Education: Excerpt from Economics in Two Lessons
Here’s another excerpt from my book-in-progress, Economics in Two Lessons. As usual, praise is welcome, useful criticism even more so. You can find a draft of the opening sections here.
In the section over the fold, I’m looking at education.
In a modern society, education is the most important single factor determining a person’s life chances. The average who holds a professional or doctoral degree earns more than twice as much as someone without a four-year college degree, and is virtually assured of being employed (at a time of deep depression in 2011, only 2.5 per cent of higher-degree holders were unemployed). In economic terms, the education sector is one of the largest in the economy.
However, this statistical analysis seriously underestimates the economic importance of sector, because it ignores the First Lesson. The true cost of education comprises not just the salaries of teachers and the cost of running schools and universities, but the opportunity cost of the time spent in education by students.
The failure to take proper account of the First Lesson is a big problem in understanding the economics of education. But the failure to understand the Second Lesson has been much more of a problem for policy.
Simple-minded analyses based on a simplistic reading of the First Lesson have driven the irsteducation debate in the US and other English-speaking countries for the last few decades. The dominant idea is that education is a product like any other and that the best guarantee of good education is market competition between providers. The villains in this story are public goods and, especially, teacher unions.
To make education more like a private good, advocates of he First Lesson tried to change the conditions of both supply and demand. On the demand side, the central proposal was that of education ‘vouchers’, put forward most notably by Nobel Prizewinning economist at the University of Chicago, Milton Friedman. The idea was that, rather than funding schools, government should provide funding directly parents in the form of vouchers that could be used at whichever school the parents preferred, and topped up, if necessary by additional fee payments.
As is typically the case, voucher advocates ignored the implications of their proposals for the distribution of income. In large measure, vouchers represent a simply cash transfer, going predominantly from the poor to the rich. The biggest beneficiaries would be those, mostly well-off, who were already sending their children to private schools, for whom the voucher would be a simple cash transfer. Those whose children remained at the same public school as before would gain nothing.
On the supply side, the central idea was the introduction of for-profit schools and colleges to a sector traditionally dominated by public and non-profit educational institutions. For-profit educational institutions had a spectacular rise and fall.
The most notable entrant in the US school sector was Edison Schools. Edison Schools was founded in 1992 and was widely viewed as representing the future of school education. Its plans were drawn up by a committee headed by John Chubb, the co-author of the most influential single critique of public sector education in the United States (Chubb and Moe 1990). For-profit schools were also introduced in Chile and Sweden.
At the university level, for-profit enterprises proliferated with the University of Phoenix was the most notable example. For-profit trade and vocational schools also expanded in the US, and, even more dramatically in Australia, where a poorly-designed subsidy scheme produced a spectacular expansion.
The story was much the same everywhere: an initial burst of enthusiasm and high profits, followed by the exposure of poor practices and outcomes, and finally collapse, with governments being left to pick up the pieces.
Edison Schools, launched on the stockmarket with a flourish in 1999, lost most of its value and was subsequently taken private. At its peak, Edison ran hundreds of schools throughout the US. It has now faded into obscurity under the name EdisonLearning.
Sweden introduced voucher-style reforms in 1992, and opened the market to for-profit schools. Initially favorable assessments were replaced by disillusionment as the performance of the school system as a whole deteriorated. Scores on the international PISA test plummeted https://www.theguardian.com/world/2015/jun/10/sweden-schools-crisis-political-failure-education and dissatisfaction became general
By 2015, the majority of the public favoured banning for-profit schools. The Minister for Education described the system as a ‘political failure’, Other critics described it in harsher terms.
Although a full analysis has not yet been undertaken, it seems likely that the for-profit schools engaged in ‘cream-skimming’, admitting able and well-behaved students, while pushing more problematic students back into the public system. The rules under which the reform was introduced included ‘safeguards’ to prevent cream-skimming, but such safeguards have historical proved ineffectual in the face of the profits to be made by evading them.
