Liberty, Peace, Prosperity

Back to Basics: What is Economics About?

The study of economics revolves around two premises. The first is that man has unlimited wants and needs. Each individual strives to obtain more for themselves and those he cares for. Even the most hermit-like of us must feed himself if he wishes to live. The second premise is that each individual, at any given time, has a limited amount of resources at his disposal. There are four kinds of resource. Three of them, time, labor and talent, are inherent in the individual while the forth, capital, consists of external goods that must be obtained through the use of the first three. As one cannot fulfill unlimited wants with limited resources, one must decide how to best use the resources available to obtain the things that are valued most. Economics is the study of those choices.


The Case for a Market-Based Education System


Public schools provide elementary and secondary education to the majority of Americans, who attend free of charge. These schools have a monopoly on the education market, due to having almost exclusive access to government funding.  They face little competition from parent-funded private schools.

Federal spending has increased regularly for several decades. Despite this, scores on the National Assessment of Educational Progress (more commonly known by its acronym, NAEP) tests in reading and mathematics have remained stable for seventeen year olds. In 1971, the first year that the reading test was administered, the National Center for Education Statistics reported that students scored an average of 285 points. In 2008 the average was 286, and had not gone higher than 290 during the interceding years. During that same time period federal spending on K-12 education increased from $3.33 billion to $38.92 billion. Scores on the mathematics test yield similar results. In 1973 the average score for seventeen year olds 304. In 2008 the average was 306, with the highest score of 308 being recorded in 1999.

Stagnation at home means that American students are falling behind their peers in other developed nations. The Alliance for Excellent Education reported in 2008 that American students rank 15th out of 29 developed nations in reading literacy and 25th out of 30 countries in mathematics. These failures of the US education system have led to a great deal of debate about how to fix public education at both the federal and state level.

Reform efforts tend to fall into two categories: top-down planning, and bottom-up choice-based reforms. The former includes setting national curriculum standards, using standardized tests to track the progress of students and determine the quality of schools, which may determine how much funding a school receives (No Child Left Behind), and grant programs that reward states for adopting so-called “best practices”, as was done in the recent Race to the Top grant program. The latter encompasses the efforts to give parents more control over their children’s education. Examples include the establishment of charter schools that can operate outside of the state’s regulatory framework, voucher programs that provide lower income parents with money to spend on private schools, such as Washington DC’s short lived school choice program, tax credits for parents who send their children to private school, and efforts to reduce regulations on home schools and private schools.

In Favor of the Free Market

The problems that occur in American education are not the result of outdated curricula or inadequate technology or any of the other bogeymen that plague the collective imagination of education experts and school board members. They are inherent in the monopolistic structure of public schooling. A free market system of competing, minimally regulated and parent-funded for-profit schools would provide greater quality at a lower cost.


Market systems produce higher achieving students than government controlled education monopolies. In his article Comparing Public, Private, and Market Schools: The International Evidence, A.J. Coulson of the Cato Institute found that the majority of studies show that the market has a significant advantage over the government monopolies in terms of student achievement on standardized tests. Of the thirty-three studies examined, twenty showed that market systems perform better than government controlled monopolies, seven showed that there was no statistical difference between the two, and four showed that the market was at a disadvantage (Coulson).

What makes these findings so compelling is the diverse nature of the places studied. The market advantage exists across national and economic boundaries, demonstrating that “the observed pattern is the result of the system itself and not simply an accident of circumstance (Coulson).” In 2006, James Tooley conducted studies in Ghana, India, Kenya and Nigeria that compared the scores of students in private schools with the scores of their public school counterparts on standardized tests. The sample size from the private schools was roughly equal to the sample of public school students. Additionally, “to control for innate ability, all children were tested for their IQ using the Raven’s Standard Progressive Matrices test.” In each of the places studied, students in private schools demonstrated greater proficiency in both mathematics and language than their peers in government schools. Similar studies that were conducted in both urban and suburban communities of the United States, Pakistan, and Colombia have yielded the same result (Coulson 37-39).

