Atanu Dey On India's Development

The Commodification of Education

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I was telling my friend CJ about a presentation I made yesterday to the trustees of a school. The proposal was to hand over the management of the school to a firm that will manage the school for a fee. One of the trustees had brought up the point that the firm was a for-profit organization and therefore it would be improper for the school to be associated with it. CJ’s reaction was, “That’s the basic problem with the whole education system, isn’t it?”

“What’s the problem?” I asked.

“That for-profit firms are disallowed in the education sector,” CJ said. “What we chiefly need is the commodification of education.”

“Is there such a word as ‘commodification’?” I asked.

“Yes, look it up. Education has to become a commodity for the benefit the unwashed masses,” he said.

“Care to elaborate?” I said.

“I was coming to that,” said CJ. “Generally speaking, when goods and services are first invented, they are produced and consumed in small quantities. The cost of production is high and therefore only the rich can afford them. Knowledge or the technology for production is not widespread, and so only a few firms operate in the market. This means limited competition in the market, and therefore the firms price their product or service significantly above the already high costs. They make economic profits.

“This happens in the early stages of the market for any particular good or service. Then with continued production, the costs start coming down and production process knowledge diffuses through the economy. More firms enter the market seeing that there is profit to be made. This has the effect of increasing supply, reducing costs, and with competition, prices fall close to the falling costs. What used to be a high priced good affordable only to the top of the economic heap soon becomes a commodity that the unwashed masses easily afford.”

“Nothing earth-shatteringly startling about that,” I remarked.

“True but the implications are indeed earth-shattering,” said CJ. “First, note that it is because of the possibility of profits that firms engage in research and development to reduce their production costs. Second, profits made by existing firms lure other firms to enter the market. Competition is never good for any individual firm but is good for the industry and for society.

“The producers and consumers have totally opposed interests when it comes to competition. Competition is never good for producers, while it is the best thing since sliced bread for consumers. The outcome of intense competition is the commodification of the good or service – which is what producers fear and consumers pray for.”

“So what does the commodification of education mean?” I asked.

“Education is no different from any other service in the sense that the same logic applies to them. Initially education would be produced by only a few firms at a high cost and sold at a profit at a high price. Given a large enough market — which in India’s case it is so — and free entry into the market, other firms will enter enticed by the above normal profits (which we call ‘economic profits’ or rents), and drive down the market price even as the quality improves. This increases social welfare.”

“But if any and all for-profit companies are allowed freely into the market would they not just produce bad education and fleece the public with high priced advertizing. Society cannot bear to leave education in the hands of profit making money grubbing capitalist firms!” I argued.

“What makes you say that?” said CJ. “The free entry of for-profit money grubbing firms has been beneficial for the public generally. In fact only when entry is not allowed, only then does the public suffer.

“When the government had a monopoly on domestic air travel, the public suffered. Similarly for telecom. Remember when the waiting time for a 2-wheeler was close to a decade? Shoddy services at high prices still persist in areas where the government restricts entry.

“Commodification happens in even those industries where there are only a few competitors. The greatest examples are lying close at hand. All electronic equipment uses processor and memory chips – they are commodities. What’s important is that there is a standard. This standard does not have to be established by the government. The industry itself figures out the standards. Once that happens, it is in the interests of the firms themselves to stick to the industry standards.

“I am sure that if free entry by for-profit firms were allowed in India, supply of education will increase, the quality of education will go down up, and education will become more affordable. Just like the driver and the cleaning person can now afford a mobile phone, while in the good old days only the rich and the influential could get a phone connection.”

“So why do you think that free-entry is not allowed into the education sector in India?” I asked.

“For the same reason that no producer actually wants any competition in the market. Monopolists hate market competition more than anyone else. The government controls entry into the education sector – and that makes them the super-monopolist. Like any monopolist, the government extracts huge rents. By restricting supply, the monopolist can ensure high prices. This the government extracts – but through the intermediary of the licensed provider of education.”

“But commodification conjures up images of very low quality and no distinguishing features. Would you like your kids to be fed a commodity?”

“Actually, commodification of education would make education quality better, not worse, after controlling for prices, availability, and standardization,” CJ said. “For instance, an IIT education is not a commodity by a long shot. How many people get in? Around 8,000 out of a pool of 320,000 who appear for the admissions test.

