This Policy Alone – Part 6

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.

{Previously in this series: Parts One, Two, Three, Four and Five. Next in the series: Part 7.}

Related: IITs are not what they’re cracked up to be. (I am an alumnus of IIT Kanpur.) Rethinking Entrance Exams

Author: Atanu Dey


20 thoughts on “This Policy Alone – Part 6”

  1. Why are there government funded primary/middle/secondary schools still in existence in the US? Where is the high-quality reasonable-budget K-12 education market place in the US? Why is it missing? Or am I misinformed? I will love to hear success stories about voucher-funded private schools in the US.


    1. The US education system is better than India’s but it is not perfect. The US university system is the best in the world, and with good reason that I will not go into here. The US K-12 system sucks big time. That’s because of the rent-seeking that goes on but is not of the same kind as in India. In the US, this comes through teachers’ unions and funding of political candidates and lobbying etc.

      The privately funded K-12 schools are quite good. But the poor cannot afford that.


      1. Are the privately funded K-12 schools in the US not profit-seeking-businesses? If profit-making is allowed in K-12 and entry-barriers are low, markets would have ensured a high-quality-reasonably-priced-K12 system. Why has that not happened in the US? Is the US government as asinine as their Indian counterpart in matters of K-12 education?


        1. Are the privately funded K-12 schools in the US not profit-seeking-businesses?

          AFAIK for profit schools are allowed in USA. They exist and many of them are doing pretty good.

          If profit-making is allowed in K-12 and entry-barriers are low, markets would have ensured a high-quality-reasonably-priced-K12 system.

          It has indeed happened in USA. Of course when you have a public schooling system to compete with the barrier is non-zero and parents care about the marginal value of every $ they spend. For example for $0 per month you get X quality education in a public school. Will you be willing to pay $1000 per month to get 2X the quality of education? This is partly the reason why private schools have not completely decimated the public education policy.

          One the policy people are pushing for is school vouchers. Instead of funding the school you fund the children and let them go to whatever school they wish to. This will completely end the corrupt public edu system in USA. Hence to quote one of the teachers union president in NY “it will happen over my dead body”.

          Is the US government as asinine as their Indian counterpart in matters of K-12 education?

          Asinine Yes. As much as Indian government ? No ways. Indian education policy is more comparable to North Korea.

          Liked by 1 person

  2. Yes, I fully agree with you.

    I think the experience of telecom space in India in last few years ( competition be between Reliance Jio, Airtel, Idea Vodaphone – all commercial and for profit) could flood India with cheap voice and data what BSNL could not do for decades with lots of government support.

    I think what is true for telecom is true for each and every other vertical including education and higher education


  3. Atanu,

    I agree with your points on what ails the Indian education system.
    However, I also see that private higher education in the US is not cheap and in non stem courses people are in debt for a long time after they graduate.

    Why do you think this is happening? If market forces everyone to stem, is that a good thing?
    Don’t liberal arts etc need attention?

    I might be conflating a few different issues, but would like to know your perspective on these.


    1. There are a lot of reasons for why college has become so expensive in the US. The most important of those is the easy availability of student loans that are guaranteed by the federal government. That creates moral hazard problems. The colleges don’t have an incentive to cut costs because they can raise fees, and also don’t have an incentive to provide a real education because they don’t have to pay if the student is incapable of repaying the loans. The colleges don’t have skin in the game.

      “Don’t liberal arts etc need attention?” The question does not specify who the entity is that is supposed to pay attention. Society? The student? Some bureaucrat? The family of the student?

      Liked by 1 person

  4. I realized that there is a distinction between competition for the market and in the market quite early in my study of economics. I am sure that others must have drawn that distinction but I can’t say for sure that I didn’t independently arrive at that.

    Liked by 1 person

  5. The premise of this post is questionable. I say its way off. US’s prosperity is only partially attributable to education system (mainly higher education). Main reason for its prosperity are – Law and order, enforcement of contracts, access to credit, ease of doing business, global trade. Or in short trade and commerce – “Dhandho”(in gujarati)

    I absolutely agree with your point on having competition between education providers.

