Republic of Ghaziabad - Part III

Once upon a time, there was a village in an island called Ghaziabad. It was located in the Indian Ocean. Fishing and farming were the two major sources of income in the village. There was a very wise fisherman in the village. His name was Ram Kumar. He had been fishing in the ocean for more than 25 years and knew everything there was to know about fishing: how to knit fishing nets, when and where in the ocean to catch what kind of fish, how to preserve his catch, how to avoid poisonous stingrays while fishing, methods to use the direction of the Westerlies to his advantage etc.  Ram Kumar was well respected in the fishing community. Other villagers, who produced fruits, vegetables and wheat, happily exchanged their produce for the fish brought to the local market by Ram Kumar. Certain varieties of fish, that only he knew how to catch, were in high demand in the village.

One day, Ram Kumar was lying on a cot in his garden sipping his evening tea when an idea came to his mind “I have knowledge and skills that everybody in Ghaziabad reveres. If people value my knowledge more than the fish I catch for them, they should be willing to pay more for it.”

He decided to open a fishing school. Ram Kumar was an astute businessman. He first set the price for a one year course on fishing at 24,000 kg of wheat and spread the word around to test the waters.  A wheat producer in Ghaziabad, who had an unemployed son, heard about the offer and thought “It is true that Ram Kumar’s skills are valuable, but I don’t think my son will gain so much knowledge and skills that he will be able to pay back 24,000 kg of wheat after graduating from his school.”

One month passed by and nobody showed interest in his school. This made Ram Kumar to reconsider his ask price. He reduced his price to 5,000 kg of wheat, and shortened the length of the course to eight months. Twenty students showed interest in his revised offer. If Ram Kumar went forward with the price, he would have earned 100,000 kg of wheat (20 X 5,000 kg) from his venture. In other words, this particular transaction would have generated, for the village, an economic value worth, at least, 100,000 kg of wheat, as determined by the participants of the transaction i.e. Ram Kumar, the twenty parents and their children.  

Ram Kumar further contemplated reducing his offer price to 2,000 kg of wheat. He conducted a survey that showed that forty students would have joined his school at the price, but his revenue would have declined to 80,000 kg (40 X 2,000 kg) of wheat and his costs would have risen. So Ram Kumar decided to stick with his earlier offer.

Note that by maximizing his profits, Ram Kumar ensured a more efficient allocation of resources available to the people of Ghaziabad. Had Ram Kumar opted for a lower price, he would have used more resources - more chalks, more chairs, more boats, more fishing nets, and above all more man hours.

Ram Kumar decided to bid for a nearby plot of land to open the school. He easily outbid the other bidder, a man who wanted to grow walnuts on the land. Ram could outbid him because he knew he could earn more from the land than the walnut grower. He could earn more from the land because the people of Ghaziabad were willing to pay more for his education. They were willing to pay more because they saw more value in the education Ram Kumar was going to provide than the value they saw in the walnuts the walnut grower was going to produce.

Note that a free market auction of the land (a natural resource) ensured that the will of the people of Ghaziabad played a key role in deciding what the resource would be used for. The land was not given for free for education because some experts in the government thought that education was better for the society than walnuts. It was decided by the people of Ghaziabad, as measured by their willingness to pay.  Don’t yet jump on the bandwagon screaming “The poor cannot pay” We will get to that in a bit.

[Side Note: A free market solution to spend on primary and secondary education would be to auction the land to the highest bidder and distribute the receipts as vouchers, which can be spent on education, to all the parents in Ghaziabd]

Ram inaugurated his school with the final price of 5,000 kg of wheat for eight months of training. A private banker called Shyam reached Ram Kumar “I am sure there are many talented students who don’t have 5,000 kg of wheat to pay you. My detailed analysis of demand and supply in Ghaziabad shows that your students are going to earn well, and should be able to earn back the fee you are charging within three years of graduation. I will offer loans to all the students who get admission in your school. You prefer bright students, don’t you? Otherwise someone else will open a school, admit all these bright students, and outcompete you.” Ram agreed to the proposition.

As expected, after eight months, fishermen trained in the school started catching and selling fish in Ghaziabad. Ram was happy with his earnings of 100,000 kg of wheat. The students were happy earning more than they would have earned without the training. The private bank was happy with the students paying back their loans. The villagers were happy with cheaper and high quality fish made available by the skilled youth. There was a very poor man in the village called Nirdhan Thakur. His son could not get into Ram’s school, but he too was happy. His son got employed by one of the fishermen who graduated from Ram’s school. The twenty fishermen saved their earnings in Shyam’s bank. With more savings in his bank, Shyam was able to give out more loans to businesses in Ghaziabad. Businessmen who could secure these loans were happy. Villagers employed by the businessmen were happy.

