Economics is fun, part 9: Joint enterprise

Madsen explains why we have firms today. It's all about specialization and economies of scale. This is the point where threads of past videos are beginning to be woven together, adding another layer to the foundations he's laid so far. If you've missed these earlier videos, you're in luck. They're all available on Youtube to watch right now.

Economics is fun, part 8: Speculators

Madsen takes on speculators this week. Or, rather, people who object to speculators. As Madsen explains, when you think about what speculators do on an individual level, they seem rather reasonable — and, indeed, valuable to the rest of us. Speculators are a form of insurers. They don't gamble any more than your car insurer does, but they absorb risk so you don't have to worry about it. It's all a form of specialization and trade.

You can watch the rest of Madsen's videos here, and be sure to subscribe to our channel too.

Do students need a union?

Pretty much every university student must be at least passingly familiar with their student union. Although the quality of such establishments – and it is as establishments that they are most widely known on campus – varies enormously from place to place, let nobody think that I want to get rid of the student union in its familiar, homely on-campus sense.

But do students really need the other aspects of a union? I mean, they’re called trades unions for a reason, and the student-college relationship is fundamentally different to the employee-employer one.
The relationship between a business and its employees is that the business buys labour with wages. In this relationship the business is the consumer, not the worker – hence the term ‘labour market’. As I argued in my Young Writer on Liberty submission, trade unions parallel business cartels by seeking to restrict supply of a good (labour) in order to inflate prices (wages).

The student-college relationship differs from this in that it is the student, not the college, that is the consumer. We purchase a university education, including access to teachers, libraries and online material, from a university via our tuition fees. This would suggest that what students need is not a ‘union’ but a ‘Which?’-style consumer champion.

Is this distinction important? Or am I simply playing around with semantics?

During my time at the University of Manchester I got quite well-acquainted with the workings of the fairly large executive council of the student union. I found that these positions could be divided between the useful - those that focused on students’ relationship with the university, each other, oversaw events and societies or government welfare – and the big-budget playthings of political poseurs.

On the one hand, it is certainly true that the work of the former – the welfare, student societies and academic-related officers – could be carried out as effectively under the auspices of a ‘union’ as anything else. On the other, in my view many of the problems in the ‘student movement’ – another awful term – stem from the casting of student interests in the trades union mould.

For example, student leaders fundamentally misinterpret the nature of student problems – and the solutions to those problems – by viewing the issue through the prism of labour relations rather than consumer relations: for example, supporting lecturer strikes and other measures out of ‘solidarity’ when they are not in the interests of current students as consumers of education.

As I argued in the Manchester student paper, the idea of a student ‘strike’ having any discernible impact on a university is absurd because students pay universities once a year and aren’t willing to get kicked out for non-payment. What then is the student equivalent of a withdrawal of labour?

A total waste of money, that’s what.

Why not a "John Lewis" education sector, Mr Clegg?

According to the Deputy Prime Minister, employee-owned companies such as John Lewis tend to perform better than other companies.  This is hardly news, as the majority of successful companies around the world have been using employee share ownership schemes for decades to help attract, incentivise and retain key staff. However, Clegg's desire to promote and encourage more companies to follow their lead, raises an intriguing question - if employee-owned companies tend to perform better, why not employee-owned schools?  Why not extend the idea of 'responsible capitalism' into education?  As teachers play such an important role in children's schooling, then any incentives which can encourage teachers to perform better, clearly have enormous potential to do good.

This idea is not as far-fetched as some may think.  For example, in 2000 Richard Vedder (Distinguished Professor of Economics at Ohio University), published a short publication titled "Can Teachers Own Their Own Schools?", in which he presents a bold plan to allow teachers to become the owners of schools, thereby acquiring an attractive financial stake in the  education process.  His proposal draws inspiration from Margaret Thatcher's privatization of government council housing, privatization reforms in Latin America, and the E.S.O.P. (Employee Stock Ownership Plan) movement in the United States and he concludes that if teachers could become shareholders in different chains of for-profit schools then this would help to foster "vibrant school communities with increased parental involvement and the innovation and efficiency essential to produce educational excellence".

Unfortunately in the UK the Deputy Primate Minister still wants to discriminate against, discourage and restrict all for-profit companies from investing in education, which means that the sector as a whole will be denied the benefits of having employee owned schools.   It is also important to note that this is only one of numerous different benefits which for-profit companies could bring to the education table, if only politicians such as Nick Clegg would give them a fair and equal chance.  Nick Clegg's on-going approach to education does not represent 'responsible capitalism', but deeply 'irresponsible government'.

New at AdamSmith.org: Does the profit motive hurt school quality?

