Markets and the Hidden Superpower of Online Education
By Michael L. Davis
Most economists probably think about education the way I used to think about education: as another kind of exchange between a producer and a consumer. We may be a bit vague about what’s being exchanged, but whatever it is we’re the producers. And like all producers we’re trying to solve a constrained optimization problem. If teaching online means that teachers have a restricted set of opportunities—if we have fewer tools in our toolbox—then it can’t be as good as more traditional options. If online education expands our choice set, it can’t hurt and may make us better. (Of course, there’s always the worry that more choices could confuse the problem and lead to worse outcomes, but let’s set that aside.)
I’ve been teaching some of my classes online for over a year. Since the pandemic began my University, like most others, has been experimenting with a bewildering mix of new ways to teach. I have plenty of reservations about online/hybrid classes, but after having taught them I no longer think that the model of education as a production process is a good way to figure out whether it will make education better.
I still think economics can help us understand the consequences of going online. I just think we need a different model. We shouldn’t think about education as a kind of bilateral exchange. Education is a complex multilateral social interaction. Whether it’s teaching your kid how to scramble eggs or teaching a PhD student nuances of Austrian economics, all education is an attempt by humans with different specialized skills to cooperate so as to achieve some mutually beneficial outcomes. In other words, education is an economic activity. But it’s not as simple as the model of bilateral exchange suggests.
Start thinking along these lines and you’ll see that online education has the potential to inject something helpful into this complex social process. I’ll start by explaining what this is, and then I’ll give a few examples of how it might help. I’ll also consider why, if online education really can be a powerful force for good, it took a pandemic to expand its use. I’ll end on a guardedly pessimistic note, speculating on where and why this could all go wrong.
The Hidden Superpower of Online Education
Let’s begin—as we so often should—with first principles as described by Ronald Coase. In his classic paper, “The Nature of the Firm,”1 Coase emphasizes that enjoying the benefits of specialization requires coordination and control. This can happen with some sort of hierarchical system—“as department chair, I order you to teach the 8:00 am section of micro.” “Coordination also sometimes relies on markets generating meaningful price signals—“if you teach the 8:00 am section, we’ll pay you for the overload.” And coordination can also be facilitated by bonds of mutual respect and affection, usually found within a small, cohesive group—“my friend, Professor Dad, has to drop his kids off at 8:00 am and so I’ll take the early section”). Every productive institution from Fortune 500 corporations to messianic cults struggles to find the right mix of the three. Educational organizations are no different.
The thing is, though, educational institutions tend to make less use of markets than most other institutions.
For some sorts of education this makes sense. Five-year olds, for example, are strange, idiosyncratic creatures. A properly educated child must master a complex set of intellectual and social skills. Competitive markets might generate informative price signals about a few things (“Goldfish are cheaper than Pirate’s Booty and so let’s have that for a snack”). But it’s hard to imagine how many of the really important questions involving the allocation of resources could be directed by market prices. (“Dani had trouble with her best friend today. Would you like to pay for an extra 10 minutes in the Calming Corner?”) However, smaller communities of people with shared values might be very good at sorting through all of this. It’s no surprise that Grandparent’s Day at a kindergarten feels very different from a trip to Walmart.
Other kinds of education, though, aren’t nearly as tricky and so might benefit from a greater reliance on markets. To appreciate how markets might help, consider the work of economist Robin Hogarth.2 In his view education prepares people to make better decisions under uncertainty.3 Hogarth’s model distinguishes between the learning environment and the target environment. In the learning environment educators provide resources and then confront students with various challenges. The student’s reaction to the challenges is correlated with a reward—score 70 or higher on the driver’s exam and you will get a license. The student moves from this setting to the target environment—aka, the real world—where the student must make appropriate choices. The higher the correlation between success in the learning environment and success in the target environment, the better the education.
A learning environment is “kind” when it is possible to design lessons that, if mastered, are highly correlated with the correct choices. For example, in flight simulator training a pilot learns that if a particular warning goes off, it is imperative to decide on a very specific set of actions. If that warning goes off while on an actual flight, a good pilot will decide to follow the training, almost always leading to the best outcome4.
In wicked learning environments it is especially difficult to devise lessons that correlate with the correct choices. This could be because the choices themselves are fraught with deep uncertainty—they’re what David Epstein and others have described as wicked problems. Or it could be because it is difficult to design lessons where success in the learning environment correlates with success in the target environment. For example, almost all business schools teach “business ethics”, but it’s not at all clear that this leads to more ethical choices. This could be because deep uncertainty makes understanding the ethical consequences of business decisions difficult. Or it could be that the correct ethical choices are obvious but earning an “A” in business ethics doesn’t correlate with doing the right thing.