Market education systems are marked as having a wide selection of minimally regulated, competing, parent funded schools. While not all of these schools need to be for profit, it is necessary that they be primarily funded by parents. When consumers have to foot the bill themselves, they pay close attention to how that money is spent. After all, the amount of cash available to them is limited and it isn’t smart to waste it. This is the key to the success of market education systems. Nobody wants to waste money on a bad school, so parents who pay for their child’s education have a strong incentive to carefully evaluate the schools they send their children to. Because well-performing schools will be more attractive, they will be more profitable and will stay in business. To compete, the other schools will try and find ways to improve their own performance. Those that succeed will be rewarded while those who cannot will fail. This results in improvements in the overall quality of schools in that particular market.

Government funded schools don’t operate by the same rules. They are not directly funded by the parents of students, so the parents don’t have to worry about the quality of the school, as they aren’t losing any money by sending their children there. This also means that government schools will be less responsive to the demands of parents. If parents withdraw their children, the school doesn’t lose revenue, at least not the way private schools do. They have no compelling interest in satisfying parents, which could help explain why NAEP scores have been level for several decades.


A survey taken of a random sample of college freshmen found that the majority of respondents believe public funding of education is “less than adequate” (Education Survey) and believe that the average public school spends less than $7,000 per pupil in a year. Like many people, they underestimated the true cost of public schools. According to the 2011 Census School Finance Reportpublic schools in the US spent an average of $10,499 per pupil in 2009. Statistical Abstract of the United States reports that that number is higher, $11,749 (qtd. in O’Rourke). Both of these numbers represent the steady increase in funding that, as noted earlier, has not translated into improved student achievement. The average private school spends about $7,848 per pupil (O’Rourke).  The disparity in funding appears in the international evidence as well. In every study that compared the efficiency of market systems with monopoly systems (seventeen in total), Coulson found that the market was more efficient (Coulson 46).

Different types of incentives for the public schools and private schools can be faulted for the disparity between the two. Similar to the way that profit motivates private schools to improve the quality of their services, the bottom line pushes private institutions to reduce operating costs by as much as possible. Every dollar wasted is a dollar of lost profit, so it makes sense to allocate resources as efficiently as possible. In fact, most small private schools probably find it essential to stretch their dollars as far as they can just to stay in the black. Public schools lack these incentives, and as a result continue to waste incredible amounts of taxpayers’ money.

Critics will rightly point out that this could lead some schools to spend so little that quality is compromised. But here again, self-interest will work to the benefit of the consumer. While firing teachers or neglecting to maintain the school’s facilities may temporarily boost profits, those profits will disappear when parents begin taking their business elsewhere. Nobody wants to waste his or her money on a bad school.

Selection Bias           

It can be reasonably argued that additional factors relating more to the individual characteristics of parents and students can skew the data in favor of market-based systems, especially in the US where private schools serve a smaller and more affluent segment of the population. A Gallup poll conducted in 2007 showed that private school parents tend to be more critical of education in the US as a whole than parents who send their children to public schools. This could be interpreted to mean that private school parents are savvier consumers of education, as well as more dedicated to the education of their own children. Given the small size of the private school population in the US, it is possible that the apparent quality of private schools in the US is the result of selection bias on the part of exceptional parents. Such parents could be assumed to produce higher achieving children regardless of what kind of school they enroll in. When these children are concentrated in private institutions instead of public ones, the data on student achievement is skewed in favor of private schools.

Ideally this would be corrected for by sorting students into different schools at random. Such an experiment has not been performed however; there are cases where such a large portion of the school age population attends private schools that the effect of elite parents and students is negligible. In places such as Hyderabad, India and Ga, Ghana, over 60% of the children attend private schools (Tooley and Dixon). A large sample size is more representative of the total population and, most importantly for this purpose, includes larger numbers of more ordinary parents. If private schools apparent advantage is the result of a selection bias on the part of “elite” parents, that advantage will disappear with a larger sample size. It turns out that even with the larger sample size, the private schools in such areas produce higher scores on tests in mathematics and English than the public schools. In Hyderabad, private school students on average scored over twenty percentage points higher on a math test administered by researchers, and over thirty percentage points higher on an English test, than their counterparts in public schools (Tooley and Dixon 31-35).

