What Does it Take to Create a Marketplace in Education?

Published December 1, 2004

Giving parents the freedom to choose their child’s school is the most important element in ensuring that an education environment operates as a competitive marketplace, according to a panel of policy experts who spoke recently at a Cato Institute Policy Forum on “Creating a True Marketplace in Education.” In fact, for one of the panelists, parental choice was the only thing that mattered.

“It’s parents that have the information about what’s best for their children,” said John Wenders, emeritus professor of economics at the University of Idaho. “The closer we can come to making the choices down at the bottom of the system, the better.”

That’s how the free market works to provide “almost limitless choices” in almost every other sector of the economy, noted conference organizer David F. Salisbury, director of the Cato Institute’s Center for Educational Freedom. Yet the U.S. K-12 education system operates as a command economy where government determines where and when children will go to school and what they will learn. So Salisbury asked: If we want to create a market-based education system, what are the three most important requirements?

Non-discrimination was the top requirement for John Merrifield, professor of economics at the University of Texas at San Antonio. Non-discrimination, he explained, means the government treats everyone’s children the same, regardless of which school they go to–public, private, charter, or religious. If the government provides support for education, he said, it should provide that support to all children.

Merrifield’s second requirement for a competitive marketplace was for low entry barriers, and his third requirement was for prices that would motivate the marketplace.

Lisa Snell, director of education and child welfare at the Reason Public Policy Institute, suggested it was money that motivated the marketplace.

“The most important thing is that the money follows the child. … The money is attached to each child and they take it wherever they want,” she said. “There has to be competition for the money.”

Snell’s second condition was that the money allotted to each child should be from a stable revenue source and have sufficient purchasing power for companies to be interested in investing in new school capacity. Her third condition was to allow for-profit companies to own and operate schools because, she contended, it is only for-profit companies that will make the R&D investments necessary to develop specialized schools.

According to Myron Lieberman, chairman of the Education Policy Institute, the following four conditions are required to create a competitive education marketplace:

  • producers and consumers are free to buy or sell services;
  • no producer or consumer controls the price of the services;
  • ease of entry; and
  • availability of adequate information for consumers.

However, in Lieberman’s view the school choice movement has made only minimal progress over the past 45 years in broadening the schooling options available to parents. By contrast, the teacher unions–the major opponents of school choice–have made considerable progress in consolidating their influence over the public school system. While no teachers were represented by a collective bargaining agreement in 1960, today between 75 and 80 percent of public school teachers fall under a collective bargaining agreement.

Over the past decade, the school choice movement has made negative progress, according to Lieberman, because leaders of the movement oversold charter schools and other severely limited school choice programs as examples of “the free market.” Now, he said, the limited results from these limited programs are being used by opponents as examples of how the free market really doesn’t work very well in education.

Snell had a different perspective on charter schools. While admitting charter schools are basically contract schools, she said they still exhibit some characteristics of the private marketplace. First, she noted, charter schools have added substantial new school capacity, some 3,000 new schools in total. Second, each of the for-profit providers–White Hat Management and National Heritage Academies–has developed a successful school model, branded it, and set about replicating it.

Even though charters lack some free market characteristics, they do have three key features that are requirements for a competitive education marketplace, Snell said:

  • funding follows the child;
  • funding is comparable to public school funding; and
  • revenue comes from a stable and predictable source.

A second panel addressed the issue, “Education Today: Are We Closer to a Market?” Panelists consisted of Andrew Coulson of the Mackinac Center for Public Policy, Richard Vedder of Ohio University, Claudia Hepburn of the Fraser Institute, and Robert Enlow of the Milton and Rose D. Friedman Foundation.

George A. Clowes ([email protected]) is managing editor of School Reform News.

For more information …

Archived video and audio recordings of the September 28, 2004 Cato Institute conference, “Creating a True Marketplace in Education,” are available online at http://www.cato.org/events/040928conf.html.