Investing in Personal Equity: The Silver Bullet (?) in Education and Poverty

In an email to some friends and colleagues, I wrote about my recently formed beliefs on the limits of philanthropy and the comparative effectiveness of business:

One of the things that I’ve become convinced of while I’ve been here in China is the limited, although effective efforts of philanthropy in helping the poor through education. Even if we increase total giving in the world and allocate resources in the philanthropic sector more effectively, the size and the scope of the problem is simply too large for philanthropy to address. Ultimately, I think the real silver bullet will be in using innovative models in business (as opposed to nonprofits, since businesses provide more incentive for innovation), finance, and technology to facilitate more effective and efficient delivery models of education and job creation for the poor.

Since the two areas I’ve decided to focus on for the time being are education and poverty (since I believe the solutions to these are necessary and first-order requirements for people to live good lives), I’ve spent quite some time here in China thinking about how to best address the lack of educational and job opportunities that the rural poor – the poorest population – face.

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Before I get into the solution, I’d like to make a philosophical aside about the perceived risk of engaging in Western cultural imperialism when trying to promote international development. Many people fear that development is often a Western imposition of its values on the lives of the poor, partly with good reason. But encouraging development does not always lead to cultural imperialism and believing the opposite prevents us from allowing ourselves to help the poor. The poor desire the comfort and security from improved economic well-being; to try and improve their ability to improve their own economic well-being is to help them. As A.J. Kumar, a fellow Stanford ‘07 alum who is currently serving out his term with the Peace Corps says, “I am not here imposing ‘development’ on anyone. I am here to help people realize they have choices.”

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So while in China, I’ve been asking myself many questions about many issues; mainly how do we make schools more efficient? How do we encourage schools to adopt best practices? How do we provide education to the poor? How do we provide jobs to the poor? And how can we do this with a solution that is sustainable (not short-term) and scalable (can reach a lot of people)? Try and come up with your own solution before reading mine. (To find one possible solution to these questions, you can look in the back of the book.)

Because of the limits of philanthropy (the inability to scale due to the size and types of funding available in the philanthropic marketplace and the reduced incentives for innovation), I started thinking about how one would create a business, motivated by mission and profit, to help the poor. In order to generate profit, one needs to generate economic value and in order to generate economic value, productivity needs to increase. To think about it in less econ terms, if a high school graduate can make $80K in his or her lifetime ($2,000 a year x 40 years, which is roughly equivalent to the current market wage right now for factory jobs if you have a high school degree) and that same person could make instead $600K in his or her lifetime ($15,000 a year x 40 years, which is roughly equivalent to the current market wage for an entry level programming job) and the cost of training that person is less than $520K (not too difficult to assume especially when considering economies of scale), then the process creates economic value. The economic surplus, $520K – the cost of education, is in theory profit that can be divided as increased wages to the student and profit for the teacher.

I bet many of you see where I’m going with this; you can create a business whose profit comes from the economic surplus generated for both the undervalued poor and the business itself. The solution is elegant for four additional reasons: (1) the business has an incentive to help the poorest individuals since they are the most undervalued and thus can generate the largest increase in economic value and have the highest potential profit margin; (2) the business has an incentive to make education as cost efficient as possible, providing a strong incentive for innovation in education; (3) the business has an incentive to place students in the highest paying jobs possible; and (4) the business forces public schools to pay higher wages for teachers, much in the same way the existence of private universities forces public universities to pay higher salaries for professors in order to maintain and attract talent.

Specifically, my idea would be to operate the business as a school that provides scholarships (tuition, room, board), a stipend (since on top of tuition, room, and board, many families can’t afford to send their kid to school strictly from the opportunity cost of lost family wages), and job placement in exchange for a student’s agreement to work at a fixed income for a specified amount of time. The difference in the market value of the student’s work and the amount the business pays is the revenue stream. The profit margin would be the total revenue generated minus the total cost to invest in a student’s education.

For the sake of clarity, consider the following not so hypothetical situation. A student from Western China who is able to afford to go to high school can migrate to a large city and make $2,000 a year in a factory job. Even if the student at the start of high school had some kind of intellectual ability to be something more than a factory worker, because of the inequality of educational instruction between rural and city schools and the high costs of a university education, the potential of many students is left unrealized.

But imagine you gave a poor student who is unable to attend high school or whose only life prospect is working in a factory the following offer: I will pay $5,000 a year for your education for six years, which includes a $500 stipend for your family (often times there is an opportunity cost of education since some drop out of school to support their family). In exchange, I will find you a job that pays $15,000 a year but will pay you $3,000 a year for five years so that I can make a return on investment. After those five years, you can work at whatever the market is willing to pay you, letting you capture the rest of the economic surplus. Would you think this is a good deal?

I think the idea has a lot of promise, but there are some key challenges outside of the business’s control that play a critical role in whether it has potential, mainly (1) the enforceability of contracts and (2) competing in a market that is inefficient and subsidized, two topics I’ll explore later. The idea also doesn’t address some philosophical issues I’m personally concerned about, like income inequality due to unequal endowments of natural talent, the validity of student consent, and my earlier, though waning concerns of increased population growth and rate of global warming via hyperconsumerism. But despite my concerns, I still think in the utilitarian calculation (honestly, although I like Kant’s moral philosophy, it’s impossible for me to understand them outside the utilitarian framework) the pros significantly outweigh the cons.

Lastly, I’d like to thank the following people for their unknowing contributions to this post: the Town and Talent staff, for answering my questions asked in broken Chinese about the economic lives of students and China more generally; Zach Pogue, who in my freshman year said if he could buy stock in me he would; Charles Yong, who took the time to explain to me his idea of Internet advertising as real estate; and Debra Satz, for her class in political philosophy, which despite my poor grade I learned a lot, including the philosophical base upon which I form my beliefs in social justice.