1st Award in Vernon Smith Prize 2024

The Education Market: Thought On The Benefits Of Competition

Marcos Lüdy

ABSTRACT

In this essay, a comprehensive approach to the educational phenomenon will be undertaken, starting with a praxeological analysis to address general questions about the feasibility of incorporating market principles and free competition into the education sector. Accordingly, an argument will be developed in favor of educational freedom, highlighting its essential and comparative benefits by contrasting the advantages of a free educational system with the detriments caused by the educational model promoted by modern welfare states, characterized by its mandatory nature and significant restrictions that hinders the achievement of the benevolent aims that statists claim to genuinely pursue.

Introduction

As we know, there is a wide variety of approaches to the concept of education. From Hegel (1977 [1807]), who conceived it as an intellectual activity through which the uneducated individual gains access to the objective conditions of the studied subject matter via reflective effort, going through The Left Hegelianism, serving as an epistemic platform for the so called scientific socialism, defining education as a mechanism of indoctrination aimed at training the oppressed and thereby perpetuating the dominance relationship in favor of the oppressor class (Marx & Engels, 1986), to the individualist approach of pro-market libertarianism, conceiving education as
a set of processes through which the individual, using their mental faculties, acquires knowledge and forms opinions (Rothbard, 1999 [1971]).

Such philosophical considerations are highly useful for reflective purposes, but if we aim to explain education in adherence to objective facts —while keeping in mind the limitations identified by Humboldt (1969 [1972])— it is necessary to analyze it through its most basic or elemental practical aspects. Once these foundational characteristics are identified, we can proceed to reflect on the ought or ought not of education.

1. On The Concept Of Eduction

Education is an activity through which an educator —whether acting independently or on behalf of an educational institution— employs a specific methodology to transmit concepts and ideas to students, facilitating their access to such knowledge compared to the considerable unilateral effort required for self-directed learning without the guidance of qualified professionals in a particular field of study. This transmission activity, being subject to monetary valuation, can be considered, in economic terms, as a
service.

Establishing that education is indeed a service, it is essential to draw a clear distinction between this service and what is often mistakenly included in the concept of education as an integral element: learning.

Learning is a potential consequence of education, but it is not a necessary outcome. Access to education does not absolutely guarantee the accurate conceptual understanding of what the educator imparts, as the educator’s role is to present the concepts. For learning to occur, the cognitive effort of the student is required, and here the student’s intellectual abilities play a crucial role, as they are assessed to grade the level of learning achieved.

However, intellectual abilities and limitations are not the sole factors to consider when analyzing learning. As previously established, the educator employs a specific methodology and concepts to carry out their work. Just as there is a wide variability in pedagogical methods, schools of thought, and doctrinal approaches, there is also considerable variability in the theoretical validity or accuracy of the concepts imparted by the educator.

The educator may err in choosing the method or the content, just as the student may fail in their study approach or in accurately grasping the 17th International Vernon Smith Prize European Center of Austrian Economics Foundation concepts. The error can lie with either party, but this does not exclude the possibility of bilateral errors. Nevertheless, methodological errors in teaching do not necessarily result in learning errors as a direct and inevitable consequence. The educator may teach theories that are erroneous, futile, or outdated, but during examinations, the scientific validity or factual accuracy of these contents is not assessed. Instead, the purpose of the examination is to evaluate the student’s understanding of what the educator presented.

In this regard, with a clear distinction established between education and learning, it is necessary to assert that while the former is classified as a service, the latter refers to a good: knowledge. Here, we arrive at one of the primary issues concerning freedom of teaching and free competition within the educational sphere. Even when students achieve excellent grades in exams, such scores do not guarantee that the knowledge acquired is free from epistemological obstacles or that it is valid, correct, and/or useful. Therefore, it becomes imperative to direct the analysis toward the creation of knowledge in educational institutions, as well as the origins, incentives, and effects of such activities.

2. Eduction Must Be Public Or Private?

Machlup (1980; 1982) quite rightly explained that knowledge production is an economic activity and carries significant implications in the social sphere beyond the individual. However, this observation raises a problematic issue: a good or service of common interest is often associated with the public domain, that is, with state activity. Indeed, the subject of our study in this case is one of the most prominent examples referenced when discussing the concept of public goods.