“The cost of an IIT education to the student only appears to be affordable. Actually, a quick calculation shows that to society, the total cost of an IIT education is of the order of a quarter million US$. That is clearly unaffordable for Indians — which is exactly why we get only 8,000 or so IIT engineers every year.”

“How so?” I asked.

“Well, 40 students appear for the exam, only one of whom gets into an IIT. On average they spend Rs 2 lakhs for coaching. So the social cost of coaching per IIT seat is Rs 80 lakhs. This is a deadweight loss. The IIT education itself is then subsidized by the public. This amounts to another US$100K or so.

“If good technical education becomes a commodity, then the quality-price ratio will become high. But for this to happen, entry barriers to technical education has to be totally removed.”

“The fear is that with free entry, fly-by-night operators will swamp the system,” I said.

“That is an unfounded fear, if fear indeed it is. My sense is that the fear is that without the government’s monopolistic control of the sector, the government will lose one of its greatest rent-seeking devices. Liberalization of the education sector is not allowed because with it will go the rents that the government currently enjoys.

“The commoditization of education is the only hope that the hundreds of millions of young Indians have. That, alas, is not in their future. So it is going to be another few generations sacrificed at the altar of greed and stupidity.

“It is all karma, neh?”

Other posts featuring CJ:

How to Study Economics Sept 2005

The Future of Energy Sept 2005

The Ownership Society Oct 2005

Do the Taliban Have Buddha Nature? Nov 2007

Of Lavatories and Laptops Feb 2008

A Solar Energy Conversation with CJ Nov 2008

The Sacred Ritual of Elections Mar 2009

  • http://youngworldrising.com robsalk

    Interesting perspective, but it seems to me that a big factor in comodification is economy of scale: the bigger the market, the cheaper the unit cost of production in a manufacturing process. The “unit” of education in terms of delivery is still the classroom and the teacher, and these don’t get cheaper with scale. The core costs of educating 1000 students at 50 students per classroom (a pretty big number, actually) = pay for 20 teachers and rent on 20 classrooms, plus materials. To educate a million students, it’s 20,000 teachers and 20,000 classrooms. Assuming a good teacher demands a minimum rate of pay that may actually increase with increased demand for their services, and the costs of space are constant, the ratio doesn’t change at all: it’s linear. There may be some marginal savings in amortizing the up-front costs of curriculum development, but that’s not where the money is spent in education.

    That said, competition in education is almost certain to produce qualitative improvements. Those are reflected in the value of the outputs, not the cost of the inputs.

  • Mallikarjuna

    Welcome back CJ.

    Make more appearances.

  • http://iwillbelikethis.blogspot.com Praveen

    There is another view point. There are hundreds of doctors in every nook corner of INDIA, but we will go to only some credible (reputed) doctors or super specialty hospitals who will charge us a bomb. The health industry was already commodiosed (in the above notation) but we wont stop going to them although they charge a bomb because it is our health and why take a chance by going to a road side MBBS guy.

    Same will apply to Education. Now a days there is a school in every lane and college in every street. But we will only join our kids in an reputed institute which will charge us a bomb because its related to future of our kids & why take a chance???

    Production & Supply logic is applicable to Manufacturing sector (like bikes) but not to service sector (like health & education). In Service sector due to competition the quality will improve but cost will not come down (in most cases). Telecommunications is an exception.

    I am seeing some engg colleges who are advertising the 10 students (out of 1000 they have) got placed in some IT company and demand some 3-4 lacs as donation (for payment seats) and 1/2lac more as capitation (or some other) fee from regular students. Those colleges neither have proper infrastructure nor qualified faculty.

  • Sundierd Atheist

    Point taken Praveen. In my expereince the best institutions are usually those that are owned partially or wholly by the Government. This is true atleast for the centres of higer learning.
    Most of the privately owned institutions of higher learning are places where people basically pay money to get degrees, there is no real learning involved. Therefore I am not too sure if the privatization of higher education is a really good idea.

  • nag

    The article did mention about the importance of standards. Without good standards and adherence to those commodification will not work.

  • Sundierd Atheist

    The problem is not the privatization of education or the lack of in India. The problem is the Indian “Chalta hai” mentality. Just about everything substandard goes for us Indians. We are quite content as long as the work is done, somehow.
    It is our outlook that we need to change. Ofcourse changing the systems are also of great imporatance but everything finally boils down to the social level and that is what makes the real difference.

