Why teachers are just like bankers

The current highly emotional debate about GCSE grades is not very enlightening. But what has happened tells us a lot about how incentives matter, how they affect outcomes. And at the same time, it shows that unless a proper set of social norms is in place, incentives can have unanticipated, perverse effects. Bankers and teachers have behaved in exactly the same way.

Go back to the major reforms in education under Mrs Thatcher in the 1980s. There is no market within the state sector. So the government tried to mimic the effects of a market by introducing exam targets. Resources for your school in general and your own promotion prospects depended on hitting these targets. Teachers were given an incentive to improve, just like in a real market. Or at least, that was the theory.

Incentives did indeed work, but in an unanticipated way, with an undesirable outcome. Teachers worked out that targets could be met by entering pupils for the more Mickey Mouse subjects. These boomed at the expense of subjects like physics.

Nobel Laureate, Elinor Ostrom, got her prize for pointing out that markets were not the solution to everything. Social norms, emerging from the interactions between people, can trump incentives. So if the teachers had upheld a set of social norms which disapproved of the devaluation of standards, we would not be in the current mess. But they didn’t. Most individual teachers are left-wing, but they acted like caricatures of Rational Economic Person in their own self-interest, just like the bankers they despise.

What about the exam boards and grade inflation? No-one outside the state education sector believes that the sustained rise in grades over a 24 year period has any real meaning. The boards compete in a real market, for students to take their exams. Competition is almost always beneficial. It keeps suppliers on their toes, forcing them to innovate, and improves quality. The concept of wasteful competition is virtually an oxymoron.

But in education, we are dealing not in competing goods and services, but in competing currencies, where a different set of rules apply. The unit of value is the quality of the grades. Collectively, it was in their interests to maintain standards. Individually, each board had an incentive to make the exams that little bit easier. The outcome has been a catastrophic downward spiral in standards.

We have seen a classic example of Gresham’s Law, of bad money driving out good. Why choose to enter your students with a board which tries to uphold standards, when another will supply you with more and better grades for the same ‘price’, the effort you and your students put in.

Michael Gove is trying to enforce a new set of social norms, with the educational sector once more respecting standards. He must not back down.

Paul Ormerod is an economist and partner at Volterra Partners LLP, and author of Positive Linking: How Networks Can Revolutionise the World