Milton Friedman’s grim vision for education funding

The finance website Slate has published an interesting article on radical free-market economist Milton Friedman’s views on higher education funding. In 1954, Friedman:

laid out a radical new plan for funding education in a footnote to a lengthy academic volume. He described a system where individuals would sell “stock” in themselves—i.e., a share of their future earnings—to investors who would finance their education and training. “The purchase of such ‘stock’ would be profitable so long as the expected return on investment in training exceeded the market rate of interest,” he and his co-author, Simon Kuznets, wrote.

Surely this idea is too horrible to envisage in real life? Well, that was said about other elements of neoliberal policy, such as mass privatisation of public assets and letting unemployment soar to tackle inflation, until they were tried by governments in Chile, the US and the UK. Now, such notions are common sense amongst the ruling-class everywhere. According to Slate:

Sixty years later, the lending system Friedman envisioned is beginning to take shape. Income share agreements—contracts that allow investors to give individuals money upfront in exchange for a percentage of their future earnings—are quietly gaining a following among critics of the nation’s staggering student-debt problem. New companies such as Upstart, Pave, and Lumni have turned to the investing-in-people model to help talented individuals secure funds for anything from education to business ventures.

The basic theory behind income share agreements (ISAs) is “that they make life more manageable for the borrower because the debt is repaid in proportion to earnings.” Now, where have we heard that logic before? As Labour List reported earlier this month, the Labour Party leadership is considering replacing tuition fees with a graduate tax:

The most economically sensible way of making a graduate tax viable would be to offer a fixed term repayment period (the NUS previously suggested twenty years) and an increasing tax scale dependent on earnings.  This would make it possible to collect the same amount of revenue as tuition fees whilst ensuring that ability to pay is aligned with amount repaid.

What both systems – ISAs and the graduate tax – have in common is that education is seen as an individual investment in future earnings. With the ISAs, this is financed in advance by a private investor; with the graduate tax, it is financed retrospectively through a tax on individual graduates – essentially, through a tax on learning.

ISAs are particularly noxious because they allow private capital to decide which education should be funded. A society without art, literature and philosophy would be a poor one, in every sense. Yet, it is difficult to point to the immediate income dividend from any of these things and such an investment would be risky. Even from the standpoint of capitalism itself, this has dangers. Many technological developments arise from scientific work initially conceived of as theoretical with little intended practical application. It is difficult to foresee which research, or which learning, could prove useful, notwithstanding the fact that we should reject these utilitarian criteria and assert that education for its own sake is valuable.

Even under our current system of loans and fees, private capital is re-shaping education. It does so most directly in the sense of business leaders and the government crafting courses to turn out graduates with the skills to work in industry. Less directly, the growing conception of education as preparation for the world of work means that school-leavers feel pressure to opt for courses more likely to lead to a job.

A graduate tax would perhaps solve part of this problem, if education was made free at the point of delivery. Yet, it continues to re-inforce the idea that education is an individual benefit, not a wider social good, and that it should be paid for solely by individual graduates. To be sure, ISAs are worse but both systems are based on the same warped principle. We recoil at ISAs only because it makes the principle explicit.

On one level, a graduate tax lets off the capitalists who benefit from our skills, placing the burden of paying for education on workers ourselves. More fundamentally, though, we don’t let healthy people off funding the NHS, because it’s in everyone’s interest to have a healthy society; and it’s not just motorists who pay for roads, because infrastructure is necessary for society as a whole to function. The graduate tax introduces a user-pays logic which, if applied to other public services, would undermine universalism and pose a severe threat to the welfare state.

Besides, there already is a tax based on earnings – income tax. A more progressive income tax, with higher rates for the rich, could pay for education, and the other services we need.


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