Another factor that can skew the data in favor of the market is the selectivity of the schools themselves. One of the defining elements of a free market is that exchanges occur willingly. As such, private schools are allowed to choose whom they will and will not accept, meaning that they may reject students that are difficult to educate. Having their pick of students means that private schools only have to take the best students, which would give them the appearance of higher quality. Again, the same counter argument is presented. Market systems where private schools serve the majority of the population, and therefore represent a broad range of poor, average and unusually bright students, still have an advantage over government schools.

 Parents are Stupid

Another argument made against trusting education to the free market is that parents can’t make rational decisions about their child’s education. They will be duped by flashy advertising, scammed into buying snake-oil language programs peddled by shady tutors who invariably lack the proper certifications from the local licensing board, and might even let their children learn about the wrong things, like climate change skepticism or God. Leave aside the incredible arrogance of this argument. In order to make it with a straight face, its proponents have to both willfully ignore the success of the free market, and be ignorant of how it functions.

In order for the free market to function properly, market actors must have complete control over how they utilize the resources available to them and be able to make rational decisions about how to use those resources for maximum personal benefit. When in the role of a consumer, this means trying to get the most desirable product for the least amount of money. Products that are favored by consumers become profitable for producers, who make them in greater quantities. In the case of education, this means that consumers (parents) will send their children to the best school that they can afford. Good schools will see a growth in profits and remain in business while the bad ones fail. The overall result is better quality. However, if consumers of education do not make decisions on a rational basis and instead pick schools at random, then the quality of the school would be irrelevant in deciding which schools succeeded, and there would be no appreciable difference between government schools and schools competing in the private market. As the evidence presented so far has shown, market systems get better results than government run systems, demonstrating that parents are at least making rational decisions most of the time.

Final Points and Policy Recommendations

American students would be better served by a free market education system than the current government system that dominates the US. The incentives present in markets would create a system that is not only of higher quality, but is cheaper for society.

The responsibility for education funding should be transitioned away from the state and towards parents. There are several policy options that can be used to aid in the transition, some of which are already being put into practice in the United States today. Tax credits should be given to parents who send their children to private schools or home school. Because the government would not have a say in how that money is used, this would be an excellent first step towards establishing market for education. At the same time, states should loosen the regulatory restrictions on establishing new private schools so that competition can be increased. Finally, regulations that dictate curriculum and hiring should be loosened as well so that the new schools will have the flexibility to meet the needs of diverse consumers. The free market can work, but it has to be allowed to.


Alliance for Excellent Education. How Does the United States Stack Up? International Comparisons of Academic Achievement. March 2008. Web. 22 Oct. 2011.

Bouchard, Jack. “Education Survey.” Survey. 8 Nov. 2011.

Coulson, A.J. “Comparing Public, Private, and Market Schools: The International Evidence.” Journal of School Choice 3 (2009): 31-54. Web. 15 Oct. 2011.

O’Rourke, P.J. “End Them, Don’t Mend Them.” The Weekly Standard, 21 June 2010. Web. 10 Nov. 2011.

“Pre-primary Thru Secondary Education Fiscal Years 1902-2010.” US Government Spending. Christopher Chantrill, n.p. Web. 26 Oct. 2011.

Tooley, James and Pauline Dixon. Private Education is Good for the Poor: A Study of Private Schools Serving the Poor in Low-Income Countries. Washington D.C: Cato, 2005. Web. 24 Oct. 2011.

US Department of Education. “NAEP- 2008 Long-Term Trend: Reading Overall Results.” The Nation’s Report Card. National Center for Education Statistics. Web. 25 Oct. 2011.

