TheMarketForIdeas

“The times they are a-changin’” and, along with them, the people’s needs and desires are changing as well. This is reflected in many ways throughout the economy, but perhaps the most interesting example we can ponder are the transformations that have occurred in labour markets. For instance, the place of the “pinsetter” of yesterday has been taken over by robots. Also, the fresh milk that used to be delivered upon our doorstep by the milkman is now part of history, as the supermarkets situated just around the corner have superseded him. However, these mutations in the labour market are not new. As time passes, new technologies inevitably replace some jobs while creating others. Coupling these transformations with the expansion of the division of labour, we can observe that, for most of the history of the modern period, jobs become better paid, and the general standard of living rises. At least this is what happened until now, but things seem to be changing. 

The “Information era” 

To see in which way our current era is different from the previous one, we must consider a few facts: as we look at the USA and compare the number of hours worked in 1998 against 2013, we see no difference. In both periods, a total of 194 billion hours of work were registered, although productivity sharply increased by 42%. But what does this mean? It means that this phenomenal rise is not due to new jobs, or more jobs; this increase is the result of the massive capital investment that was undertaken in the past decades. Robots, software, and algorithms are taking over more jobs that they create. The extent of the problem can better be grasped by looking at the company Blockbuster – in 2004, it was making 6 billion dollars in turnover and employing 84.000 people. As the “holy internet” entered our lives, Blockbuster was shortly overtaken by Netflix, which, in 2018, with a headcount of only 5.400, made 15.8 billion dollars.

However, talk of the job crisis is as old as the Industrial Revolution. Every new technology frightens those who see their jobs threatened. In almost every domain, some people are constantly worried that they will have to look for another job and spend time and resources on learning new skills. 

The State enters the game 

In this frightening context of fewer jobs, with a global population that will rapidly increase for the foreseeable future, the state has the premise to justify stepping into the fray. Every day, we hear discussions about how education is under-funded, and the need to pump more money in education is already a political cliché.

The idea that education is a public good is not new. In almost all the countries in the world, the education system is state owned or at least very well “insulated”. But regarding the definition of a public good, we can see that education fails both of them: first, its consumption must be non-rivalrous, and, secondly, non-excludable. The non-rivalry criterion can be deemed impossible without further academic nitpicking – if a child sits in a classroom, he will be the only one occupying that seat, thus denying others the possibility of consuming education services at the same time. And, of course, as Western debates prove, schools are not created equal. On the other hand, the non-excludable criterion is not met either. As education is a service, its providers can, at any moment, exclude those who are not compliant with the admission criteria.

It is useless to debate whether there is a strong bond between education and economic growth. We can easily see that our economic advancement is influenced by the level of education of the workforce. This created the premise for the state not just to control the educational system, but to move education beyond a right and into compulsion. This brings into discussion the morality of compulsory education. Murray Rothbard provided, in his Education: Free & Compulsory, a very good example that allows us to summarize the main problem of free and compulsory education. The premise is that the government decides to use money that it collected through taxes to print a national magazine, and enacts a law that compels every citizen to read that magazine. The state even goes further and starts to restrict other magazines by regulating them out of the market. After making all of these arbitrary decisions, the government assures its constituents that this is the correct approach and that it is its role to protect this strategic market for the sake of our economy.

Many would see this example as an abuse of our freedom. If this scenario were to occur, many people would be scandalized and label the policy as dictatorial. However, this is exactly what happens when it comes to education. 

What is education about? 

Now is the time to get into economics. To see the real value of education, we have to measure two theories against each other – the human capital theory and the signalling theory –, and then see which of them better applies to our system of education.

The human capital theory is best explained by its initial proponent, Gary Becker. In Human Capital (1975), Becker defines this concept as the education, training and the health that a person invests in. Taking into consideration this definition, we can easily see that education is the basic way of building your human capital because it determines the level of training and health at the same time.

On the other hand, Michael Spencer presents the “signalling theory” as the way in which the labour market resolves the problem that stems from information asymmetry. When an employer and an employee sit at the same table, even with good will disclosures, there is still a gap of information between them, in both quantitative and qualitative terms. The employer does not know exactly what the capabilities of the aspiring employee are, and this problem is resolved by the signalling with the help, for example, of a certificate that attests the fact that the employee graduated with a university degree. The employer can be reasonably certain that the prospective employee has certain knowledge, skills and even the qualities necessary to finish his studies program.

But, at the same time, Spencer himself recognized that signalling is a costly way of addressing the asymmetric information problems, in terms of time and resources, while it does not necessarily add value to the employee or the employer. 

“One way or another...” 

Assuming that the human capital theory is true, this means that going to school or university is about learning, and about developing the professional self. We will take into consideration that the future value of an individual in the workforce is in direct proportion to his pay – the more educated he is, the better income he will earn. However, the student does not get half of the paycheck after sitting through half of the courses necessary for obtaining a university degree. The real average increase in future pay is potentially locked in at the moment when the student actually graduates and gets his diploma. Until then, the impact of education on future income is mostly negligible. This effect is called the “sheepskin effect” (in the past, studies certificates were printed on velum from animal hides). So, we can see that, in practice, education serves more for signalling than as investment in human capital.

In order to see more clearly this effect, we can use an example: first, let us imagine that in front of an employer there are two employees: both of them have the same education level, attended the same university, and we will further assume that they got the same grades on exams of equivalent difficulty. But, due to a problem, one of them does not have a diploma which attests graduation. Even if the employer could be sure that both participants had the same education and capabilities, he would choose the one who is in possession of the certificate.

