Freeman

ARTICLE

The Trouble with Education

SEPTEMBER 01, 1991 by WILLIAM J. MCNICOLL

Mr. McNicoll is an aerospace engineer in Houston.

The Clear Creek Independent School District (CCISD) is a public school system in Texas encompassing all or part of a dozen cities and towns, including a portion of southeast Houston. The quality of its programs places it in the upper tier of school systems in Texas. In fact, CCISD was cited in 1988 as the best public school district in Texas.

Each January, CCISD conducts an election to fill two or three seats on its seven-member board of trustees. This year’s election attracted much more attention than usual because of a simultaneous effort by a local taxpayer group to roll back the district’s tax rate, which the board had recently increased by 20 percent, The rollback issue, in fact, dominated the campaign. It prompted virtually every one of the nine candidates for the board to promise, in one way or another, to “maximize the efficient use of tax dollars.” None of the candidates was very specific about how to achieve this. Given the way public schools operate, a discussion of whether tax dollars can be used efficiently is appropriate.

The concept of maximizing the efficient use of resources puts us in the realm of economics. To decide whether the promise can be kept we need only go back to Economics 101. The fundamental and simple ideas we studied there are more than adequate to reach a conclusion.

Scarce Resources, Opportunity Cost

On the first day of class we learned that resources are scarce. That seems very simple, but it has important implications.

Resources must be consumed to produce the goods and services we all want. Resources are obviously finite. The earth has only so much mineral resource. There is only so much time and human labor available. Individuals have only a finite amount of money to spend to satisfy their needs, wants, and desires. The fundamental problem Of economics is that while resources are scarce, human wants, needs, and desires have no limits. We can’t have everything we want; we have to choose. We must forgo some desires in favor of others.

That leads directly to the next basic concept in economics: opportunity cost. Opportunity cost is the cost of choosing one alternative over another. It is the benefit forgone when we make a choice.

For example, if you have $50 to spend and want either to go to a baseball game or out to a fancy restaurant, you must make a choice. You can’t do both. If you choose to go to dinner, your opportunity cost is whatever benefit you might have gained by going to the ball game.

This idea of opportunity cost helps to explain how we make choices. We act to minimize our opportunity costs, or to maximize our benefits by the choices we make. In this way we strive to achieve the greatest benefits from consuming scarce resources.

Economic Demand, Efficiency

Another important concept is economic demand. Each of us wants to derive as much personal benefit as possible from our scarce resources. But we can’t satisfy all our wants and desires. Economic demand is our expression of what we have chosen to do with our scarce resources. Economic demand is not just wants and desires, but also the ability and willingness to pay for what we have chosen. I may want a new Mercedes, but I’m not willing to expend the required portion of my scarce resources to obtain one. I am expressing no economic demand for a Mercedes.

It’s important to remember that people express their economic demand only when they are actually faced with the decision of how to make use of their resources. Economic demand cannot be accurately measured by taking surveys or talking to people. Almost invariably, people will respond to questions with wants and desires, not economic demand.

The concept of efficiency bears directly on the school board candidates’ promise. We usually think of efficiency as some process that maximizes output of a finished product with a minimum of inputs or costs. That is perfectly valid, but there is another aspect of efficiency that concerns the value of the finished product, which is determined by the level of economic demand for it. If there is no economic demand for a product, then it lacks value, and the efforts to minimize the resources consumed in producing it are irrelevant. The resources are wasted when the decision is made to enter them into this process.

An example might be a solar-powered flashlight. (Guaranteed to meet all your daytime flashlight needs!) The product has no value because no consumer expresses an economic demand for it at any price. The production process is immaterial; the resources that went into this product were wasted.

Producers and Consumers

We cooperate with each other to derive maximum benefit from the resources we consume. A business is an organization that produces goods and services for other organizations or individuals.

Businesses are run by people who want to benefit just like the rest of us. They do that by providing products to consumers, but they concentrate on providing only those products for which there is a genuine economic demand. Of course they can confirm what is in demand only by observing consumers and the decisions they make. Consumers make their decisions based on quality, price, and opportunity cost. This is how consumers reveal their economic demand for goods and services and maximize their benefits.

