Recent articles from Taylor Branch, Seth Davis, and Andy Schwartz, among others, are part of a call for reform of the collegiate athletics system. Some argue that the system needs some tinkering, but by and large should be maintained. In this essay, I will argue that colleges need to reexamine the purpose of athletics departments and suggest some major changes for colleges to consider. These changes will improve the experience for college athletes, improve the educational effectiveness of colleges, and, hopefully, improve the athletics viewing experience for the fans.
The N.C.A.A. has a rule in place that sets the market price of a college athlete as one year’s tuition, provided in kind to the student-athlete. The controversy centers around the question of whether the cost of tuition is a fair salary for “student-athletes.” However, economic theory generally ignores the question of whether or not a price is fair – it is assumed that a price is fair if two parties agree to trade at that price. Despite all the complaints about compensation from commentators, no one forces student-athletes to play. If they really are being exploited, they always have the option to walk away. Thousands of student-athletes sign on every year to play knowing the terms a university offers. Many play in non-revenue sports or have no hope of ever playing professionally. For most student-athletes, an athletic scholarship, if they are lucky enough to have one, is compensation enough.
So rather than asking if student-athletes are fairly compensated, we should ask whether or not the N.C.A.A. regulation prevents athletes and universities from exchanging athletic and educational services at a mutually agreeable price. That is, does the regulation prevent some potential athletes from playing for a university because the regulated price is set too low? It’s certainly possible. Stories about players who can’t afford trips home for break or have difficulty scrounging up a good meal (though most college students subsist on a diet of ramen anyway) show that some athletes can just afford to attend, which suggests that extra costs could prevent some players from accepting a scholarship. Removing the cap on student-athlete salaries could provide more students with access to higher education and higher compensation for their athletic talents.
Additionally, the regulation prevents some colleges from hiring their most preferred athletes. As Schwartz points out, the N.C.A.A. universities act as a cartel, working together to push down salaries for student-athletes. The numerous bribery scandals over the past few years show that some universities would prefer to violate the cartel agreement and pay some athletes more than the value of a scholarship. Therefore, removing the N.C.A.A. cap on player salaries could improve the welfare of both players and universities. A free market for student-athletes would ensure that the most desired players end up at the universities that most strongly want them.
Paying players in cash shatters the noble idea of a “student-athlete.” But I maintain that the concept of a student-athlete, at least in sports where there is a significant amount of money involved, is dead anyway. It’s time that we recognize that fact. The N.C.A.A. does a poor job of policing offending schools, and when it does, its punishments are applied unfairly. Athletics departments spend resources trying to game the system. Schools that agree to follow the rules face a competitive disadvantage. Opening up the range of competition for athletes levels the playing field by making the recruiting rules the same for every school. Unfortunately, that means that small schools will be unable to secure the necessary funds to compete with the larger universities. Some schools would need to scrap their teams entirely.
Such an unpalatable notion leads many people to conclude that the N.C.A.A. should still maintain caps on player salaries, but tinker with the amount of the cap. Yet, the end of many collegiate athletics programs is a feature, not a bug, of my proposal.
Universities and colleges exist to preserve old knowledge, develop new knowledge, and pass that knowledge along to the next generation. In no way could you construe the central mission of a university to include operating a minor league sports franchise. Athletics departments perform auxiliary functions for a university – they raise money for the university, maintain connections with alumni, and promote the university to the wider public. That is, universities use athletics for marketing and fund-raising. Yet, a university can market itself and raise funds without an athletic department. They say you have to spend money to make money, but surely there are cheaper ways to garner alumni donations than operating a Division I athletics department. College sports do get a lot of attention, but is it the type of attention that attracts the best qualified students?