We can further take into consideration the fact that, in a lot of cases, those with studies in fields with few opportunities (the arts), who are working in fields outside their specialization or which do not require a degree, are paid better. This means, in the end, that the human capital that is supposed to be accrued during education is not the reason for the higher pay, but the signaling of higher productivity than that of a person without the degree. 

Monopoly 

Some economists believe that a monopoly, in an authentic meaning of its word, cannot and will not exist. If a company takes up this position and begins extracting monopolistic rents, it will not be too long until another company will put an end to the monopoly through either innovation or development of substitutable goods or services. At least this is supposed to happen in a free market. However, when the government is responsible for the majority of the educational institutions, adjusting and controlling this area, it fulfils all of the characteristics of an established and long-living monopoly.

A monopolistic company is thought to eventually loosen up because it no longer has competition, and it will tend to offer its products in a very expensive and inefficient way. As the government is the monopolist, the biggest force in any market, the buyer’s supremacy will fade away. Many of us consider that we can choose the private or tutoring system instead, but we have to keep in mind that the government, as a monopolistic power, is “preserving” the education through bureaucracy and laws that are applied to any private entity that wishes to take part in the education market. Another overlooked monopoly, especially in Europe, is that on final examinations such as Baccalaureates which are gateways to educated status and further advancement.

Going even further, if we happen to see the government as the only investor into human capital because it decides how to teach and what can be taught, we can see that an issue akin to that of socialism emerges: the economic calculation problem. This dilemma is established in the socialistic system as follows: the government possesses all of the resources of a state, but it cannot decide how to invest them as efficiently as a free market system because it lacks the information aggregation capability of free markets. Furthermore, it cannot put a price on any of those resources it allocates.

In the socialist economy, the economic calculation generated the idea of “economic planning” – the government is the only one setting the context of the labour market, it makes most of the investments concerning this field, and has a decisive influence over the future workforce through the education system. In the end, the government is the one who decides what is produced and what must be consumed by the companies in terms of human resources. The companies have no other alternatives other than to accept this workforce, maybe start their own training and learning programs and to look after and assist the growth and development of the fresh employee (and we already see this happening).

If we want to observe how the calculation problem exposes itself in the education system, at least the publicly-managed one, we can ask the following: How much should we invest in education? The ordinary answer from any politician will be: “More!”. OK, but “How much?” after all? Which criteria can we rely on when we make this investment?

Ludwig von Mises, in Bureaucracy (1944), when talking about profit-management against bureaucrat-management, describes the problem through the next phrase: “Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The producers do not produce for their own consumption but for the market. They are intent on selling their products” and we can see that this would hold true for education, as well. 

The free market miracle 

The education and the labour market have a significant bond. James Tooley travelled around the world and saw how “the poorest people educate themselves”, and how the miracles of a “liberalized” education market arise even in the poorest places on earth. This can be the basis for a strategy to address the challenges that mainstream thinking attributes to the labour market.

We will bring India into the discussion from two points of view: first of all, this country aspires to the role of Great Power, but has a large number of people and a consequent great challenge when it comes to their education. Secondly, the development of education in India will have a decisive impact on its evolution in the future that could suggest “the other path”, a distinct path compared to other countries.

India has both private and public education – a lack of performance in the public and free schools has driven parents to send their children to private schools. Both the large population and the differences in quality between the state and the private sector have caused the educational services market to increase. The wave of migration from public to private took on such a proportion that the Indian government suspended the offer of licenses for private schools because the public schools had hardly any students left. This attempt to maintain the monopoly failed and created the rudiments of the black education market.

Talking about the competitiveness of those schools, we will borrow James Tooley’s examples: he and his team examined and tested 35,000 students attending all three education systems and the examples speak for themselves.

The quality of service is the one that recommends the private schools and makes the parents choose to bear the financial burden, instead of sending them to public schools. Also, if we were to exemplify the power of the free market to adapt to any economic environment, the tuition fee starts from $0.60 per month whereas the average salary of a parent is $15.00.

Looking back at the discussion about human capital, we can see, in this example, that the signalling effect is not applicable at the very least in the case of private unregistered school attendees. Attending those types of schools indicates the fact that this is a true investment into the human capital of tomorrow’s workforce, not just a waste of time and resources for a piece of paper. The signalling is impossible so long as the vast majority will not have recognized certification. The labour market and the employers will have to manage this in the future. 

Conclusion 

In the context of the Information Age, in which the division of labour is increasingly specialized, and there appears to be a shortage of jobs, is the government in the right place to own and control the education system in order to produce the workforce of tomorrow? Or shall we look at those who seem to understand that this investment in the human capital must be made through a free education market? Keeping in mind that the private educational institutions are profit-driven to offer high-quality services as well as to train the future workforce that the companies demand.

We believe that, at this moment in time, when any decision on education systems will have a huge impact in the coming decades, value judgement must be made to understand the future demand, because education is a long-term investment. A journey of a thousand miles begins with a single step now, to maintain and sustain our economic growth in the future. 

References 

Becker, Gary. 1994. Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education. University of Chicago Press.

Caplan, Bryan. 2018. The Case against Education: Why the Education System Is a Waste of Time and Money. Princeton University Press.

Ford, Martin. 2016. The Rise of the Robots: Technology and the Threat of a Jobless Future. Basic Books.

Krugman, Paul. 1994. Competitiveness: A Dangerous Obsession. Foreign Affairs, March/April.

Mises, Ludwig von. 1969. Bureaucracy. Yale University Press.

Rothbard, Murray. 1998. The Ethics of Liberty, New York University Press.

Rothbard, Murray. 1999. Education Free & Compulsory, CreateSpace Independent Publishing Platform.

Tooley, James. 2013. The Beautiful Tree: A Personal Journey into How the World’s Poorest People are Educating Themselves, Cato Institute.