Let’s start with a conjecture. The more rigid and government dominated a country’s education system is, the poorer the country; and conversely, the more flexible and accommodating the education system is, the more prosperous the country. India belongs to the first kind, and is remarkably poor; the US belongs to the second kind, and is remarkably prosperous.
It’s just a conjecture, not an established fact. But something to think about.
If Adam Smith (1723 – 1790), the father of the modern discipline called economics, were to find himself in the 21st century CE, he’d probably not recognize anything from his time — except the educational system. Everything has been unrecognizably transformed except schooling. Like in his time, it’s essentially the same system in which students are age-segregated and instructed in an uniform way, with teachers transferring information to a group of generally unmotivated young people.
Why the educational system has not changed is a complex question to answer comprehensively. The short answer is that the state (i.e., the government) has an interest in exercising control over its subjects or its citizens (as the case may be) by training them to be docile and obedient. Therefore it has to have total control over the education system. As a side-benefit the politicians and bureaucrats, the agents of the state, get to extract economic rents from the education sector. The economy has changed in many ways but the incentive for the state to prevent innovation in education has not changed.
Too Important for Profit
What justification does the state advance for its continued control of education? It argues that education is too essential for society to be left to the anarchy of profit-seeking private entities. For-profit private institutions, the argument goes, would only serve the interests of the rich and leave the poor out. This facile nonsense is accepted by the gullible public — which is not surprising since the state-controlled education system produces a population incapable of critical reasoning. Even well-meaning people who have little to gain from the continuation of a dysfunctional education system eagerly accept the nonsense.
One of the principal pillars on which the government’s specious argument rests is the public’s misunderstanding of the concept of profit. The people have been taught (by the state schooling system) that profit is bad, that it enriches the rich and impoverishes the poor. The government is, of course, not for profit. Therefore the public believes that the government is good and the private sector is bad. Therefore the private sector must be barred from entry into education, but if allowed to provide education, it must be severely regulated.
In this essay my principal argument is that if the government of India were to make one policy change of allowing the free market to operate in education, that change alone will unshackle the economy and set it on the path to prosperity. In this part I explore the consequences of that policy change.
The Profit and Loss System
The first effects would be an increase in the quantity, quality and diversity of educational offerings, and a lowering of prices. This is the standard outcome of competition. This happens invariably in every sector of a free market economy.
Recall that in a free market, there are no state-imposed restrictions on entry into or exit from the market. If you wish to produce widgets (that mythical object that economists have been producing long before software monkeys misappropriated it without acknowledgment), go and do so. If people buy your widgets over your competitors’ widgets, you make a profit. The profit you make is a direct, although incomplete, measure of how much you have benefited society. If you suffer a loss because no one wants your widgets, it means you have wasted resources and you should stop making those inferior widgets.
The free market is a profit and loss system. The market provides you information through its price mechanism. That information helps guide you in your decision on what to produce. The opportunity for profit encourages you to do things as efficiently as you can. You keep your costs down and maximize the value you provide to your customers. And the possibility of losses disciplines your actions. You are told to exit the market not by some bureaucrat but by the people who don’t buy your stuff.
If the free market is allowed into the education sector, there will be innovation in how education is provided. The nature of competition in the education sector will change. Let’s examine this bit first.
Competition Among Buyers
When the quantity supplied (what’s available for consumption) is far below the quantity demanded at a certain price, it results in competition among the buyers.
For example, the quantity of IIT seats is much lower than the number who wish to enroll in IITs. Therefore they compete in a series of rounds of competition. To get to an IIT, the student has to take an IIT entrance exam, which is tough because a lot of students take that exam. So there are coaching classes for passing the IIT entrance exam. The more successful coaching classes have their own entrance exams to select whom they coach.
If Agarwals Coaching Classes is good at its job, then another round is added: Bagarwals Coaching Class which trains students to pass ACC’s entrance exam, so that the students can then take the IIT entrance exam, which if they pass, they get one of the coveted seats in an IIT. Then of course you have Cagarwals Coaching Classes that train you to pass BCC’s entrance exam that train you to pass ACC’s entrance exam that trains you to pass the IIT entrance exam.
(I believe that there are only three or four levels of coaching classes for IITs.)
It is an insanely idiotic system the leads to massive losses to society in a negative-sum game.
Competition Among Sellers
In the above we briefly considered the competition on the demand side of the equation. Now let’s consider the supply side. The government regulates entry into the education sector. Only a limited number of not-for-profit institutions are allowed to serve the education market. Potential entrants compete to enter the market. That is, they compete for the license, permit and quota that the government hands out. This basically entails bribing the officials. The fiercer the competition for the market, the higher the bribes. Having paid the bribes and obtained the necessary permits, the entrants face limited competition in the market. They profit-maximize by charging higher than normal prices and are thus able to recover the bribes they paid to the officials.
Competition for the market is a substitute for competition in the market. When there’s competition for the market, the money flows from the consumers (higher prices) through the suppliers (the firms that got in) to the controllers of the system (the politicians and bureaucrats.) This is why the education sector will never be reformed in India — there is too much to lose for the overlords who control the economy.
If all government-imposed barriers to entry into education were to be removed, there’d be no competition for the market; there will be no need to bribe the officials; that means there will be competition in the market; that means an increase in innovation in the market; that means quality will improve and quantity will increase, and prices will decrease. That means rents will disappear.
In the next bit, let’s explore the innovations one can expect from free entry. Let’s count the benefits that will accrue to Indians and India. But in all this, remember this is just an academic exercise. This change is as likely to happen as the Pope is likely to convert to Jainism.