This acceptance of the efficacy of education is itself derived from a belief in the standard economic theory of the labor market. Ac-cording to this theory, the labor market exists to match labor demand with labor supply. At any given time, the pattern of matching and mismatching gives off various signals: Businesses are" told" to raise wages or redesign jobs in skill-shortage sectors, or to lower wages in skill-surplus sectors; individuals are" told” to acquire skills in highwage sectors and are discouraged from seeking skills and jobs in sectors where wages are low and skills are in surplus. Each skill market is “cleared," in the short run, by increases or reductions im wages, and by a combination of wage changes, skill changes, and production-technique changes over the long run. The result, according to the theory, is that each person in the labor market is paid at the level of his marginal productivity. If he adds $3,000 to total economic output, he is paid $3,000; if he adds $8,000, he is paid $8,000.

This theory posits wage competition as the driving force of the labor market. It assumes that people come into the labor market with a definite, pre-existing set of skills (or lack of skills), and that they then compete against one another on the basis of wages. According to this theory, education is crucial because it creates the skills which people bring into the market. This implies that any in-