Especially in wicked learning environments, educators require nearly constant feedback. First, they need to understand the target environment they’re training for—if the goal is to make good decisions when doing business in China, then lessons in Mandarin are better than lessons in Latin. Second, educators need feedback about how closely success in the lesson environment correlates to success in the target environment—if the Mandarin listening quiz is read by a professional actor, it may not help on the streets of Beijing.
The need for feedback is not unique to education. Any system of coordination—whether hierarchical, communal, or market directed—requires that information be shared among all the specialized agents involved. In both hierarchical and communal structures. This typically happens through direct, face-to-face interaction—the Department Chair schedules a faculty meeting, the parent notices that the kid never eats her peas, and so forth. But online learning exists because direct interactions are very expensive. If online education is to work at all, it must rely heavily on market signals.
And that, I think, may be online education’s hidden superpower. If educators want to depend more on online education, they will have to pay more attention to market signals.
Where More Reliance on Markets Will Help
One obvious constituency affected by the move online are those who use education as a signal. This includes graduate schools recruiting students and, most importantly, future employers5. It’s worth asking, then, whether online education can be an alternate means of signaling, perhaps even freeing scarce resources to serve other ends.
I don’t see why not.
Remember, employers and graduate schools use academic achievement as a signal of some unmeasurable characteristics, usually a particular sort of intelligence and self-discipline. The signal works for two reasons. First, the signal is correlated with those characteristics. Second, it is less expensive for people who possess those characteristics to send the signal than it is for people who lack those attributes. A law school, for example, needs students capable of abstract verbal reasoning. Someone who has or can learn those skills will have a much easier time earning, say, a degree in philosophy from Notre Dame than would someone whose talents lie elsewhere. Educators who love their subjects are loath to admit this, but in many cases the signal is valuable, independent of the value of the education. Understanding Thomas Aquinas doesn’t help understand antitrust law but a demonstrated ability to read Summa Theologica may signal the ability to critically evaluate US v Von’s Grocery.
But generating such signals can be terribly expensive—a philosophy degree from Notre Dame comes with a price tag of over $200,000. Could success in at least some online Coursera-like philosophy courses designed by Notre Dame’s best faculty provide as useful a signal?
I have no idea. Neither, I suspect, does the faculty of Notre Dame. But students who want to generate a valuable signal and law schools who want to identify the best students have every incentive to find out. Online education is a market place generating information about what kinds of signals work best.
A second area where more market based direction might make things better is in education intended to influence values. This notion of values education seems to have become conflated with indoctrination, a pejorative word that implies coercion. But we’re social animals. We need certain values in order to get along. We’re also self-aware, reasoning animals. This means we can shape our own values.
Education has always been part of this process of socialization and personal transformation. Religious education of children is intended to instill spiritual values, so many parents seek religious education for their kids. Education in the arts is intended to shape aesthetic values, so many people seek arts education as a means of reshaping their values to have a richer artistic experience.
But who decides what values to teach?
Here I can only reveal my own view, a view shaped by a strong bias towards individualism. I think that individuals have the self-knowledge to help them understand what values will best contribute to their own flourishing.6 It may not be simple and many mistakes will be made, but I think I’m in the best position to choose the values taught to my kid. I think I’m in the best position to seek educational experiences that will reshape my values. I think you are too.
Given this starting point, you can see why I am a big fan of relying more on markets in education. Market decisions are individual decisions. The information that comes from markets is information about what individuals want. If the move online coincides with a greater reliance on markets, values education may better reflect the desires of individuals to select the kinds of values they wish to explore and perhaps embrace.
Recently the California State University system implemented a requirement that all students complete at least one course in “ethnic and social justice studies.” Can there be any doubt that the courses are intended to change student’s values? Many of the courses will be taught by proponents of “critical race theory” and a few will be taught by self-described Marxists.7 When my young daughter goes to college, I’d probably encourage her to take one of those courses. I might have benefited from one of those courses when I was in college.
But the decision to add that requirement was made by a hierarchical university system that depends on feedback from the California political system. The decision may, by happy coincidence, be the kind of values education that the targeted students and their sponsors want, but without market feedback, how certain can we be of that?
And it does no good here to respond—as I’m sure many educators will—that the requirement is necessary because students don’t know what they need to know. Of course, it’s true that students need expert educators to help design their curriculum. That’s no different than saying sick people need experts to design their treatments. But medical experts and patients largely agree on the goal of the treatments—doctors don’t need an elaborate feedback mechanism to know that the patient wants to feel better.
