Tuesday, July 22, 2008

Reforming Education - A Market Based Solution

In one of my previous posts I mentioned I would discuss solutions to the some of the infrastructure problems of the UK. I have selected the subject of education to start with, as it is an area in which it is possible to see the potential for imaginative solutions that can resolve many of the problems in education.

I will not go into detail on the current failings of the education system, as I have provided an academic essay on the subject elsewhere. However, it is just worth noting here that there is an ongoing difference of opinion on the quality of education between educationalists and….. just about everyone else. My own view is that there is an ongoing decline in quality, and that this needs to be rectified. However, unlike the typical government solutions of more government action, I will discuss a radical solution that, over time, will guarantee that quality will improve and will do so cost effectively. Furthermore, the solution will offer a major benefit for pension provision in the UK.

I am trying to summarise many ideas I have considered, so I hope you will excuse me if I am at all unclear, or if the post does not flow well. This is the first time I have written this idea down.

So what is this solution?

The first element is that the state will retreat from all aspects of control of education, such that all educational organisations will be entirely independent. The method for freeing institutions is through a novel method of financing, which I will outline below.

Instead of government funding education, education will be funded by the students themselves. This does not mean that they will need to pay up front fees, but rather that their education will eventually be paid for by the students. At first glance the proposed system may seem similar in some ways to student loans, but it will be apparent that the principle underlying the system is very different, and quite radical. Furthermore, this system avoids the heavy debt repayment for students in the first few years of work, and adds more quality control into the system, as well as extending into every area of education - it goes beyond university funding.

Post Secondary Education

Payment of course fees:

I will outline the method of course fee payment very briefly, and will apologise now for the rather perfunctory style of delivery.

Each educational institution will publish a list of the courses that it is running, the cost of each course, the number of places and the entry requirements for the course. They will solicit bids for funding for the courses from potential investor institutions. The institutions interested in funding the course will then bid against one another to fund the course. What they will actually be bidding on is taking a percentage of the lifetime earnings of each individual who attends the course. The institution that offers the lowest percentage will then be in a position to be able to fund the course. In this way the obligation for the student will be minimised, but the course will be fully funded according to the requirements of the university.

We might imagine that, for example, a university will offer an undergraduate degree course in Marketing, with 100 places available, requiring that all students admitted to the course have achieved a minimum of 3 ‘B’ grades at ‘A’ level, costing £7000 per annum for three years. The institutions would then assess whether, on average, over the lifetime earnings of a typical graduate of the course, what would be an appropriate percentage of the graduate's income to provide a reasonable return. The investors would most likely fund a large number of courses to spread their risk, rather than looking at individual courses or institutions.

Payment of Living Expense

In addition to this, each course will have the facility for the students to later select a living allowance, utilising a similar system as for course fees. In this case, the bidders will offer their percentage terms for the living allowance along with a maximum amount that they will fund. The student will then select which funding option suits them.

The student who then undertakes the offered course, will have a legal obligation to repay whatever percentage of their income has been set through the bidding process, and selection of living allowance.

Payment by the Graduate

Payment of the income percentage will be made through the tax system, which will prevent the student from evading their obligations (one outstanding issue is when an individual immigrates into another country – the solution to which is not detailed here for the sake of brevity). The tax office will be informed of the amount of the future income that needs to be repaid to the investor and, as soon as the individual earns income, the agreed percentage will collected to be returned to the investor on an annual basis.

Primary and Secondary Education

Primary and Secondary schools will need a different system, as it may not be possible for entry qualifications to be used - if universal access to education is to be provided. Furthermore, children are unable to enter into legal contracts for giving a percentage of their lifetime earnings.

As such, the percentage of income required will be fixed by actuaries based upon expected national average earnings levels (how to calculate this would be one of the most complicated parts of the system). The investing institutions will then bid on the funding of individual schools. Instead of bidding on the lifetime income of the students they will bid on funding per pupil. The institution that offers the most funding per pupil will then be allowed to fund the institution. In utilising the system in this way, money will follow excellence. If an institution creates poor results, then it will not be able to gain funding, and would presumably close for lack of funding. Furthermore, well run institutions would be able to fund expansion through greater access to finance.

