Original article published on the 2nd September 2011 by Juan Ramón Rallo
Almost the entire population agrees that education is one of the pillars of the welfare state. In Spain, talking about a privatisation of education which extends beyond school vouchers seems to be taboo, even among liberals. However, economic theory allows us to understand why completely private education, especially higher/university education, is not only recommendable but essential for the development of education.
It is important to be clear about what does and does not constitute higher education. To summarise, university should be a business whose purpose is to produce or provide a very concrete and specific capital good: the so-called highly specialised human capital. University should not be a public forum to get a marginally deeper general education than that which is provided by secondary education and which makes us good citizens. Or, at least, it should not be so if we claim later that those years of learning served to achieve higher wages in the labour market.
Therefore, university produces human capital, that is, it instils in its clients/students a range of theoretical and practical knowledge that, subsequently, should enable them to produce more goods and services in the market than other players without that education: human capital should serve to increase the productivity of workers and, therefore, to earn higher wages.
Human capital is therefore a capital good, with all that that it entails: its value depends on its ability to generate valuable economic assets within a business plan that must be coordinated and be complemented by other capital goods. The higher wages (or extraordinary profits, if the student becomes self-employed) are precisely the remuneration for that capital good, like stock’s divivends or bond’s interests. Higher wages can be paid if a worker has a certain human capital that is more productive within a specific business plan than another worker who lacks that human capital.
The task of universities is not at all straightforward. In a certain way, they should consider themselves production centres of an enormous complexity: their main raw material is an extremely specialised knowledge (think of the number of bachelor’s and master’s degrees that exist within these) that is outdated every year by the advance of science, the changing tastes of consumers and new teaching methodologies. Its customers, the students, must receive a cutting-edge education (otherwise, they will enter the labour market and be displaced by other, better trained workers), which is adapted to consumer needs (otherwise, there will not be any entrepreneurs who want to incorporate them into their business plans and pay them higher wages) and makes it as intelligible to them as possible (otherwise, all of their teachers’ efforts will be in vain).
The question, then, is not only of educating the best possible architects –or engineers, economists or lawyers– from a technical point of view, but rather those who can design buildings that are in line with consumers tastes (or maybe if they are overbuilding and there is an excess of architects, it would be wise not to educate any more architects). The knowledge they acquire, ultimately, does not have to be useful for the personal and human training of the student or for the abstract advancement of science –for which there may be other university–affiliated centres that feed back into the work of the teaching– but rather for the consumer, who will pay the premium wage to the student in the end.
This being so, human capital that does not comply with these three conditions –excellence, technique and adaptation to the needs of the consumer that will allow higher wages to be earned in the market– can be considered a bad investment, comparable to that of a property developer who at the height of the housing bubble would continue building more and more houses that they later cannot sell at a decent price.
The question is whether public university can provide human capital that is not, in general, just a series of bad investments or if, instead, good human capital will be developed in private universities subject to market competition and the lack of regulation from the public sector.
There are reasons that affect both supply (the way universities work and teach) and demand (the quantity and quality of education that students want to get) that lead us to conclude that, as in any other specialised production centre, it is essential that university itself be subject entirely to free market competition.
Supply reasons: the university should be flexible enough to adapt its technical knowledge and teaching methods to the constantly changing needs of the market (businesses and consumers). Teaching staff, and their organisation within the university, must be subjected to a continuous reworking; a flexibility that can be achieved not through the force of central planning and five–year plans, but at the mercy of competitive pressure from more efficient universities that can displace those that are less efficient. Outdated educational models need to disappear and not perpetuate themselves at the teat of the public budget; for which it is, in turn, necessary for companies and the administration to be able to discriminate between the degrees of different universities according to their quality: a degree from a leading university cannot be comparable to that of an inadequate one.
Additionally, competition between universities not only affects the quality of its services but its cost too. The internet, EBooks and other new technologies offer infinite possibilities to develop new educational models that extend beyond traditional university. The participation of an institution of higher education in the formation of human capital can vary: from the direct supervision of a classroom and teaching staff for 20 hours a week over five years to the provision of teaching materials and subsequent certification that a particular student has acquired the knowledge that their degree requires on their own, through online face to face teaching or independent learning online. Each university could put together their own supply of academic services, the price of which would rise with the cost (depending on the degree of involvement in training) and would be giving a wide range of students with diverse income levels access to the same degree. There are already numerous centres today that only charge for testing and certifying the acquisition of certain knowledge, notwithstanding that, by paying an extra price, students can directly buy materials or go to tutorials.
