Austrian economist Joseph Schumpeter coined the term “creative destruction” to describe the positive impact of business failure on free market economies. It’s a simple concept. As better ideas for products or services emerge, old ones dies out. The classic example is the automobile coming on the scene and displacing horses and buggies. More recently, the internet has been a very creative destroyer. From retailers to travel agents to media companies of all types, it’s been steadily remaking just about every industry out there.
But often the companies and industries ripe for creative destruction aren’t as obvious as video rental shops or horse-drawn carriages–and they use their social and political connections to hold out far longer than they have any right to. That’s definitely the case in two sectors right now: real estate and higher education.
A recent study found that 90 percent of prospective homebuyers, and a full 96 percent of homebuyers under 40, use the internet in their house searches now, and yet old fashioned brokers and agents still reap massive commissions by shutting out online competition like Seattle’s Redfin. In other words, real estate consumers want Netflix, but the industry’s insiders are still managing to give them Blockbuster. And like Blockbuster was able to do for decades, those insiders are getting fat on outrageously bloated fees.
Think about it. Homebuyers still have to pay 5-6 percent of the purchase price to the listing and selling agents. What services are those parties providing that should earn them tens and even hundreds of thousands of dollars per transaction? They are little more than glorified clerks making sure that the proper forms get signed and filed. In case you haven’t heard, there is a somewhat handy machine known as a computer nowadays that can perform these functions perfectly well in less time and for no money.
Higher education is an even worse example. If it were a stock, we’d all be shorting it. People wonder why the economy has been so slow to recover from the Great Recession. But it’s not terribly complicated. Recent college graduates are about $1 trillion in debt now, and unemployment among them is pushing 9 percent. We can thank our wonderful higher education system for both of these problems.
Most universities routinely waste millions on non-educational initiatives like athletics programs, overpaid tenured professors, and unnecessary administrators. Unsurprisingly, the cost of tuition has outpaced inflation by 400 percent since the 1970s. These increased costs have been paid for through a backdoor government subsidy–student loans, which students have to carry with them like leaden pianos on their backs for years after they graduate.
Luckily, the free market has come up with a disruptive innovation that could help our young people–online, distance learning. EdX and Coursera, founded by professors at Harvard, MIT, and Stanford, already offer a combined 370 online courses serving over three million students. These “MOOCs,” or massive open online courses, are much cheaper per student. As for quality, it’s impossible to believe that an intro to poly-sci or sociology course with hundreds of students crammed into a giant lecture hall is any worse than one delivered online, especially when the online professor is a renowned expert in his or her field.
Of course, MOOCs make traditional educators very nervous. They’re going to do all they can to hold them off. So far, they’ve managed to keep the great money flow of government-backed loans flowing into their coffers. But, like real estate agents, they can’t fight these innovations for much longer. The benefits are simply too great.