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Jun 19, 2017

Education markets and Betsy DeVos

As many ex-Soviet people are, I am suspicious of big governments, social engineering, and believe in free markets. Russians of my generation just saw their fair share of the socialist economy, and authoritarianism that inevitably follows a utopia. However, as an educator, I see clearly that education markets are different that other kinds. Of course, people in health care economics can put together a convincing case that health economy market is also different. And the utilities markets are different, and airlines is different, not to mention pharmaceuticals, and of course, the agriculture. And did I mention the labor market, so-so different? What are they different from? There is no one classic market model; what we have instead is a set of very unique industry-specific markets, each operating within its own set of constrains, sometimes poorly understood.

Here lies the problem of market ideologists like Betsy DeVos. Their belief in the universal power of markets is at the ECON 101 level. They do not understand the economic segments deeply, and operate at the abstract level of the “classical” economic theory. Less regulations, more competition – is all they know. Hence, for example, the recent decision to roll back regulations aimed at curbing the college loan bubble fueled by for-profit colleges. I am not an economist either, but know enough to be dismayed. So, you want to roll back a policy, fine, but how do you intend to address the problem the policy was set up to address? John Akerlof, for example, has shown back in 1970 how markets can quickly degrade with the information asymmetry between buyers and sellers. Higher education is exactly the kind of the credence good that creates the problem. Deregulation plus loose borrowing rules is exactly what brought the higher education to the brink of another bubble, threatening the economy. The same story is school vouchers: they should have worked in theory Milton Friedman developed. But they do not work, because Friedman underestimated the specifics of the school markets. He thought schools would compete not on price, but on innovativeness, and ultimately, quality. It turns out, innovations and quality gains are very hard to achieve without student selection. And the message of quality is subject to the already mentioned Akerlof’s “Lemon Law.”

Like any ideology, market ideology is deaf to nuances, and ignores the messy state of our knowledge about how markets work and do not work. Ideologues all need to go back to school, and learn enough specifics before they can make federal policy.

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