Noah Smith graciously responded to my post regarding education, pointing out a very interesting fact that I had overlooked:

Niklas Blanchard at Modeled Behavior basically agrees. But there is one point of mine that I think he doesn’t quite get. He asks: “But why would there be a supply shortage at such high tuition rates?” His answer is that universities require such huge initial investments, and take so long to pay off, that building them is not feasible for the private sector. I think that although this is true, the main reason for the supply shortage is that schools don’t “pay off” in the traditional sense, ever. Colleges just seem to only work well as nonprofits. And the only people who are willing to invest huge amounts of money in nonprofits are the government and rich private individuals (e.g. Leland Stanford). We have a supply shortage because governments make the decision whether or not to build new public-school campuses (and recently they have not done so), while colleges themselves can only respond to skyrocketing demand by raising price.

I agree, and this adds to the discussion…but this fact also raises even further questions.

First, what makes universities “work” as nonprofits and not for-profits? I suspect that there is a tiny bit of bias in the datasets between state universities and for-profit colleges as far as outcome, but still, for-profit institutions have a very large dropout rate*, and generally don’t have the prestige of even a poor state-sponsored institution. For example, I live in Council Bluffs, IA, where graduating from Iowa Western Community College is something of a badge of honor, and graduating from ITT Tech is sort of a joke. Still, seems like a value (aka signalling) judgement.

Bottom line: if the fact of reality is that you need a piece of paper marked by calligraphy (as network theory would suggest), then institutional capital plays a large role in differentiation.

Second: We are more wealthy now than we have ever been as human species. However, in the 18th/19th centuries the mark of a successful philanthropist was to start a university (i.e. Leland Stanford). Where are the philanthropists today? Today, the mark of a successful philanthropist is starting a fund for children in Africa. I don’t begrudge this development (although I do begrudge the deployment of much philanthropy), but it bears investigation. The closest analogy I can think of is live-performed classical music, which survives almost solely on government subsidy. There is an interesting story here. The marginal productivity of performing Beethoven’s 9th is not changed since the 19th century. In fact, more people know it more perfectly today than ever before in history. We can reproduce it in multiple mediums, at higher quality than any single person watching Beethoven conduct his symphony ever dreamed. Yet, many countries see it fit to heavily subsidize the live performance of the opera.

I doubt a for-profit company would structure themselves around playing the Classicals. But back to the issue at hand. The dichotomy between the highly wealthy and the common man was astronomically higher in previous times than it is today. One would say that it is like the wealthy today vs. the poor in Africa. And that would explain the trends in philanthropy. People in rich countries have risen to a level of affluence such that class is not about income in America, it is more about various measures of signalling in a large echo chamber. I would point out that the initiative for universal education has made the world this way, but that seems redundant. The point is that the “theory of second best” would say is that since increasing levels of wealth, and previous government distortions provided us with a landscape where it is incredibly hard to build institutional capital for a new university, then the government should step in an provide for the deficit.

My reading: There was a market for education, and then the market was destroyed by productivity, and subsequently subsidized.

I’d be eager to hear your take (and what Noah has to say)!

P.S. If you buy this analysis, it points to either a structural deficiency in the way humans acquire skills, or a structural deficiency in the way certain groups perceive humans acquire skills. I tend to lean toward the latter.

*Note, that many of these comparisons are not “apples-to-apples”. I work for a university that caters to the armed services, adults, minorities, and foreign exchange students. One cannot expect that we would have the graduation rates of a typical four year institution.