Vox posted a series of interviews with Marc Andreessen in which the billionaire co-founder of Netscape seems to feel that most of the economy outside of silicon valley is simply backwards.
…you have the sectors in which prices are rapidly rising: health care, education, construction, prescription drugs, elder care and child care. Here there’s very little technological innovation. Those are sectors with insufficient productivity growth, innovation, and disruption. … To me the problem is clear: The problem is insufficient technological adoption, innovation, and disruption in these high-escalating price sectors of the economy.
There might not be much technological innovation and disruption in elder care and education, but he is completely off base in talking about construction, health care, and prescription drugs. Real construction costs are about the same now as in 1980 despite rising wages because of better technology. The rising costs for construction is due to regulations that restrict the ability of landowners to build higher density, particularly in places like silicon valley. It is a bit ironic that the great innovators and disruptors of silicon valley have created a local government zoning monstrosity that caused a massive housing crisis there by banning the numerous simple construction technologies that could eliminate the problem. Jason Furman has research that the rise in housing costs is due to zoning restrictions, not construction costs:
Andreessen is also completely wrong about health care and prescription drugs. The rise in costs is not caused by a lack of innovation but exactly the opposite. There has been tremendous innovation in healthcare and that innovation is a major cause of rising costs. Nevertheless, it is a good thing despite the rising costs. For example, if there were no pharmaceutical innovation, then all our drugs would be cheap generics and we would spend almost nothing on drugs because we wouldn’t have developed most of our beneficial drugs. We might not even be able to enjoy the money we would save on drugs because we would die earlier.
But the focus of Andreessen’s criticism is the education sector and it is understandable that he is particularly frustrated with the education market because he has been investing untold millions of dollars trying to ‘disrupt’ education for years and so far he has little to show for it. He says:
Primary education in the US is a monopoly. It’s a public sector monopoly with very little competition. …With higher education, at least there’s competition, but it’s a government-sponsored cartel. The structure of the cartel is accreditation and student loans, both of which are run by the government. So you have exactly the effects at the higher education level you’d expect to see from a cartel, which is the facade of competition but not really. The higher education market in the US, the traditional one, can’t adapt to increased demand. Any increase in money is just wealth transfers to the owners of these institutions. Many of which are the government. And therefore you get the student loan crisis, massive inequality, and the fact that there are only so many kids who can get a top-quality college education, and everyone else is confined to lower-quality schools. New technologies tend to vaporize on impact with those institutions. …Of course they don’t want to adopt new technology. It’s antithetical to the philosophy.
Andreessen doesn’t seem to have studied education very much. First of all, primary education is not a monopoly because it isn’t run by one federal system. Primary education is run by over 13,000 different independent local school districts that compete with each other for students. One of the most important concerns for parents in choosing where to live is to go to a place near a good school which creates a competition process known as Tiebout choice. Even in a rural area like Bluffton Ohio (population 4,000) where I live, I know many families who have moved here from nearby towns solely because they prefer Bluffton’s schools. I also know parents who drive their kids to another town to go to school. In urban areas there are many more options for choice and thus more competition than in rural areas like Bluffton. Economist Caroline Hoxby has empirically shown that metropolitan areas like Boston there are dozens of different school systems that compete with each other within a 30-minute commute and she argues that this competition does indeed increase school quality relative to more monolithic school systems like Miami’s.
Secondly, there are over 30,000 private schools in the US which serve about 10% of primary school children. They compete intensely for the 5 million students they serve. Plus, there are nearly 2 million homeschooled students. What accounts for Andreessen’s business failure to appeal to this enormous market? He can’t blame a government monopoly here, but his failure is still big.
Finally, higher education is incredibly competitive for students, but instead of leading to lower costs, competition is actually one of the reasons college costs are so high. Colleges are forced to spend an ever increasing budget on recruiting students rather than on educating them in order to survive. The US higher education system is one of the most privatized and competitive in the world according to the OECD with only Japan and Korea being more privatized as measured by the percentage of spending that is financed by private versus government sources.
The fact that the US system is so privatized and competitive is one reason it is by far the most expensive system in the world. It also has also long held the reputation for being the best in the world.
Even though Andreessen is remarkably ignorant about the economics of the market he is trying to profit from disrupting, I do think that his educational investments could eventually do some disrupting, but he isn’t really going after the market he thinks he is going to destroy. He thinks he is going to put lots of teachers out of work and schools out of business, but I think if he is successful, he will actually put a lot of textbook publishers out of business. His MOOCs would work better to replace textbooks than teachers and once he figures out that the textbook market is the market he should be trying to disrupt, I think his chances for success will rise. The education textbook market has surprisingly little competition and rapidly rising prices, so it is ripe for disruption.
Andreessen shouldn’t blame his educational business failures on the backwardness of teachers. The problem is that he hasn’t even been able to create better content than traditional textbook publishers so far, but I hope he succeeds.