Notes on the human venture capital model

My Saturday column proposes we think about funding for higher education not as grants to universities, or as aid to students, but as an investment in “human capital,” with students in the role of risky startups and the state as benevolent venture capitalist. (The basic idea is hardly original to me: I’m just exploring some ways of thinking, and talking, about it.) The model implies that we should invest those funds directly in students, rather than, as now, giving the lion’s share to universities (who are in turn restricted in the fees they can charge students). And, since students are by far the biggest beneficiaries of this investment -- the state’s interest is essentially limited to promoting equality of opportunity -- it suggests also that they should repay their investors an appropriate share of the returns accruing thereto. This is both fairer and more efficient than the present system, for reasons I explain in the piece. There are three common objections to this model. One, as in a letter that appeared in the Post, stresses the many benefits society obtains from the skills students learn in university, the point being that society should therefore pay the whole cost of their education, rather than merely staking them the money up-front. But society already pays them for their skills: that’s what a salary is for. There’s no reason to pay them twice. The problem most students face is not a lack of funds, at least in a lifetime income sense. It’s cash flow. They may have very little money to start with, just when their expenses are highest. And they may have very uncertain income for a time after graduation. Helping them through that period is an appropriate role for the state. Handing out free lunches to the children of privilege is not. The second objection notes that students in the primary and secondary school systems -- the public systems, that is -- are not expected to pay tuition fees. It’s just paid for out of general revenues. Why should we treat unversity students any different? Because everything about their situation is different. Primary students are hardly in a position to take on financial obligations, nor can they be expected to repay those incurred on their behalf. Nor, for that matter, could most parents. A university student is obliged to pay for his own education only. A parent may have many minds to feed. The time spent in university is relatively brief, and can be anticipated -- and saved for -- many years in advance. By contrast, primary and secondary schooling takes 12 years, with very little, as it were, warning. And so on. But the biggest difference is this. Primary and secondary schooling is universal and compulsory. Everyone is expected to go, the schools (public schools, that is) have to take everyone, everyone learns much the same things, and everyone is expected to get roughly the same benefit out of it. If everyone earns the same return on their investment, it hardly makes sense to go to the time and trouble of recovering it from each of them individually. It’s simpler just to pay for it out of taxes (though there are good arguments why these should be allocated individually, ie through a voucher system). By contrast, the decision to enrol at an institution of higher learning is discretionary -- on both sides of the transaction -- and one that to this day only a fraction of the population undertakes. Moreover, it is expected that some will get vastly greater benefit out of it, financial or otherwise, than others. Indeed, that’s the whole point: to nurture the brightest talents. It’s worth it to those who have the brains to pay the universities to fill them, as it will later be worth it to their employers to pay them for the skills thus obtained. It’s not worth it to those who don’t have the brains. Which raises a third objection, this time from the right: If education is an investment, and if students are the biggest beneficiaries, why involve the state at all? You wouldn’t want the state funding risky startups in the business world; why is it any different for students? For that matter, in a free market universities would find it in their interest to arrange financing for students the money to pay their tuition fees, much as car companies will lend prospective customers the money to buy their cars. Well, for some students they would. And some students would be certain enough of their prospects to take on such obligations. And some banks or venture capitalists would be willing to finance them -- some of them. The problem is the ones who get left out. We let competitive markets sort out the winners and losers when it comes to funding startup firms, because we’d rather take the risk of deserving firms going without capital than finance every firm, no matter how undeserving. With students -- human capital -- the risks are reversed. In the aggregate, the risks are predictable. But the risks associated with any one student are hard to assess. And so far as both students and potential investors might be disposed to take undue account of a student’s background, rather than their prospects, it makes sense to have the state shoulder some of the burden (mitigated not only by its ability to spread risk over very large numbers, but by its power to compel repayment). There’s also the matter of students who might be considered to have very little earning potential, but whose academic field (philosophy, English lit.) or subsequent profession (social work, the priesthood) might be thought to confer important benefits to society at large -- important enough to justify educating them at public expense, in whole or in part. Actually, the funding would still come from private investors: the program could be run by a Crown corporation, and funded by bonds issued against the aggregate earnings of each cohort of graduates. I believe they call these public-private partnerships, and for once the term is appropriate. Anyway those are my thoughts. I’m still sort of roughing this out in my own mind, but that’s what a blog is for.