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TECH TALK: Doing Education Right: Markets Work

May 8th, 2007 · No Comments

By Atanu Dey

Imagine for a bit what it would be like if education were provided by private sector firms. Can it be done? Would a socially optimal amount, variety, and quality of education be provided? Would there be market failures? If so, how can those market failures be corrected? Can one devise mechanisms to correct those failures?

The answer to whether the private sector can provide education is clearly yes because around the world for a very long time private firms have provided education very successfully. Both private sector for-profit and not-for-profit business models exist. Education, at some level of description, is a service like any of a very large variety of goods and services provided very efficiently by the market. The generalization that markets work holds quite meaningfully in the specific case of education broadly.

It may be worthwhile to briefly expand on what markets work means, say, in the context of a good such as computers (both hardware and software.) Basically, there is a demand for computers, or in other words, people are willing to buy them. Firms supply to the market to make a profit. They innovate to increase the variety of the goods to increase their revenues, and figure out ways to reduce their costs so that they have greater profits. Like the large number of profit-seeking firms on the supply side, on the demand side, a very large number of consumers also enter the market with the generalized desire to get the most bang for their buck. The competition that arises from the self-interested behavior of consumers and producers ruthlessly forces unfit computers (and therefore the firms that make them) out of the market and relentlessly drives up the quality and variety, while prices constantly fall.

It is a Schumpeterian world out there red in tooth and claw. But out of the dance of creative destruction, emerges things that no onehowever smart or wisecould have ever predicted. Let me stress that: no one knows what amazing stuff the market will deliver, who will make it, how it will be made, how much it will cost, how it will be improved upon and by whom. Nobody knows, and that includes government bureaucrats or politicians, regardless of how strenuously they claim to know. The inescapable fact is that every innovation, every object that you use, every service that you enjoy, arose overwhelmingly in the private sector, through the risk-taking, imaginative, innovative, entrepreneurial spirit of individuals driven by a basic desire to make a buck.

So is there no role for the government? Yes there is. First, it has to ensure what is called a level playing field, to set the rules, to resolve disputes, and maintain such institutions that are necessary for supporting the functioning of the market. Second, in case of market failures (which we will not go into here as this is not a text book on basic economics), to do what it can reasonably do without making the problem any worse. If the government cannot do better than the imperfect markets can, then it is better for us to live with the results of the market failures.

Here then is the basic recommendation that one is forced to make: let the private sector supply educational services in India. The government must not be in the business of providing education at any level. Let the market have a go at it. The government of India is not capable of providing education. It has demonstrated its incapacity over decades, and there is no reason to believe that it is even theoretically up to the job. Education is too critically important for the future of India for it to be left to the government. In todays world, more than ever, education is a dynamic service. It requires innovation, creativity, entrepreneurial talent, risk-taking ability and human resourcesall of which are sorely missing in the government. It is government control of the sector which has had the unfortunate consequence of Indian education to resemble what Keynes characterization of education as “the inculcation of the incomprehensible into the indifferent by the incompetent.”

Lets imagine what would happen if private sector firms were allowed to provide education, next.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Scarcity


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