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Human Capital Contracts and education

darkkermit
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2/14/2012 3:57:30 PM
Posted: 4 years ago
For those of you don't know what a human capital contract is, its a contract that students agree to go to college, and instead of having to take out a loan, someone else pays for your education, and you have to give them "X" amount percentage of your money from your job after you graduate.

Many economists, include Milton Friedman, favored this idea.

My personal take on this. We have strong developed financial markets for business development, but our system of financial markets for education is kind of inefficient and undeveloped. Our plans include "let the state run it" or "just get a loan". Now the problem with option (a) is that it is a socialist plan. We can state the obvious setbacks with socialism: the socialist calculation problem and incentive problems (no incentive to make the system more efficient). Now the problem with option (b) is that it's a risky decision. Unless you have some certainty that the education with have a positive Net-Present Value, then its risky because there is a possibility that it will not and you will be poorer as a result. The manner in which financial aid is given, it creates many market distortion on the real value of an education and how much interest should be charged. Human capital contracts make the decision to invest in education less risky for the buyer of education, and will make the market for education more efficient (practical price signals, poorer people that are smart will be more likely to attend since the risk is less). However, likely the reason why they've never been developed is the social stigma they seem to have. Just like it used to be controversial to earn interest on money which made the practice illegal, and hindered development.
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Ragnar_Rahl
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2/14/2012 6:11:02 PM
Posted: 4 years ago
I'm not sure it's necessary for college, loans seem fine to me there, though more options is better of course. But it's probably at least the best business model available for primary school in a minarchy (aside from voluntarily not having kids you can't afford of course, which is a great idea but a hard sell for some reason).
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
Mimshot
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2/14/2012 7:33:55 PM
Posted: 4 years ago
Hmm, what percentage do you think would be a reasonable market price for this kind of investment? That is, is there a percentage at which you would be happy as either the student or the financier? If so, what percentage? Would it depend on what college someone went to, or what he or she studied?
Mimshot: I support the 1956 Republican platform
DDMx: So, you're a socialist?
Mimshot: Yes
Ragnar_Rahl
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2/15/2012 1:30:27 AM
Posted: 4 years ago
At 2/14/2012 7:33:55 PM, Mimshot wrote:
Hmm, what percentage do you think would be a reasonable market price for this kind of investment?
A market decides what a market price is. "Reasonable" can't be determined by plucking an out-of-context percentage from a DDOer's arse, it's whatever someone's willing to pay.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
Mimshot
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2/15/2012 1:43:54 AM
Posted: 4 years ago
At 2/15/2012 1:30:27 AM, Ragnar_Rahl wrote:
At 2/14/2012 7:33:55 PM, Mimshot wrote:
Hmm, what percentage do you think would be a reasonable market price for this kind of investment?
A market decides what a market price is. "Reasonable" can't be determined by plucking an out-of-context percentage from a DDOer's arse, it's whatever someone's willing to pay.

I know how markets work. See those little bits I highlighted? :p

One can get a decent guess by pretending to be both the buyer and the seller and asking at what price would one consider the trade fair from either side.
Mimshot: I support the 1956 Republican platform
DDMx: So, you're a socialist?
Mimshot: Yes
Ragnar_Rahl
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2/15/2012 2:05:08 AM
Posted: 4 years ago
At 2/15/2012 1:43:54 AM, Mimshot wrote:
At 2/15/2012 1:30:27 AM, Ragnar_Rahl wrote:
At 2/14/2012 7:33:55 PM, Mimshot wrote:
Hmm, what percentage do you think would be a reasonable market price for this kind of investment?
A market decides what a market price is. "Reasonable" can't be determined by plucking an out-of-context percentage from a DDOer's arse, it's whatever someone's willing to pay.

I know how markets work. See those little bits I highlighted? :p

One can get a decent guess by pretending to be both the buyer and the seller and asking at what price would one consider the trade fair from either side.

I don't think one can.

