Subsidized Education and the Free Market

Economics Political Theory
1

Let’s imagine that USA abolishes all market-hampering laws and government programs in favor of establishing a free market within our borders. Nothing is subsidized, including public education. What would happen in a situation like this?

In an ideal free market economy, I think it is possible that, after a period of adjustment, we would find our way, and education for an overwhelming number of Americans would persist even without it being subsidized by the government. Whatever aggregate level of education established after the free market has run its course would be ideal for the skills needed of employees in the marketplace.

My only problem with this idea is that I don’t believe America could be considered a truly free market when there are other nations in the world that subsidize the heck out of public education and produce many more highly-educated individuals that would love to come to this free market and thrive more than they ever could in the hampered market back home. The non-subsidized-free-market-educated Americans would lose, as would the people back in the foreign nations whose taxes went to their exported workers’ education, since they’re seeing the “fruits” of their taxation emigrate to free market America. The emigrating workers would be the ultimate winners, having been the beneficiaries of their fellow citizens’ taxation, while never growing up to pay these taxes themselves, opting instead to “make off” with the free education and thrive in free market America. So therefore, can America truly be a free market when there are other nations in the world that we trade with who aren’t free?

This is somewhat similar to something I read in Rothbard’s Man, Economy, and State, where Rothbard says that the one of the only reasons that the production system in Soviet Russia didn’t fall apart sooner (due to the problem of incalculability in socialist production systems where a single entity, in this case the state, owns everything) was that there was a capitalist system in a foreign nation, namely America, whose prices of capital goods could be used to calculate whether or not a stage of production in Russia was profitable. In this way, Rothbard argues, Soviet Russia was never truly socialist. In the same way, I would argue that America could never have a truly free market while there exists other nations in the world in which much is socialized and subsidized.

Therefore, I think I’d be willing to make an exception to my (normally) rigidly free market political leanings and support more money being put into subsidized education while these other nations are still relatively much less free than ours. Maybe someday, when these other nations open their markets a little more, tax their citizens a little less, and decrease the amount of money put in to subsidized education, I’d be willing to relax our own spending on subsidized education and let the free market educate individuals to the most optimal degree. An obvious flaw to my reasoning is that this policy seems directly analogous to the arms race that took place between US and Russia, but if we were to back down, what natural forces would cause these education-subsidizing nations to break down if we adopted a truly free market?

I can certainly think of many instances where a free-market-America could still produce win-win situations for everyone even when the rest of the world is still hampered, but I can’t seem to sort it out when it comes to investing in human resources.

I hope I’ve made my dilemma clear – I’ve been struggling with this one for a while.

For what it’s worth, the book that made me start thinking about this the most was Thomas Friedman’s “The World is Flat” – it’s good to continue to read well-researched literature that arrives at conclusions dissimilar to mine so that I may be challenged and hopefully overcome, but I’m still struggling with this issue. So please help me out, Austrians!

Is it the Government Job to create Infrastructure?
2

Just to clarify:

Why?

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in a free market…the market isn’t free.

contradiction.

why would they lose? why would more productive people in the market be a loss to any other producer/consumer. there is not a limited number of jobs to go around. if you could double the population of the world, and have the new half be twice as smart and productive as the other half. life would be better for the original half. a bigger market, more scope for specialisation, a greater number of specialised managers and skilled entrepeneurs to direct the pyrmaid of production. lowly wage labour benefit when their boss is superior at making business decisions.

this is obviously true but its no reason to institute taxation on other people so that they can suffer similarly.

human resources is certainly no exception to any other ‘resources’

4

I said, “in a free market, so and so would happen, but I don’t think America could be considered a free market because _______, even though they’ve done everything within their non-interventionist power to make it as free as possible”

If you disagree with the ____ (i.e. the reasons given – that we are too involved with coerced markets to be considered free), then argue that, but there’s no contradiction.

Yes, I see your point.

Help me out with this though: say America establishes a free market economy within its boundaries, but every other nation in the world is so protectionist that no one in America manages to get a sliver of trade in with any other nations. I would argue (and no one should be able to disagree) that America has achieved a totally free market economy. Though market data is always changing, this free market is around long enough to be pretty stabilized and closely trailing equilibrium and everyone has a good idea about what sort of wages they’re worth given their abilities.

It’s possible for another country that heavily subsidizes education to open up its borders, causing workers to emigrate, replace other workers, and overall the standard of living in the two nations would increase. But isn’t it still possible for there to be a few ultimate losers in America, who, after the economy has more or less approached a new equilibrium (I’m not talking ERE, just a general shift and reorganization of the production structure), suffer a permanent loss in real wages (as in, they suffer in nominal wages, but the economic growth that takes place with the smarter workers does not outweigh their nominal wage decrease before these original free market workers, young or old, die), all because of the influx of subsidized-educated workers, whose education to American employees is essentially free (paid for by the foreign nation’s taxpayers rather than invested-in by Americans)? Why invest money in the education of higher-cost American workers when you can get the freely educated (in the minds of American employers) foreign workers to produce more for less? Because of this, some of the American workers with a significant enough cut in nominal wages, such that the cut outweighs the improved efficiency of the economy, will suffer a decrease in real wages and be incredibly hard-pressed to improve their situation because no one is investing in the education of others anymore – they’re all getting it for free from the foreign nations’ taxpayers.