By the same token, it does not make much sense either that the university degree can only act as an inseparable body of knowledge that provides the student with a complete understanding of a subject over the course of four or five years. The logical thing would be for each university to offer ‘packs’ of a reduced duration and price and with much more specific content; the objective being to produce specialists that can develop extraordinary services in a certain field. The best accountant in the world does not need to have a profound knowledge of macroeconomics, so both subjects need not be studied at the same time; the opportunity to study modules that students can acquire, without detriment to their obtaining a degree that precisely confirms the knowledge they have acquired, provides huge flexibility to producing human capital and internally reorganising the subjects taught and methods employed. More than seeing undergraduate studies as a discrete variable (0 or 1: either you have a degree although you lack a subject, or you do not), they would have to understand it as a continuous variable (possessing varying degrees of knowledge reflected in a dynamic curriculum).
As far as demand is concerned, let us not forget that university education is an investment in human capital and its return is the wage premium that the worker reaps. If we find it absurd that the state grants us all (or rather, some teenagers) a cheque for €20,000, for example, so that we can all own a stock portfolio (and not just the wealthy savers!), it should be considered equally as absurd that the state subsidises the demand for what is, I repeat, an investment in a very specific and specialised asset, human capital.
And why is it absurd? First of all, the costs are socialised (all the contributors support public university) but the benefits are privatised (wage premiums earned by those workers). Many might consider that a progressive tax system counteracts this fact (those who earn more pay more), but let us not forget that not everyone who gets higher wages has to get it for completing their university studies…neither do those who enjoy university have to get higher wages nor receive one due to their degree. Therefore, the progressive tax system is a very clumsy and unfair way to counter socializing costs and privatizing profits.
But the core problem lies elsewhere: the logic and desirability of any investment depends on whether its profitability is positive and greater than that of other assets of similar risk . That is to say, it is not just about earning money, but about earning at least the same as we could get from other investments. If we fully or partially subsidise the cost of university, it’s logical that the demand for university studies will exceed what is really profitable and advisable. For example, if the cost of studying at university for five years is €40,000 but the state offers it for free, a student will still decide to invest in human capital if the higher wages they will get over the course of their working life does not exceed €30,000. In other words, the investment will be ruinous (the cost of obtaining human capital will be greater than the utility it provides), but the incentive will be to invest in it anyway.
Obviously, if the private cost of going to university is zero, what we can expect is, firstly, that demand will greatly increase even if the premium wage is zero; and secondly, if other, non-monetary benefits of going to university exist (for example, five sabbatical years in which they do not do a lot of studying and enjoy a golden youth), students will tend to ignore completely the disciplines that must be mastered to earn premium wages that allegedly justify university education (their subject of study being chosen almost at random or by personal interest). In short, if the state subsidises the cost of university education, demand will always be excessive and generally unconcerned about the quality of the supply.
The obsession with acquiring an academic degree is a sickness of societies where university has no price, where students are not in the least bit interested in comparing the costs and benefits of investing in human capital and where the centres responsible for issuing degrees do not fight for survival through their differences in quality. A society, in general, does not need undergraduates, but rather people who are specialised in very diverse areas; when all it provides is a printed out degree and unemployable youths –who must then turn to private postgraduate education to minutely specialise themselves– the university system is completely flawed.
Finally, the fact that the price of higher education reflects all its costs will not necessarily lead to increased social differences. Firstly, because an unintelligent rich person will not get higher wages for a long time owing to a degree they bought in cash (family contacts are another thing, but that has nothing to do with having a degree); and if that is so, buying degrees tends rather to decapitalize the rich (it would have been better to buy a stock that provides an annual return of 7% instead of a degree that provides zero return),and secondly, because poor intelligent people can not just receive scholarships from private universities (something that is not unusual nowadays), as the prestige of these universities comes from having excellent students who are well-placed in the ‘establishment’; but because the versatility of a private and deregulated university industry would allow such a great variety of prices that it would lead to a truly continuous education. Nowhere is it written that a person should acquire all their human capital between the ages 18 to 23. For example, someone could study a finance module, toearnpremium wages over four years, save part of the earnings to finance further studies, etc. All that de facto changes is that more people would analyse every step: namely, if it is appropriate (or profitable) to expand their education more in each stage of their life. In fact, this is how things should be done: human capital should be continuously recycled (not getting stuck on the knowledge acquired during adolescence) and should always aim to increase the value for the consumer who has paid for it.
Public education does not guarantee a democratisation of human capital; rather, it ensures widespread bad investments.
Original article in Spanish: http://juanramonrallo.com/2011/09/por-que-la-universidad-deberia-ser-totalmente-privada/