  • Madhav

    Well said, though the concept is old is interesting w.r.t the education system. I only hope some of the policy makers are reading these posts. I feel the ‘Commodification’ of higher technical and medical education has already started in the southern states but it lacks the quality, the reason could be most of the parents are forcing a specific discipline on their children, that is because there might be better job opportunities. Lack of proper faculty is because most part of creamy layer is attracted towards the universities/jobs abroad.

    I feel this processes of ‘commodification’ is in its beginning in India as the time passes there is potential that it could lead towards the balanced environment.

    But this concept may not work well w.r.t the primary and secondary education as there is a larger percentage of the population lying under below poverty line, most of them cannot afford even the units of food and water, forget the affordability of the ‘units’ of education. Thats where the social structure (the so called government) comes in to the picture and uses tax payers money, which is either not happening or happening in the wrong direction.

  • Satish Ahuja

    While this sounds good in theory, and even if this ever gets implemented, there are far more serious systemic problems to consider in a country like India.

    “It is in the interest of the firms to stick to standards”… now how often have we heard this before everything explodes? CDO/CDS ring a bell? Wall street ring a bell? The repeal of Glass-Steagal and the subsequent crashes? The crash of 1987? The crash of 2000? All those huge multi-billion dollar firms that had self-interest as top priority and were “policing themselves”? And that’s just one example.

    The fact is that every single instance of market-driven economics is always profit driven. It rarely delivers “highest quality” at the best price. Take budget airlines – great deals at low prices right? customers win? – the pilots are overworked and underpaid, the aircraft maintenance is often questionable, and everything is done to cut costs. Air crash investigation (NatGeo) has shown innumerable instances of shoddy workmanship, repairs and maintenance just to cut costs, and only when a huge flying metal beast crashes and burns and kills 500 people does anything get done about it.

    In order to provide high quality education, there must be proper and balanced regulation that is not overbearingly oppressive enough to kill the market, and at the same time thorough enough to ensure high quality. The lack of oversight and regulation is the reason we see such a huge number of “donation colleges” that crank out so-called “graduates”, doctors that can’t tell an arm from a leg, or engineers that don’t know the difference between pressure and force.

    I can think of almost everything that applies to the financial markets as being applicable here. Collusion and monopolistic practices? Sure thing. (price / fee rigging and fixing). Insider trading? Yes, at a price. (leaking question papers to the highest bidder, for example). I can go on.

    The real problem here is that every one of these checks and balances can be subverted in India if you have the right connections and money. I have personally encountered “recognised” universities that offered courses they were not authorised to, and there are hundreds or thousands of similar cases in India.

    I feel the only way of providing high quality education is when reputation comes in. If CMU or Yale sets up a campus in India, they will make doubly sure everything in there is top notch. Their reputation matters far more to them than capitalist-style competition to provide “acceptable quality” education at a price the market is willing to pay. This would also ensure the Uni does not go cutting corners like crazy, as is sure to happen when we commoditise education.

    I’m not saying your proposal won’t work, but it has to be substantially modified to work for the good of students. Greenspan style laissez-faire market driven models won’t work.

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  • http://clueso.wordpress.com Clueso

    If I am not mistaken, two pretty major reasons for the lowering of costs in the manufacturing industry has been the adoption of the assembly line technique and automation. Both of these meant that the average factory worker (if it is a human) does not really have to be skilled. They just have to know how to do their bit of the job and once they have done it 10000 times, they are bound to get pretty good at it.

    None of these seem to be feasible in the education sector. It is no good have unskilled teachers who are only good for one small segment of the entire curriculum and would probably force students to learn by rote. Automation in the form of use of technology to deliver more effective teaching may be a solution, but I don’t think it will lead to a massive upward shift in quality.

    Commodification will also mean that students and parents (consumers) will value education purely for the product it provides. Unfortunately it is more probable that the product will be perceived to be the piece of paper conferring the degree and not the quality of the education. This will definitely result in operators who will offer an easier way to get that piece of paper, while turning a blind eye to the quality of the curriculum/teaching/examinations etc.

    As for industry driven standardisation, that occurs only when there is a need for the various components manufactured by different parties need to work together. In electronics, the people making the processor and RAM need to decide before hand how the two will communicate, otherwise they can simply chuck their products into the bin. That is not the case in education. Once the degree is conferred, it is the student’s problem to figure out the rest of his/her life.

    I agree with Mr. Satish Ahuja that things like reputations and charitable desires will make a big difference if private players are allowed into education. I am quite sceptical of purely profit driven education.

