Why a school system should not be run like a business


by Making Education Work on Saturday, June 11, 2011 at 7:17am

A successful business is one that maximizes the bottom line.  It is successful because it gets the most “bang for the buck”.  It cuts out wasteful spending, and only spends what is required to achieve its output level.  So why not use this model for the school system?  Wouldn’t it make the taxpayers and the economy better off?

To answer that, first take a look at what makes a business successful, and how this success helps the economy.  Please follow along; this is somewhat lengthy but I believe necessarily so in order to make this point:


For purposes of understanding, take for example a hypothetical company that produces one product.  It doesn’t matter too much what that product is.  The company makes a product, and it needs to sell that product in order for the business to make any money.  So it needs customers who want the product.  The customers, in turn, are people who also want the most “bang for the buck”.  They have a limited amount of money that can be allocated towards a combination of all of the competing uses of the money, including spending it on the product that this company sells.  This is a budget constraint for customers.  If the company lowers its price, then more people are likely to put the company’s product within its budget, and the people who already buy the product might be willing to buy more at a lower price.  If the company raises its price, then the opposite would be expected to occur.  People buy more at a lower price, less at a higher price.  These customers are working on a budget constraint.  They can increase the budget, and become consumers of more products, by making more money to add to the budget.  So they can make changes in their personal lives to increase their incomes.  They can hire themselves out to work for a paycheck.  They can do things that make them qualified for higher paying jobs.  They become part of a different kind of market, a labor market.  This labor market in turn becomes part of the decisions that a company makes when it produces its product.

So the customers will buy more if the price is lower.  The business, on the other hand, will make more money if it can sell the same product, at the same cost to the business, if the price is higher.  So the business and the customers have competing interests.  The business will adjust its price until it finds one that will maximize profits, given the amount that it can sell at different prices.  This balances the competing interests of the business and its customers.  The business can maximize its profits given the level of demand; the customers who want to purchase at that price will purchase, while other customers will be “priced out of the market”.  They simply use their budget for something else.  Nobody gets hurt, nobody feels left out.  If the customers really want something that they cannot afford, they can try to find a way to afford it, such as increasing the budget.  This also helps the economy, as it increases the size and skills of the labor market.

A business doesn’t just compete with “other uses of people’s budgets” for its customers.  It also competes with other businesses that produce the same product.  If you define “product” in its general usage, then you can see that customers can choose one company’s products over another company’s products for a variety of reasons.  Reasons such as: the price, the quality, the convenience of purchase, how well they know the name of the company, even how pretty the package is.  This gives a company a choice as to a “niche” in the market to target.  For example, a company that sells women’s clothing can choose to produce high-end clothing, using the most famous fashion designers and the most expensive, but highest quality, production methods.  Or, it could target any number of other types of customers, each with a different budget and taste.  It can then set its production costs according to its target customers.

Once the business finds its target customers, then it can increase its profits by eliminating all wasteful spending.  As long as different options are available that are consistent with the process of providing the product, the company is better off with the lowest-cost of its choices.  If it isn’t targeting the customers who are buying the latest fashions, it doesn’t have to pay for the best fashion designers.  If it doesn’t require the most expensive materials, the most expensive sewing methods, then it doesn’t need to pay for the best material.  It doesn’t have to pay for the most skilled workers, or the labor costs (wages and benefits) that the labor market says the skilled workers will receive (remember that labor is another market, separate from, but related to, the product market).  It can use more automated equipment and fewer workers, if that will cut costs and still produce the desired product.



I know, you thought that this post was going to be about schools.  It is, and I’ll get to that.  But please keep following along, because understanding these basic points about businesses is important to understanding how businesses are different from schools.



When a business is successful at this, it helps the economy.  That is what capitalism is all about.  The workers, the materials, the equipment, even the land, are put to efficient use, producing a product that people want, at a cost that people are willing to pay.  Efficiency means success in a capitalistic economy.  Even if a company fails, perhaps because it isn’t good at cutting costs, or doesn’t target its customer base well, or for whatever reason, then that is considered good for the economy in the long run.  A failed business means that these resources (workers, material, equipment, land) are not being used inefficiently.  They are freed up, to be used by another business that finds a customer base to target.  Resources get reallocated until somebody finds a more efficient use for them.

This is the business model.  There are some important assumptions that are required for this model to work.  First of all, you will notice that this model depends on the goal of the business to be profit maximization.  Nothing else, just maximizing profits.  Another important assumption is that whoever gets the benefit has to pay the cost.  Whoever has to pay the cost must receive the benefit.  Without that assumption being true, resources cannot be allocated efficiently.

That last part requires an explanation.  Suppose this business model produces a business that employs a factory that pollutes the air, or the water.  This imposes a cost to the neighborhood, perhaps even beyond the neighborhood.  The cost doesn’t have to be a monetary cost that people pay out of their current budgets, but it could be.  Breathing dirty air, looking at a smog-filled scene, having fish in the river downstream dying.  These are just some of the costs.  If the business doesn’t have to pay these costs directly, they are not factored into the decisions about how much to produce, or at what price.  If the price isn’t affected, then it doesn’t factor into the customers’ decisions about how much to buy.  As a result, too much of something is produced.  The added costs are external costs, imposed by the business but paid for by society.  It doesn’t necessarily mean that the company should shut down.  It just means that if these costs were added, the company would produce a smaller amount.  So the market becomes inefficient by overproducing.