Those who are successful at supplying whatever is in economic demand in an efficient manner will be rewarded with profits. That’s all profit is, a reward for meeting the economic demands of consumers. A large profit suggests that you are doing a very good job of meeting consumer demand without wasting resources.

On the other hand, a business that loses money is doing so because it isn’t doing a good job of meeting consumer demand. It is producing a product for which there is little demand, or it is producing it so inefficiently that the cost exceeds the market price. In either case, the losses it suffers encourage the business to stop producing that product and stop wasting resources.

But even a profitable business situation can come to a swift end if somebody else comes along and provides an equivalent product at a lower price, or a better product at the same price, thereby allowing customers to satisfy their demand while consuming fewer resources.

This interchange between consumers and producers (and we all are both) is a communication system. In it, information is carried by prices. Prices are determined by the economic demand for goods and their relative supply. Profits and losses show whether resources are being used efficiently. This communication system leads to the satisfaction of economic demand in the most efficient way possible, meaning that the fewest resources will be consumed.

Public Schools

Now consider the particular case of public schools and whether we can maximize the efficient use of taxpayer dollars.

Public schools are fundamentally different from businesses. The biggest difference is that the communication system just described doesn’t exist! It doesn’t exist because it isn’t allowed to exist. Instead, public schools are financed by taxation. Money is simply taken from people without regard to economic demand or opportunity cost.

There is, however, a non-economic communication system between the education consumer and the provider. Unfortunately it’s not a very good system. Information on the best use of resources is incomplete and garbled as if by static. Some needed information doesn’t get through at all. Since it doesn’t operate by consumers making choices, this communication system cannot carry information on economic demand or quality or on how resources should be allocated to maximize benefits. It can carry only wants and desires.

Furthermore, it doesn’t carry information from all customers for the product, as the communication system for private businesses does. For this is a political system. A businessman needs to listen to all his customers if he wants to be rewarded with profits. The people in charge of the public school system (politicians, not businessmen) can survive quite nicely by listening only to those people they choose to hear. Some people, no matter how hard they try, won’t be able to communicate over this system. Complaints that special interests are met while the general interest suffers are valid. It is in the nature of the system.

To stay in office, school board members have to be re-elected periodically. They make promises to achieve their re-election, and making good on these promises costs money. Those people with influence over the board members can get their wants and desires (but not their economic demand) granted this way. The result is a parade of new programs and services that are of dubious value, but carry a very real cost.

Another difference between public schools and private businesses is competition. Because public schools deliver their product at no direct cost to the consumer, any competition is at a severe disadvantage. Few consumers are willing to pay both school taxes and private school tuition. The kinds of improvements in quality that arise through business competition are almost nonexistent in public schools.

The result in our system of public schools should be easily predictable. Since no information on economic demand is available, it is inevitable that services will be provided for which there is little or no economic demand. This is a major cause of waste in the public school system. Costs continue to rise at alarming rates because of the effort to satisfy a wide array of wants and desires, without any process to reduce those wants and desires to genuine economic demand. They’re making solar-powered flashlights, but get no market signals to stop.

Can the candidates’ promise be kept? Clearly not. Under the present system, it isn’t possible to “maximize the efficient use of tax dollars.” In fact, no system can maximize efficient use of tax dollars. Consumer dollars come with an indication of their most efficient use. Tax dollars do not.

To solve a problem, we must first understand its cause. We have recognized a serious problem in education throughout this country, yet no significant progress has been made toward solving it. I believe this is because so few people understand the source of the problem. (Some don’t even want to understand.) The greatest part of that problem is explained by this simple economic assessment. From a sound understanding of these difficulties, it should be a simple matter to proceed to a solution. Achieving that understanding is the hard part.

As for the CCISD election, the available seats were won by two gentlemen who opposed the tax rollback effort and believed that the education problem is caused by inadequate funding. Two months later, the tax rollback succeeded.

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September 1991

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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