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Clear thinking about: Running public schools "like a business"

One of the things we hear over and over are calls to run our public schools "like a business." The basic argument is that if schools were run in a more businesslike manner, they would not have the budget problems we are seeing today. It sounds like a simple argument, and that gives it great appeal. The reality is more complex. Let's take a look at how it plays out in the real world. Differing objectives

Running a school district like a business implies more than just spending carefully and operating in a rational and efficient manner. Many people who make this argument are really asking for schools to do what private sector firms theoretically do: deliver a good product at the lowest possible cost. But this is where things get sticky: businesses and schools have profoundly different objectives. For a business, the primary goal is profit for the owners; for a school, the primary goal is a quality education. Is it any wonder, then, that the systems they use to meet those objectives would look very different? Imagine running a company where you had to provide all prospective customers with a high quality product for free, and some other entity determined how much money you would have to make that happen, based on factors that aren't really connected to your costs. Not so easy. The primary objective of any private business is to generate a reasonable return on investment to the owners (proprietor or shareholders). This is a financial goal: success is measured in terms of dollars. Everything else - the cost of materials, the quality of the product, the cost of labor - is manipulated in order to generate a sustainable return on investment. (Businesses don't actually maximize profit; maximizing anything gets harder as you go along. Instead, they aim to generate returns that are "good enough" to be competitive given other alternatives investors might choose and the relative risk of these various investments.)

One critical consequence of this is that the product - whether a good or service - is considered "good enough" if it attracts sufficient buyers to generate a profit and a reasonable amount of growth. The product is not the point of the business: the return on investment is. That return on investment is evaluated in both the short term and the long term, and these different perspectives lead businesses to balance various priorities (profit today versus growth tomorrow, and so on). For our public schools, however, the product - a quality education - is the point. Where private businesses focus on generating a good financial return, the mission of our public schools is to provide the best education possible given resource constraints. This has a few consequences. The most important is that varying the quality of the product in order to control costs is simply not an option for school systems. In fact, many of the levers private businesses use to control their finances (product quality and price, for instance) are not available to public schools. Demand for their product (the number of children they must serve, the needs of the community for an educated populace) is mostly unrelated to the revenue they have available. This is especially true in Michigan, where local demand has little impact on the per pupil funding districts receive.

Another consequence is the disconnect between the buyers and beneficiaries of the product. If you buy a car, or a microwave, it becomes fairly clear in short order whether you got what you paid for. As a result, a business will not offer a product with features that no one is willing to pay for, but consumers will pay for products that provide direct benefit. But with schools, the "buyers" - the taxpayers of today - will not be able to see the return on their investment for many years. The total impact of a public education won't be clear until today's children grow into adults. We may try to measure quality indirectly, using things like standardized tests, but the results of those tests do not guarantee long term success. In fact, it is this very disconnect that prompted the creation of publicly-financed schools in the first place.

This nation was founded in part on the principle that government should be "by the people," and to do that you need to have an educated citizenry. Unlike other nations at the time, where education was reserved for the select few, the new United States committed to making a basic education available to all. The reason this became a public, rather than private, project is because of what economists call "market failure": the huge time gap between the purchase and the return effectively discourages most private investment. Moreover, the measure of the benefits is only indirectly financial - it comes in the form of quality of life and effective governance, both things which are hard to measure in dollars. In short, what public education is all about is making an investment in the future, an investment that for the most part will not bring a return for 20 years or more. The amount we invest - the "cost" of a child's education - is not driven by impersonal market forces, but by the choices we as a society make about how many resources we will give to our schools. Our willingness to invest depends on our perception of the long term importance of education.

This is where efficiency arguments get tangled up. It's one thing to reduce duplication and take advantage of economies of scale in our schools. But it's quite another to extend to schools the logic businesses use to evaluate the cost of production: for a business, production if efficient as long as the product actually sells and costs are sufficiently below revenue. This calculation ignores quality, since different levels of quality command different prices. But what if quality is the only thing that matters? Would wage and benefit cuts - the kinds of tools usually used to reduce costs and increase productivity - really have no effect on the quality of our schools' "product"?

Products versus services

Another complication raised by the "run schools like a business" argument is that there are many different kinds of private business. Because of Michigan's manufacturing history, most people who compare schools to business are unconsciously using businesses that make products for the comparison. But there are other kinds of business: service business. Providing an education is arguably more like providing accounting services than making instrument panels.

Let's think about the characteristics of service businesses. There are some which specialize in work which requires modest skills, commands low wages and thus can be sold at low prices. On the other hand, there are services which require great skill, command high pay and cost a great deal. (Think lawyers, accountants, doctors, for instance.) Moreover, many of those high-skill service providers face a situation rather like our public schools: the quality of their work is not immediately self-evident. The quality of a doctor's work may not be apparent until a patient has been healthy for years; the quality of an accountant's work may not be clear until you are subjected to an audit. In all these cases, reputation is key and it takes time to build. Your current client may not be immediately sure that your work was done well, but when the quality is tested, they are in a position to recommend you (or not) to other, new clients.