To me it seems as though it’s no longer just the foreign nation’s taxpayers that are paying for the subsidized education, but now the American employee who now earns a lower permanent real wage. What brought on this lower permanent real wage? Well, one could argue that an expansion of trade within a free-market brought it, right? But the countries that America traded with are not free, and instead of just the foreign taxpayers carrying the burden of taxes for the subsidized education, the real-wage losers in America now have to deal with that burden, when they’re the ones that supposedly have the free market to begin with. So I say again, can a nation truly be considered to have a free market if it trades with nations without free markets? I understand the law of comparative advantage, but even if the well-being for all is improved, some people’s nominal wages will simply decrease more than the gains in standard of living from the more efficient market are felt, and therefore suffer a permanent decrease in real wages.

If what I’m saying proves to be true, I do think that voluntary charity would likely take care of those hurt by permanent decreases in real-wages, though the challenge would be determining what is permanent.

None of this would be a problem though if the entire world were free – my point only applies to trading with countries that are not totally free.

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why would their be a permenently lower wage, in a free market, as you claim is possible?. free markets are remarkable in that they ensure a long term advance in everyones real wages, setbacks are temporary and due to shocks such as those you describe.

you have somewhat confusedly mashed together two seperate concerns; 1) effect on incumbents when immigrants arrive. 2) what happens when a foreign country has an interventionist domestic policy.

to look into ((1)-the effect on incumbents of immigrants) it is irrelevant whether the new immmigrants are arriving from subsidized countries, or free market countries, from natives giving birth to the new generation or from aliens landing from outerspace.

if you truly believe that voluntary mutually beneficial trades should not be allowed when some 3rd parties might have to expect lower wages for continuing to perform the same labour as in the past, then you should not make ‘education’ a special case but you should oppose any innovation and reduction of costs, in other words you should bite the bullet and abandon being a capitalist. socialism all the way. (but of course the results will be inevitably even worse than if you did nothing (laissez faire) so maybe be a capitalist and learn to live with the fact that in progress there is turbulence and if no one is being unlibertarian there is no injustice. which is as close to utopia as man on earth can hope for…)

6

I agree with you that setbacks in purely free markets are temporary, and that in the long run, there is guaranteed to be an advancement in everyone’s wages. We are in agreement about this.

What I am arguing is that trade with a hampered nation is as free as it gets, but not truly free trade, and therefore permanent losses on behalf of some individuals can occur through trade with this nation.

Free nations can trade with hampered nations and establish a production system that maximizes wealth and most efficiently distributes capital to those best at appeasing the demands of consumers. The only problem is that the demands of consumers are distorted by whatever regulations/taxation is in place in the hampered nation. So if the production system of the free nation is geared towards appeasing distorted consumer demand, is the market in this nation truly free? Even though this system is efficient as possible (assuming the hampered nation refuses to become free), can you really categorize it as free when the coercion in the hampered nation affects demand of consumers in that nation?

Furthermore, the hampered nation will inevitably subsidize something that an individual in the free state would’ve specialized in had both nations been truly free. For example, the hampered nation could subsidize the education of really incredible butt inspectors, and with free trade between the nations, there’s no longer any need in the free nation to invest in the education of butt inspectors since they can just skip those costs and just hire someone from the hampered nation. Naturally, the would-be butt inspectors in the free nation would have to forgo what they would have best specialized in. I would argue that it is possible for the butt inspectors in the free nation to suffer permanent losses if the difference in profit between butt inspection and their second-most-efficient specialized occupation is greater than whatever gains are felt by the overall economic growth.

7

This seems eerily similar to the Protectionism argument which was given here:

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no

no

well yes and no, if you subsidise something you will get it, but of what quality, shielded from competition on price the quality can be expected to fall.

they are relieved from one line of work that someone else can do, now they can do something else. just like any industry that is transformed by technology. they will best specialise in something else.

no over time, butt inspectors would take on other jobs and have rising wages again…

9

For one thing, the immigrant becomes an American, so while the person whose job the immigrant takes probably is worse off, the new American is much better off.

For another, the only reason the immigrant would be hired is because he can do his job for less money (or do his job better to help the employer make more profits). This either drives down prices of the employer’s product / service, or drives up profits.

If it drives down prices, consumers have more money to spend elsewhere or save.

If it drives up profits, the entrepreneur who employed the immigrant also has money he can spend elswhere or save.

Either way, the hiring of the more efficient and better educated immigrant will increase capital accumulation and sales for other businesses.

This argument is also very similar to the one which argues that countries which subsidize their export industries are unfairly hurting their American competitors. Strictly speaking, this may be true, but it ignores the benefits which accrue to American consumers.