We find compelling arguments in favor of public goods in the works of Ostrom (2005), who defined them as those goods that “yield non subtractive benefits that can be enjoyed jointly by many people who are hard to exclude from obtaining these benefits” (p. 23), and in Samuelson (1959), who identified public goods as “goods the inherent quality of which requires public production” (p. 44). Combining both definitions, we can establish that so-called public goods are state-produced goods characterized by non-excludability and/or jointness in consumption. Addressing the issue from the perspective of benefits, it is clear that access to education represents a benefit for its recipient. However, this analysis is overly simplistic and deliberately omits a vital element: financing.

Being government-produced, these types of goods are funded publicly, meaning the necessary expenditures for their provision are covered through taxation, external debt, or monetary emission. Thus, when discussing public goods, we must not only speak of benefits but also of costs. State-funded and/or state-provided education could contribute to the justification of exploitation —if financed through public treasury— or inflation, if funded via monetary emission. Any state policy that seeks to arbitrarily benefit one party will necessarily create a detriment to another.

Beyond this, a widely accepted argument for state production of so-called public goods is the alleged inability of the private sector to produce such goods. If entrepreneurship is deemed incapable of this task, from a statist perspective, it would appear logical for the state to take over (Holcombe, 1997), but this notion ignores the fact that “historical evidence shows us that all of the so-called public goods that states now provide have at some time in the past actually been provided by private entrepreneurs or even today are so” (Hoppe, 1989, p. 29).

Specifically referring to the Ostromian notion, goods or services of general interest are not inherently public, as their public or private nature is determined by their production origin. The interest of an individual or collective in something does not automatically make them its owner. This perspective can have highly detrimental consequences, as it serves as a foundation for redistribution mechanisms and the expansion of the state’s monopolistic activity.

3. Educational System & The Role Of The State

The conception of education as a public good, within the content of the modern welfare state —which is notably inclined to adopt a guarantor role—leads to the notion of a right to education.

A right to education, from this perspective, imposes upon the state the obligation to guarantee the effective provision of educational services, attributing characteristics of obligatoriness and universality to it as a public service. However, two objections can be raised here: first, that such a thing “could never be a right, as its fulfillment would necessarily violate the rights of others by reducing their property to cover the costs of education provided to others” (Benegas Lynch & Krause, 1994, p. 51); and second, that state-enforced obligatoriness, surveillance, and potentially exclusive provision of education in a non-competitive environment is contrary to the principle of freedom in
education, keeping in mind that, as Krause (2017) explained, freedom in education can be subdivided into freedom of content, freedom of methodology, and freedom of choice regarding service providers.

As advocated of freedom in all areas, we must avoid repeating the mistake made by Hayek (1978 [1960]), who argued in favor of compulsory education on the grounds of “certain common standards of values”, asserting that a “peaceful common existence would be impossible without any such standards” (p. 377).

How are such standards determined? Who determines them? The answers are inevitably arbitrary because these questions arise from arbitrary premises. While it is clear that teaching respect for life, liberty and property of others is essential and beyond dispute, entrusting the responsibility —or the power— of teaching these fundamental concepts to the state is highly dangerous. This task could instead be fulfilled by parents, legal guardians, or other responsible individuals without strictly requiring state funding, even in cases of financial hardship, as Becker (1991 [1981]) notably proposed to solve what he defined as market constraints.

At this point, if we combine basic or elementary education provided by the state with other levels of education also under state provision, the dangers of indoctrination become inescapable. Allowing the state to indoctrinate individuals since childhood is a perfect gift to statists, who have no desire for autonomous individuals with critical thinking skills. This concern validates the powerful warning made by Rothbard (1999 [1971]): “the record of the development of compulsory education is a record of State usurpation of parental control over children on behalf of its own” (p. 19).

