Tuesday, 3 November 2015

How To Fix Schools

Education secretary Nicky Morgan wants to give parents greater choice in state-funded schools because she thinks schools will “up their game”. We hear this a lot from politicians - they regularly tell us they are trying to do us a favour by giving us more free choice in our public services. Basically, they are trying to sell us the choice-driven qualities of a private enterprise consumer market. Alas, what they fail to realise, or don't want to tell you, is that choice is always going to be sub-optimal when the things being chosen are funded by taxpayers.

Suppose the government nationalised handbags and gave them away for free by obtaining money from our taxes. What would happen? Demand would increase, but supply wouldn't be able to keep up with the demand, because there are a limited number of handbags. Consider a Gucci handbag for £2000 and a Next handbag for £30. Taxpayers cannot fund Gucci handbags for everyone, so they must be rationed. So wealthier people will have the Gucci handbags (because they've paid more tax) and others will queue for Next products.

The problem arises because the government won't be able to match supply to demand. The reason being: it doesn't know how much everyone values handbags, so nationalising handbags would be unsuccessful. The free market of private enterprise doesn't have this problem because the market of supply and demand dictates prices of handbags and tailors those prices to how much people value them.

Rich Rachel may wish to buy a Gucci handbag for £2000 and Skint Sally may only be able to afford a Next handbag for £30. But that doesn't just tell us about wealth; it tells us about desire for handbags too. Loaded Lorraine may have more money than Rich Rachel, but she might have no care for ostentatious handbags and instead prefer to spend £30 on a Next handbag and use the remaining £1970 to pay for a holiday or a painting. The right supply of handbags (and holidays and paintings) depends on how consumers make the trade offs.

Public services paid for by the taxpayers are not better off with the introduction of more choice because the government does not have the supply and demand price mechanism to factor in consumer choices - and thus it has no metric by which it can check people's valuation of the different products. Understanding this is the key to understanding why increased choice in taxpayer-funded services fails to capture what people value.

Suppose we have a city in which there are two only schools - let's call them S1 and S2. One of the schools is bound to be better than the other - let's say S1 is better. In a public sector system where prices are not attached to value, everyone is going to be paying for S1 or S2, but some parents are going to receive better service than others (apply this to state run anything and the same applies). In a state funded, unpriced system (obtained from taxation) everyone is going to prefer S1 over S2, and half the city's population is going to be disappointed that they got S2.

Let's take it to an extreme and suppose that there was no more nationalised education - and that schools were fee-charging, with tax for education (roughly about £10,000 per year, per person) staying in the pockets of families. Now S1 and S2 would operate under a much more efficient system. Here's what would happen. By charging for services, the inequality between S1 and S2 would turn into something better; there'd be an increase in demand for education in S1, which would bid up prices, which would engender lower prices at S2. This process would carry on until the differentiation between S1 and S2 matched the value parents placed on them. Those in S2 would be compensated by paying less for a less-good service, and because parents would be considering the average trade-off, they'd be free to splash out on better education, or have cheaper education and more money in their pockets.

My thought model only had 2 choices - imagine how much better with dozens of choices. Good and expensive or not so good and cheap is the kind of choice we should value (‘not so good’ ought not to mean ‘bad’ though). We are constantly being told that it's wrong to disadvantage those who can't pay for better education like the wealthy can. But not only is it undesirable to attempt to suppress those opportunities, it is also the case that if we stopped wealthy people's ability to buy more than their poor counterparts then monetary value would go out the window. Of course politicians don't really mean this - and neither do the electorate - they really mean everyone is entitled to a decent education. But this favours supply and demand in a free market because it is when choice is obtained and prices match value that standards improve.

I'll wager quite a few of you are uncomfortable talking about schools in this way - after all, education is such an important thing that all talk of cheaper, less good education is surely to be guilty of failing our children. Yes it would be if that were the case - however, given that education is such a precious resource it is precisely for that reason that competition ought to be the mechanism to improve standards.

Of course, it’s worth noting that no one has any trouble understanding this if the subject is mobile phones, cars or televisions. Everyone agrees that if mobile phones, cars and televisions had been funded from taxation for the past 25 years that the products would be far less good, and more expensive (or poorly allocated). Tax-funded projects would generate far less concern for providing consumers with better products at better prices. Why, then, do so few people understand this same principle when it comes to schools?

A system in which schools are funded by taxation frees schools from such a high burden of satisfying consumers' preferences, just as would be the case if this applied to Sony, Panasonic or Apple. By and large private schools provide better educations than state-funded schools, not just because fee paying schools contain a greater proportion of bright pupils, but also because, just like Sony, Panasonic and Apple, the school has market pressure to deliver the standard of education that the parents demand at the price paid.

The popular assertion from politicians that tax-funded schools are best because children deserve a good education gets things backwards. It is because education is such a vital resource that it needs price signals and market competition to allocate those resources better.

Finally, I will grant you that at the moment we are not quite ready to overhaul the current system and make children's education solely a matter for market forces - which means such a system ought to be brought in gradually, and tweaked and refined over time, not piled on to parents in one foul swoop.

But even so, to suggest that in the meantime more taxpayer-funded consumer choice will continue to generate a healthier competition that can greatly increase the standards of education in this country is at best naively optimistic, and at worst, just plain wrong.

Finally, if you are having trouble imaging a life where schools aren't the responsibility of the state, you may like to know (if you don't already) that politicians only took over education in Britain as late as the late 19th century, and in that period a much higher proportion of working class people could read and write competently (90%), whereas nowadays it is thought to be somewhere between 75-80%.