Along with roads and defense, education often comes as a necessary output of the State. Even Hayek claims that, since we need to be educated to value education, it has to be compulsory. I want to focus on a different question: the cost of universities. There are various statist arguments around State funded universities, based on different angles.

• Universities produce positive externalities, a country needs to be smart (although knowledgeable would be more appropriate) to develop, thus we need to finance education.

• Paying universities increases inequalities since rich people get to have education while poor people don’t, thus creating an endless separation.

• (Combination of both) It’s unfair that smart but poor students have to pay, providing them with free education is necessary.

All of the goals stated in these arguments can actually be fulfilled with greater efficiency by the free market. There are four ways by which university education is funded. Direct payment, grants, work, loans.

Direct payment is of course the easiest. The student’s parents will save money in order to pay for the children’s education. Although this works, it is doubtful it will convince leftists. They’ll argue that the poor still can’t afford it, come up with the paternalistic argument that parents don’t know what’s good for their children or argue that relying on one’s parents is an unacceptable tyranny.

Grants work fine… basically you’re given money by a generous entity. Arguing for grants is like arguing for private charity, it’s doomed to fail - as an argument - because no one can actually know the amount that would be spent in charity, men are greedy, etc.

Working is another possibility, but it’s not always easy to work and study at the same time. It puts students who cannot rely on direct payment at a disadvantage and there comes the same argument again.

Of all the payment methods, the loan is probably the healthiest. It highlights education as an investment. Why should you pay for your education?

a) Because you want to be educated, for your own pleasure

b) To be more successful in your life, make more money

In the first case, education is pure consumption, at that point few people will argue for the need of “free” education. The second case sheds an interesting light on education as investment. The cost of studying becomes a market price signal to know if it’s a good idea to study or not.

One problem remains, lending represents a low risk to the bank, since loans are aggregated and collateral can be required. However, it represents a huge risk to the student. If you don’t plan on defaulting, you know you’ll have to pay a fixed cash flow in the future, but depending on your future, the disutility could be very different. If your studies succeed and you make tons of money, repaying the loan is nothing, if you don’t, you face a lot of nights eating spaghetti.

How do we remove this risk? By replacing debt with equity. A student could issue shares of his future work and sell them to venture capitalists, or rather student capitalists planning to cash in on his future income. However, this is impractical and the much more logical solution is to integrate this task with the university itself.

A university could offer students the choice of paying the whole cost upfront or agree to a future cash flow indexed on this income. For example, you could give up 10% of your income for the next 10 years in exchange for free education. You face absolutely no risk in doing so. Now the university faces the risk that you will choose not to become a doctor but to start living a simple life raising goats. Venture capitalists protect from such things by having a say in the direction the business is going, the university would only rely on the student’s incentive to do something with his life. Maybe he can contractually agree to seek work or pay a fee etc.

What would be the consequences if universities adopted this means of payment?

• The best students would get lower rates since they are likely to make more money, thus the system becomes meritocratic

• Anyone could afford the studies, at no risk to him

• The rates would reflect market demand for specific jobs and thus create incentive to adapt the supply. If there are too many university educated persons, the universities forecast that wages will go down and raise their rates. If the universities expect a higher demand for biologists, the rates for biologists fall and more students will opt for biology.

Having a plain upfront price doesn’t reflect the market at all and leaves the forecast to the students, while private competing university might be better at it…

• The university has a very good incentive to provide excellent education. Instead of suffering from bad results indirectly, through reputation, they suffer direct financial damage if their education is not good enough.

This is how the free market could provide efficient, meritocratic, market driven universities.