  • TiredProf

    Glad to see the clear analysis of Satish Ahuja. There are fundamental flaws in Indian society and its moral character (see The Games Indians Play, for example) that will prevent most attempts at reform. However, Satish is perhaps overly optimistic about CMU or Yale. Similar hopes were expressed about, say, HCL and Wipro vs. the current glut of MNCs selling computer equipment. But, in India, IBM is way overpriced, Lenovo does not pick up the phone to take an order, HP has no clue about its own server hardware, and Dell service is worse than the gray repair market. India has a great flair of “tropicalizing” all MNCs that dare to enter. As limiting cases consider Union Carbide and Dabhol. Private “enterprise” does not really fix our national character. Only solid primary education, followed by corruption-free (how?) civic policing may improve some things. Can we just make our cities less filthy, to start with, dropping all other goals if needed? Crowded, inevitable. Filthy, avoidable with strength of character. You’ll find even that is an impossibility.

  • Sriram

    The task of reforming education system can never be pointed and surely spans a broader horizon and time-frame. I often see great ideas often recognized only posthumously, which means an organization driven in the interests of share holders (profiteers) can not afford to be in a scheme spanning decades.
    I think the *horizon* of a typical profit driven organization is quite limited to quarterly and street (stock market) pounces if there is some *visionary* trying to work at grass root level of any sphere of a society.

    However, there are *coaching/crash* courses which can make use of commodification which is already happening. I feel their value addition is already under critisism even in Atanu’s blogs (including the Ramakrishnan’s (recent Nobel laureate) views on coaching classes). American institutions such as Harvards and Yales are nurtured not by commodification but by philanthropic acts with total autonomy. In india, Tata’s have done far better than birla’s and Reliances in this regard

  • Jagadish

    Commodification of education is one side of the equation, which can be implemented to achieve the desired goals in some fashion, though I suspect, not in the way the author describes, at least here in India.

    The other side of the equation is cost. It is an inescapable fact that great education costs a *lot* of money. I’m not talking good education, we already have places like IISc and other high end research and science institutes that have a good track record. I’m talking about truly world class institutions that can go head to head against the likes of MIT or Cambridge. There’s a difference between assembly-line degree mills and world class education, and I assume you’re talking about the latter from your article.

    How many truly world class institutions do we have? I can count them in one hand. Take a country like the US. Almost every city or town and every state has something that’s truly world class.

    These cost a *lot*. A 4-year science or engineering degree program in an average school costs around US$100K, that’s 50 lakhs. Ivy league schools are far more expensive. All right, since this is India, we can find ways of reducing cost, but you’re looking at that ballpark number. How many parents are going to spend 50 lakhs on a 4-year bachelor’s degree program?

    This question is very interesting because it has deep systemic implications. In the US, a 4-year degree is not considered necessary for a career. You could be a school dropout and have a successful plumbing or roof repair or food business, people will still look up to you and allow you to marry their daughters. Here in India in most families, academics is still given too much importance at the cost of neglecting other skills and talents (well, Gujarat and a few other places being the exceptions). In a country where choosing a groom still means “IIT educated, Microsoft employed, green card holder or better still a US citizen” I see a very very *very* long struggle.

    Those that study a 4-year program in the US do so because they are truly passionate about the subject, not because they are pushed into it by dad or peers or family or circumstances or pressure. These students have options for financing, student loans, part time jobs, summer internships or jobs, flexibility in course structure, the ability to drop out for a semester or two and come back, and much more. It is far more rigid and iron-clad in India.

    In the US, it’s 100,000 units of money. Here it’s 4,000,000 units of our money. Commodify education all you want, but this money still has to be paid, and if we ever hit these numbers, most parents would balk at sending their children to study in these schools.

  • larissa

    Education in India sucks. There are a few elite institutions that train some technicians, other than that there is no emphasis on the education of the masses. Now you have affirmative action such that the standards are lowered–thats India for you–a nanny government believes that nothing can be corrected without affirmative action because Indians are stupid (thats how Congress treates Indians, well you know when most of its leaders have been college drop outs like the Gandhi family, you can be sure that they want to make the entire nation a drop out nation in their image). Indian kids study like crazy to get into some technical colleges. There are no good liberal institutions in India–which is why the educational system just turns out technicians. Even the technical colleges are not world class–none of them. I think with the way educaion is going, and with the false mythologies made as national ideals by Congress, you can be sure that people that follow such a government will get ever stupider…already Indian houses the larggest number of illiterates…does not seem to bother the Congress government in the least…Now these illiterate millions will permanently drag India down…Instead of building a solid educational system for the masses, the government tries to squirm out of the problem through affrimative action and so lowers the standards for everyone, it cannot even conceive of solutions without affirmative action, thats what happens in a nanny state. My friend saw stupid children of politicans get into med school–then he realized its futile to study so hard when you might not even get a seat reserved for affrimative action or stupid politicians’ children and so went to America to study and is successful there. I think this experience is true for many people.

