Unbundling College

I, along with the rest of the universe, came across this meme the other day:

dopl3r.com - Memes - Annual Streaming Price NETFLIX $108 hulu $72 ...

Today’s post is about explaining what is wrong with this image, but also why thinking about it really, really matters. Let’s begin:

Electricity and Education: More Similar Than You’d Have Thought

This Friday, I’ll be launching a new YouTube series on India’s electricity sector. Stay tuned for further details.

The reason I bring this up right now, is because one of the points we cover in that first episode is about how the electricity sector in India became much better after generation, transmission and distribution were “unbundled”.

And thinking about that point helped me frame a question about the education sector in India. I have written about this before, but I’ll expand upon that thought in much greater detail today: unbundling college.

The Typical College Bundle

What does the typical bundle in college look like? Something like this:

A student writes the entrance exam and gets in, attends classes, makes friends, writes internal examinations, gets an internship, gets placed, writes the semester end examination, gets the degree. And next year a new batch comes in, and we rinse and repeat. That, in a nutshell, is the higher education sector, at least in urban India.

One point worth emphasizing here: when I say peer networks, it is actually much more than that. Well, at any rate, it should be much more than that. Mentors, in particular, are best discovered in college.

Horizontal and Vertical Players

Ben Thompson had a lovely write-up many years ago about understanding Google

You really should read the article in its entirety, but here’s the quick takeaway: some firms, like Apple, are vertically integrated. Everything, right from deciding which kind of screw should be used in the construction of the latest iPhone, to the OS (that is, the software), to the in-store experience – everything is controlled by Apple. Hell, they don’t let you change the number of icons in the dock! It is a vertically integrated firm.

Other firms, such as Netflix, are horizontal. You can watch Netflix on Chromecast, on the Firestick, on your laptop, on your tablet, on your phone – Netflix honestly doesn’t care where you watch it, so long as you pay them their monthly fees. In fact, they will go out of their way to make sure that you can watch Netflix no matter what device you own. Netflix is a horizontal firm.

And that’s one way in which the forward I received the other day is wrong. Every other service on that forward is a horizontal firm. But Harvard? Entirely vertical. They control who gets in and how, they control what they’re taught and how, they control who gets the degree and how. They don’t even need to control the peer network: the Harvard alumni network is one of the reasons getting into Harvard is worth the effort, so naturally the alumni themselves will work to maintain the exclusivity. Entirely vertical!

But, Pandemic!

Now, the reason that forward exists, and the reason that forward became as popular as it has, is because there is more than a grain of truth to it, especially in the year 2020.

Take a look at it again:

dopl3r.com - Memes - Annual Streaming Price NETFLIX $108 hulu $72 ...

Most students in most colleges the world over are asking a very simple question: if we are to sit at home and watch videos, why restrict ourselves to what our college professors have to say?

I’m due to teach Principles of Economics to the incoming undergraduate batch at Gokhale Institute, for example. But why should students listen to me rather than watch videos from MIT’s OCW, or Marginal Revolution University, or Coursera, or edX, or Khan Academy?

Hell, for that matter, why should I bother coming up with a teaching plan when all I have to do is point students towards all of these resources?

And as the forward asks, or at least implies: if that is indeed the case, then why pay tuition fees this year? Not just Harvard students of course – every student is asking this question.

So What’s the Answer?

Well, microeconomics 101: a good place to begin is by asking what you’re paying for when you pay those tuition fees. And as I wrote in a blog post a while ago, you’re paying for much more than classes:

Now, the problem of education: when you buy a degree from college, you’re getting all three things.
College is a bundle: education | credentialing | peer networks

https://econforeverybody.com/2020/03/12/signaling-bundling-and-college/

Harvard is not charging you money to teach you stuff you can learn elsewhere. Those guys – the people who run the place and the professors who teach there – they’re pretty good, y’know. They know you can learn that stuff elsewhere.

