On private universities

Along with roads and defense, education often comes as a necessary output of the State. Even Hayek claims that, since we need to be educated to value education, it has to be compulsory. I will not go into the details of the implication of State controlled education, nor will I discuss the question of compulsory education. I want to focus on a slightly different question, the cost of universities. There are various statist arguments around State funded universities, based on different angles

- Universities produce positive externalities, a country needs to be smart (although knowledgeable would be more appropriate) to develop, thus we need to finance education.
- Paying universities increases inequalities since rich people get to have education while poor people don't, thus creating an endless separation.
- (Combination of both) It's unfair that smart but poor students have to pay, providing them with free education is necessary.

All of the goals stated in these arguments can actually be fulfilled with greater efficiency by the free market. There are four ways by which university education is funded. Direct payment, grants, work, loans.

Direct payment is of course the easiest. The student's parents will save money in order to pay for the children education. Although this system makes them, it is doubtful it will convince leftist. They'll argue that the poors still can't afford it, come up with the paternalistic argument that parents don't know what's good for their children or argue that relying on ones parents is an unacceptable tyranny.

Grants work fine... basically you're given money by a generous entity. Arguing for grants is like arguing for private charity, it's doomed to fail - as an argument - because no one can actually know the amount that would be spent in charity, men are greedy, etc.

Working is another possibility, but it's not always easy to work and study at the same time. It puts students who cannot rely on direct payment at a disadvantage and there comes the same argument again.

Of all the payments method, the loan is probably the healthiest. It highlights education as an investment. Why should you pay for your education?
a) Because you want to be educated, for your own pleasure
b) To be more successful in your life, make more money

In the first case, education is pure consumption, at that point few people will argue for the need of "free" education. The second case sheds an interesting light on education as investment. The cost of studying becomes a market price signal to know if it's a good idea to study or not.

One problem remains, lending represents a low risk to the bank, since loans are aggregated and collateral can be required. However, it represents a huge risk to the student. If you don't plan on defaulting, you know you'll have to pay a fixed cash flow in the future, but depending on your future, the disutility could be very different. If your studies succeed and you make tons of money, repaying the loan is nothing, if you don't, you face a lot of nights eating spaghettis.

How do we remove this risk? By replacing debt with equity. A student could issue shares of his future work and sell them to ventures capitalists, or rather students capitalists planning to cash in on his future income. However, this is impractical and the much more logical solution is to integrate this task with the university itself.

A university could offer students the choice of paying the whole cost upfront or agree to a future cash flow indexed on this income. For example, you could give up 10% of your income for the next 10 years in exchange for free education. You face absolutely no risk in doing so. Now the university faces the risk that you will choose not to become a doctor but to start living a simple life raising goats. Venture capitalists protect from such thing by having a say in the direction the business is going, the university would only rely on the student's incentive to do something with his life. Maybe he can contractually agree to seek work or pay a fee etc.

What would be the consequences if universities adopted this mean of payment

- The best students would get lower rates since they are likely to make more money, thus the system becomes meritocratic
- Anyone could afford the studies, at no risk to him
- The rates would reflect market demand for specific job and thus create incentive to adapt the supply. If there are too much university educated persons, the universities forecasts that wages will go down and raise their rates. If the universities expects a higher demand for biologists, the rates for biologist fall and more students will opt for biology.

Having a plain upfront price doesn't reflect the market at all and leaves the forecast to the students, while private competing university might be better at it....

- The university has a very good incentive to provide excellent education. Instead of suffering from bad results indirectly, through reputation, they suffer direct financial damage if their education is not good enough.

This is how the free market could provide efficient, meritocratic, market driven universities.

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Arthur, Why do you suppose


Why do you suppose this doesn't already happen? Why don't universities take on the risk for loans? Sure, universities don't play up the image of profit-seeking entities, but looking at some of the endowments of large universities, you'd think otherwise.

Because my idea is not popular yet :)

I don't know really... it's like any arbitrage, one can spend time contemplating whether there is or not an inefficiency or one may arbitrage it... There are however a few reasons I could think of:

- There are already more university-educated students than the market need, because of public funding. This is even more pronounced in France where university education is free (with benefits).
- Government competes (although poorly) by providing tax-funded universities
- There are probably some heavy regulation in this business area. I am not even sure a contract indexed on one's income would be legal in the US.
- Tracking people's personal income is costly, although university could tap the IRS to do it.
- The system attracts the least talented students who are not very ambitious but want a degree (but an exam can be administrated to calibrate the rate)
- Poor people would benefit most from this system but they are expected to be less successful no matter the education

On the other hand, a University providing this could calibrate its rates to bring in an average price much higher than other universities while still attracting a lot of students "left out".

Who needs expensive schools?

I like your idea but I don't see why education needs cost hardly anything at all for most people as it is. I'm a political science student. I could easily watch lecturers and read books and journals online for free if the libraries were webbed and lecturers recorded. I'm sure arranging programs where a student could communicate with other students or the professor that recorded the original webbed lectures and have their papers graded by a teaching assistant over the internet could be done for cheap just like the course in Austrian Economics offered by the Mises Institute. If human contact and interaction is important it would be easy to set up study guilds in certain towns and specialized seminars like the ones offered every year by Cato, IHS, and others, for college students to take care of that valuable aspect of the school experience. Testing, interviews, and competitive internships could achieve most of the same signaling functions that schools today serve.

If it wasn't for intellectual property, government licensing, and subsidized education I'm sure the system would look much more like what I have just described. No need for big loans, big endowments, or selling shares of your youth.

Ironically, this is much

Ironically, this is much easier to do in a world with a big government and a big tax department that handles income tracking for you.

One important point that I think you missed is the difference between funding students (vouchers) and funding schools. Both are public funding, which is somewhat bad, but the former has private implementation and the latter public implementation, which is a big difference. Public funding & private implementation seems like it might be a reasonable compromise which would appeal to leftists while working reasonable well.

It is indeed much easier to

It is indeed much easier to do if you can piggyback the IRS service. Considering the cost of the IRS, it makes things a little scary for a thriving new business. There are a few workaround however:
- First of all the IRS is expensive but it's government managed. For example, according to Tabarrok, The law prohibits the IRS to use incentive to detect frauds. The IRS cannot legally pay bounty hunters or reward people to tell on their neighbors.... because it's to efficient. A private income verification agency could be much more lean than the IRS. It is also possible that such a service would already be provided on a free market for credit score purposes.
- The universities could rely on strong esprit de corps to limit fraud. A member caught cheating would be banished from the network.

I do make a difference between public funded private universities and completely public universities. However, the system I am describing is not used to counter the "only private universities are you mad" ( which vouchers do counter) but the "No taxes at all are you mad". When I pull this system out of my sleeve, I am way past seeking compromise.