10

Alex,

To your point, and the general one of Rothbard, about the Soviet USSR using market prices to help calculate, I think this is just void of all empirical fact.

While true the Soviets did look at the pricing information, they almost never followed it based on what the west did. That said, I think relying on this argument to prove that subsidized education in other countries would outperform unsubsidized education in another is a weak one based on an abstract position of what could happen.

Unless you can show that the probability of that happening is above .5, it leaves your position wanting.

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Just for reference, this is what Rothbard had to see about it (from MES): “The extent of socialism is overestimated because most writers ignore the fact that Russia, socialist as she is, cannot have full socialism as long as she can still refer to the relatively free markets existing in other parts of the world. In short, a single socialist country or bloc of coun­tries, while inevitably experiencing enormous difficulties and wastes in planning, can still buy and sell and refer to the world market and can therefore at least vaguely approximate some sort of rational pricing of producers’ goods by extrapolating from that market.”

I only brought that point up to show that whereas Socialism with the existence of foreign Capitalism can never be true Socialism, Capitalism with the existence of a foreign hampered market (that can still be traded with) can never be true Capitalism. I believe nirgrahamUK agrees with me on this point.

As for considering support for subsidization of education, I’m still undecided at this point. If China and India are exporting much more highly educated (compared to graduates of our subsidized system of education) to America and taking our jobs, how could it possibly help the situation to quit subsidizing education? Not just for America, but how would it help those other nations exporting their subsidized-educated workers to our nation?

I’ll hazard what I believe to be the response: ending the subsidization on education won’t actually end education – people who still want it will voluntarily step up to pay for it. Am I warm?

12

the global economy can’t be full and free capitalism whilst there is an interventionist state. but it is proper to say that the country itself which is free, is free and expresses capitalism, as there are no internal interventions.

it helps cause we are getting smart people for for no money down, capital accumulation would happen faster and everyone would be better off sooner.
imagine that these people coming from abroad are productive machinery, robots. maybe read hazlitts one lesson about luddites.

in the short term they ‘took er jubs’ but in the long term we prosperred and worked other jobs.

maybe they will stop…

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We, society as a whole, prosper, but there will be some who suffer permanent losses (even if the the aggregate welfare has increased) in manners that they wouldn’t have suffered had the subsidization not taken place.

I’m going to stop there and take a moment to thank you all for your patience in this – I know what I’m arguing is a little nit-picking, but I think it’s worth considering. I also want to make it clear that I’m not against the free market changing in ways that cause some deeply rooted workers to need to abandon their previous occupations if they want to become profitable again. The only thing that makes me squirm is that when trading with nations with subsidized exports, the force that is uprooting them is strictly non-free market, namely the coerced subsidies. There is no question that trade with even incredibly hampered markets will maximize the aggregate psychic welfare of both nations, but there is something off about certain workers in the free nation losing to non-free market practices. Should we therefore make an exception to our general fiscal conservatism and start a subsidy race with the hampered nation? This thread has solidified for me that the answer is a resounding “no”, but I might urge others to help out these uprooted-by-the-hampered-market workers through voluntary charity, though I suppose I’m still struggling with what form that might take. If we educated them to take other peoples’ jobs, then the negative effects of the hampered nation’s policies start to trickle through the rest of our economy. So we would have to decide – let these workers bear the brunt of the losses or voluntarily cushion them, dispersing some of the loss to both those who providing voluntary charity and to the existing workers of whatever these workers’ next jobs would be. I’d probably opt for the latter.

Yes, I suppose this is what my argument as identical to. I’m not ignoring but very much do appreciate the benefits accrued to American consumers (and most everyone in both nations) due to the trade, but merely focusing on those in America (assumed to be the free nation) who lose to non-free market practices.

14

Border dissolution is a necesscity to have a free market.

So your concept is that the best of foreign nations is going to come to the free market America and not stay in their homeland? Well you preassume some sections of this argument. One that subsidized education is already better then free market education. Two that is it bad for ‘Americans’ to have to compete for these jobs.

The premise that we have to wait on and confer agreement with the outside world as to which economic system we should embrace is pure nonsense.

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It is though, thing is, you can rant about the state as much as you like. Neither economic science nor philosophy would be where they are without the state giving huge amounts of money to academics.

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im assuming you think where things are is good. whereas i would read your statement to mean bad. thats what you get for ambiguity.

regardless, is your belief founded on empirical evidence or have you derived it a priori?

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empirical proof of this and proof that without such a transaction, individuals would not of been able to do what they did.

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You subsidize something, you get more of it. That’s basic economics and it holds true regardless of whether or not that something ranks high on your value scales.

19

So you merely equate more of something to being a net positive? Interesting rationalizing. By chance what would happen to say…the monetary supply if we were just to increase it? Would it be a net positive?

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I’ve not claimed that it’s necessarily good. What I said is that if one values education then more of it is good, so to answer your analogy: yes, if I value money more of it is good.