Opponents of the idea that schools should be owned and operated by businesses for profit often claim that such can only come at the expense of quality. Until relatively recently, advocates of the model have had to base their argument on case study evidence, mainly of the performance of proprietorially owned chains. However, system-wide studies are now beginning to emerge and it is worth bringing these to wider attention.

In the US, the most noteworthy study of the for-profit effect has been undertaken by Hill and Welsh, who used school-level data to compare for-profit and non-profit charter schools in Michigan. A four year panel of data was constructed (2001-02 to 2004-05) , with all Michigan charter schools which had students taking either the required 4th and/or the 8th grade state level math exam, referred to as MEAP scores (Michigan Educational Assessment program), included in the analysis. A random effects model was employed, controlling for student and district characteristics. The results were published as ‘For-profit versus not-for-profit charter schools: an examination of Michigan test scores’ (Education Economics, 2008), with the authors concluding that they could find no evidence to suggest that the type of ownership of a charter school (profit or not‐for‐profit) affects the delivery of education services either way.

Read this article.

New at AdamSmith.org: Why private schools have a moral duty not to support government schools

According to Anthony Seldon, head of Wellington College, Berkshire, fee-paying private schools have a “moral duty” to help run failing government schools in deprived areas.  However private schools are right to question the wisdom of this approach.

First, it is important to remember that the government initially intervened in education in the late 19th century to help support the growth and development of education in deprived areas.  However, instead of subsidizing parents and allowing them to choose between a variety of different schools, previous governments directed all public subsidies towards its own free schools, whilst neglecting and ignoring all private alternatives.  This subsequently forced the closure of thousands of private and voluntary schools leaving only a small number of private schools to cater for families on a higher income.

Read this article.

That higher education bubble you've been hearing about

Talk of the higher education bubble is all the rage these days, especially in the US. I'm convinced we've got one here too, for slightly different reasons, but this graphic of US degrees really puts the idea that more graduates equal a better economy into perspective. There's nothing wrong with a "degree that doesn't pay", but there's no economic case for government subsidy for visual and performing arts degrees (US data):

Read the article I got it from for more.

7024

blog/education/that-higher-education-bubble-youve-been-hearing-about

Free schools good, profit motive better

6836

free-schools-good-profit-motive-better

I went on the BBC News Channel yesterday afternoon defending free schools against the charge that they would lower standards and lead to social segregation.

First, it is worth re-capping what the ‘free schools agenda’ is all about. Essentially, it has two purposes. The main one is to increase the supply of good school places by letting independent providers set up new schools, and receive state funding on a per pupil basis. The idea is that this allows parents to exercise a meaningful choice over where their child is educated. That drives schools to compete for pupils, which increases accountability and drives up standards. The second purpose of the free schools agenda is to give schools greater freedom from bureaucratic interference: let them innovate, let them focus on teaching the child in front of them, and stop thinking the man in Whitehall always knows best.

School choice may be a radical idea, but it isn’t a new one, and it has worked where it’s been tried – most famously in Sweden, that well-known socialist nirvana. Moreover, it is hard to deny that the British education system is in need of serious reform: despite the fact that spending has practically doubled in real terms over the last decade, Britain has tumbled down the international league tables. Academic research has even suggested that 17 percent of British 16-19 year olds are illiterate, while 22 percent of them are functionally innumerate – a shocking indictment of a failing system.

Moreover, the claims made by the critics of free schools do not hold water. They suggest that free schools will promote inequality, but this has not been the experience in Sweden or the US. In fact, American evidence suggests the opposite: that privately operated schools can be better integrated, since attendance is not as closely linked to where one lives as it is in the state sector. Indeed, it is worth remembering that our current schools system is deeply unequal precisely on these grounds – in many cases it amounts to little more than segregation by house price. Live in a nice area, and chances are you’ll get to attend a fairly decent school; live on a sink estate, and you probably won’t be so lucky. Free schools offer an escape route.

At this stage, however, it is worth making a point about the profit motive – which Nick Clegg today ruled out of bounds vis-à-vis free schools. The trouble with not allowing for-profit companies to run free schools is that it dramatically narrows the pool of potential school operators. Fewer new schools will be set up, and those that are established are more likely to be concentrated in relatively affluent areas, where parents have the time and the ability to push for them. By contrast, if we were to allow profit-making free schools, we would get far more of them, and see more of them being set up in deprived areas – where both the demand and the need for them is greatest. Whatever Nick Clegg says, the profit motive in education could easily be a force for social mobility, not against it.

