Thoughts on economics and liberty

In which James Tooley demolishes the bogus free rider problem in school education

The concept of EXTERNALITIES IS THE MOST BOGUS AND FRAUDULENT CONCEPT invented in economics. I have shown this in my preliminary sketch of Paper 5 (download from here).

In his book, The Beautiful Tree, Tooley looked at arguments advanced for public ownership and management of school education on the basis of “free riding” and found that these arguments have no empirical standing. Of course, by now I also realise that the argument has no theoretical standing.


The second major reason why private education wasn’t the way forward for the poor had to do with “market failure.” Development experts tend to use this term synonymously with education being a “public good,” and there being “externalities” of education that need to be taken into account. At issue here, perhaps surprisingly given the complex way it is often described, seems something rather simple. The UNDP puts it like this: Governments should “finance and provide” primary education because “market prices alone” would not capture its “intrinsic value and social benefits.” Why not? Because basic education “benefits not only the individual who gains knowledge, it also benefits all members of society by improving health and hygiene behaviour and raising worker productivity.”

The basic idea, then, is that there are social benefits to be had from people being educated. If a parent educates his child, this child, so the theory goes, will contribute to society by being healthier, by being more productive at work, by being literate, and so on. But these public benefits, it is claimed, are not reflected in the market price of education, so there will be “market failure.” That is, in the absence of the state’s providing and financing education, not enough people will buy enough education, of the right sort, to provide these social benefits. That’s what the conference critic was claiming about my position.

I’ve wrestled with this, and it seems to me that it’s not as powerful an objection as the development experts imagine it to be. Suppose we’re in a system where there is no public provision and financing of education. A poor parent is deciding whether to educate her child. Private schooling costs a certain amount, and her resources are very limited. She certainly values the benefits that education brings to society generally. She values low incidence of disease, the benefits of democracy, and social cohesion—in very practical terms. Disease hits her hard, for instance, and may have already killed some of her children. A lack of democracy leads to corrupt bureaucrats who pester her and her family for bribes. A lack of social cohesion leads to communal riots, which adversely affect her family and livelihood. Clearly, she would benefit from every child, including her own, being educated.

But, weighing it all, she decides not to educate her child because she chooses to allocate her resources to different ends. She can “free ride” on others getting educated, so some social benefits may come her way. But every other person will be in the same boat and will make the same calculations, so in fact society won’t get educated at all, and so no one will benefit. That’s the perceived problem of collective action that so troubles most development experts.

But is it really that problematic? Surely not: because the poor parent also knows that there are private benefits from being educated—especially for a poor person, as precisely the development experts also argue, it’s one of the best routes out of poverty. And the child will not only be able to get a middle-class job with education but will also likely assist her parent as she gets older. So instead of the pessimistic conclusions reached by the development experts, a much more favorable outcome emerges: Because these private benefits are so great, she’ll pay fees to educate her child, even if it means sacrificing other goods. But so will many other parents, and so all will enjoy the social benefits this brings, even though they weren’t a significant part of their initial decision to educate their children.

The key points seemed to be the cost of schooling and the value of the private benefits. It is a mistake to blithely assume that the cost of schooling will be so high, and the private benefits so low, that parents will decide not to educate their children. The only way to address the issue is not in the abstract, as the UNDP and my conference critic had, but by looking at the evidence and seeing whether poor parents are actually willing to spend on education, and so produce the desired social benefits.

The evidence adduced in my research demonstrates quite categorically that poor parents are prepared to pay for schooling, for this is in fact what they are already doing. In slum areas, the vast majority of parents are prepared to pay, and are paying. … Poor parents have shown that there is no problem of collective action and no grounds for assuming that the externalities of education will lead to market failure.

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Sanjeev Sabhlok

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