Competition, Choice, and Privatization

Published January 1, 2004

Education and Capitalism: How Overcoming Our Fear of Markets and Economics Can Improve America’s Schools
Herbert J. Walberg and Joseph L. Bast
(Hoover Institution Press, 2003, 362 pages, ISBN: 8179-3971-7 $25.00 cloth, ISBN: 8179-3972-5 $15.00)

Let’s face it. The average reader–conditioned from previous encounters with books on education or economics to expect dense, jargon-ridden prose and arguments that are barely understandable–is not going to add Education and Capitalism to a “Must Buy” or “Must Read” list on the strength of its title. But that would be a big mistake.

This book is written clearly, concisely, and cogently for the lay reader, but it packs such a remarkable range of arguments and exposition in its 362 concentrated pages that it would also readily serve as a rich and challenging college-level text. Education and Capitalism is destined to become a modern classic.

The authors explain why reform of K-12 education is necessary but also argue that it’s likely to founder unless popular myths about capitalism are challenged. If reformers and the general public do not possess a broader understanding of how and why markets work, the baby steps that are currently being taken towards school reform will not develop into the adult strides required for K-12 education to deliver superior performance.

“Unless popular myths about capitalism are challenged, school reform will stall well short of success,” write the authors, education researcher Herbert J. Walberg and public policy expert Joseph L. Bast.

Walberg, chairman of The Heartland Institute, is a distinguished visiting fellow at the Hoover Institution at Stanford University and a professor emeritus at the University of Illinois at Chicago. Bast, president of The Heartland Institute, is the author of numerous policy studies and coauthor of five books on topics ranging from school reform to environmentalism.

After detailing the shortcomings of the present K-12 school system, the authors explain how a capitalist school system would work. They then take an extensive detour into economics and capitalism to explain what capitalism is and how its principles would be applied to K-12 education.

A particularly enlightening chapter is devoted to debunking myths about capitalism–after all, don’t the rich get richer under capitalism, while the poor get poorer? Walberg and Bast dispose of nine such myths.

They also dispose of many of the arguments against school choice that are raised by opponents. In addition to providing a comprehensive set of guidelines for school choice, they provide a structure for understanding the different ways of privatizing K-12 education.

The Communist Economy

Although it isn’t used in the book, the late Al Shanker’s candid assessment of the K-12 education system is a good starting point for understanding why reform is needed:

“It’s time to admit that public education operates like a planned economy, a bureaucratic system in which everybody’s role is spelled out in advance, and there are few incentives for innovation and productivity,” said Shanker, who was president of the American Federation of Teachers for many years. “It’s no surprise that our school system doesn’t improve: It more resembles the communist economy than our own market economy.”

It’s not surprising that communism doesn’t work, since it lacks all of the factors that Walberg and Bast explain are necessary for capitalism to operate: markets, private property, and the Rule of Law. Instead of relying on centralized planning and decision-making by a ruling elite, capitalism relies on three other features of its operation that are missing from a communist economy: prices, competition, and profits. These send signals to producers to direct resources to where they are most needed and to reward those who can best satisfy the wants of others.


Privatization is a way policymakers can introduce some of the beneficial features of capitalism into K-12 education without having to commit to a wholescale conversion to the free market. Privatization means relying more on private institutions than on government for the delivery of needed goods and services. Privatization is a strategy that aims to increase the role of the private sector in an activity or in the ownership of the means of production.

According to a useful classification developed by E.S. Savas a decade ago, goods and services may be funded by the public sector or the private sector, and they may be delivered by the public sector or the private sector. When this classification is applied to K-12 education, 10 options emerge, as shown in the accompanying table.

Privatization Options with Applications to Education
1. Government service Conventional public school system where government both funds and manages nearly all schools  
2. Intergovernmental agreements (open enrollment) Public school choice, where pupils attend schools outside their districts and the sending district pays tuition to the receiving district  
3. Grants   Private schools get government grants for some or all enrolled students, perhaps for specialized services or transportation
4. Franchises (contract to manage)   Public school system contracts with education management organization to run local public schools
5. Charters (contract to operate)   Public school system issues charters to private groups to operate schools
6. Vouchers and tax credits   Parents get public assistance to pay for tuition at private nonprofit and for-profit schools
7. Government vending Local public school accepts out-of-district pupil and is paid by parents  
8. Free market   Private nonprofit and for-profit schools compete for pupils without tax subsidies
9. Voluntary service   Charities finance private schools or provide scholarships to needy pupils
10. Self-service   Home schooling: Parents educate their children themselves at home or in partnership with other parents
SOURCE: Adapted from Table 10.1, Education and Capitalism, pages 231-232.

The first two options–public funding-public deliverer–use the public sector for both funding and delivery of the service. The next four options–public funding-private deliverer–use the public sector to fund the service and the private sector to deliver the service. The next option –private funding-public deliverer–is where consumers pay directly for a service delivered by the public sector. The last three options–private funding-private deliverer–have consumers pay for a service that is delivered by the private sector.

Privatization is the process of shifting from public-sector delivery to private-sector delivery and from public funding to private funding. Many activities and services, including airports, prisons, railroads, waterworks, parks, golf courses, and building maintenance, have undergone this shift since 1980.

“Extensive research shows that privatization delivers significant cost savings, greater accountability and responsiveness to consumers or elected officials, and a level of quality equivalent or superior to public-sector delivery,” note Walberg and Bast. They also note that in K-12 education, many privatization proposals have been advanced but few have been tried.

George A. Clowes is managing editor of School Reform News. His email address is [email protected].