Alumni of a school that care about its athletic program would understandably be disappointed if the program were to disappear. But, if they want the athletics program badly enough, they should pay for it. I propose that universities should sell off their athletics programs to a separate trust (or a more appropriate legal form) owned by the alumni. Manchester United fans started a similar trust to buy a share of the club when Rupert Murdoch offered to buy it. Alumni could by shares in the new trust. The trust would gain all sources of revenue that currently accrue to the school. From those revenues, the trust could pay out salaries as necessary to players. Students could still play for the trust’s teams without accepting a salary. Any money left over could be donated to the associated university. Such a system allows universities to maintain academic integrity by leaving the unseemly business of paying athletes to the alumni.
Of course most athletic departments lose money as a whole, so the trust would have to decide which teams to fund and which teams to drop. Most likely the trust would continue to operate only the major revenue sports – men’s football and men’s basketball. But once you recognize that the concept of the “student-athlete” is dead, and remember that universities exist to produce research and education, not entertainment, losing some smaller athletics departments doesn’t seem like a loss. Yes, it’d be a shame to lose sports such as men’s wrestling and women’s field hockey, but I maintain that money spent on those sports are better spent on research and education, for example, lowering tuition.
Small schools, such as my alma mater, Washington and Lee University, should scrap their athletics programs altogether. The absence of an athletic department would not have changed my experience at W. & L. at all. I went to the football games, but mainly as a social event, and even then I never stayed past halftime. My fiancee played for the women’s tennis team; she would have had a drastically different experience. But if she wanted to continue playing tennis in college, she could have still had the opportunity with a student club. I rowed at W. & L. as part of a club team that was financed by the student body rather than the athletic department. Yes, it’s a different experience because there is less money available for the team. But since she’s the recipient of the supposed educational benefits inherent in the student-athlete experience, should other students’ tuition dollars go to support her experience? She still would have had the opportunity to play tennis in college for a team comprised of students representing Washington and Lee, but she would have had to pay for that herself.
While I pointed out earlier that there are possible welfare gains from opening up the market for student-athletes, we see that there are possible welfare losses, too. We need to determine whether or not the gains outweigh the losses to decide whether or not the N.C.A.A. should open up the market for athletes and colleges and/or alumni trusts eliminate some sports programs. Properly done, we’d come up with a numerical answer, but this is an essay, so I’m not going to take the time with the calculations. Obviously students that receive scholarships for non-revenue sports would lose out. But their loss could be offset by providing scholarships to students on the basis of academic merit rather than athletic prowess. I think that’s a net win from a societal standpoint. Universities would gain by the amount that they could raise by selling off athletic facilities and broadcast contracts to an alumni trust. Smaller universities wouldn’t be able to capitalize as much from their facilities since their teams would presumably attract less attention in a competitive market. But losing the athletic department allows smaller universities to divert alumni donations toward educational services. Alumni are worse off by the amount of money that needs to be raised to cover expenses of the athletic department, including new potentially higher salaries for players. Not all players would receive salaries and not all players would receive scholarships, so the total cost may not need to be much higher. By shifting the costs of an athletic program as entertainment out to those who receive the benefits, the market ensures that teams that are truly wanted by their alumni and fans survive and eliminates all others. Players in revenue sports are made better off by the increase in salaries they could receive.
So yes, there will be both winners and losers if the changes I propose are implemented. But current N.C.A.A. policies restrict the price system’s ability to send signals that ensure scarce resources are directed to their most productive ends. The gains from opening up the market will outweigh the losses. I believe that we will all be better off it universities focus on education and research, students focus on learning, alumni focus on maintaining their relationships with each other and their alma mater via athletic contests, and athletes focus on playing.
Yesterday we had our first midterm in micro. I feel pretty good about the whole test, but we’ll see if that feeling is justified when the grades come back. Before the exam, Dr. Thurman handed out a sheet showing the relationships between the four major functions that we’ve covered. He called it the “wheel of duality,” but our study group colloquially referred to it as the “wheel of pain.” I took the liberty of making a few additional notes and typing it up all pretty-like.