In short, the success of a school would become visible, and money would follow success. It would also have other benefits, such as the creation of a real market for education salary based upon merit. e.g. If a teacher is a good teacher, they could be paid more, as their positive results would attract more funding.

Statistical Support

Statistics on the tax collected by course and by institution will be made available for potential investors (in forms that retain the anonymity of the graduates of each institution). In this way, the financing institutions will be able to make increasingly accurate assessments of the potential return on different courses at different funding levels.

A Market Place

The method for matching courses and institutions will be through a market place system (an e-market would be the sensible approach). Each educational institution will list their details, and each funding institution will enter the market with an independently verified level of funding. The marketplace will, of itself, create other institutions, such as actuarial support for lifetime earnings, as well as ranking services for institutions and so forth.

In an ideal world, even the market place should be independent of government involvement, but pragmatics suggest that one should throw government a 'bone' just to help them find in favour of the idea.

Who Could Provide Education

This could not be simpler. There are no limits, provided that investors and students thought the institution was a good investment due to their turning out good graduates. In other words, there is no need for any kind of bureaucracy whatsoever - no checks, no inspections. If only good outcomes can attract funding, why would there be any need for screening institutions?

General Advantages

In creating this system there are many advantages. The first is that there is no limit whatsoever on funding. There is no ‘budget’ for education, but there will be very little waste. There will be few supply bottle necks for courses that are in demand, and a system that is responsive to both the needs of the students, and the needs of society. If course ‘x’ is a success, it will attract more money. If institution ‘Y’ is not a success, it will soon lose funding.

The method of funding will lead universities to focus on quality, rather than quantity. If a course leads to poor outcomes for students, then the cost of the course in lifetime earnings will be relatively high. Equally, funding institutions will have access to a large body of statistical information that will indicate the relative quality of both institutions and courses. In such a system both students and universities will seek quality.

Even more importantly it will free the system from bureaucracy, and top down management. It will focus everyone on turning out graduates who have the skills to generate income through their lifetime. Furthermore, a diversity of different methods of provision can emerge. For example, one type of secondary school may opt for their students to take one kind of qualification, and anther school something completely different. There is no need for the grammar versus comprehensive argument. Each school can follow its own course.

Such a system will also account for the 'kind' of people different schools are ‘producing’ in more broad terms. If the future funding of an institution is linked to the future employment income of their students, institutions will gain by encouraging students into activity and behaviour that will have a positive impact on their future employment prospects. The institutions will inevitably seek to produce graduates who are not just capable of passing exams, but also have the other qualities that society values.

Funding for Pensions

One of the most interesting aspects of such a system is the potential for funding institutions to be pension funds. This is not to say that they will be the only funding institutions, as the market should be as open as possible. The reason why pension funds would find such a system so attractive is that the returns on investment will be linked to the income levels of the population. As income levels go up and down, so will the returns on investment, as the returns are based upon a percentage of a person’s pre-tax income. They will mirror society.

In so doing they are ideal both for annuities and for long term investments. One of the major problems with pension systems is that they leave the possibility of a pensioner having what appears to be a good return on an investment, but still a return that sees them living in relative poverty compared with employed people.

Potential Difficulties

One potential practical difficulty in such a system will be getting the system itself up and running. In particular, in the early years, the risk for investors will be relatively high. The information on which to base their risk decisions will be imperfect. Bearing this in mind, there would need to be a period of transition, with system being phased in over time. This period might need a subsidy from central government to cover the additional risk of the unknown, at least for the first of three years. Furthermore, the system would need to build up a pool of funding liquidity to cover such a large market. As such, it might be necessary to commence with university funding, and then to proceed step-by-step with other types of education provision.

Another difficulty is the question of a person who chooses not to work after graduation. For example, an individual might choose to be a traditional stay-at-home housewife. I have no obvious solution for this kind of difficulty, so ideas are welcomed.

I have had one argument suggest that such a system would mean that some subjects, such as history in universities, would disappear. However, there is no reason to believe that this would be the case. Provided that the history students mostly gain employment at the end of the course, funding will continue to be available. History students go on to productive employment, just as engineers do. It may be that, the student will have to pay a relatively higher percentage of their income as a result of taking a course for personal preference rather than employability, but that is an entirely fair outcome. However, there is no reason to make assumptions that one subject will lead to a better outcome than another, as the statistics will (over time) provide this. As time progresses, choice will become ever more informed for financing institutions and students.

