Assumptions of the Market Theory
The classic assumptions in market economics, which specify the necessary preconditions for true markets working efficiently, have to be tested against what is known about the actual conditions of choice in urban American schools. The idea that markets are both fair and efficient in allocating resources and opportunities is based on the assumptions that (1) all potential customers have equal and accurate information, (2) there is broad competition among many suppliers and therefore a strong incentive for each to offer a better product, and (3) all buyers have an equal chance to buy. With many buyers and many sellers, and especially with simple, standardized, easily understood products like bushels of wheat or bales of cotton, sellers are forced to compete on price because no one has significant control of the overall market. If all these conditions exist, the theory holds, the better providers will prosper, the worst will fail, consumers will get better products at lower prices, results will be fair, and political forces and special connections will not matter. Under this theory applied to education, the previous monopolistic institutions (public schools) will have to compete for students and become better because otherwise they will lose per-student funding and staff.
Key assumptions of the market theory were clear in the Friedman argument. According to him, the basic problem with education for poor and minority families in Harlem and elsewhere was the “socialist” monopoly controlled by unions and bureaucracies, which stifled innovation in public schools. The cure was competition and “freedom of choice,” which would make educational opportunity “open to everybody.”23 The union stranglehold would end and innovation would flourish.
John E. Chubb and Terry M. Moe's controversial and influential 1990 book, Politics, Markets, and America's Schools, purported to show statistically that public schools were systematically inferior to nonpublic schools and that this was because they were subject to the political control of elected officials. This book, which used data from a national longitudinal study, quickly became a leading justification for voucher supporters. Private school vouchers would mean that students and schools were matched by the informed market choices of parents, whose only real interest was good education for their children. Although many researchers harshly criticized the book, it became a sensation in the policy world, partly because of the extraordinary claims Chubb made, for example, in his article “America's Public Schools: Choice Is a Panacea.”24 The idea that there was a simple, choice-based way to accomplish what government had failed to do for generations had great appeal in an era of business dominance.
Though the arguments of Friedman, Chubb, and Moe aimed at supporting private schools and came before the invention of charter schools in 1991, they are widely cited by charter school leaders, many of whom believe they are offering the same kind of challenge to regular public schools. Charter schools enjoy strong support from business leaders who see them as entrepreneurial institutions creating a market and encouraging innovation. The foundations of the billionaires Bill Gates, Eli Broad, and the Walton family of the Walmart fortune, as well as the Wall Street private equity billionaire Theodore J. Forstmann, are just a few of the prominent supporters.25
Limits to the Market Theory
The fundamental problems with applying market theory to education are that the basic assumptions do not hold even in the realm of buying and selling much simpler products and services and that, even if they did, a market for schools has very complex products. The ideal model of unrestricted markets has a limited connection with reality. Almost all of the world's major successful market economies are heavily regulated to protect workers’ and buyers’ health and safety and to prevent anticompetitive trusts and financial conspiracies—in short, to prevent the major abuses that occur in uncontrolled markets. The goal of those selling goods is to make as large a profit as possible, and without regulation this can often be done in ways that mislead, endanger, or cheat customers, limit competition, or degrade the environment. The truth is that those who cheat will often make more profit, at least in the short run, and competition can produce a race to the bottom. The corporate structure, which offers huge compensation to executives who make short-term profits, often rewards the most rapacious behavior, which achieves quick results. It shields leadership from personal responsibility. Such massive prizes and minimal risks too often incentivize not the wisest and most ethical long-term investment but quite the opposite. When markets are deregulated, as were the banking and financial industries in the United States before the Great Recession, very profitable business can wreck the economy and threaten the entire world.26 Markets can be a powerful force for better choices, but they can also be corrupted and distorted. Those without rules are risky and inefficient for everyone. How can you know that you are receiving the right amount of something if the weights are not regulated and checked, or that your money is safe in a bank if the bank is free to wildly speculate with its depositors’ money? How could anyone reasonably buy a stock if companies could simply make up false business reports?
Getting the best results from competition requires enforcement of the rules of the game by government. When one uses the promise of private gains as the basic engine of change, one must channel that great force to produce real gains and limit harm. The drive for profits is a powerful motivator, and if it is possible to get more while doing less by cheating, the market will be corrupted. America's founders had no delusion that men were angels. That is why they designed a system of government full of limits, with institutions balancing and checking one another and with federal power offsetting the tendency toward local tyrannies.27 It is ironic that the same ideology that assumes people are inherently inclined toward evil and corruption in politics and therefore need to be watched and limited somehow believes that people in markets are not subject to the same temptations. What we see in many discussions of school choice is a school produced by an ideal type of market instead of the real situation facing the most disadvantaged neighborhoods.
Examples abound about the necessity of limits on markets. Nuclear power produces a vast amount of electricity, but it can devastate the environment if not controlled properly. And while its profits are short term, it produces by-products with very long lives, thousands of years, whose cost to future generations must be considered. Everyone wants cheap flights, to cite another example, but very few people would want to fly through uncontrolled airspace in planes not regulated for safety. Modern capitalism is competition within rules of the game set by law and regulation. But those who favor school choice often strongly oppose regulation, having embraced a romantic version of markets.
The classic products of markets are objects, subject to regulation, not institutions that can capture their regulators. One of the differences between commodities markets and competition among schools is that the largest system of choice schools outside public control, charter schools, are not passive objects of choice produced by private markets but instead almost entirely government subsidized and very active politically, often succeeding in controlling the rules of the game to favor themselves.28 They aren't really private anymore: any institution almost totally dependent on public dollars inevitably becomes quasi-public. And such institutions virtually inevitably organize lobbies whose objectives are to get more funds and minimize regulation, since their very survival depends upon a continuing flow of public dollars within a political process that distributes the permissions to create schools and decides on their funding.29
Market advocates assume that nonpublic institutions can remain independent from government and nonpolitical even when they are completely dependent upon public funds, forgetting the saying that is often called the golden rule of government: he who has the gold makes the rules. Government has vast leverage over the institutions it totally funds, which usually must win battles for appropriations every year. Whether the group is composed of scientists, green industries, or artists, if it depends on public dollars, it will organize associations to promote its mission and attempt to influence decisions about governmental resources. Totally dependent “private” institutions can become subject to many of the demands for accountability that public institutions face. Many “bureaucratic” rules have their origin in such demands.