Imperfections in Education

Here is a thought-provoking article by Manan Vyas about how complete education is a luxury:

http://www.mananvyas.com/thoughts/why-complete-education-is-a-luxury/

There is certainly no disagreement about the fact that for most of our population, complete education is indeed a luxury. The purpose of this article is to further expand on what Manan says, and also introduce certain disagreements with the referenced article.

While I have no disagreement with the advocacy of a dual education system, it must be noted that there are two more fundamental market imperfections at play here, one of which supports the broad-based education system that we currently have.

Before I deal with those those issues, a subtle clarification must be sought: I am a firm believer in the fact that education has an intrinsic value - not only does it get me a good job, but it makes me feel good about life. Of course, the article does not seem to disagree with that at any stage. It accepts this by calling complete education a luxury, in the sense that this intrinsic value of education is important but out of reach for a majority of our population. However, it must be noted that a good (in this case, education) is not a luxury forever. At some point, with rising incomes, it becomes a necessity. Hence, are we arguing that the dual education system will be progressively dismantled over time as complete education ceases to be a luxury? Why is it that Germany, a fairly rich country, would still find complete education a luxury? It is the most basic of economic phenomena - the Engel's law - which will ensure that education cannot be a luxury forever. Why then do we see this paradox?

Now returning to the two market imperfections that I referenced to earlier.

Firstly, there is the issue of imperfect capital markets. Why can't Sushil borrow to finance his children's educational expenses and then use the higher income potential to pay off this loan either himself or through his children? Of course, such loans in themselves are a luxury for most Indians. However, it is an aspect of education that I saw was not discussed in the article. Rather than provide the agent with an X (broad-based education) or Y (vocational education) choice, financial inclusion will provide him with a whole gamut of choices. This change is, of course, not going to happen any time soon, maybe not even in the next quarter of a century. Moreover, given the long gestation period of such loans, it might even be difficult or impossible to enforce such contracts. However, my point is that it is theoretically possible for Sushil to want to send his kids to school, given his low current income.

Secondly, there will be imperfections even if financial market imperfections are removed. There are benefits from a well-educated workforce that an individual agent is unable to internalise. Of the top of my head, a person who is able to explain much of how the world around him works will be happier and more motivated - hence more productive. Even as a financial analyst, it would make someone happier when he knows himself how electricity works. However, since these positive externalities are not internalised by the agent, there will always be under-investment in education. Hence, leaving the agents to make choices on their own will produce a level of education that isn't socially optimal.

Another problem that I realised while writing this response, is one of agency. If you propose that a dual education system be introduced, do note that in the presence of imperfect information regarding the aptitude of the child and uncertainty regarding the job prospects after a particular stream (since all industries go through phases of growth and stagnation), some subjective choices need to be made. Who makes these choices? In a society such as India's, these decisions will often be made by the parent. It is not certain, and not even likely, that the agent's (parents') interests coincide with those of the principal (the child). Once introduced to a particular stream at a young age, the child faces high costs of making a switch. In such a case, having a monolithic educational system till the age of 16 might not be a bad idea. I am not, in any way, saying that this WILL happen. What I am saying is that this is another aspect to be considered.