There is also potential for an argument over whether primary and secondary schools should be allowed to select pupils. For the moment I will leave that question alone, as it moves beyond the scope of questions of efficiency, and goes into more philosophical questions.

The greatest difficulty would lie in gaining the acceptance of the educational 'establishment'. This is not something that I will discuss here, as this is not a question of efficient delivery, but political will.


The point of such a system would be that it would align the interests of educational institutions towards providing quality, and that quality education would receive the funding necessary, with minimal waste. Students would benefit, as they would have greater freedom of choice, and can calculate the risks and returns involved in their educational choice.

Most importantly, there would be virtually no bureaucracy. The government would just be providing the infrastructure for a marketplace, and managing the collection and distribution of the returns on investment (this would be a small additional burden for the tax collection agencies, which would just need to adapt existing systems).


At this stage, I have just provided an outline of the system as an introduction. The reason for suggesting this framework is not that it is a perfect solution, but rather that is shows how some imagination can offer alternatives to a wasteful system that is currently seeing educational standards continually sliding. Rather than continue with negative criticism of existing systems, I hope that the above offers a positive alternative.

As I have said in my other posts, the UK needs to take action to become a more competitive economy. One of the keys is having well trained and educated individuals capable of making a positive contribution to the economy. The tired and well worn state based solutions have proved to be ineffective and, in a more competitive world, there is no room for waste and ineffective investment.

I am sure that there are holes in the proposed system, and will welcome feedback and suggestions.


  1. As you mentioned, emigration remains the 'elephant in the room' with this idea but it is interesting and radical.

    My own view is (and I know that this is something that virtually nobody will agree with me on) that we would be better off without schools at all.

    I felt that I didn't learn anything at school. My childhood would have been far better spent out playing sports in the park, reading for pleasure, going to movies, theatres, museums and doing other things that I enjoyed. I also would have liked the chance to earn money, as a child, to buy the things that I wanted.

    I have no idea how many £1000s the govt wasted on putting me through school. It was the last thing that somebody with a thirst for knowledge and an ambition to get on and live life needed.

    How I would have loved those early years to have been my own and not the state's. It would have been fantastic if, rather than wasting money on trying to educate me, the state had offered me a few hundred pounds a time to successfully pass a genuinely challenging exam every every so often in a rented hall.

    I may well have wanted to swot-up and take another paper every few weeks, so I could pocket the cash. Alternatively, after I had reached the age of 12 or 13, I might want to apply for a job in the private sector which I felt I was perfectly capable of doing at the time. By 18 I would have considerable commercial experience and be already enjoying a good salary and contemplating a great future.

    If I was a bit of a slacker and neither worked or studied for the exams, at least I would have had my own time to my self. Time is essentially all we have on this planet and most of us squander it or have it squandered for us.

    There is of course a 4th scenario. Rather than showing just idleness, I might have also take advantage of the state's liberty. I might have become a feral teenager, living a life of crime and making other people's lives a misery. If so, lets hope I would have been caught and sent to jail.

    The essential thing to look at here is not really education. It is our view of childhood.


  2. From the point of view of the student, looking at these ideas I have to say that I am thankful that I went through the old education system! However, I accept that in the past we have run an overly-indulgent education system because, as you point out elsewhere, we think it is our right to carry on being rich.

    What I have to question is the idea that the 'market' is the best mechanism for designing the education system. Isn't it the free market that has just screwed up the world in a spectacular way? Simply looking at graduates' earnings for the last 10 years we would have drawn the conclusion that wealth is best created by trading paper in the City, or buying and selling houses. If I understand it correctly, under your proposed system schools would have churned out thousands of wheeler-dealers who, now that the bubble has burst, would be out of a job, and particularly ill-suited to generating real wealth in the future.

    Could one of the reasons why we became so wealthy in the past be that we introduced universal education for its own sake, rather than as a means to employment? I seem to recall that a general education for the masses was once opposed by some because they thought it would lead to a shortage of factory fodder, and could even cause unrest once people started thinking for themselves, but we went ahead with it anyway.


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