In other words, the time horizon of people who run these kinds of service businesses is quite long; think of all the firms named after partners who are long dead. Investing in quality today is a reasonable business strategy if your future business depends less on your price than on your reputation for quality. This is particularly true if you provide a service where low quality has especially serious consequences. For schools, the long term perspective is the same. Handed an educational mission by their communities, they must invest in the long term. Children will spend twelve to thirteen years in their care, and quality - or lack of it - is cumulative. Short-term cuts that reduce quality have amplified long-term effects. (It's hard to put Humpty-Dumpty back together again, and even if you can, you've done a disservice to a whole cohort of children.)

Many people recognize that teaching children is a high-skill, high qualification job which should be reasonably well compensated if you want a high-quality service. Others, however, are stuck thinking of teachers more like manufacturing workers, where education requirements are modest, individuals are easily replaced, and short term layoffs don't really have much effect on next year's production.

Schools as a public project

Private business can teach a lot to the public sector, including our schools. Organizations which are constantly under pressure to innovate and economize on resources will have developed techniques and tools to use available resources as efficiently as possible. Those methods and tools can be useful in any large organization, regardless of how it is owned. But the public sector, including our schools, cannot operate according to the logic of private business, nor should we try to make them do so. Every private business is driven to generate a profit that can be distributed to owners, and all decisions about the operations of the business are subordinated to that goal. Whether a high-quality product is sold for a high price, or a lower-quality product is sold for a lower price, each business tries to find the right balance between costs and revenues for the particular part of the market they are trying to serve.

The public sector, in contrast, is charged with providing goods and services that benefit the public as a whole. Higher quality, if possible, is always better. And the return on the investment of taxpayer funds is not immediate, and may not even be financial. But the benefits do accrue to all of us, now and in the future. The public sector, including our schools, is the tool that we the people use to make sure our government "of the people" is also "for the people." The job of the public sector is to attend to those tasks which affect the quality of life of citizens but might not attract sufficient private investment. At our direction, the public sector provides the infrastructure - everything from roads and airports to laws and schools - which allows the private sector to function effectively.

When we the people direct that a quality education be provided to all without restriction, we do so because: we know that a democracy functions best when all citizens can intelligently participate in governing; we know that each mind not developed to its full potential is a dead-weight loss to society; and we know that the best way to ensure prosperity and happiness for each of us is to do our best to ensure it for all. Our schools, in other words, are our common vehicle for investing in the future - for all of us. That investment should be made wisely, and the "investors" (all of us) have a right to participate in how that investment is directed and to ensure it is being used well. But we also have a responsibility to remember why we created public schools in the first place and to invest accordingly - with an eye to the future of our whole community.



"AMC" - Thank you for reading and taking the time to comment. Unfortunately, your arguments don't hold much water. It is your perspective - albeit one widely shared in this country - which ignores both basic economics and history. Recent history is replete with examples of products which attained market dominance despite not being the best available product, even for the price: consider the Betamax vs VHS struggle, for instance. IBM did not introduce the first PC, nor was it considered the best on the market at the time, even at its price point. What the IBM PC did have was IBM's huge existing sales force with connections in nearly every business office that used a Selectric typewriter. IBM's market dominance gave a leg up to DOS, which IBM had subcontracted Microsoft to write, even though there were competing operating systems that most thought were at least comparable. The list goes on.

Even on a theoretical level, the argument does not hold up. A profit-seeking business does not seek to maximize product quality, it seeks to find a combination of quality and features which will maximize the difference between the price it can charge for the product and the cost of making that product. My argument is that provision of a public good, like education, does not fit well into that formula. To a private firm, the returns on cost are fairly immediate, when the product is sold. For schools - and the community which supports them - the return on costs is extremely long-term and often hard to measure financially: it has to do with the long-term development of productive citizens and how they contribute to economic development and quality of life. As recent studies have shown, the investment in high-quality preschool education may not be fully visible until the children have reached adulthood (see High/Scope's Perry Preschool Study, just down the road from me in Ypsilanti).

In other words, it is rational for a community to want to maximize the quality of education subject to resource constraints, which is very different from trying to maximize profit (the difference between market price and total fixed and variable costs). One of the reasons education IS a public good is because the returns on investment are so long-term, and often difficult to measure in monetary terms, that the private market fails to provide this good (education) in the quantity and quality that is in fact most beneficial in the long run.

Finally, I don't know what to say about your contention that automobiles were on an upward trajectory of quality, safety and reliability until the heavy hand of government interfered. Items such as seat belts, then air bags, and so on, were introduced only after government regulation. As to reliability, many American cars were made and sold on the presumption that consumers wanted to and were willing to do a lot of their own maintenance. A car being "in the shop" was normal. But the willingness of many consumers to do that changed in the 1970s and forward. In any case, if government regulation is somehow at fault, why did the Japanese import models - subject to the very same regulations - do so well in the marketplace?

Quite frankly, I feel American public education is much more of a success story than the American auto industry and that it is a more important key to our future. I realize many will differ with this assessment, but I encourage everyone to take a close look at the real achievements of public education and not fall prey to claims of horrible shortcomings based on selective evidence.

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