Better Capitalism in Action - Stanford Law School
The ethic of mutuality – pursuing self-interest and the interest of others – is a core tenet of what we term Partnership Economics™ and advocate is the pathway to better capitalism. We are thrilled when we find real-time examples of mutuality, Partnership Economics™, being put into practice toward better capitalism. If you’re new to this blog and an introduction to the ethic of mutuality might prove helpful, we invite you to explore this earlier post. For a deeper dive, we invite you to check out our book Better Capitalism.
Stanford Law School has recently announced it will offer a pilot program of income share financing to its students. There are details of course (and the details in this case make for a well-thought-out program), but the essence is that students have their tuition paid upfront in exchange for paying 10% of their income for twelve years after graduating. We believe in celebrating what you want to see more of, and this is well worth celebrating!
It's no secret that student debt is both enormous and growing. That debt burden creates both present challenges and future risks for its stakeholders -- indebted students, debt-addicted schools, and all American taxpayers who are footing the bill for government-funded student loans. "We are they," whether or not you personally have student debt.
In response to these problems with the current economics of debt-based student financing, and inspired by Luigi Zingales, Purdue University, and edly.co, we advocated for equity-based approaches, such as income share financing, in Better Capitalism. From our chapter on "Educational Companies," pages 156-157:
Funding to a student would be given in exchange for a portion of their future income for some number of years... This approach creates significantly better alignment in incentives and informed decision-making across all participants -- partners -- in the educational enterprise. ...
In an equity financing model, the lenders are incentivized to actually advise students on educational investments that will generate good future value (helping the students) and provide funding where it offers increased value and not where it doesn't (helping the funders and students and society generally). These aligned funders and students will exert pressure on educators to deliver increasing value (helping the funders and students and educators and society generally) rather than continue in entrenched methods that have guaranteed subsidies regardless of results.
The equity approach also transfers risk from government (taxpayer-backed) loans decided on by young students and handed out by intermediaries with little skin in the game, to equity funders exercising informed investment decision-making with their own money. If a student's investment doesn't pay off, the cost will be borne by the equity funder rather than taxpayer subsidy (bailout).
The recent student debt forgiveness plan announced by President Biden is a bailout by another name. In addition to the "moral hazard" of disconnecting costs/risks from the weight of responsibility for those risks, which effectively incentivizes cost/risk creation out of proportion with value creation, this bailout transfers a cost of hundreds of billions of dollars from people who decided to take on debt and forces it on their economic neighbors (American taxpayers) who did not choose that debt/cost.
"Bank" or "school" -- when someone else bails you out, why not make risky loans, and lots of them?! Image Credit: EconomicsHelp.org
When corporations push their costs onto society to enhance their own finances at society's expense, it is called "externalizing" and rightly vilified. This exploitation is not magically virtuous when performed by or for educational corporations, nor is it redeemed by being cloaked with the word "forgiveness." (Forgiveness is a wonderful thing and too-little practiced. We are all for forgiveness that is truly forgiveness, not "forgiveness" that is really externalizing -- shifting a burden from people who received a benefit and agreed to bear the responsibility, to people who neither received the benefit nor agreed to bear the responsibility!)
The better way is aligning incentives so there is partnership -- advancing both self-interest and the interest of others. This is Partnership Economics™ and the ethic of mutuality. Love your (economic) neighbor as yourself.
While that may sound lofty, it is not fantasy! There is no better argument for the reality that such an ideal can be put into practice than actually putting it into practice, and that is exactly what Stanford Law School is doing. They are not the first, and we are confident they will not be the last, but they are putting one foot in front of the other and taking meaningful steps toward better capitalism with an ethic of mutuality in the significant arena of student financing.
From Reuters: "Stanford Law’s chief financial officer Frank Brucato called the pilot program 'a game changer,' predicting it could establish a new, national model of financing law school." Stanford Law professor Ralph Richard Banks: "This could ultimately extend far beyond Stanford. There is great potential here."
May it be so, and may we -- we students, we educators, we funders, we as a society -- celebrate and participate in making it so!
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Our 2021 Amazon #1 New Release: unleash more with Better Capitalism: Jesus, Adam Smith, Ayn Rand, & MLK Jr. on Moving from Plantation to Partnership Economics.