You are paying your local college an obscene amount of money for the other two things. Coursera might be able to give you a better econ prof than your local college, but Coursera can’t yet give you a certificate that carries as much weight as does the one from your local college. This is much more true if you sub in Harvard for your local college.

Or put another way, Coursera existed since before the pandemic. Yet enrollments happened in colleges, did they not?

Enrollments happened because people weren’t buying lectures.

They were buying access to the peer networks, and they were buying the certificate.

And Harvard – and most other colleges the world over – are effectively saying that the certificate is still as valuable in 2020 as it was in 2019. Arguably more so, and so no discounts.

OK, But What About Peer Networks? Surely A Discount There?

Um, well, no. And for two reasons.

First reason, this excellent argument from Tyler Cowen:

Perhaps the logical conclusion is that both the “social connections/dating” services of Harvard and the certification services of Harvard are strong complements. If you are certified by Harvard, but live on a desert island, or carry a contagious disease, that certification is worth much less. So it is hard to unbundle the services and sell the certification on its own, without the associated social networks. Nor is it so worthwhile to sell the social connections on their own. Harvard grads are socially connected to their dry cleaning workers as it stands, but that does not do those workers much good.

https://marginalrevolution.com/marginalrevolution/2020/07/signaling-vs-certification-at-harvard.html

Peer networks develop best when you go through intense, shared experiences. Both adjectives matter: just hanging about in a college without going through the same grind that everybody else is going through doesn’t cut it (skin in the game). And that grind must be intense, it can’t be an optional, laid-back thing.

So sure, the grind is going to be online this year, but it still is shared, and it still is intense. That’s what helps with the bonding, and that bonding is valuable enough for Harvard to get away by charging you USD 50,000.

Peer networks developed online can be an extremely valuable resource, by the way. Ask David Perell or Seth Godin, to name just two people.

Second, those peer resources stay with you for life. You develop them now, but they get even better with time than does wine! As your peer group grows and matures, the number of connections they open up increases exponentially. So even if you can’t meet your peer group in a physical sense, it still is an investment worth making.

Tyler Cowen again:

Keep also in mind that the restricted Harvard services are probably only for one year (or less), so most students will still get three years or more of “the real Harvard,” if that is what they value. And they can use intertemporal substitution to do more networking in the remaining three years. It’s like being told you don’t get to watch the first quarter of a really great NBA game. That is a value diminution to be sure, but there will still be enough people willing to buy the fancy seats. Most viewers in the arena don’t watch more than three quarters of the game to begin with.

https://marginalrevolution.com/marginalrevolution/2020/07/signaling-vs-certification-at-harvard.html

If anything, Tyler Cowen’s analogy is slightly off the mark. The people who watch the NBA game in the stadium are never going to get in touch with each other twenty years down the line, much less depend on them for jobs or references.

So no, no discounts for reduced peer network benefits in 2020, sorry.

So far, Harvard can still justifiably charge you USD 50,000 – and they will.

So What Next?

Well, think of many vertically integrated colleges, all offering more or less the same kind of services:

… and ask yourself how we could introduce horizontal services into this structure. LinkedIn and Coursera attempt two separate models:

And those two models overlap more than you’d think. LinkedIn offers learning, for example.

But the real way, if you ask me, to think about how to unbundle college is by expanding our framework a little bit more:

This is a blog post, not an academic paper, much less a book. And therefore, forgive me for using catch-all terms here. By recruiters, I mean literally anybody who will work with graduates in any capacity: colleagues in start-ups, government, think-tanks, and yes, recruiters.

But the point of the framework I shared above is this: it will help us understand where change will come from, if at all it must.

Put another way, do you think $50,000 for Harvard (or whatever amount for whichever college) is too expensive? Then you need to explain how you can get the same things (or more) that a bundled college degree gives you for a lesser price with a different model.

