There’s strong evidence that new markets can be invented that anchor financial incentives to public goods. In some cases, markets can achieve public goods more efficiently than top-down approaches. It’s worth contemplating whether new market-like mechanisms could create incentives to spur innovations that increase the quality and drive down the cost of online learning.
Existing Markets in Online Education
Let’s first consider whether market mechanisms are currently working well in education. The overall picture is not encouraging, but there are some bright spots. Training in software engineering is arguably one of the most competitive and innovative markets in online education. Online and hybrid bootcamps abound and compete ferociously for students and funding. The availability heuristic explains some of this phenomenon: developers and VCs are inclined to build and fund the familiar, and software engineering is as familiar as it gets. However, the proliferation of bootcamps is also driven by the market. There’s a huge demand for trained engineers, which means plenty of people and organizations are willing to pay for this training.
It’s not an accident that competition and innovation is flourishing in the for-profit workforce development space: adults are best positioned to succeed in online learning, and the other major education markets (K-12 and higher education) are saturated with established players. These other markets are also massive and notoriously byzantine: the road to reform in K-12 and higher ed is long and paved with unintended consequences. Finally, geography matters hugely in childhood education, whereas geography-agnostic online programs are viable substitutes in many realms of adult training. The reality is this: markets aren’t a panacea, but in some situations, a well-functioning market can be very useful for fostering innovation and driving down costs.
Markets: Good and Bad
Public perceptions of “the market” are fairly bipolar and correlate highly with political persuasion. The market is presented as a tool of oppression and plutocracy on one hand, and a force for economic liberation on the other. The reality is somewhere in between. The economist John McMillan says it well: “…Both of the simple, direct solutions regularly offered for all kinds of societal ills — ‘suppress the market’ and ‘leave everything to the market’ — more often than not are wrong.” There is plenty of solid evidence that economic growth (which happens when markets are functioning well) lifts people out of poverty, improves health, and bolsters quality of life. At the same time, unregulated markets can have all kinds of negative consequences, from wealth inequality to excessive consumption and environmental destruction.
McMillan and others argue that we can’t categorically judge all markets as good or bad. Markets don’t simply appear out of thin air. They emerge out of interactions between people and are shaped by culture and governments. New markets can even emerge to create solutions to societal problems. Let’s look at an example.
Inventing a Market to Curb Acid Rain
In the 1980s the rain in the Northeastern US was being acidified by sulfur dioxide emissions from coal-fired power plants and factories. A 1990 amendment to the Clean Air act created the world’s first cap-and-trade system: a market in which the biggest emitters buy and sell the right to pollute. By design, it’s also a regulated market with enforcement and compliance mechanisms. Polluters are required to install automated monitoring systems on smokestacks and report hourly data. The cap and trade system works – acid rain is no longer a serious threat in the US – and it’s more cost effective than non-market-based “command-and-control” programs designed to regulate emissions.
The acid rain example illustrates that well-designed markets can be an efficient and simple way to achieve good outcomes. In the case of acid rain, companies had strong incentives to quickly cut emissions in the most cost-effective manner. Emissions reductions were achieved through a portfolio of changes that included technological innovation and a reshaping of the market for high-sulfur coal.
Emerging Markets for Social Good
Is air pollution just an edge case? One might argue that it is unique because the “goods” being sold (emissions avoided) are easily defined and measured. Under this line of reasoning, it would be much harder to create markets for good in fields such as health and education. Though this is difficult, it’s not impossible.
GiveWell is an organization that recommends charities that are most cost-effective at improving and saving lives. GiveWell functions as a marketplace: it serves as a connector between buyers (donors) and sellers (nonprofits). Before GiveWell existed, small donors had no simple way to find and invest in causes that maximize human impact per dollar spent. The nonprofits benefit enormously as well: the funding sustains their day-to-day operations, so they aren’t constantly hunting for major gifts that inevitably fund new initiatives. In this way, GiveWell-recommended charities behave more like for-profit businesses: they are incentivized to scale by doing more of what they already do well.
Improvement at the Margins: Nonprofit Workforce Development
The success of GiveWell suggests that market-like mechanisms can work in the nonprofit sector, particularly in the realm of health. Could such mechanisms be brought to bear in online learning? Let’s briefly recap why there’s so much market-driven innovation happening in online workforce development:
- It’s a smaller, more neglected, and less bureaucratized market than K-12 or higher education,
- Adults have developed the executive functioning skills that allow them to be successful online learners,
- Geography doesn’t matter a great deal in online learning so there is much more competition, and
- There’s enormous demand for worker upskilling.
In the case of software engineering bootcamps, these factors have created the right incentives to foster a great deal of innovation. In other areas of adult learning, all of these factors still apply, but students and their employers just can’t pay. This is where funders and governments could learn from GiveWell and other analogs. New “market-like” models that anchor financial incentives to outcomes could encourage education nonprofits to innovate. As they innovate and demonstrate impact, those same mechanisms would sustain their operations so they can focus on delivering maximum good.