We must always bear in mind that any expansion of the state, particularly in the realm of education, is a step closer to the growth of state power, a process that could culminate in totalitarianism, remembering that, as Rothbard (op. cit.) remarked, “at the base of totalitarianism and compulsory education is the idea that children belong to the State rather than to their parents” (p. 34).

Approaching the issue from the perspective of financial burdens previously mentioned, we encounter the classic problem of free riders. This problem manifests both in state-financed and state-provided education, as well as in state-funded but privately managed education (Smith, 2003). In both cases, the origin of public funding for education is generally expropriation, that is, the coercive-coactive confiscation of the fruits of workers’ labor. Thus, it becomes evident, once again, that state-funded education relies on redistribution mechanisms, which in turn require a network of extractive institutions that harm some individuals to benefit others, thereby giving rise
to the free rider problem.

The research works of Tolley (1996a; 1996b) demonstrates that state-run educational systems often fail due to a lack of incentives to provide satisfactory educational services, whereas free and self-managed systems show genuine concern for students’ development, even when pursuing economic profit.

Therefore, considering the lack of incentives for the provision of an efficient and authentic education service (if it is not used as a tool for indoctrination), alongside the parasitic nature of public funding in education systems and the existence of successful examples of self-managed educational models without state intervention, it is crucial to highlight the benefits of a purely private education system.

4. Development, Cooperation & Coordination As Outcomes Of Competition

Being aware of the numerous negative aspects of a state-intervened, state-funded, and/or state-provided educational model, it is logical to explore other options. Among these, the one offering the most permission outlook for the development of education is the free competition. In this precise regard. Kirzner (2000 [1997]) explains that a healthy and fruitful rivalry among competitors, leading to the development of more efficient private alternatives, is a market process that can only be achieved “by an institutional framework which permits unimpeded entrepreneurial entry into both new and old markets” (p. 31).

While free entrepreneurship and competition can lead to better alternatives, it is crucial to examine more closely the relationship between supply and demand. Kirzner (1973) notes that every freely accepted exchange between the parties involved leads to the improvement of each party’s current condition. When the regulatory and institutional framework fosters exchange without extractive or authoritarian interventions, the conditions for development are given. Anyways, since human beings are imperfect, so too are their creations. In the context of the education market, exchanges may fail to meet expectations, as competition, knowledge, and foresight, being
products of human activity, are inherently subject to possibilities of error (op. cit., pp. 215-216).

Here lies the critical importance of informed freedom. The dissemination of accurate and useful information is only possible in an environment where variables are not arbitrarily altered. Unfortunately, such an environment is absent in educational systems that restrict freedoms related to content, methodologies, and instruction.

An increase in opportunities to obtain benefits without harming others would enhance incentives for cooperation. This cooperation could emerge not only among educational institutions and associated educators, the supply side, but also among students striving for high grades to secure scholarships or academic distinctions, the demand side. Effort would be rewarded, solving the problem of declining academic performance and creating incentives for pursuing merit rather than fostering a free rider behavior. This shift would result in what can be described as an educational meritocracy.

In an environment characterized by free competition, free exchange, and educational meritocracy, the availability of reliable information would properly guide decision-making. Specifically in the education market, this would address the challenges posed by ignorance and irrationality as causes of suboptimal decisions —issues explored by Musgrave (1957) in his argument about merit goods.

Educational alternatives with poor results or unfavorable price-to-quality ratios would be discarded, and this rejection would act as a form of preference signaling. This process would serve to prevent other competitors from making the same mistakes, thereby generating a coordinating effect. As Machlup (1984) describes it, this coordination “acts to force individuals to revise their expectations and correct their original plans, and thereby to coordinate the separate actions of different people” (p. 187).

CONCLUSIONS

➢ State intervention in the field of education —whether in the form of entry barriers, control over content and methodologies, or public funding—leads to decision-making errors, resulting in unfavorable outcomes for individuals in education matters.

➢ The development of more efficient and beneficial educational alternatives can only emerge from free competition in the education market.

Marcos Lüdy is Swiss-Argentine scholar pursuing a Master’s Degree in Economics and a Postgrad. Degree in Institutional Economics & Pol. Sci. at the University of CEMA.

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