Similar processes took place in Chile, under the influence of the Chicago-trained reformers whose policies were implemented by the Pinochet dictatorship. There were glowing initial reports, but the eventual outcome was to amplify inequality without improving performance. Chile banned for-profit education in 2015
The for-profit university sector followed a similar trajectory. The University of Phoenix epitomised the process. Enrolments peaked at 600 000 in 2010, but had fallen to 142 000 by 2016 as the US government cracked down on shady enrolment practices. Other for-profit universities closed altogether or converted to non-profit status
Perhaps the most spectacular boom and bust took place in my native Australia. From tiny beginnings around 2007, a scheme to provide loans-based funding for vocational training grew into a full-blown educational and budgetary disaster. Even more than in the for-profit US university sector, the companies involved found it profitable to exploit the weaknesses of the funding system, and the fact that students could not judge the quality of education in advance, rather than to do the hard work of providing improved education.
The results speak for themselves. By the time a conservative government radically restricted the scheme in late 2016, the estimated losses to the budget ran into the billions of dollars, while thousands of students were left with unrepayable debts and worthless qualifications. Meanwhile, the public system of Technical and Further Education, which had worked well for decades had suffered grave and possibly irreparable damage.
The failure of full-scale privatisation left the field open to the main remaining alternative ‘charter’ schools. The idea of charter schools was originally put forward by Albert Shanker, the president of the American Federation of Teachers. His idea was to encourage schools where teachers had more opportunities to try out innovative approaches, and where the student body would be more diverse, both economically and racially.
In the hands of the education reform movement, however, charter schools took on a very different tone and purpose, much closer to that of the for-profit model that failed with Edison. While some independent charter schools have pursued innovation along the lines suggested by Shanker, others are part of chains relying on services like management companies, including for-profits like EdisonLearning.
Charter schools have been, and remain, politically popular with Republicans and Democrats alike. Duncan. The only problem is that, according to the empirical evidence, they don’t work. Charter schools have not failed spectacularly, as for-profits have done, but they have not yielded any significant return for the money and political effort that has been poured into their expansion.
Nationally, there is very little evidence that charter and traditional public schools differ meaningfully in their average impact on students’ standardized test performance.
Moreover, although the evidence is murky it seems that an increasing proportion of charters are being run on a for-profit basis, even in cases where formal structure is non-profit. Given the failure of the for-profit model in general, the prospects for the future are not good.
Why has market-oriented reform of education been such a failure? Every part of the Second Lesson is relevant here. On the ‘production’ side, education is, in many respects similar to other industries. Prices send signals about the cost of providing particular courses of study in particular ways, and of the rewards of one kind of employment or another. Institutions and educators respond to those signals. Students try to weigh the cost and the likely monetary benefits of continuing education, or of seeking employment, along with less tangible costs and benefits, and decide accordingly.
On the other hand, an analysis based on prices falls down badly in the attempt to describe education as a market transaction. All the terms of the Second Lesson are relevant here. Education is characterized by market failure, by potentially inequitable initial allocations and, most importantly, by the fact that the relationship between the education ‘industry’ and its ‘consumers’, that is between educational institutions and teachers on the one hand and students on the other, cannot be reduced to a market transaction.
The critical problem with this simple model is that students, by definition, cannot know in advance what they are going to learn, or make an informed judgement about what they are learning. They have to rely, to a substantial extent, on their teachers to select the right topics of study and to teach them appropriately.
Moreover, any specific course of education is a once-only experience in most cases. Students may judge, in retrospect, that particular teachers, courses or institutions were good or bad, but in either case they are unlikely to return, so that there is no direct market return to high quality performance.
The result is that education does not rely on market competition to any significant extent to sort good teachers and institutions from bad ones. Rather, education depends on a combination of sustained institutional standards and individual professional ethics to maintain their performance.
The implications for education policy are clear, at least at the school level. School education should be publicly funded and provided either by public schools or by non-profits with a clear educational mission, as opposed to corporate ‘school management organisations’.
Post-school education raises more complex problems, regrettably beyond the scope of this book. But the key element should be to make high quality post-school education available, and affordable, for all young people.