Atanu Dey On India's Development

The Indian Education System — Part 7

Markets Work

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 one—however smart or wise—could 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 today’s world, more than ever, education is a dynamic service. It requires innovation, creativity, entrepreneurial talent, risk-taking ability and human resources—all 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 Keynes’ characterization of education as “the inculcation of the incomprehensible into the indifferent by the incompetent.”

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

[Previous post: Part 6. Next post: Part 8.]

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  • http://castaway88.blogspot.com Abhinav

    “Education is too critically important for the future of India for it to be left to the government.”

    I think one day an economist woke up and said “electricity is too critically important for the future of India for it to be left to the government” and bingo!The contract was handed to private sectors?What happened next?Well it’s certainly not a service because I doubt the power cut issue has been solved in cities like Delhi.In fact it has become even worse,but no one wants to point a finger just because it’s the private industry.

    ” 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.”

    Oh really?It’s failure either ways but it’s a big deal if the government does it however you do not have any problem if the ‘imperfect markets’ fail along the way.Just curious,how is it better for us to live with result of the market failure?And in that sense,isn’t the government also an imperfect market?

    Will a private company ever make education free for all?Obviously we(‘we’ as in general) are not going to employ some small contractor for the project.It’s going to be a big company who will be quite interested in profits.You yourself say that “no one knows what amazing stuff the market will deliver” then how can you be so sure that it will be amazing?

    I don’t read your blog(sorry economics is not subject,science is but I do not ‘thinking’,which is not a subject,by the way),but I don’t think I need to go through your old post to understand how much of an anti-government person you really are.

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  • http://onlyvoid.blogspot.com Shivani

    If the private players are to control the education services provided – how would we ensure that those who cannot afford to pay for these – get educated ?.

    Government’s role would be then more than regulation and rules provision for the education sector?.

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  • Revathi

    It is terribly upsetting that govt schools are not able to deliver the quality that they had thirty years ago! However, I think all is not lost. Govts can and do wake up and can get their act together if citizens insist.
    So, if education is outsourced, what about health care? Obviously that should be outsourced too. So why should we at all have a govt? What is the need to spend millions to elect representatives? why not leave it to the richest to govern? After all, according to you, the govt is a failed enterprise.

  • http://desidirectory.com/desi-indian-blogs/ remo

    Hi, Friend
    India today is the second largest higher education network in the world. Universities

    in India are set up by the Central or State Governments by means of legislation,

    while colleges are established by either the State Governments or private bodies

    trusts.