US Department of Education. “NAEP- 2008 Long-Term Trend: Mathematics Overall Results.” The Nation’s Report Card. National Center for Education Statistics. Web. 25 Oct. 2011.

The Broken Window Strategy

Fiscal stimulus is centered on boosting aggregate demand. In economics aggregate demand is defined as the total demand for final goods and services at a given price. Demand itself is the number of people who are both willing and able to purchase final goods. By spending money on public works and investing in private companies, the government feeds money into the economy and the pockets of consumers. This increases their ability to spend on final goods, thereby enriching the producers of those goods who will in turn enrich those that they buy from themselves, leading to an overall increase in productivity. In theory, a certain increase in government spending can lead to a larger increase in overall productivity.

In February of 2009 the Obama administration signed the American Recovery and Reinvestment Act, a combination of tax cuts, welfare and grants and contracts for private businesses with the goal of creating or saving jobs and spurring economic growth. According to, the website tasked with providing information on the stimulus to the public, the bill cost $787 billion in deficit spending. At that time unemployment continued to climb as GDP fell. Today, while GDP is no longer falling, unemployment remains above 9%.

The idea that government spending can be used to boost the economy out of a recession is based on flawed economic thinking and has likely done real harm to the economy.

In order for the government to spend, it must first destroy wealth either through taxation or inflation. In order to spend $787 billion, the government must first come up with the money by either increasing taxes, printing more money and inflating the currency, or borrowing (which will have to be paid for by one of the former methods at a later date). The first flaw of stimulus spending is that it ignores the hidden cost of spending and focuses only on the visible results it produces. While it is true that government money is building bridges, paving roads and creating jobs in targeted industries, those benefits must be weighed against the opportunity costs incurred by destroying the wealth of private individuals and businesses. This cost is the potential investments that would have been made if the government hadn’t taxed or inflated away their wealth, such as business ventures, new cars or higher education.

The classic example of this comes from the French economist Frédéric Bastiat and his parable of the Broken Window. Bastiat presents the example of a boy breaking a shopkeeper’s window. As the gathering crowd discusses the matter, they come to the conclusion that the boy, rather than doing damage, has actually benefitted society. Now the shopkeeper must pay the glazier to repair his window, and the glazier is enriched and can now purchase goods from someone else. Bastiat acknowledges that all of this is correct, but points out that it is a mistake to think that the town experienced a net gain in productivity or wealth. Because the shopkeeper had to pay the glazier, that money could not be put to any other use. Now he only has the window, whereas before he could have had the window and a good equal to the cost of the glazier’s services. Essentially, you can’t create wealth by destroying it first.

The second problem with stimulus spending is one of incentives. In the private sector individuals control how their money is spent. They must take responsibility for all the risks associated with their purchases and investments, which provides an incentive to spend carefully. When someone is thinking about buying a car they want to make sure that there is nothing wrong with it before they make their purchase. They know that they can’t waste money on a vehicle that breaks down as soon as it leaves the lot, so they are careful with how their money is spent. The same holds true for entrepreneurs and investors. They will do extensive research to determine if a new enterprise can be profitable before they risk their money on it. Should it fail, they will have to bear the consequences.

This is not the case with government. As I stated earlier, the government has no money of its own. All of it comes from taxpayers. When the government spends money it doesn’t assume the same risks as a private individual, namely because the money wasn’t theirs to begin with. The incentive that ensures the careful use of capital by private individuals doesn’t exist for the government. As a result it can spend recklessly, wasting taxpayer dollars on pet projects for congressmen to brag about in their districts and shaky investments in politically favored firms like Solyndra. Government projects are often marked by the excessive price tag attached to them. Without the risk that normally attends private sector investment, the government is particularly prone to make risky and wasteful investments.

Stimulus spending takes money away from private individuals through taxation and places it in the control of congressmen and bureaucrats who lack the incentive to invest it well. Not only is such a policy wasteful, it stalls real growth by limiting private sector investment. Every grand government scheme must be scrutinized for the unseen opportunity costs it creates and the incentive structure that is at work.