Some Republicans do not want any increase in the debt limit, come hell or high water. Treasury Secretary Geithner has said that failure to increase the debt limit could mean that the United States could default on its debt. While that’s true, the decision to default lies with him. Revenue runs about $200 billion per month, but the cost of servicing our debt runs about $20 billion. If the U.S. were limited to spending what it took in revenue, it could afford to pay interest on the debt, Social Security, Medicare, Medicaid, defense expenditures, and have a little left over to run the federal government. Running up against the debt limit amounts to a partial government shutdown.
However, neither Congress nor the president have drafted any plan to prioritize payments in the event that the debt limit is not raised. A partial shutdown would not occur in an orderly fashion. The federal government borrowed an amount equivalent to 9.6% of GDP in the first quarter of 2011. In fact, it borrowed more than it contributed to GDP through consumption and investment. Nine percent of the economy cannot just stop one day. Yet, we can’t keep borrowing to fund about one tenth of the economy either.
Most of the proposed deals have involved a large, immediate increase in the debt limit. I suggest that Congress raise the debt limit in stages. Using the 2011 Q1 GDP numbers, the federal government spends about $75 billion each week; $28 billion of that is borrowed. Congress can enact a bill that raises the debt limit by $28 billion in the first week, $27 billion in the second week, and so on. Hey, they can cut it a half a billion each week and that would balance the budget in a year. The government would continue to function without a great disruption. It would send a signal to the markets that the government has a plan to reduce spending. Constituent groups that might lose funding would have time to prepare for an eventual loss. Congress can get the support to cut a half a billion dollars in a week much more easily than it can get support to cut $4 trillion over ten years.
Roger Godell has taken to the pages of the Wall Street Journal to explain the consequences for the N.F.L. if the players win their suit against the league. Among other things:
In the union lawyers’ world, every player would enter the league as an unrestricted free agent, an independent contractor free to sell his services to any team. Every player would again become an unrestricted free agent each time his contract expired. And each team would be free to spend as much or as little as it wanted on player payroll or on an individual player’s compensation.
Oh, no! N.F.L. teams would have to operate just like … every other major company in America. That would certainly change how the league allocates new talent, but I’m not sure it would be for the worse. The N.F.L. has excellently promoted its annual draft, expanding it to a three-day event with prime time coverage. The draft and off-season roster moves are a game within a game, where general managers compete to assemble the best teams. Eliminating the draft wouldn’t rob fans of the drama surrounding competition for talent. Owners and managers would still need to evaluate talent. Fans would still get the drama of discussing which team acquired talent most efficiently, regardless of whether new players come in via a draft or free agency.
I really doubt that letting teams buy talent in a market will skew the competitive balance towards wealthy teams. Major League Baseball teams can stack the deck with as much talent as they like (though they have to pay a luxury tax), yet baseball hasn’t seen the domination by a few teams that Goodell warns about. In the past ten years, nine different teams have won the World Series, with the Boston Red Sox winning two championships three years apart. Billy Beane and the Oakland Atheletics showed that a team with a small budget could compete and win by exploiting inefficiencies in the market for talent.
But suppose an owner’s objective isn’t to maximize wins, but to maximize profit. He could still field a competitive team without paying maximum salaries for superstar talent. As long as his team is competitive enough that it still has fans, the owner can sell tickets, advertising, and merchandise. I’m sure that the profit-maximizing roster is less expensive than the championship-maximizing roster.
Moreover, if the N.F.L. really wants to distribute talent easily, the draft might not be the best means to that end. Massey and Thaler showed that teams overvalue high draft picks. That means that teams with high picks would do better to trade away their picks. Berry and Schmidt note that quarterbacks taken with picks between 51 and 90 were as productive as quarterbacks taken with one of the first ten picks.
Of course, players would benefit from maximizing their salaries. I doubt that the average N.F.L. player would see a drastic difference in salary, but the top players would certainly come out ahead. Bench players, whose market salaries would probably be lower than the current leage minimum of $250,000, would lose out in the shift away from collective bargaining.
