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Published in Print: January 16, 2008, as Why Markets Are Important (And What They Could Do for Public Education)


Why Markets Are Important (And What They Could Do for Public Education)

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As everyone knows, free markets are important because they voluntarily bring together willing buyers and sellers. Supply and demand are the sine qua non of economics. In fact, so important is their function that, in classical economic theory, a free market occurs only when no single buyer or seller can determine price. This bears restating: In classical economic theory, cost does not determine price; price is set by what sellers and buyers agree to. That’s why prices climb (and quality eventually falls) when monopolists are in the saddle, and prices fall when goods and services are abundant.

To be sure, no producer deliberately sets out to sell below cost—they do so only reluctantly—but the choice is not the producers’ to make (except under duress). Markets, of course, reward efficiency and productivity. Put most simply, the effective capitalist holds quality constant while cutting costs and increasing output enough to achieve profitability.

What does this have to do with education? There are four pieces to the puzzle.

The door of the typical school has never been darkened by an entrepreneur’s shadow.

First, according to no less an authority than former Harvard University President Derek Bok, one of the main reasons American higher education is so robust is that it exists in a vibrant market, made up of public and private providers, for-profit and not-for-profit, two- and four-year institutions, large and small schools of all description. The long and short of it is that there is a solid higher education option for everyone who’s interested in pursuing it. Having willing students and willing institutions means there is no compulsion.

Second, and by way of contrast, one of the reasons so many public elementary and secondary schools are troubled institutions is that they are protected monopolies, run by regulation and fiat, not market forces. Indeed, they are very much like Soviet collective farms: Those that are blessed with high-quality natural resources (sun and rain for farms, happy and well-tended children for schools) do well. Those on the short end of the stick do poorly.

According to the management guru Peter Drucker, there are two tributaries to classic economic theory that have a special bearing on school reform. The first is the Viennese economist Joseph Schumpeter’s elegant idea of “creative destruction.” He advanced the compelling argument that the only system that eliminates (or transforms) faltering and failing organizations is free-market capitalism. Political insulation not only props up failing institutions, it also rewards them (and, in so doing, it punishes customers). Conversely, that’s why monopolies are bad for consumers.

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The second is from the 18th-century French economist Jean-Baptiste Say (who coined the term “entrepreneur”). His great insight is that in a market, supply creates its own demand. The entrepreneur (who may or may not be a risk-taker) creates a product, good, or service that no one knows they need. In modern times, the examples are countless; think of Xerox and plain-paper copies (replacing a whole industry that survives with only a symbol, “cc”), or facsimile transmission, or the personal computer, or the cellphone, or the Web. Before the fact, no one knew they needed any of these; rare is the person who can live without them today.

What makes entrepreneurship possible? Rewards and incentives, for both entrepreneurs and customers. The entrepreneur must practice in an environment that provides incentives to innovate and rewards for innovating successfully. Chester F. Carlson believed that once invented there would be a future for xerography (few others shared his vision, and he had a difficult time raising the capital to carry it forward). He was right (and so were the lucky investors). Carbon copies are a fading memory for most of us, just as the old Multilith and Gestetner copying machines are for teachers.

What lesson for public schools is embedded in this tale? As most skillful educators know, the first lesson is to keep your head down. There are neither incentives nor rewards for innovating, and there are abundant disincentives and penalties for trying. The absence of a market explains the abiding conundrum about K-12 education: its overwhelming uniformity in spite of a long tradition of local control. Educators make up the largest single group in the labor force (2 percent), employed in over 100,000 public and private schools that for all intents and purposes are identical. Indeed, the door of the typical school has never been darkened by an entrepreneur’s shadow. The reason? It would be a waste of the entrepreneur’s time and energy. Not only are there no incentives or rewards to change, there is active hostility to change.

In this one important respect, the private firm and the public school are the same: Both organizations resist change because it is often painful and always daunting. The private firm’s willingness to change is not a sign of superior virtue but of necessity. That is the power of the market: It forces change.

Join me, if you will, in a thought experiment. What if we in education were to start from scratch as the entrepreneur does? Would we design a similar system? Unlikely. To the contrary, we would recognize that schooling should fit the cultural and economic system of which it is a part, and we are a long way from the agrarian calendar and factory model that inspired the modern school. Today’s reality is latchkey kids, working moms, high-tech and high-touch games and tools: in a word, multitasking. The social order kids are part of is a world with few adult role models. It is the peer group that dominates, which is impressionable, with a limited institutional memory, flexible to the point of chaos, open, innovative, and more than ever in need of structure and adult guidance.

What if we in education were to start from scratch as the entrepreneur does? Would we design a similar system?

The two most pressing needs of modern culture and the economy, in fact, are a safe place for children to be from dawn till dusk, year-round, and mastery of the knowledge and skills kids need to take their place in society when they grow up. No social institution (save the family) is better prepared to serve these needs than the school. But not as it is presently organized. The modern school should look like the modern high-tech firm—open 24/7 (or at least 12/5), all year long, with teacher and student rank established not by time in the saddle but by demonstrated accomplishment.

Imagine a school that is open when the family needs child care and that provides a constant stream of academically oriented enrichment activities; one that is standards-based (not age-based), in which you advance at your own pace. These deceptively simple structural changes would have a profound impact; for example, for whatever reason, students could “stop out” for days, weeks, or months at a time, returning to where they left off when they came back. They could do so to join an expedition, live abroad, prepare for exams, succumb to boredom, participate in Olympic training, or simply take a break.

Or they could accelerate, covering a traditional K-12 curriculum in 10 rather than 13 years. What would they do with the “extra time”? Learn a second or third language, earn an associate’s degree by age 18, graduate from college early (by doing the same thing in college—compressing four years of coursework into two and a half or three).

With the costs of private colleges reaching $40,000 a year, the economic incentives (and rewards) alone should be enough to stimulate such change.

That it doesn’t is a commentary on the heavy hand of tradition and the lack of entrepreneurial vitality in the education realm.

Vol. 27, Issue 19, Pages 24-25

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