What’s the potential of on-line education?

About MOOC

The hip term in academia for online education is MOOC (massively open online courses). MOOC’s medium (the internet) isn’t really a new thing, however what is new is the fact that it is free, and that top universities have started to roll out this free content on the internet.  These courses generally have very large cohorts of students, and although the completion rate is fairly low, it is still significantly large in aggregate terms. This logically implies that the average quality of teachers on the web is much higher than the average teacher (assuming the internet picks the best teachers). As MOOCs expand, they offer terrific possibilities for developing countries, the only requirement for this free knowledge is access to internet. A 16 year old Indian who has never been to school could potentially know more math than an MIT graduate. The only real advantage offline courses offer is direct contact with the teacher though this is not necessarily as important as it may first appear; it could be that the forums created will become extensive enough to answer every possible question a student might have (especially with some advanced algorithms we can produce today) but in terms of thesis feedback and supervision, there would be complications, and there are also some limitations on more practical subjects being mastered online.

Economic theories of education

Before discussing online education we must first lay down the ground work for why people get educated.

The first theory is the theory of human capital, which basically says that people go to school or university to improve their skills or knowledge. Improving themselves makes them more valuable to companies, and as long as your value capacity is higher than what the employer has to pay you then you should be able to get a job.

A second theory is signalling, here people don’t go to university or school to get better, they merely go there so that they can prove to employers that they have certain skills. For instance, getting a degree might signal that you are more intelligent or that you work hard, which are traits the employers desire. This theory could imply a limited capability for social mobility since signalling accreditation is not accessible to all.

Finally the third main theory is the status theory; this is people going to Universities because of cultural or societal ranking purposes. This is not very different from attending a church, though this model could imply a networking effect which boosts earnings.

The literature I am familiar with seems to indicate signalling is the more prominent one. The specific measurements seem to indicate that depth of education is secondary to selection criteria and brand value of the university, which both lean towards signalling.

edit: An example of how researchers try to separate human capital from selection is by looking at those who got accepted into top universities but did not attend, some studies .

Generally my ball park estimate for the value found from attending University is something like 80% signalling and a close match between the other two, human capital is probably slightly more important than good status.  This split isn’t the same in all degree types of course, humanities rely more on signalling; technical skills could be more reliant on human capital and MBA programs more reliant on status.

Application to online education

Under all three theories, online education has a place, however its potency differs. Under signalling dominating there is likely to be a wage premium for attending regular Universities since a large portion of their value is their selection criteria which are diluted when there is an online system. However if a shift should occur and human capital becomes more important, that is, people attending Universities to improve their skills, then that spells a bust for traditional universities.

Making online education also appeal to signalling will require a way to make testing credible by being exempt from plagiarism, it might seem plausible to just have screen sharing settings on or webcam active at all times during testing but it’s very hard to say who would watch these, it is perhaps better if an automated process is found. If credibility is attained in online education it may be possible for it to signal things that regular universities don’t, such as discipline, initiative, independence or even entrepreneurship.

Demand and Supply

In my mind there are two main types of demand for these MOOCs, mainly seeking mental stimulation (perhaps old retirees) and career advancement. There are likely to be cases where the human capital model applies for career advancement, as some jobs might offer on-site testing but it’s perhaps better if centers for testing were established that people can just show up for and use their knowledge to gain accreditation and then not have to re-take endless amounts of tests. In any case if the goal is accreditation the cost will generally be higher, but if the goal is the acquisition of skills or recreational purposes, it’s very cheap to provide since no involvement with test centers and diplomas is required.

A special demand market that the flexibility of online education can tap into is people who are full time workers. This pool of people is likely to be gigantic and the talent endless, these people are people who are so valuable to companies that the company cannot afford to let them off for a year to do an MBA or specialist program. Let’s also not forget that this extra choice for students will create competition with Universities, and with competition, there won’t be as strong of ability for Universities to select the very best candidates since the pool of people they will be selecting from will be smaller. This will dilute their selection criteria, and subsequently their signalling value.

On the supply side, the business model of providers this will shift attention to the lecturers, probably significantly cutting down non-lecturer staff of universities. It could be argued that if some of these fields being taught online aren’t expanding(I want to say fields like Anthropology generally evolve slower) enough every couple of years, the maintenance of updating the videos will be very low resulting in very few lecturers being required. For instance it could be that the same videos of mathematics will be watched 100 years from now, essentially killing the market for math lecturers. This could result in a winner take all effect, such as the music industry has witnessed, but not likely to be as prevalent since the language barrier might be important, this is because it is the main source of communication (where as music today barely relies on language).   This winner take all effect could be monetized through textbooks, although the market for textbooks will shrink in aggregate because of MOOC’s (controlling for shifts from developing to developed). This is an inevitable consequence of the winner take all effect, it is likely that successful textbooks will be boosted as the reputation of its author (who is an MOOC lecturer) rises and offers higher brand value to the University hosting the lecturer, which can also be monetized in a number of ways. This also implies much fewer universities being around unless people still value other things about them such as the cultural or extra-curricular aspect, but it is also just possible people meet that demand by participating more in their local clubs.  There are also legal boundaries preventing such supply shifts from occurring, such that you need to be accredited by government agencies and I am not certain how that affects online courses.