So it’s fair to the players, profitable for the owners, and exciting for the fans to get rid of the draft. Yet, I doubt the N.F.L. will actually do it. That means I’m stuck having to watch Cam Newton struggle to lead the Carolina Panthers through next season, if there is one.
There’s no siren, but Drudge broke out the red text to announce that Federal reserve aid went to companies, to banks, and offshore. The Washington Post article makes it sound like the lending is some ominous, shadowy program for a few paragraphs, before revealing
Companies that few people would associate with Wall Street benefited through the Fed’s program to ease the market for commercial paper, a form of short-term debt used by major corporations to fund their daily activities.
By the fall of 2008, credit had frozen across the financial system, including the commercial paper market. The Fed then purchased commercial paper issued by GE 12 times for a total of $16 billion. It bought paper from Harley-Davidson 33 times, for a total of $2.3 billion. It picked up debt issued by Verizon twice, totaling $1.5 billion.
In other words, the Fed fulfilled its duty as lender of last resort. It lent to healthy companies in times of stress in the financial markets. Not one of the more than 21,000 loans has lost money. I understand the scepticism surrounding large amounts of Federal Reserve lending, but I don’t think that should be the case here.
But the release now makes me wonder what else is going to come to light in the next few months and whether any more releases will affect the way in which the Fed does its job. I doubt these records will hamper the Fed at all; any politician who has a bone to pick with the Fed now had already made up his mind a while ago. Will the releases put any minds on the Hill at ease?
Update: Frank Partnoy writing in the Financial Times notes that the Fed charged low rates on its loans, sometimes as low as 0%, which casts doubt on my interpretation above. The Fed should charge a sufficiently high interest rate on emergency loans such that insolvent firms aren’t tempted to take a no-downside gamble with taxpayer money.
The market widely expects the Fed to announce a new round of quantitative easing after the next FOMC meeting on November 3. The Fed would induce banks to exchange long-term U.S. government bonds for dollars, hoping that banks will use the dollars to make new loans.
But banks aren’t interested in making loans at the moment. The above chart shows that excess reserves, the amount of dollars banks hold in their accounts with the Federal Reserve above what they are required to hold, has exploded since the start of the financial crisis. Normally, banks don’t want to hold more money than they have to, because money in a bank vault doesn’t earn interest (technically it’s 0.25% now, but it’s still a lot less than a loan).
The large amount of excess reserves shows that banks want to hold an asset with a value of which they can be certain. Banks already hold billions of mortgages and mortgage-backed securities that are difficult to value if homeowners are likely to default. The Economist reports the U.S. has $766 billion in negative-equity debt. One in five homeowners may default on their mortgages. Housing prices may fall further as banks foreclose on more mortgages. Any additional money pushed into the banking system is likely to sit in a bank vault until banks know the full extent of their losses. Sorting out the housing market will have the same stimulative effect on lending as another round of quantitative easing, while returning the monetary base back to typical levels.
I can’t stand to listen to most people in the corporate world. The grammatical structure and vocabulary selection that accomanies most advertisements just sounds like someone running his fingers along a chalkboard to me. I recognize most of the words, but I can’t seem to discern any meaning from them.
Tyler Cowen writes today that the vacuous nature of corporate-speak exists to smooth disagreements between rival factions within a corporation. I think that’s certainly one benefit to vague language. But I surmise that empty words exist mainly for the benefit of those outside the corporation. Consider a company that advertises they “provide unique solutions for their clients.” Who doesn’t need a unique solution to their problems? Vacuous phrases allow companies to appeal to as many potential clients as possible when spending money on broadcast advertising. The potential clients then fill the empty words with whatever meaning best suits them.
Dr. Cowen brings up politicians and CEOs (speaking in public) as examples of leaders who use vague language in order to prevent conflict. In those cases, I think viewing those figures as salesmen rather than leaders gives more insight to the situation. When Eric Schmidt speaks to the public he isn’t trying to mobilize people to use Google services in the way he would mobilize his employees. He’s selling Google and their “don’t be evil” ethos. When Sen. Barack Obama spoke on the campaign trail, he tried to sell us on the “hope” and “change” his presidency would bring, without ever defining the terms. Good leaders, by contrast, address conflict head on and assuage large egos within an organization in order to keep everyone on target. Note that President Lincoln didn’t fill the Gettysburg address with emply platitudes about “common purpose,” nor did President Roosevelt encourge Americans to develop “out-of-the-box solutions” to the Depression.