    In India unfortunately people want “education” to get job security. Almost couple of centuries of poverty has made society extremely risk averse and thats where “education” comes in – providing security.
    Very few want to get education for the sake of education. “Education” in India is a means to lord over others. Thats why in parts of India people prepare for 3 years for the civil services exam.
    What an utter waste of human capital !!!!
    The society in general looks down upon work done by hands, any trades are looked down upon – not considered “educated”.

    If tomorrow Bhagwan Vishnu says “Tathastu” and education becomes liberalized, needle on prosperity will barely move. Because enforcement of contracts, law and order and general level of trade – the only way to get prosperous – has to be done by the society. Will not happen by more people having access to IAS coaching. Or having unlimited seats in IITs.


  6. In India unfortunately people want “education” to get job security.

    I am not sure what is unfortunate about this. People should be free to get whatever education they want for whatever reason they want. Job security sounds like a perfectly reasonable reason to get educated and a vast majority of Indians will be better off if they have a good education that gives them job security. Not sure why anyone should frown on that.

    Very few want to get education for the sake of education. “Education” in India is a means to lord over others. Thats why in parts of India people prepare for 3 years for the civil services exam.

    That is an obvious outcome of government control of education. Imagine a town where government decides the menu of your three meals, ingredients, cost at which you buy them and there is only one predetermined menu item you can cook. Everyone in this town will be eating for the sake of eating. Eventually they would put huge amount of their time figuring out how to either leave the town or be part of the cabal that decides the menu so they can become rent seekers.

    If tomorrow Bhagwan Vishnu says “Tathastu” and education becomes liberalized, needle on prosperity will barely move.

    To quote Tom Sowell, “society creates wealth at fastest possible rate when people who know how to create wealth are free to do so.” A freerer education system will create more people who know how to create wealth. Once there are many people who know how to create wealth they will also demand freedom to practice their trade without interference.


  7. A freerer education system will create more people who know how to create wealth.

    People don’t need “education” to create wealth. People have been creating wealth since time immemorial. Trading is a natural human need. “Educated” (don’t know what that really means) people dont need to teach it to anyone. Its a natural thing. Just like owning property a natural tendency. No need to teach that.
    The true function of a government is the protection of natural rights such as these.


    1. People have been creating wealth since time immemorial

      People have also been using medicines since time immemorial but that does not mean people don’t need to get education to improve health, become doctors and so on. Also what you are arguing is that since people have been practicing medicine for last 5000 years, having more medical colleges won’t really help health of the society.

      Education is a trade, trade of knowledge. A non-free education sector makes it illegal to engage in the trade of knowledge. A free market education sector can hence produce more trades of knowledge and hence more wealth in the education sector itself. More knowledge trading will eventually lead to more wealth in all other sectors too.

      If you can’t see the link between education and wealth I can not really argue much here. Very likely your definition of education is not same as mine, but then you have admitted you don’t really know what is meant by education.


      1. Looks like you may need to “educate” yourself on what freedom is. My whole point is that if you make education free but entire other economy is under the boot of state control, it does not help one bit. Ukraine has highly educated population, but per capita GDP of only $3000, but a country with similar demo and history, Poland has per capita GDP of $15000 – 5 times. Thats the power of freer economy
        You keep talking abstract theories – I am pointing to real example.
        (BTW, I am not against education obviously. Just not convinced that it magically frees up economy)
        Oh well …. Someone smart once said “freedom is the only way to achieve lasting prosperity”


        1. You asking me to get educated is equivalent of Pope asking someone of F*** off.

          You can certainly benefit from some very basic comprehension skills.

          Atanu’s claim about a freer education system was :

          it will bring about a transformation that will enable the Indian economy to reach its potential by liberating the human capital that is the limiting factor now.

          As you can see that claim has absolutely nothing about GDP values. It has absolutely nothing about how India will do compared to other countries. It also does not claim miraculously India will be prosperous.

          The specific claim Atanu made (which I fully agree with) is:
          – it will enable Indian economy to liberate its human capital and reach its potential.
          – India is currently limited by human capital.

          A a thought experiment you can read that again and ask yourself what is that you have missed here.

          I would have done it but then I have a feeling I will be wasting my time.


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