Inefficiency is also created when the business produces something that is beneficial, but the company doesn’t get compensated for the benefits, and the people that receive the benefits aren’t just the ones who pay for the benefits.  For example, a company that produces flu shots will create a public benefit beyond the benefit received by those who pay for flu shots.  The person who receives a flu shot will feel safer from the protection.  But even people who don’t get a flu shot will receive a degree of benefit from living in a neighborhood with less sickness going around.  This “less sickness” is created by other people receiving the flu shots.  In the case of an external benefit, the company will produce less than the desirable quantity.  If it could be compensated for this benefit, it would be willing and able to produce more, and more people would benefit.  The added social costs and benefits discussed here are called externalities.





Ok, now, these are the points I want to make about the business model.  Finally, I want to talk about how this all relates to a school system.  Remember the assumptions required to make the business model work for society: profit maximization as the only goal of business, and no externalities.  Now, look at what a school system is:




What are the goals of a school system?  A wide range of views will answer this question.  Should a school be a job factory?  Should it prepare everybody for college?  Should it promote the arts?  Should it create “well-rounded” individuals?  Should it simply teach people to think for themselves?  Should it be tailored according to somebody’s idea of current needs in society?  I have seen many different ideas, I’m sure you have also.  I recently asked that question on my Facebook page, in preparation for writing this note.  I received a few answers, all different.  Let me offer my own summary of all of the answers that I have seen.  This is deliberately vague; it includes many different points of view,  but I think it gets to the point nontheless.  My thoughts about the goals of a school system can be summarized in one word: Commencement.  Commencement is the ceremony that indicates that a student has fulfilled all of the requirements that the system has imposed.  At the same time, commencement is a word that means “beginning”.  It may be the end of that particular chapter in a person’s life, but it is a signal that the person is ready to move on to the next chapter, to “begin” a life that the school has prepared the person for.  I think that the goal of a school should be to maximize the students’ preparation for this “beginning”.  That is vague enough to cover a variety of things, such as college prepraration, job training, creative thinking, whatever.  In the United States, practical experience by the founders, settlers, and others who followed led to a demand for universal free education.  The idea is that the entire society benefits from having everybody educated (an externality).  Whatever the goal of education is, it does not mean “profit maximization” as described above on how businesses operate.  How do you select a “niche” customer base?  You need to cut out all wasteful spending in order to achieve efficiency, but how do you select the quality of the factors of production?  How do you decide what level of labor skills to hire?  Do you hire from the unskilled labor market, or do you try to get the best?  The raw materials are the students, the finished products are also the students.  You cannot pick the quality of the raw materials and achieve universal education.  You cannot pick the quality of the raw materials and meet the goals of society, unless your goals are to throw away the chance that kids will have in life.  This would even mean throwing away entire demographics.   It would mean throwing away the American dream of equal opportunity, a chance to be upwardly mobile.  Even if you could quantify success (profit) in a way that counts achievement instead of money, you cannot properly account for all of the external benefits that are inherent in the education system.  Education is an investment in the future: in our children, in the future of our standard of living.  This investment pays off many times over, well into future generations.



This all adds up to: Education is a key part of the nation’s infrastructure.  It is not a business.  It cannot be run successfully using the same approach that businesses use to maximize profits.  With external benefits being a key part of the education system, it is society who receives the benefits; the most efficient model is for society to pay the costs.  The quality of the output depends on how you measure the output, on the quality of resources you put into the system, and dealing with the fact that the system does not choose its own “raw materials”, but society does.


Sorry that this analysis is so lenghty.  I could have shortened it considerably by using terminology that is familiar only to people who have studied economics.  However, I am not targeting this only to people who would understand that terminology.  I also could have made it considerably longer.  For example, I could have said much more about the subject of externalities: what they are, what the options are to deal with them.




If you agree with this analysis, or if you at least agree with having a discussion on the issue, please share this note with others.







If you would like to see posts and discussions created by different individuals and organizations around the United States that concern issues relating to education; if you would like to add your own thoughts to the discussion; or if you would like to see what issues other school districts are dealing with, and how different districts and states are dealing with similar situations; if you are an educator or are simply somebody who cares about how the education system works – please check out this page, and encourage everybody you know who could benefit from this to “like” this page as well.  I post relevant news items that I find, as well as many posts from other education-related Facebook pages.  I try to post many different points of view.  Sometimes I add in my own viewpoint, in order to open or promote discussions, but I would be happy just to let other people’s opinions keep the page going.  My name is Jerry Wyant.  I am only one person.  I happen to be disabled (currently, but I hope that changes some day) with limited income, so I cannot afford to pay for advertisement for my page.  I rely totally on users of my page to spread the word.  I consider myself an advocate for education, but I myself am not an educator.  My area of expertise is in economics.  I also have a Facebook page for that subject, called “Economics Online Tutor” (named for my website, which that page is an extension of).