Especially when we don't know the optimal amount of education in a free market, and how much that costs. (The present cost of a heavily subsidy-and-mandate distorted education is a totally different thing.)
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
Mimshot
Posts: 275
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2/15/2012 2:50:03 AM
Posted: 4 years ago
I was just trying to further expand the idea. I'm really not sure why you're fighting me on this. You could have rewritten my question as two others: What's the highest percentage you would be willing to pay to have your college financed? What's the lowest percentage you would be willing to accept to pay for someone else?

I'm surprised you don't think it's even worth discussing. I haven't given it too much thought, but we could probably come up with a model under an efficient market hypothesis. Like commodity prices going to the marginal cost of production, or something. Incidentally, the biggest distortion in education financing (and consequently education pricing) is probably that student loans aren't discharged in bankruptcy. This legal gem makes creditors willing to loan much more at lower interest rates because they know they only way to get out of the loan is to die.
Mimshot: I support the 1956 Republican platform
DDMx: So, you're a socialist?
Mimshot: Yes
darkkermit
Posts: 11,204
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2/15/2012 7:13:32 PM
Posted: 4 years ago
At 2/15/2012 2:50:03 AM, Mimshot wrote:
I was just trying to further expand the idea. I'm really not sure why you're fighting me on this.

This is a debate site. If you find something you disagree with someone, you debate about it. Sometimes I debate different sides of the issue.

You could have rewritten my question as two others: What's the highest percentage you would be willing to pay to have your college financed?

One's individual subjective value of education is not equal to the price. The main issue is opportunity costs, in which people have different opportunity costs. Also, how much someone likes/dislikes a subject.

What's the lowest percentage you would be willing to accept to pay for someone else?

Real rate of return on stocks is around 6.8%, nominal its 10%, so one can base it on that.

I'm surprised you don't think it's even worth discussing.

Problem is that it's nearly impossible to figure out the answer and what would it prove anyways? What difference does it make what the price is?

I haven't given it too much thought, but we could probably come up with a model under an efficient market hypothesis.

How would one know the cost of schooling under the new system, and how much one internally values school for non-monetary purposes?

Like commodity prices going to the marginal cost of production, or something.

One can draw supply and demand graphs and stuff, but unless you actually know the parameters (you don't), it's more of an academic exercise rather than something you can actually do.

Incidentally, the biggest distortion in education financing (and consequently education pricing) is probably that student loans aren't discharged in bankruptcy. This legal gem makes creditors willing to loan much more at lower interest rates because they know they only way to get out of the loan is to die.
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Starcraftzzz
Posts: 487
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2/16/2012 8:15:38 PM
Posted: 4 years ago
At 2/14/2012 3:57:30 PM, darkkermit wrote:
For those of you don't know what a human capital contract is, its a contract that students agree to go to college, and instead of having to take out a loan, someone else pays for your education, and you have to give them "X" amount percentage of your money from your job after you graduate.

Many economists, include Milton Friedman, favored this idea.

My personal take on this. We have strong developed financial markets for business development, but our system of financial markets for education is kind of inefficient and undeveloped. Our plans include "let the state run it" or "just get a loan". Now the problem with option (a) is that it is a socialist plan. We can state the obvious setbacks with socialism: the socialist calculation problem and incentive problems (no incentive to make the system more efficient). Now the problem with option (b) is that it's a risky decision. Unless you have some certainty that the education with have a positive Net-Present Value, then its risky because there is a possibility that it will not and you will be poorer as a result. The manner in which financial aid is given, it creates many market distortion on the real value of an education and how much interest should be charged. Human capital contracts make the decision to invest in education less risky for the buyer of education, and will make the market for education more efficient (practical price signals, poorer people that are smart will be more likely to attend since the risk is less). However, likely the reason why they've never been developed is the social stigma they seem to have. Just like it used to be controversial to earn interest on money which made the practice illegal, and hindered development.
Interesting idea. I think one possible benefit would be less stress on students given that they wouldn't be loads in debt. This would mean that their health cost potentially could decrease and their grades could increase due to less stress.
RoyLatham
Posts: 4,488
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2/19/2012 9:31:53 PM
Posted: 4 years ago
A variation on this theme is for an organization to pay for schooling in return for which the graduate must work for them for some number of years. I understand that this has been implemented for health care professionals where there are significant shortages, such as nurses. The organization takes the risk of the person making it through school, but graduates are guaranteed a job. I don't know how the salary is set.