Additionally, dressing up ordinary actions, such as a conversation with a client, in fancy terminology and jargon creates an air of exclusivity. If it works, then a company has shrunk the percieved size of the market for its services, enabling it to charge a higher price. Note that this strategy has the highest payoff if a company doesn’t actually do anything unique – otherwise, it would just explicitly say what it did.
Kenneth Rogoff worries that “the accelerating speed of innovation seems to be outstripping government regulators’ capacity to deal with risks, much less anticipate them.” Drawing parallels between the oil spill in the Gulf of Mexico and the recent financial crisis, he concludes,
Economics teaches us that when there is huge uncertainty about catastrophic risks, it is dangerous to rely too much on the price mechanism to get incentives right. Unfortunately, economists know much less about how to adapt regulation over time to complex systems with constantly evolving risks, much less how to design regulatory resilient institutions. Until these problems are better understood, we may be doomed to a world of regulation that perpetually overshoots or undershoots its goals.
When has any regulatory body perfectly set regulations? I never understand the power that some people ascribe to government agencies who oversee markets. No one person or one agency can ever know enough information to perfectly regulate an industy. Rogoff, who just wrote a book on eight centuries of financial folly (which is on my reading list), knows as much. Still, that doesn’t mean we should do away with the regulators. We’ll never get regulations exactly right, but we can get them as close to right as possible. Some regulations are generally better than none.
Mark Thoma at Economist’s View notes that “If the risks of too little regulation are very large — … much larger than the potential costs from too much regulation stifling innovative activity — then there should be a bias toward erring on the side of too much rather than too little regulation.” While that’s true, we aren’t faced with a binary choice between regulating away innovation and accepting large catastrophes. We should accept that regulations will fail, but then put plans in place to limit the damage when incidents do occur.
For instance, an offshore drilling policy that accepted that some oil rigs would occasionally create spills, but focused on methods to quickly contain the spill, would both remove the catstrophic danger and allow for the benefit of increased domestic oil production. Opening up costal areas closer to shore, where the sea bed is shallower and rigs are easier to maintain, would help oil companies contain any spils that do occur.
Do you think the bailouts were good or bad? Should the U.S. be bailing out Greece, or other countries, with money we don’t have instead of trying to limit our own spending? I think that banks continuing to get bigger and bigger is bad, just as I think other businesses or agencies that swell till they burst if they don’t have taxpayer help is bad. Am I wrong?
Well, it’s not a clean right or wrong issue. Our economy can grow so well because of fractional reserve banking. When people have money that they don’t need to use now, they put it in a bank. The bank lends that money to businesses, who use it to purchase new capital and make new goods or services. Once they make a sufficient profit, they repay the loan. The depositor can then withdraw his money as if it never left. The whole system works, so long as the business is profitable and the depositor doesn’t need his money while the business has it. For a certain amount of money that’s used by banks, businesses, and depositors, only a fraction of it is in tangible bills; the rest are just marks on bank ledger.
When a business can’t repay its loan, the bank still owes the depositor his money, so the bank suffers the loss. If the bank makes enough loans that don’t get repaid, then the bank goes out of business and may not have enough money to repay all of its depositors. If depositors see a bank lose a lot of money, they may try to withdraw their deposits before the bank goes under. If too many depositors ask for their money back, then the bank runs out of money. Think back to the bank run in It’s a Wonderful Life — George Bailey explains, “You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house; that’s right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others.”