Present and future structures

Imagine a moving platform that holds a product and goes through different points to add new elements to the product. Now imagine that those elements are dependent on the previous one’s being properly installed. Well that’s how I view education as it is right now, only the products are people. This method causes way too many defects, and not necessarily by being more efficient either, since the energy expended to make sure each sequential piece was properly placed would be given by the people themselves. So the main cost is the switching cost, the initial cost of change. It doesn’t make sense for someone (regardless of their age) who hasn’t mastered a subject to move on to a more advanced subject that has the un-mastered subject as a prerequisite.  I don’t really need to produce evidence that it’s harder for a child that hasn’t learned the power rule to apply the chain rule.

It seems the easiest step to take in making education more dynamic is pushing it online, students have the ability to rewind, fast forward and pause and really go at their own pace, the Khan Academy model also seems fairly effective, they have a quiz after each concept is introduced, making sure students have mastered a concept by acing a quiz before being recommended to move on, so all students are A students. Not to mention that the world would be much more efficient if degrees were given out for every concept mastered, like that, people would not get over or under educated.

Perhaps the most backwards mechanics we apply is grading on curves that is giving x% of a class an A or a B. This gives no indication of mastered material, and makes the goal to be better than the rest as opposed to learning the material. This relative grading passes on an information cost to employers since they have to employ capital to learn what different kinds of grades mean, to see if they meet an absolute qualification and to see how they fare compared to graduates of other systems. An employer knows very little if an A or a B was received in a curved class and his only way of knowing how much stuff they learned in these classes is by knowing something about the school or university which channels money to the elite who have an already established reputation and costs the employers less. This is in part why it’s good to have national/international wide testing (eg. GCSE, IB, AP etc) that is widely accepted, so we can compare people. However this information cost must still be borne when comparing people who took different types of tests and in the case of Universities, the lack of such test types makes it very hard to compare students.

The structure of education needs to be taken into account, especially in government funding; it could be funneling us to towards some of these theories. For instance the French education system which I previously discussed has government pushing the status and signalling theories, which could amplify inequality. Online degrees probably haven’t had enough time to be able to project degree type value, in the future the mere fact that you have an online education could signal things like discipline and initiative to employers, and may probably offer value in that people can boost their job experience whilst simultaneously boosting their education credentials but these things will likely emerge over time.

As a final note, let’s not forget that online education is today much cheaper, which allows students to more flexibly choose their career, whilst traditional graduates will have to choose things that will repay their loans, even if their career advancement prospects in this given position are limited. However this cannot be properly observed without specific econometric techniques to get rid of the selection bias of people who did not attend regular university.

links 08/10/2012


When do economists agree?(fun)

Exponential Economist meets finite physicist(fun)

Bernake and student conversation(fun..ish)

What came first, the chicken or the egg? Empirical Evidence!(fun…ish)

What are the key functions of Asset management?

What is the price of going short volatility?

Bestiary of Economists!(fun)

The economics of video games(fun..ish)

Gravity and international finance

Foreign banks and financial development

Corporate governance in financial institutions

Too crooked to fail? (fun…ish)

With Mitt Romney having released his effective tax rate and it being below 15% there has been a debate about optimal capital taxation. Here’s a good academic paper on it, and a slightly more comprehensible article on it, there is also an unsmoothed graph presented after that article.


Want to be a crony?

Should we end the Fed?

Do Indie Video games have a competitive advantage?

Random economics knowledge bites:

Lecture on macro0-economics(includes stuff on optimal currency area)

Marginal Revolution Site for economics

Fed lectures series

Money’s use: the unit of account

As expected, during times of crisis people start critiquing the system.  Most notably I hear a lot about the evil of money. To really understand money we must first understand division of labour, people specialize in different fields, the often cited classic examples of division of labour are professions such as a farmer, butcher or carpenter. This division has allowed humanity to achieve enormous productivity gains(obviously this is a shameful summary). However when these professionals wish to exchange their product or service with another being, they are prone to suffering a transaction or accounting cost. This is because they do not know the value of their good in context to the rest of the world.

