement of others, a measure of objectivity and rigor is inevitably reduced. Committed university tutors sympathise with their students. By the same logic executive remuneration committees usually support their chief executives, while accountants tend to look positively on the businesses they audit. My experience in business showed me that most companies wanted to award their staff above average pay increases. The same reasoning applies to remuneration committees; none will wish to see their executives receiving below average packages. The same argument applies for private sector exam boards and individual universities. However, in the process of evaluation, if consistently 'assessors' are increasing scores that are on average, above the average, then overall results, scores and pay will continue to increase and so 'grade inflation' occurs.
The Compromise of Objectivity has Benign Origins
It is easy to see how this process has benign origins. My students at university, just like students taking A Levels, the main 18+ examination, to gain university entrance, tend to focus on the particular set of skills and knowledge on which they will be assessed. By targeting, and committing to memory, those elements of their course it is likely that their individual performance will improve relative to overall performance. Hence we get the circumstances associated with the phenomenon of 'grade inflation'. In this situation the process of pleasant social interaction combine with self interested commercial motives to boost measured performance in the assessment of other people.
As a result of the notion of grade inflation, where one set of interests are in judgement on another, begins to occur. So, we see university marks increase, privatised examination bodies escalating student marks annually, audit standards slipping and executive remuneration outstripping the earnings of employees. Self interest, combined with commercial interest and perhaps our good nature will ensure that when we judge the performance of others, their performance will tend to steadily increase.
For sound business reasons we see that the process of assessing and measuring performance, when the potentially subjective role of people becomes involved can compromise the process of securing objectivity. As modern economies evolve the products produced may change and the information costs involved in appraising the output may increase, however, the force of competition in the market, Adam Smith's invisible hand, will continue to remain prominent in driving the quality of product standards ever higher.