Education is Not a Business

And by that, I do not mean the administration of an educational institution should not be conducted in a businesslike manner.  What I mean is that students should not be treated in the same fashion as a business treats a customer.  Recent events have focused on for-profit colleges such as ITT Technical Institute which has closed due to irregularities in both academic standards and financial aid.  However, a well funded ideological movement is in place at a state level to promote a profit orientated curriculum.  Nominally, this is free-market ideology but as we’ll see, in fact, this is detrimental to a well functioning market economy.

Free market models taught in undergrad micro incorporate some pretty abstract concepts.  These include competition to the point that neither an individual buyer or seller can impact the price of a product.  Also, both buyer and seller has perfect knowledge of the market which leads to a rational transaction process.  These conditions result in an optimal allocation of resources.  This model is akin to the Carnot engine in physics.  No engine can run more efficiently than a Carnot engine.  However, the Carnot engine is impossible to build as it requires zero friction and would violate the 2nd law of thermodynamics.  What the Carnot engine does is help us understand the inefficiencies of real engines and the same is true of basic free market models.  In the case of education, perfect knowledge, or lack thereof, is the key.

Asymmetric information in a competitive situation presents profit opportunity depending on who holds the upper hand.  It is why inside information, despite its illegality, is often sought in financial markets. It is why websites offer pricing information on products such as gasoline to arm consumers in the market.  In its more egregious forms, it is how some auto repair shops dupe customers in repairs they do not need or doctors charge for procedures a patient does not require.  In a non-business sense, it is why a sports team will attempt to steal signals from the opposition to get the advantage in a competitive contest.  Information asymmetry is not always unethical, but it is why businesses do not voluntarily disclose their hands when making a deal, and why businesses, if they are smart, require due diligence before closing a deal.

Education has information problems on two fronts.  One is temporal and the other is the lack of information the student has enrolling in an educational institution.  As Alfred Marshall noted in 1890, students are in the dark as to how valuable in monetary terms their education will be years down the road.  Conversely, future employers have no way of investing in education years before they even meet a student.  For Marshall, this meant the free-market would in general fund education below optimal levels and necessitated public funding to make up the gap.  The lack of information on the student side of the equation also means an educational institution operating on a for profit basis may seek to exploit this asymmetry for gain just as a business would.

In terms of social policy, the role of education is to reduce, not to exploit, information shortfalls a student possesses.

Kenneth Arrow, in his landmark paper on asymmetric information in the health care industry, notes that social structures are established to protect a patient against exploitation.  Arrow notes that the societal expectation of a physician’s behavior towards a patient is much different than that of a salesman towards a customer.  A doctor is expected to act with the patient’s welfare in mind.  Some of the expectations are by nature of the social contract such as the Hippocratic Oath, some are monetary in nature such as ACA regulations which stipulate that reimbursement for services are tied to patient health outcomes.  Given that students enroll in a school with the same kind of information disadvantage, it is sensible that educational institutions operate within a similar framework.

Recently, the Frank-Dodd Act has enacted regulations upon financial institutions to act on a customer’s behalf in situations when the institution has a higher degree of product awareness.  One, of many, of the factors leading to the mortgage bubble was a lack of understanding of the product customers were signing into.  One such example would be daily simple interest mortgages.  These mortgages accrue interest on a daily, rather than a monthly, basis as most standard mortgages do.  The end result is that homeowners who paid their mortgage bill after the due date but before the late fee grace period expired would still be left with thousands of dollars in unpaid principal balances when the loan matured, risking default.  The new regulations endeavor to ensure customers do not enter such agreements without an understanding of such details.

If financial institutions are being required to act on a customers behalf, why on Earth would we not expect educational institutions to do the same, if not even more so, on a student’s behalf?

And if the role of education is not to arm students with information, what is it for?  One suspects those who desire to enforce free market ideology on education wish to keep students in the dark so they are always potential marks for the next scam.  Part of the current free market movement is to provide economic instruction based on an uncritical study of the works of Ayn Rand, a fiction writer, into the classroom.  That’s like teaching astronomy based on an uncritical viewing of Star Wars films.  I happen to enjoy Star Wars, but I am not going up to a NASA engineer and suggest they use The Force to get to Mars.  The role of education is to prompt students to up their intellectual game, to challenge assumptions, to bump their preconceptions against empirical observations, the exact opposite of what ideologues of any stripe do.  There may be an Absolute Truth to the universe, but it’s not going to be held in the confines of a single mind.

As for those who believe only “career-orientated” curriculum should be offered, Alfred Marshall, the father of classical economics, had this to say:

For a truly liberal general education adapts the mind to use its best faculties in business and to use business itself as a means of increasing culture

After all, a market-based economy, like democracy, will operate most efficiently with a well informed citizenry.

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