How to get, that is to say, credentialing, peer networks and learning (and maybe more) for less than USD 50,000. That’s the million dollar question. And even if we come up with an answer, you’ll be up against the following:

  1. Colleges will be unwilling to change for two reasons.
    1. Why change something that isn’t broken? And college isn’t broken, from the perspective of the college.
    2. Inertia
  2. Firms such as Coursera and LinkedIn will struggle to replicate the “full-stack” experience that college has right now. And a piece-meal horizontal replacement will never be as valuable.
  3. Government will be unwilling to change the way college is structured right now
    1. Because of lobbying by colleges themselves
    2. Because too radical a change is a risky move, with unpredictable upsides and more than a little chaos in the short run
  4. Parents and students will not want colleges to change far too much, because the system as it stands right now is what enables jobs to come by.
  5. And that, finally, leaves recruiters. Or as I explained above, it is us: society. Until we (society) acknowledge the fact that college as a bundle has become too sclerotic, too expensive and too rigid for its own good, we can’t begin to change it.

And so, it ultimately comes down to this: we need to prove the inefficiency, and therefore the relative expensiveness of college as it stands today to society, before we can begin to talk about reforming it.

Well then, let’s get to proving the inefficiency of college as it stands today. That’ll be next up!

EC101: Links for 27th June, 2019

  1. “Total Expense Ratio aka TER means cost incurred by a fund house to run a fund. It includes management fee, legal fees, registrar fee, custodian fee, distributor fee etc. The major part of the TER consists of management fee followed by distributor fee. The TER is calculated daily and will be deducted by AMCs on the same day, which means your NAV includes the impact of fees on your fund.”
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    A good article to help you understand how mutual funds make money, what the new SEBI regulations mean for retail investors, and how dependent the mutual funds are (as of now) on the distributor.
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  2. “…Say’s Law provides a theory whereby disequilibrium in one market, causing the amount actually supplied to fall short of what had been planned to be supplied, reduces demand in other markets, initiating a cumulative process of shrinking demand and supply. This cumulative process of contracting supply is analogous to the Keynesian multiplier whereby a reduction in demand initiates a cumulative process of declining demand. Finally, it is shown that in a temporary-equilibrium context, Walras’s Law (and a fortiori Say’ Law) may be violated.”
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    Econ nerds only – and perhaps the even stranger beasts called macro-econ nerds only. David Glasner gives us a view of Say’s Law that may actually be (gasp) Keynesian in nature.
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  3. “Why incentives? Economics is based on the premise that incentives matter. Incentives can help by increasing or decreasing the motivation to take up a certain activity, by changing the cost or benefit of the activity. If someone were to pay John enough for each time he hit his steps goal, he would likely begin walking, perhaps even enthusiastically. After all, health consequences are in the distant future, but cold, hard cash can be given in the present. ”
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    That is from this link – you’ll actually have to download and read the PDF. This excerpt is useful to me because it essentially says that behavioral economics is, well, economics.
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  4. “This view goes something like this – there are no priors (in fact, you discredit experience as being biased – after all you guys have been doing development for decades and we still have poverty and misery in abundance) >> and therefore conventions, latent wisdom, and experience counts for little >> therefore there are no theories >> so we need evidence on everything >> how better to create evidence than look for data >> so let’s do experiments (RCTs) or mine administrative data and understand reality and design evidence-based policies.”
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    Gulzar Natarajan is less than pleased with Raj Chetty’s new course at Harvard (the first item from 23rd May, 2019’s posting), and I am very inclined to agree with his views. Empiricism is slightly overrated today.
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  5. “The Baumol effect predicts that more spending will be accompanied by no increase in quality.
    The Baumol effect predicts that the increase in the relative price of the low productivity sector will be fastest when the economy is booming. i.e. the cost “disease” will be at its worst when the economy is most healthy!
    The Baumol effect cleanly resolves the mystery of higher prices accompanied by higher quantity demanded.”
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    Alex Tabarrok over on Marginal Revolution is on a spree with the Baumol Effect, and having followed his series, I’d say with good reason. It upends several things in microeconomics that we might have taken for granted.