LIZ: We need a definition of 'efficiency' here. Efficiency for lowering prices? Efficiency for quick provision of service? Efficiency for generating wealth? And in the case of schools, why would we be generating wealth for traders when that is not the goal of education?
DAN: Efficiency means you are producing as much as possible with the given resources. Whether you are producing goods (like apples or airplanes) or services (like education or haircuts) it is the same thing. You maximize efficiency when you are getting as much out of your resources as possible. Compared to any other system, a market-based system is the most efficient. That doesn't mean there aren't market failures -- one example is dealing with externalities (i.e., things external to the transaction -- for example people buying paper and people producing paper in a market system will get us the most efficient ways of producing paper, but it might cause a lot of pollution. But since that pollution is outside "or external" to the paper selling=buying transaction it leads to a market failure and overproduces pollution so we need think about things like fines for polluting to correct for the market failure).
LIZ: OK, so I think I understand that efficiency means traders are getting as much out of resources as possible within a closed system, but since schools are not closed systems, what about those complicated things that impact their quality – like variable teacher training, programming, school leadership, family inputs, poverty, disabilities…?
DAN: Well, before we start touting the wonder of markets -- and I do believe they are incredibly powerful and useful mechanisms -- we have to be very clear about what markets do. First, for a market to work well there has to be perfect information. All the people involved need to have good information about exactly what they are getting and what they are giving up in a transaction. If that doesn't happen, then we won't get the best allocation of resources (think about Wall Street!). That's easier when buying a tuna-fish sandwich than an education - but with oversight and analysis and transparency we can probably do fairly well in that regard. If not, then the people with the better information will do better at the expense of others.
LIZ: I’m not convinced that some schools do better than others simply because they have better information... doesn’t this have to do with other factors besides efficiencies around delivery of service? The production factors that Fed Ex deals with, for example, may pale in comparison to the schooling factors involved with delivery of quality teaching and learning in schools. Schools are not simply factories run by good information that help streamline finite products and enable ‘exchanges’ to go on.
DAN: The point about information is that the more accurate information all participants in a transaction have, the closer to an optimal outcome we get. If parents -- for example -- don't know about the schools and the educational programs and what is known about their effectiveness and suitability then they can't make choices that lead to the best possible outcomes. For some, goods or services information is easy to come by. For others it can be very hard. Health care is the most often cited example -- especially since information is asymmetric. That is the producers (doctors, drug companies, hospitals) have much more information about your health, the range of treatments, their effectiveness, their side effects, etc than you do. Because they have more information they can create prices and procedures that benefit them at your expense. For a market system to work (optimally) information must be available to everyone.
But second, we have to think about what economists mean when they say markets are "efficient." or "optimal". You hear that all the time. Markets lead to "optimal" outcomes. With a clearly defined product, no barriers to competition, and perfect information, markets DO lead to an optimal outcome. But by optimal, economists mean "Pareto Optimality." That is a situation where it is impossible to make one person better off without making someone else worse off. In other words, there is no "dead weight loss." Let's say we are distributing apples and cookies to a bunch of kids. Some of them love apples, some love cookies, some like a variety. A distribution of apples and cookies is Pareto Optimal if there are no longer any gains to trade. A market will lead to a relative price of apples to cookies (let's say one apple for five cookies) so that no one with an apple would feel better off trading it for five cookies or vice versa. The fact that markets can do this on their own without any kind of managerial process is actually quite an amazing outcome.
However, there is an important catch. They say nothing about the endowments people start off with. Pareto Optimality is a positive thing because it means you’re not wasting resources, but there are many Pareto Optimal situations. The one we end up at depends on initial endowments people bring to the marketplace. If you value equity as well as efficiency, you have to make a decision about how to combine the two goals. Economists tend to like the way markets create efficiency, so they tend to like solutions that affect the endowments that people bring, rather than the outcomes. That is, fund things like scholarships and set up things like earned income tax credits, etc., things that help people in a disadvantaged position come to the market with more resources. Then let the market drive things towards an efficient outcome that will be more equitable because you’ve made resources that people brought to the market more equal. Making things equal on the back end (e.g., making laws that say "equal pay for equal work" to eliminate wage disparities between men and women) tends to create inefficiencies that reduce the size of the pie.
Take an extreme case. There are two kids. One has 100 apples and 100 cookies and the other kid has nothing. Well, that is a Pareto Optimal allocation. It is impossible for the children to trade anything in a way that makes them both better off (assuming that the rich kid doesn't care about the poor kid). Pareto Optimality says nothing about the distribution of goods between people. If some people come to the market with lots more stuff than someone else they'll leave better off. Now, it is possible for a market to make the poor person have a bigger improvement in well-being than the rich person's improvement, but there is nothing about a market that guarantees this.