There was one man who was not happy. His name was Gyan Bahadur.  He was an aspiring politician in Ghaziabad. One day he gathered a bunch of people near a local courtyard and started shouting at the top of his lungs “Ram Kumar has made a business out of education. Education is a birth right. Education builds nations. It should not be used for making profits. We should force Ram Kumar to charge a lower fee so that the poor can study. We need to give free land to open schools, and provide loans to anyone who can secure an admission. It should be mandatory for the banks to provide education loans. If you elect me, I will collect wheat and fish from the people of Ghaziabad and open free schools. We will educate one generation and all our problems will go away.”

He struck a chord with a lot of villagers and won the next election. Gyan Bahadur did everything he said he would do. Ram Kumar was forced to lower his fee. He lost his motivation and closed down his school. Many other fishermen, who were not as competent as Ram Kumar, thought “We should open a school. The people of the village are going to pay for the land. The banks are going to pay the fee. What do we have to lose?” Five such fishermen opened new schools and priced their courses at 200 kg of wheat. Gyan Bahadur collected wheat and fish (tax) from the people of Ghaziabad and opened five more schools. Two of the schools he opened did not teach fishing at all. They taught subjects that a group of “experts” in education thought were necessary for the society. One of the schools taught how to interact with aliens from another planet. The will of the people of Ghaziabad was taken out from the equation, and replaced by the knowledge of the all wise Gyan Bahadur and his group of experts.

One thousand villagers signed up for the schools. Banks gave loans to anybody who could secure an admission. The banks did not care who got the loans because Gyan Bahadur had promised that if the students did not pay back the loans, he would collect wheat and fish from the people of Ghaziabad and pay the banks. The students did not care whether they will be able to pay back the fee after graduating, because there was no pressure from the banks to pay back the loans. The school owners did not care what was taught in their classes as the students did not care. Gyan Bahadur did not care as he had won the election and that is what it seemed to him was the right thing to do. “I am doing it for the poor” he thought.

Nirdhan Thakur, who had another son, was very happy with the scheme. He thought “The fee is low. The bank is giving us the loan. Even if my son is not able to pay back the loan, Gyan Bahadur will pay. We have nothing to lose.”  There were tears of joy and praises for the messiah Gyan Bahadur in Ghaziabad. “The man on the white horse has arrived” declared a clairvoyant in the village. 

After about one year, the reality started setting in. All the one thousand students who graduated started looking for fishing jobs. Nobody in Ghaziabad wanted that much fish. Unemployed, under debt, and having wasted one full year, the students were worse off after their graduation. Gyan Bahadur had taken wheat and fish from the people of Ghaziabad to build schools, leaving the people with less to save in the banks. Moreover, a good chunk of the savings left with the banks was used to give out student loans. This double whammy left the banks with less to lend to other businesses. As a result, several businesses closed down creating even more unemployment in Ghaziabad. The vicious downward spiral had begun.

When Gyan Bahadur realized his mistake after six years and tried to establish free market in Ghaziabad,  another politician gathered a crowd in the local courtyard shouting slogans and offering free education and free other stuff to the people of Ghaziabad. He defeated Gyan Bahadur in the next election.

After a decade, both the sons of Nirdhan Thakur lost their jobs. One of his two sons committed suicide. Nobody was there to shout slogans for him in the courtyard. Nobody was there to wipe his tears.

What we discussed above is an over-simplified demand-supply dynamic of a single tradable good (fish). There are hundreds of thousands of goods and services and producing each one of them requires different knowledge and a large number of different skill sets. And there are a billion of us; each one, every minute, with his individual demand and supply, carving out, for the society, a sustainable path that generates value for all. No single human, or a group of experts, can determine better than a billion individuals, what they demand, what needs to be supplied, and how much of what resources ought to be allocated to meet the demands. Commercial interference (price controls, subsidies, guaranteed loans, free land, government administered schools etc.) in higher education will only destroy the marvelous workings of the invisible hand.

“Education spending will be most effective if it relies on parental choice and private initiative - the building blocks of success throughout our society.”

- Milton Friedman 

There is a ground for government financing, repeat: financing (not administration), of primary and secondary education; voucher system promoted by Milton Friedman best preserves the operations of the invisible hand. There is a marginal case for the government to administer, repeat: administer (not finance), a self-financing program (fund) for higher education but that would require a level of sophistication that is lacking in our current administration. Besides, education would be far more effective if the government first achieved the object in judiciary, police and defense, its three primary responsibilities. My other two articles Republic of Ghaziabad and Republic of Ghaziabad – Part II explain in the form of a story, similar to the one above, why and how our government strayed away from the three primary responsibilities and what needs to be done to bring true Swaraj (rule of the self) in India.