The Constitution prohibits "indentured servitude." An employment contract can always be broken, provided the person does not get employment in the same industry. I suspect the educational costs would then have to be repaid.
darkkermit
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2/19/2012 9:35:17 PM
Posted: 4 years ago
At 2/19/2012 9:31:53 PM, RoyLatham wrote:
A variation on this theme is for an organization to pay for schooling in return for which the graduate must work for them for some number of years. I understand that this has been implemented for health care professionals where there are significant shortages, such as nurses. The organization takes the risk of the person making it through school, but graduates are guaranteed a job. I don't know how the salary is set.

The Constitution prohibits "indentured servitude." An employment contract can always be broken, provided the person does not get employment in the same industry. I suspect the educational costs would then have to be repaid.

If employment contracts can be broken so easily, then doesn't that kind of take away the point of a contract?

And I don't see how this is any worse then getting a loan. I mean your still indentured to pay the money. People should have the choice.
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Ragnar_Rahl
Posts: 19,297
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2/20/2012 1:51:26 AM
Posted: 4 years ago
At 2/19/2012 9:31:53 PM, RoyLatham wrote:
The Constitution prohibits "indentured servitude."

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted
Nothing about indenture, only about involuntary. If you volunteer your name on the dotted line...
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
Ragnar_Rahl
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2/20/2012 1:53:37 AM
Posted: 4 years ago
Besides, as a practical matter we know damn well that the military engages in indentured servitude.
(It used to engage in slavery too).

The Court's blatantly nonsensical distinction notwithstanding, as though a profession being theoretically high-status somehow makes it voluntary (Evidently they never heard of the Mamluks).
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
DevinKing
Posts: 206
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2/29/2012 9:22:24 PM
Posted: 4 years ago
At 2/14/2012 3:57:30 PM, darkkermit wrote:
For those of you don't know what a human capital contract is, its a contract that students agree to go to college, and instead of having to take out a loan, someone else pays for your education, and you have to give them "X" amount percentage of your money from your job after you graduate.

Many economists, include Milton Friedman, favored this idea.

My personal take on this. We have strong developed financial markets for business development, but our system of financial markets for education is kind of inefficient and undeveloped. Our plans include "let the state run it" or "just get a loan". Now the problem with option (a) is that it is a socialist plan. We can state the obvious setbacks with socialism: the socialist calculation problem and incentive problems (no incentive to make the system more efficient). Now the problem with option (b) is that it's a risky decision. Unless you have some certainty that the education with have a positive Net-Present Value, then its risky because there is a possibility that it will not and you will be poorer as a result. The manner in which financial aid is given, it creates many market distortion on the real value of an education and how much interest should be charged. Human capital contracts make the decision to invest in education less risky for the buyer of education, and will make the market for education more efficient (practical price signals, poorer people that are smart will be more likely to attend since the risk is less). However, likely the reason why they've never been developed is the social stigma they seem to have. Just like it used to be controversial to earn interest on money which made the practice illegal, and hindered development.

--I think that the idea could work, but in practice, it would actually be very similar to a loan. I think having the interest on educational loans be subsidized by the government to artificially increase the number of loans given would work wonders.

--I also like the idea of employers who would contract prospective students and pay for at least some of their schooling and guarantee them a job upon graduating in return for them agreeing to work there for x number of years.
After demonstrating his existence with complete certainty with the proposition "I think, therefore I am", Descartes walks into a bar, sitting next to a gorgeous priest. The priest asks Descartes, "Would you like a drink?" Descartes responds, "I think not," and then proceeds to vanish in a puff of illogic.