So if you don't want a market based system to re-enforce or expand inequalities you have to do something to even out what people bring to it. That is why more liberal economists usually suggest things like not just setting up charter schools but giving vouchers to poor people so that they can compete in the market on more equal terms with richer people. And as for people voting with their feet on which school is best, you have to look at the full price of going to that school -- which includes the time and expense of transportation. If the schools people want to go to are in the rich section of town then there is an implicit price on poor people for sending their kids there. Without something to subsidize those extra costs it isn't really a free market because everyone is not paying the same price.
LIZ: So, how can a free market model claim to account for other inequities beyond the ‘transaction’? It would be literally impossible to make sure all families had perfect information with which they could make choices. Looks like a market model would automatically favor those who can get information easily, so it would seem to be the worst thing possible for families/students who are already struggling for access to quality education...
DAN: This relates back to the externalities thing I was talking about. The classic example is pollution. People buying and selling gasoline don't adequately take the social impacts of pollution into account when they buy and sell gasoline (or the political ramifications vis a vis Iran, for example) -- so they lead to an efficient production and allocation of gasoline in terms of energy production but not pollution production. What needs to be done -- in econo lingo -- is to "internalize the externality". That is somehow get the costs of the pollution into the transaction. One solution in this instance would be to have a gas tax. The gas tax raises the cost of buying gas and reduces its profitability so less gets produced -- but, it will still lead to an efficient allocation of gasoline because the market will drive the allocation. So you can get an efficient outcome that takes into account the social costs of gasoline (assuming you figured out a gasoline tax that adequately captures the social costs of burning gasoline). This is better than trying to tell everyone how much gasoline they should be using. That is the theory behind all this carbon pricing stuff you here on the news. The world determines how much carbon we should be burning -- but then lets the market decide who gets to burn it.
School choice is complicated because of the way public schools are funded via property taxes and because of the impact of parental involvement and the benefits of going to school with kids who value school. So being forced to go to your local school can lock in inequalities that already exist because of what is happening in the housing market. School choice can allow kids from crummy districts to go to schools in richer, better districts. Of course, richer kids have more money so they can afford better schools. That is why people want to give vouchers to poor kids so they can compete better with rich kids. Or have a per capita system where whether you are rich or poor you bring the same resources to the market.
There is some logic to this... but I think there are problems. First, rich kids can opt out of the system by going to private schools. This not only takes resources out of the school system but starts to undermine political support for public schools. Second... like I said before... even in a per capita system there are different costs for these kids. Transportation costs (time and money) and transaction costs (learning about what schools are best for you) can still drive a wedge between rich and poor kids, in my opinion. Now one way to try to even things out is to give more resources to schools in poorer areas, but that doesn't happen with per capita budgeting.
LIZ: That’s the Weighted Student Funding idea being proposed in Rochester…
DAN: With per capita budgeting schools that are seen as underperforming will lose students -- and money. Those students who remain will be the ones who probably faced the largest costs of changing schools (or were less able to handle those costs) or who had worse information (maybe because their parents were too busy to get that information) and so they will end up going to a shrinking school. Why should the "initial endowment" of a financially stressed parent be allowed to hurt a kid in a public school system? Even if it is because the parent doesn't value education, I would still argue it is not right for the child to have that sad situation re-enforced by a public school system.
LIZ: Are those who tout market approaches to schools concerned about market limitations as applied to real school systems? I find the use of market language to talk about public schools disturbing because it frames everything as an exchange rather than addressing the learning process as well as the deeper issues around access. Teaching and learning is not a simple ‘transaction’ and students are not ‘products’. Quality student learning is dependent on having time for and variety of teaching approaches that lead to the widest number of students' success in knowing and understanding content. Metrics for quality would be dependent on the kind of learning taking place, not simply on the demand for it. Efficient use of public money is important, but if a market model for public education doesn’t guarantee distribution for all children then it cannot be the entire answer. I'd like to see improvements, but I'm spooked by the haphazard actions that are being rolled out in Rochester.
DAN: Trying to harness the power of markets sometimes makes sense. But it is important to remember what conditions are necessary for them to lead to optimal outcomes (perfect info, everyone faces the same price, no barriers to competition, fairly homogeneous product) and what exactly is meant by "optimal" -- and to what extent public policy should be concerned about the distributional issues that markets do not address. My point is that while markets have great aspects, you have to think about endowments, information, externalities, and other types of market failures or limits of markets. You have to set up a system that takes advantage of what markets do well but acknowledges their limitations.
