Consider the added costs of face to face education. Students and faculty have to change their places of residence. There must be dormitories and places to eat. There must be academic buildings, labs, and athletic buildings. There must be infrastructure for and equipment furnishing these buildings. Computer networks have to be set up. All of these facilities and systems must be maintained. Administrators have to be paid to manage all of this.

All of this costs society a large amount of resources(and that’s just what a student pays at a public school, neglecting the amount paid by the state) just to provide the outcome of education under a vision of education that we are accustomed to. If we assume that the market for education is in equilibrium, then the implication is that this system must be the most effective for providing that outcome. But we can immediately see that this is not the case. The system is rearranging itself at a rapid pace, with greater exploitation of the internet and the cheap communication that it brings.

If our present vision of education was necessary to assure real learning, then this transformation wouldn’t be happening. One piece of evidence is in the anecdotal behaviors of students, where “Why doesn’t Dr. ‘X’ just post it on Blackboard/Canvas?” is one such ubiquitous cry out.

In economics, there is jargon for the effort one must go through to even make an “exchange”, excluding the price you actually pay once its made, unsurprisingly called “transaction costs”. If it takes less effort to exchange, then you have effectively lowered the “price” for the “buyer” and raised the “price” for the “seller”, and they’ll both obviously be more likely to make that exchange than before. This fact explains why our anecdotal student is upset about his assignment not being posted online: it saves him time and effort if he can access it directly rather than having to email the professor, contact friends, or wait until the next class to get the information he needs.

Certainly, the internet reduces the “transaction costs” of acquiring information of nearly any type, in addition to literally making it cheaper, since books or other alternatives are either expensive or scheduled, be they persons or broadcasts, and the information on the internet is mostly “free”. But I think the more significant fact is that the effort needed for retrieval is reduced.

Shamelessly using a simple supply and demand graph:

The new ease of acquiring information is best represented by considering those who provide and distribute it. The reason it costs the “buyer” less is twofold. One is simply because it is cheaper for providers to do so, since the cost of serving an additional user once the system is set up is near zero. Second, it is easier for a “buyer” to switch from providers who are more costly than others, since alternatives are within googling distance. These two dynamics in combination lead to a market for information where the only providers that survive are those that serve information for a zero list price. But it is not as if providers can really do this for free, since such service requires, for example, servers, software, and maintenance. Instead of using magic, they subsidize basic users through some passive monetization scheme, be it advertisements (most sites and services), advanced features available for payment (such as Skype or Dropbox), donations (like Wikipedia), or some combination of all of these things.

Consider the second wave impact of educational information. The students who pay for the “advanced features” through tuition and fees and who might also pay as alumni who donate, are subsidizing the education of all of the people who receive it indirectly because of and or through these students. The effect of the internet in the long run is to lower the costs of “attendance” which means more of these “second-handers” will instead go to the source. Of course, this shift means that there must be a new payment model, since those educational organizations that “charge” too much can be dropped and replaced easily, by virtue of the short googling distance as I mentioned before due to the openness and cheapness, and thus the competition of the internet.

One possible monetization is with the “advanced features” model, where individuals for whom a great deal of special equipment and academic resources would be prohibitively costly could pay an institution for access and use, where the economies of scale from having many paying intermittent users permits such an arrangement. This might include a chemistry lab, art equipment such as a furnace, a theater for students of drama, musical equipment as well as acoustically designed rooms, a supercomputer for research, an observatory, a particle accelerator, etc. The academic need for these facilities in their respective fields is certain, but a freshman student of physics has no need to be on campus with the particle accelerator that he might begin working with 3 years later. And a student of Political Science or English really has no need for any of these resources, so if it is easy for them to switch to a cheaper provider of their education (other things equal about said education), with the limit being a wholly free provider, they will switch, and soon campuses will only host those students with an irreplaceable need for such facilities, which might typically be upperclassmen, graduate students, or those studying the arts.

Monetization through donations from alumni has the advantage of acting as a selection mechanism for superior institutions. Those that increase the productivity of their students the most, should, other things equal, receive more donations from alumni since that higher productivity should translate to higher income after graduation, making such donations more affordable. This extra cash flow would allow superior institutions to have some mixture of charging less to students online, charging less to “premium” users of the facilities, and paying for the expansion of “basic” level enrollment, which would make the institution either more attractive price-wise or expand the student base, which should translate to higher “premium” enrollment assuming the same conversion rate. Since institutional quality rarely changes over night, higher donations imply higher future income for prospective students, which should increase enrollment compared to other institutions. (This paper by Jeff E. Hoyt has a pretty thorough dissection of alumni giving, in case my claim is too bold to eat without knowing its ingredients) And as tends to occur with things on the internet, the traffic should aggregate to the best free provider of a certain service, and I find no reason why education should be any different.

Another possible monetization is by a systemic patronage system from employers. Instead of offering to directly pay for the education of individuals in the skills the employer needs as sometimes happens now, employers could pay for several students worth of education in a sort of block grant, be given some influence on relevant curriculum in exchange, and then be allowed to court any students, who have the needed skills, for employment. This arrangement, executed correctly, could make every party a winner: students gain directly valuable skills which increase their chances of employment; the school gets extra funding and a reputation for a high rate of post graduation employment, which should attract students; and employers get the workers they need without nationwide manhunts. Of course, the real dynamic is more complicated than this, but it is important to recognize that these monetization schemes are not mutually exclusive and likely have complementary functions.

Basically, this argument has been leading to this claim:

Those institutions which provide the best(most productivity enhancing) and most socially credible(actually respected by employers) education online for free will be the ones that best survive the technological transition of education and who will provide the skeleton of the new educational paradigm known as alt.Residential.

Perhaps MITx will be able to exploit its (sort of) first mover advantage in this future market for education and we will be treated to a first rate provider of online courses that society recognizes, by virtue of MIT’s prestige, as credible, real learning. With this kind of public provision of free(or at least cheap) education by private and public organizations, we will likely arrest the spiraling inflation of costs in higher education, and that would be nice, because I would much rather be able to pay for my kids’ college AND buy a one-man helicopter than have to choose between the two, because even though my kids would probably be cool with a copter instead of an education (because they’re totally sweet), I would be a really bad parent.

More can be said about the details of our educational future, but my head is spinning from all this theoretical forecasting, so interested readers can step from my theoretical rant kiddie pool to Alan Levine’s (@cogdog) summary of “The Four Futures of Education” by Bryan Alexander or just go googling.