That’s not true about values. Different people will seek to move their lives in different directions. Some students may wish to become more sensitive to the plight of minorities. Other students may wish to become more sensitive to the differences between rap and hip-hop. Many students may say that they don’t quite know in what direction they want to be steered, but they trust a particular group of expert educators to help them figure that out. My contention, though, is that educators should respect individual autonomy in setting the curriculum for values education. Relying exclusively on hierarchical structures responsive to political calculations just can’t do that as well as markets.
Why Did We Wait for a Pandemic?
If, as I’ve argued here, greater reliance on market forces can make education better, then why did it take a pandemic and the forced march online to move us in that direction? If there are $100 bills on the sidewalk, why hasn’t someone picked them up?
I think the answer is both obvious and unpleasant to discuss. Creating a hierarchy necessarily creates powerful incentives to resist change. Coase teaches us that to understand economic institutions we should pay close attention to transaction costs. But we should also remember that one person’s cost is another person’s income. The administrators, faculty, and politicians who advanced the Cal State mandate for social justice education don’t work for free. Their income and status derive from having the power to control curriculum. Allowing more market direction threatens that sinecure and so they will—as all of us are wont to do—defend their turf.
In summary then, I think that for a very long time educational institutions have made too little use of markets and prices to help direct resources to their highest and best use. The pandemic has forced schools to make greater use of online learning and to rely more on markets. Online classes can only get better as we gain experience. But even if some online classes never overcome their inherent constraints, the movement to online can be a force for good.
What Could Possibly Go Wrong?
I worry most about whether the educational establishment is ready—either temperamentally or institutionally—to more fully participate in a market based system.
Consider what happened in the aftermath of the collapse of the former Soviet Union. I don’t mean to suggest a direct analogy—the typical university is not nearly as inefficient and corrupt as the Communist USSR. But the former Soviet Union and the modern western university have one thing in common: the absence of clear and transferable property rights. And without clear property rights, markets are prone to all sorts of failures.
Successful educational institutions have a valuable set of tangible and intangible assets. But these assets are not “owned” in any meaningful economic sense. Most importantly there are very limited pecuniary incentives to preserve the reputational capital that is usually the most important portion of an institution’s value. If the owners of a private business produce a shoddy product they may gain a short term profit, but by damaging the firm’s reputation they reduce the market value of their firm. If a university’s administrators roll out an inferior online program, they may earn short term revenues but may not personally suffer much of a long term loss. The President of my university seems like a good guy but he doesn’t plan on funding his retirement by selling his shares of the University’s stock.8 I wish he did.
Even before the pandemic a number of small private colleges were in a weak financial position. Some of these schools will not survive.9 What’s been remarkable is that even the most celebrated universities—schools with multi-billion dollar endowments and ultra-selective admissions—feel deeply threatened. Nothing so concentrates the mind as the sight of the gallows. I don’t know if these schools will sacrifice the future for the present. But I know they have little pecuniary incentive not to do so.
I don’t want to overstate the case for online education. I can imagine its possibilities to reshape education but having been on the frontlines I’ve also seen how bad it can be. The pandemic, though, is revealing new choices for education. Sure, we need to think about how to make our Zoom classes better. But more importantly we need to think about how this pandemic, for all its horrors, is giving us thousands of experiments that can help us reshape a sclerotic, inefficient system.
 Coase, Ronald H. (1937), “The Nature of the Firm,” Economica 4 (November): 386-405.
 Hogarth, R. M. (2001). Educating intuition. Chicago, IL: The University of Chicago Press.
 This view is best understood as describing practical, vocational education but in fact does not exclude any target environment. Modern popular music, for example, is a target environment characterized by a few brilliant compositions offered up next to the tedious and banal. A class in the history of pop culture can help the interested student make better choices about what pop stars deserve attention.
 To say that the environment is kind does not mean the lessons are simple or the problem isn’t complex. It just means that a student who masters the lessons will usually make correct decisions. Chess students are trained to quickly recognize patterns. This is fiendishly complicated because of the enormous number of possible patterns, but Grand Masters who have mastered the skill dominate the chess board.
 If you have any doubts about the importance of educational achievement as a signal, I can only recommend Bryan Caplan’s recent book The Case Against Education.
 When I talk about “choosing” values I’m revealing the biases of a classically trained economist. For an introduction to the complexities of the problem check out the recent EconTalk podcasts with Agnes Callard on aspiration.
 It would be helpful if the small army of academics who claim that business suffers from “short-termism” could acknowledge that incentives within their own institutions are much more likely produce the very result they disparage.
 “Why The Coronavirus Will Kill 500-1,000 Colleges,” by Richard Vedder. Forbes, Apr. 7, 2020.