This is where the first of three functions of money comes in, in this first post of three I will talk about the first function, the Unit of account:

If the economy has n amount of goods or services, in an economy without a unit of account, the number of prices is denoted by:

Whilst in an economy with a unit of account, the number of prices around is merely:

So if the economy has seven goods, Beef, Carrots, Chairs, Pants, Chimay(Belgian beer), Water and Ipads. There are possible 21 possible combinations. These are:

Beef-Carrots, Beef-Chairs, Beef-pants, Beef-Chimay, Beef-Water, Beef-Ipads, Carrots-Chairs, Carrots-Pants, Carrots-Chimay, Carrots-Water, Carrots-Ipads, Chairs-pants, Chairs-Chimay, Chairs-Water, Chairs-Ipads, Pants-Chimay, Pants-Water, Pants-Ipads, Chimay-water, Chimay-Ipads, Water-Ipads.

The reason its n-1 and not n is because you assume they will use any one of these goods as a unit of exchange. For instance you could make chairs the unit of account, and everyone would agree to price their goods in chairs, so if the brewer wanted to buy an ipad, he would bring like 50 chairs to Steve Jobs(may he rest in peace) and exchange it for an Ipad. So now you only need to know six prices these are:

chairs to beef, chairs to Chimay, chairs to carrots, chairs to pants, chairs to water, and chairs to ipads.

It’s very troublesome to carry around all those chairs, what about something valuable but small then? Well maybe microprocessors? Well then how would you buy water? You might be forced to buy it by the tonne. If you try to add another object for less valuable transactions then the number of prices you need to know doubles(+ the exchange with the first unit of account).

So a convenient way to do this is to just have contracts entitling you to a certain value. In fact that’s what money IS, in the olden days bank notes were something you could literally go to the bank and redeem for gold, but even then nobody did because you could conduct all this business without ever having to lay a hand on the gold.

Anyways even though you’ve simplified the process of knowing a little, it’s not sufficient because in an economy with so many products as our own it’s still very troublesome to know all the prices.

My favourite critique of competition!

Perhaps the greatest appraiser of competition of all time is Hayek, in “the road to serfdom” he makes a point about competition being pivotal factor about why capitalism is one of the most efficient systems we can have because competition is an automated dynamic mechanism which cannot be replicated from a top down approach. It’s very hard to disprove that competition is great yet perhaps we can find holes…

So Robert Frank in the “Darwin Economy” describes an example of evolution being inefficient. Frank uses the example of competition within male deer. Deer compete with the environment to attain food and survive large predators, but they also compete amongst themselves over females. How do they compete? with their antlers of course, usually the bigger antlered deer’s wins the fights and get the female. So over time evolution dictates that they the average deer horn size will increase. Yet what matters is relative antlers size not absolute antler size, so in other words, the same hierarchical structure would exist even if all deer’s horns were halved. So if the deer could vote on decreasing everyone’s horn size(assuming they are rational) they would all vote for it because they would benefit as a species by not having to carry around X amount of extra weight when being chased by a lion.

So what’s something similar in the human competitive process. Once you get to thinking about it its very easy to come up with examples, interviews are one. What matter’s in interviews is that you be better than the other applicants(assuming a company is taking a fixed number of employees), so the more you practice the higher your chance of getting the job. But what if you could spend the months leading up to the interview actually getting better at the job? The whole world would benefit if everyone spent less time preparing for interviews and more time polishing their skills(which are sometimes not tested until your on the job).

Another example, maybe in dating, women favour blue eyes(not sure if this is true), but in reality blue eyes are more sensitive to sunlight and a genetic weakness because it usually means lower levels of melanin which means less protection from UV radiation.

This eugenics movement about optimizing the human race is completely misguided because it assumes which attributes are superior, Hitler deemed blue eyes to be superior… yet now we know they aren’t. You could argue that intelligence is an absolute that matters, but does it really? Steve Jobs wasn’t renowned for his intellect but his creativity, which is perceived to be exclusive from intellect and look at the value he created for the world. Even if we assume intellect creates more value how do we know it’s not because of the way we structured our society around it? Maybe if education was revamped other attributes would come out dominant. This kind of discrimination is the pretence of knowledge(start and finish with Hayek) and should not be taken seriously.

How to separate education from degrees

One of my last posts here was about making education more integrated with the market. But there are some who want education to be pursued for its own sake. How could this be achieved? Simple we restrict the ability of employers to request educational information. Now this might seem contradictory if you read my last post about the hazards of information asymmetry. But this is a very different case because this isn’t about bearing risks its about a selection process. The actual hands on knowledge we receive from degrees is very little, most of their earning power is from the brand, and the selection process, less than 30% of the difference in salary between Ivy schooling and non Ivy schooling can be explained by the content.