Finally, a point on standards: there simply isn’t any convincing evidence to suggest that free schools will provide a lower standard of education than state comprehensives, or that standards at those state comprehensives will suffer because of the existence of free schools. True, part of the rationale behind school choice is that irredeemably bad schools should go out of business. But that is surely as it should be: a system where good schools can grow and be replicated, and where bad schools are not kept interminably on life support, will lead to standards being driven up across the board.

Parental responsibility in schooling depends on choice

6835

parental-responsibility-in-schooling-depends-on-choice

It would appear that the reason why the UK¹s education sector will remain closed to private investment, innovation and entrepreneurship for the foreseeable future is because Nick Clegg and his Liberal colleagues personally dislike the idea of giving highly efficient and successful for-profit companies the opportunity to transform the way education is designed and delivered across the UK. That said, Nick Clegg is now also calling for more parental responsibility in education which sounds like a positive development. Mr Clegg can’t have his cake and eat it too.

If parents are responsible for their children’s education then they can only fulfil this responsibility if they are free to choose the nature and form of education which their children receive. As a result, if the freedom of parents to choose is restricted then this will also undermine parental responsibility. Parental responsibility and the freedom of parents to choose are therefore intimately linked and are best viewed as two sides of the same coin.

Governments therefore have a clear choice. They can either promote parental responsibility in education by guaranteeing that they have the greatest possible variety of educational opportunities to choose from or they can undermine parental responsibility in education by restricting the variety of different educational opportunities which parents are free to choose from.

Therefore, by refusing to allow a variety of different education providers to compete on a fair and level playing field, Nick Clegg is continuing to undermine parental responsibility in education. Any rhetoric about wanting to increase parental responsibility in education should therefore be challenged as being in direct conflict with his position on refusing to allow for-profit companies to compete in education.

Without profit, Free Schools won't help the poor

6819

without-profit-free-schools-wont-help-the-poor

The Guardian reports today that most of the first Free Schools approved by the government are in affluent, middle-class catchment areas:

Research shows that the 10-minute commuting area around the first wave of free schools is dominated by middle-class households, appearing to undermine coalition claims that they are empowering working class families. The areas have 57% of better-off, educated and professional households compared with the English average of 42.8%. There are also a higher-than-average proportion of Asian homeowners in the free school catchment areas – 5.3% – compared with 1% in England as a whole. Just 29.1% are categorised as "hard-pressed" or of "moderate means", compared with 36.9% for the country.

Well, what did you expect? Setting up a Free School isn't easy, and it takes a lot of time and dedication. Who's surprised that it's mostly fairly wealthy parents who have the time and energy to bother?

As long as there's no reason for people with a comparative advantage in this sort of thing to set up Free Schools for people who can't, this trend will continue. That's a bad thing – the people who need better schools most are poor people, who have few enough chances in life as it is. Free Schools, with more local control and independence from the state, would be a great option for lots of struggling kids. The programme is a good one – if only the option was there for more of the people who most need it.

So, what can we do to encourage people to set up Free Schools in poor parts of the country? Create incentives for them to do so: allow the management firms to make a profit on the schools they're running. We published a paper last year arguing just this. Profit doesn't affect outcomes for children, but it would be rocket fuel for the Free Schools programme. If people are serious about improving school choice for poor children, they need to get serious about harnessing the power of profit.

Update: The report's author, James Croft, has weighed in in the comments section:

It's widely held that business-led educational ventures maximise profit at the expense of pupil outcomes. This is one of those myths that has arisen because of misleading (and often politically motivated) press coverage of occasional instances of things going wrong blown out of all proportion. The truth is that in contrast to other ownership models proprietorial school businesses, whether directly accountable to their owners or to shareholders, are tightly managed and rarely engage in the sort of profiteering that compromises quality for short-term gain. They know their markets and they are keenly aware of the expectations of their customers.

My study found that of the 489 proprietorial schools operating in England in 2010, 87 educate their pupils for less than the ‘revenue only’ maintenance figure of £5,320 (33 of which by £1,000 or more), at the same time apparently able to make a modest profit. A further 71 were doing so for less than the combined revenue and capital figure of £6,240. In addition, according to a third benchmark, allowing for total fee remissions of up to 10 per cent,154 a further 41 were found to be educating their pupils on fees less than £6,864, on a comparable basis to that of schools in the state-maintained sector. This represents 41% of all proprietorial schools. As a group they outperformed equivalent trust schools on key teaching and learning related criteria by a significant margin (on all criteria for those inspected by Ofsted, and 3/5 for ISI). There is widespread evidence of generous bursary provision for the disadvantaged too - something I hope to be able to detail more fully in a forthcoming study.

Bang goes the theory that for-profits are interested in only one thing.