Bank runs used to be a regular feature of American life, at least until the FDIC was established and the Federal Reserve got an idea of what it needed to do (Milton Friedman argued that the Federal Reserve actually made the Great Depression worse). Financial crises usually precipitated recessions. When banks go out of business, other businesses can’t access credit. They either put off plans to expand, contract their operations, or go out of business. Financial panics call the lie that is our monetary system; not all money is “real.” Everyone hoards as much of the “real” money as they can and puts off trading. Some firms are so large and interconnected, that their failure would trigger a financial panic. So bailouts are in part good, because they prevent the entire economy from tanking because of the actions of one particular firm.
But the insurance of “too big to fail” creates what economists call moral hazard: the government encourages banks and investment firms to place risky bets by covering their losses. It creates a “heads I win, tails you lose” bet. In an efficient economy, the threat of loss prevents businesses from pursuing risky endeavors and generating losses. Moreover, it’s not fair to stick taxpayers with the bill for something over which they have no control and from which they could never gain. So bailouts are in part bad, because they encourage wasteful spending.
In March of 2008, the Federal Reserve provided financing for the sale of Bear Stearns, and investment firm that suffered heavy losses in the subprime mortgage market. Six months later, the Fed declined to do the same for Lehman Brothers, letting the firm file for Chapter 11 bankruptcy, the largest in history. The Fed justified its disparate treatment of the two firms by noting that problems in the mortgage market took Bear Stearns by surprise, but that Lehman and other firms had plenty of time to right their finances and could have avoided their losses. The Fed hoped that other firms would realize that it would no longer encourage risky investments and take steps to fix their own finances. The firms got the message. After Lehman failed, wholesale lending markets stopped. Anyone with money held on to it, for fear that if they lent it out, it would never come back. It took the creation of TARP and several other lending facilities to calm the markets and allow them to function while the large financial firms got their affairs in order.
Greece, along with several other European and American states, has spent lavishly on social programs and benefits for public sector employees, all of which depended on revenue from the private sector. With the downturn in the economy, the money just isn’t there anymore. They need to get their financial houses in order. But what’s the best way to help them do it, carrots or sticks? A bailout gives Greece time to cut spending here and raise taxes there, but it doesn’t force them to own up to the fiscal imbalance that is the root of the problem. If Greece were to fail to repay its debt, it would force more reorganization, but would harm the global economy.
So I’ll leave you with the thoroughly unsatisfying answer of “it depends.” In an ideal economy, people who make good decisions would get rewards and people who make bad decisions would suffer losses. But we don’t have a perfect economy. Those who act in the public interest must decide whether a bailout prevents short term economic harm more than it encourages long term economic harm. And that probably changes depending on the company, the time, and the economic situation.
There isn’t anything inherently wrong with large companies. In fact, large companies can lower costs by using economies of scale. But we need the legal framework to deal with the failure of large companies. A good framework would allow for the continued operation of the firm during the bankruptcy process, while ensuring that a failing firms’ equity holders and debt holders suffer losses, not the public.
Governments around the world responded to the recent contraction with Keynesian fiscal stimulus. Though government action appears to have warded off financial crisis, the world now faces a fiscal crisis as governments struggle to balance their budgets. Public sector employees in Greece rioted in response to that country’s bailout and austerity measures, yet Greece will likely default on some of its debt anyway. Bond markets are worried that Portugal, Spain, or Ireland might default next. Moody’s has even floated the idea that it would downgrade U.S. debt. Arnold Kling suggests the bond markets stop lending to governments to prevent them from building, and eventually reneging on odious debt, despite, or rather because of the fact that “it would make Keynesian stimulus a bit difficult to carry out.”
I don’t have the General Theory in front of me, but I was under the impression that Keynes suggested the government run a surplus during expansions, then draw down the surplus during contractions. I think Keynes would have acknowledged that this business of borrowing for stimulus is like trying to raise yourself up by your bootstraps. The amount of money in the economy at a given time is fixed; by borrowing, the government puts no money into the economy that it doesn’t first take out, leaving the net result unchanged. Perhaps it makes a modest increase in the level of spending by borrowing from someone with a lower marginal propensity to consume, but the value of that increase in spending is counterbalanced by the inefficiency of the transfer.