  • larissa

    Education in India sucks. There are a few elite institutions that train some technicians, other than that there is no emphasis on the education of the masses. Now you have affirmative action such that the standards are lowered–thats India for you–a nanny government believes that nothing can be corrected without affirmative action because Indians are stupid (thats how Congress treats Indians, well you know when most of its leaders have been college drop outs like the Gandhi family, you can be sure that they want to transform the entire nation a drop out nation in their own image). Indian kids study like crazy to get into some technical colleges. There are no good liberal arts institutions in India–which is why the educational system just turns out technicians. Even the much vaunted technical colleges are not world class–none of them. I think with the way educaion is emplemented by the state, and with the false mythologies made as national ideals by Congress, you can be sure that people that follow such a government will get ever stupider…already India houses the larggest number of illiterates…does not seem to bother the Congress government in the least…Now these illiterate millions will permanently drag India down…Instead of building a solid educational system for the masses, the government tries to squirm out of the problems involving through affrimative action and so lowers the standards for everyone, it cannot even conceive of solutions without affirmative action, thats what happens in a nanny state. My friend saw stupid children of politicans get into med school–then he realized its futile to study so hard when you might not even get a seat reserved for affrimative action or stupid politicians’ children and so went to America to study and is successful there. I think this experience is true for many people.
    You can’t blame them. Who wants to live under such a stupid system?

  • TiredProf

    Jagadish — great analysis, big thumbs up.

    The “virtuous” cycle: train scientists, build atom bombs, police the world, print as many dollars as you want, get “rich”, send kids to great colleges, train scientists …

    The vicious cycle: waste money on IITs and neglect primary education, fail to control illiteracy, birth rate does not reduce rapidly enough, too many “pure consumers” below the productive age of 22+, not enough people to provide services like teaching and training, …

  • SK Sharma

    A pack of biscuits is a commodity, the manufacturing cost and sale price are low, and volumes are high. Assembly-line techniques have given us that. If I buy a pack of biscuits and it is stale, I will go to another brand or another shop next time. No great loss except 10 rupees.

    The way I see it, the process of education is not even remotely similar, unless you count private for-profit companies like Brilliant Tutorials mass producing reams of paper with “high quality” physics problems.

    CJ has fallen into that classic Adam Smith ideological trap of “enlightened self-interest” and the magic invisible hand theory that promises bountiful abundance to one and all. As we have seen, there have been waves of American and other western companies who came marching in to India with these principles, viewing us as a “nation of a billion consumers”, sure of making a killing selling to us all. Little did they realise the psyche of an Indian “consumer” is diametrically opposite to what they’ve been playing with in the west. None of them made those mountains of money they hoped for.

    There is one existing system that has done exactly what CJ suggests – the US healthcare industry. Today, it is among the most expensive in the world, pharma companies buy doctors to push their latest products, drug companies hype illnesses like H1N1 to sell new drugs at ripoff prices. People without insurance in the US are better off dead if they ever face a serious problem. But… but… it is free market, commoditised, and not socialised healthcare, so it’s all good, right? Not like those pesky French with their national healthcare, or those smug Canucks across the border who don’t enjoy our benefits of capitalism.

    Being blunt, commodification of education will never happen. If it does, it will result in greedy corporates ripping off customers, just like the banks, since education like the banking industry is something modern society cannot live without. There are some things that are left to market forces (my biscuit example). Others have widespread and long term social impacts which are never considered by capitalist economics, which is one of the biggest reasons they fail.

  • Ranadheer Reddy

    The views on commodification of education and against are good for debate.
    Here is a problem.
    1000 private engineering colleges. Each producing 300 engineers. Parents spend average of 3lacs per student. 80% cannot repair a leaking water tap. What will they do?. If this is commodification what will happen to us?

  • jb

    Someone pointed out the irony today – the right to education act comes into effect on April Fools day. Actually, I’m not really sure how it came into effect but that’s a different story.

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