Third, never structure markets in ways that punish virtuous behavior. If the NBA allowed punching, teammates and fans would see any player or coach who chose to abstain as disloyal, not fiercely committed to winning games. When the rules of competition are structured to allow such violence, Gandhi-like behavior looks like unilateral disarmament. Coaches would pull aside conscientious objectors and tell them that, while their values are admirable, as long as other teams are punching the players have no choice but to do the same.
We see parallels in market after market. Where companies can achieve lower costs and higher market share through predatory or abusive behavior that reduces social well-being and economic dignity, the companies and their employees that race fastest and farthest toward the bottom win, and those that might wish to compete on a higher ground are too often undercut and punished in the market. In 2006, before the financial crisis, there was likely little room for a virtuous mid-level bank employee to refuse to make reckless subprime loans, since the market was structured to reward his competitors and peers at his own company for race-to-the-bottom competition.
Few markets reflect all three principles for market structure as poignantly as the for-profit higher-education market, which is completely shaped by and dependent on government. Efforts to regulate for-profit schools are inevitably met with special-interest-group howls of limiting market competition, but there is no market so dependent on and intertwined with government as for-profit higher education. Half of all for-profit colleges derive more than 70 percent of their revenues from Pell grants or government-backed loans. Without those taxpayer dollars, there would likely not be a real for-profit education industry.
The only legitimate rationale for supporting a for-profit higher-education industry with taxpayer dollars would be that for-profit competition truly helps more people pursue their potential and sense of purpose, thereby increasing their economic dignity. But instead, this market has been structured to reward enrollment, regardless of results or performance. Schools are usually guaranteed payment from the federal government when a student enrolls, regardless of the institution’s quality, competence, or value. When a student is lured into enrolling in a for-profit program, the school gets paid. If that program fails to deliver any education of value, the loss is borne by the student and the taxpayers.
Sound familiar? This is precisely the formula that contributed to the subprime housing crisis. Once the secondary markets were willing to buy even the shadiest of mortgages and stamp them with AAA ratings, the actors who originated mortgages were going to get fully paid no matter what. The government might lose because it was guaranteeing investors; the borrowers might have massive debt and could even lose their homes, down payments, and credit. But once the loan was originated, the bank got paid—no risk, no skin in the game.