However, when the government runs a surplus, it transfers money across time. By “borrowing” money saved from the previous expansion, the government can add to the economy during the contraction without detracting from economic activity in the current time period. Thus, the government would act as a counterweight to the business cycle; it would moderate expansions by spending less, but moderate contractions by spending more.
Of course, this assumes that the government can perfectly ascertain the current state of the business cycle and adjust fiscal policy accordingly. If policy is out of phase with the business cycle, then the government increases spending when the economy has recovered and no longer needs help and decreases spending when the economy has peaked and needs help the most, which actually exacerbates the severity of the business cycle.
Susan Allen, a prospective law student at UNC, has set up a website soliciting donations so she can cover the cost of tuition, about $105,000 for three years. Elie Mystal, writing at Above the Law didn’t think very highly of the idea, saying that Allen, like many prospective law students, “expect[s] to get a really expensive legal education, yet not be forced to do stressful, high-paying work in order to pay it off.” At first, I reacted the same way — why can’t Allen get loans like the rest of us?
But then I realized that I didn’t pay for my education entirely with loans; I got scholarship money to cover as much as I could, then used loans to cover the rest. Sure, I went to big organizations with established, well-funded scholarship programs to ask for my money instead of setting up a PayPal account. But what’s the difference except for the size of the donation? Allen shouldn’t care whether she gets a $40,000 scholarship from a foundation or 1,000 donors to give $40 online.
The internet has reduced the costs of financial intermediation. Now, most political campaigns turn to the internet to solicit donations. In his special Senate election victory, Sen. Scott Brown raised $7.8 million of his $14.2 million total in the final three weeks from small donors. Groups like Kiva and the Grameen Foundation match lenders with small business owners in the developing world who need loans of less than $1,000. What’s to stop people from financing education the same way?
A flexible market for scholarship money should match up students and donors much more quickly and efficiently than the current institutional system. Students, instead of depending on a handful of institutions for scholarship money, could appeal to hundreds of thousands of potential donors, which make it more likely that they could each raise a little money. Donors, particularly ones with esoteric interests, could fund the study of subjects of their choice, without getting limited to the interests of institutions.
The World Bank has post on one of its blogs explaining the rise of zero rupee notes in India as a protest against bribery and corruption in the governement. The notes are printed by 5th Pillar, a local NGO. 5th Pillar has distributed over a million of the zero rupee notes, which have effectively reduced corruption in India. For example, one old lady outside Chennai City needed to pay a bribe to obtain a title for the land she owned.
Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success. Had the zero rupee note reached the old lady sooner, her granddaughter could have started college on schedule and avoided the consequence of delaying her education for two years. In another experience, a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.
Is the zero rupee note money? It’s not official in any way, and, by definition, it isn’t worth anything. Does it function as a store of value when it is intended to store no value? (Think about that one for a while.)
Yet, I say that it does function as money, at least in the case above. The old woman presented a object worth the advertised price of the service she wanted and exchanged it for that service. I doubt that she could have gotten the same effect out by writing “zero rupees” on a piece of paper and handing it to the official.
Justin Lahart has a great piece in the Wall Street Journal chronicling stories of economists who practice what they preach by acting “rationally” — maximizing personal utility. For instance, John Sigfried, a professor at Vanderbilt, bought a black car instead of a gray one, even though he preferred gray, because it was $100 cheaper. Robert Hall, a Stanford professor, wants to hire someone to trim his Christmas tree so he can use the time for more productive things.
Economists typically posit that people act in their own interest — they maximize their own utility, or happiness. It explains why studies have shown that economists free ride — get others to pay for things from whcich they themselves benefit — and contribute less to charity. A purely self-interested person would never give to charity; yet people give to charities all the time.
All of which give rise to the question: are economists cheap because they assume people are self-interested, or do self-interested people gravitate to studying economics?