The most immediate reaction of someone would be… how will the companies decide who to select? Especially for specialist roles such as doctors? Its very simple really, the companies will just incorporate more tests into their selection processes to ensure that people really know what they are talking about. Why this is favourable? Well social mobility is one answer. Anybody can just pick up a book learn all the content, then maybe watch a couple of videos on youtube on how stuff works and then go through the application process. The concept might seem frightening and its true that its very reliant on companies being able screen candidates in a much more integrated way, however this is not far fetched at all.

Degrees in this day and age don’t guarantee jobs anyway, and vast majority of people who actually only go to University because they want to get a job, which is understandable but it is perhaps unnecessary. Seeing that most of the content they will be learning is not applicable to their careers. The end result would probably that people who don’t want to learn just for the sake of learning but for work would structure their studies at their own pace to reach only in areas that are relevant to where they would want to work, probably through private tutors.

On the University side, sure they would get less students, either most Universities will shut down or classes will merely be smaller, either way the result will be that whoever is in University will be studious and passionate about the subject leading to a much more intellectual environment that will be less about achieving grades(since they won’t help you get a job), and more about achieving knowledge.

My theoretical advice to the French Ministry of National Education for their University System.

Without changing the culture and morality of the system, the aim is to make it more efficient both in terms of budget deficit and in terms of dropout rate in tertiary education, one of the highest in the world. Protecting public education whilst attempting to find optimization routes is crucial, it allows social mobility without discriminating according to household income or willingness to go into debt.

An accounting entity can use its auditing services to gain a better understanding of the system and apply lean techniques to cut wasteful activities.  Feasibly tracking down how to offer non-core services more selectively (the ratio of student to service and technical staff is 1:40, in the US, its 1:3) or reducing the frequency of optional and less popular courses or just eliminating non self-supporting non-core activities. Gamification (one of PWC’s expertise), could be key by transforming mundane tasks into enjoyable ones.  Lessons learned are benefits of high frequency positive feedback; the best approach  is using ICT as an important ingredient to ameliorating efficiency and student capacity allowing individual tracking of progression enough to create self-motivation and eventually allowing  a switch  from batch processing to a more continuous way of handling students.

To set up a proper waste reducing system a proper measurement capacity of value adding activities is required.  Perhaps use the percent of graduates gone to further education or found a job. Such a primary index set in a dynamic manner, adjusted according to economic conditions sustaining or increasing spending in departments or schools achieving or exceeding this quota and reducing it in those that missed it by a proportionate amount. The forte of such a structure is its reliance on market mechanisms as information sources and has the government act on those, creating a much more demand based classification of education  avoiding miss-matching skills to employer’s needs. The supplementary benefit will be a much clearer sense of purpose for educators subsequently gearing their teachings to fit this need and offer work specialized education, incentivizing interaction between industry and research, enabling cross training opportunities not only for students but also for teachers. A catalyst could be introduced in the form of bonuses for exceeding quotas, along with penalties for dropping out or failing.

France’s spending in education per university/high-school student is among the lowest in the EU. Moreover, 30% of that funding goes towards “Grandes Ecoles” (who train less than 5% of students), and create a completely parallel structure which contributes disproportionately to the formation of the “elites” and results in a two tier education curricula distorting the system and painting an even grimmer picture. The steps highlighted above offer a way to reduce this emphasis on “Grandes Ecoles” and eventually should be able to replace them.

What’s the point of Higher Education?

If your still wondering… then there’s probably some idealism at play here. The point of Higher Education is to create value for the society which established it. If a model of government subsided education is not sustainable then leave it to privatization to determine if it is in fact worth its weight in gold.

There’s an overwhelming amount of hogwash in Britain about the rising fees and interdepartmental funding. This might not even be going far enough…

Nobody wants to graduate and left wondering why they still can’t find a job… overwhelmingly it seems like one of the reasons employers are no longer hiring, is because there is a lack expertise among graduates. China’s new program here will issue cutting of subsidies if a program fails to find jobs for at least 60% of its graduates in the last 2 years.Although this approach is probably not perfect, it is the first step we need into rethinking how to set up our education.

Cheap(or free) education is important because it allows income and social mobility but when that education is non value-adding(and hence with limited prospects), perhaps it should be only for those who have the money and time to spend… for the rest of us, we need to focus on making sure we can bring food to the table by giving back to society. I.E i have great respect for Film Makers, and there are people who make it out there, however the vast majority do not, and with the development of the internet technologies the “winner take all effect” is taking place. With such a high rate of failure, only those who can afford to take this risk should do so. Government should only subsidize programs that are known for their value adding abilities.

If this approach is taken, in the long run, every degree will have an equal chance of yielding success, government need only offer support to make this happen. The alternative of private education will create too much inequality as seen in the US today.