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The Economics of Education


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[Click here and I'll let you know when I publish future posts.]

The non-profit world is filled with passionate and intelligent people who fail because of the stigma around raising money. They fail because despite this stigma, organizations need money to accomplish their goals.

The world of education suffers from the same problem. There are fierce arguments about whether we should privatize education or keep it public, but these debates miss the point.

We need to raise capital within the education system in a way that actually increases the quality of students' education.

Creating and Capturing Value

There is at least one rule that all successful organizations must follow: all organizations must create value in the world “X” and they must capture some percentage of that value, “Y”. X and Y are completely independent variables, except that by definition, Y can never be larger than X. Successful organizations aren’t ones that capture the highest percentage of X, but rather the ones who capture the right percentage of X and distribute the remainder “Z” in the proper way, so far as they can influence it.


Y is typically defined as revenue, but revenue is often non-monetary.

In the current approach to education, the student’s goal is to capture as much of X as possible, and that is what we call learning. However, there is a total loss to education institutions—schools capture zero percent of the value they create through students. Students expend time and energy on school work, and it is graded and thrown away. We rationalize this by saying that we are creating a net gain to society in the distant future, or that we are being greedy if we capture any percent of the value that students produce.

But by doing this, we ignore the fact that our education system is based on an unsustainable business model. We sink enormous amounts of energy and money into schools each year without getting a direct return to sustain it. No institution can function like this in the long-term, no matter how altruistic or important its purpose. This fact is undeniably true.

In schools, students produce work that has no extrinsic value: an assignment is completed, graded, and thrown away. As a society, we are losing out on an enormous amount of value. However, each assignment is an opportunity for students to create something of extrinsic value, and this has the happy consequence of increasing the assignment's intrinsic value as well. If we do this, we not only create a way of sustaining our education system, but we incidentally increase the intrinsic value to the student as well.

As we redesign education, we need to do so in a way that gives us a "Y" greater than zero. This is another way of saying that our students' work should have value not only to them, but to the school and society as well. 

Without this, the education system will remain in crisis indefinitely.

HackSchool is doing this. Students solve the problems of real communities and learn tremendously in the process. Check out and subscribe to HackSchool's blog for updates, student project summaries, and so on.

[Click here and I'll let you know when I publish future posts.]

Reader Comments (1)

Economic education is essential for ever one. Because by using that our world running.

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