The Price of Education; E. G. Rose

You would consider his contention ludicrous. After all, everyone knows that ed ucation is more expensive than ever. Everyone knows that the costs of ed ucation go up with virtually each se mester. Everyone knows that costs for teachers, administrators, tu ition, books, supplies, and mainte nance are at all-time highs. Yet, with all the money thrown at education, from kindergarten to graduate schools, the quality is not Mr. Ross is an Oregon commentator and writer es pecially concerned with new developments in human freedom. He has been a teacher in both the public schools and in the private sector. up-but down. So it seems that if there were a statement to be made about the relationship of costs to quality, it would be that the higher price of education is somehow erod ing its quality. But that really doesn't make sense, either. After all, it is well-known in eco nomics that higher prices tend to re flect increased demand. The in creased demand brings more producers into the field who must work to improve the quality of their product in order to compete, in order to retain and attract new customers.

Producers also attempt to improve their efficiency, which can often lead to competitive price reductions. So it would seem that our increasingly high prices for education should have spurred more competition in the field 107 108 THE FREEMAN February and resulted in a raising of educa tional quality, and perhaps even to reduced costs. As we all know, that has not hap pened. Why not? And why would anyone want to suggest that the present price of education is too low? The clue to the answers lies in the fact that there is a great difference between governments' paying for ed ucation and private individuals' paying for it; there is a vast differ ence between prices in a free market for education and prices in our mod ern public educational system. Taxpayer's Cost Almost all education in the U.S. is publicly funded (there are only five million students in private schoolsl ). The taxpayers' cost of public educa tion is over $100 billion a year. 2 This government funding is a crucial in trusion into the market price of ed ucation. It is an intrusion which steadily raises the price to taxpay ers (now put at at least $2200 per student per year 3), but reduces the perceived price of education to the educational establishment.

There is no mystery about the first point: Every taxpayer in the nation understands that education has taken a bigger bite out of his pay check almost every year. It is rare when a state government or local school district cuts the taxes needed for education. Federal funding of ed ucation has a comparable record of escalated costs, especially since the Great Society days when Congress passed the Elementary and Second ary Education Act of 1965 and insti tuted massive student loan pro grams which eventually, because it was so easy not to repay loans, be came the equivalent of a billion-dol lar student welfare program. 4 As to the second point, the educa tors' lower perceived price of educa tion, that is not obvious. In fact, if you asked anyone in the educational system, he would undoubtedly be quite shocked at the idea. He would also be insulted that you would sug gest he was unaware of rising edu cational costs.

But the economic reality is that public educators do look at costs in the system very differently. Here's why. Friedrich A. Hayek, the great Austrian economist, pointed out that only under a free market will the price of a product or service function to "automatically record all the rel evant effects of individual actions" and thus serve as "the guide for all the individual decisions." Further, "The important point here is that the price system will fulfill this function only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them."5 (Emphasis added.) But what if there is no truly free market in education? What if the 1983 THE PRICE OF EDUCATION 109 educational establishment has a way of circumventing prices and elimi nating any need to adapt to them? If that is true, then the price sys tem would not fulfill its function and would not automatically record the effects of the actions of the individ uals responsible for education.

Unfortunately, this is exactly the case. The educational establishment has a mechanism for evading prices: the power of taxation. Prices Distorted The power to tax (whether di rectly, as with local school districts, or indirectly through the state or other branches of government) guarantees public educators a ref uge from the market. The power to tax in order to support teachers, schools, and dozens of attendant costs, permits public educators to misperceive prices because prices are subsidized. In the minds of people subsidized, the subsidized prices are regarded as equivalent to lower prices. This is so because a subsidized price bears the same, light burden as a lower price. In other words, those subsidized must pay attention only to that portion of costs which are not subsidized. And in the case of most public education today, almost everything is subsi dized. Not teachers, not administra tors, not even students must directly shoulder what would be true market costs.

It is worth noting that there would be little economic difference to the educator between prices which he could artificially hold down by price controls, on the one hand, and, on the other hand, subsidized prices. He would see both as lower prices-lower than what he would experience di rectly in the free market. Interest ingly, this would be true even if in the.free market the total price of ed ucating a student were less than it is now. Because educators actually feel only a fraction of the effects of prices (since almost all education is subsidized), the free market price of education would have to be near zero for the educator to experience the same, ridiculously low price which he now does! The only other way educators could achieve this artificial price effect would be if they could dictate edu cational costs-say, for example, by having the power to require utility companies, textbook publishers, lab equipment manufacturers, and so on to give educators what they needed.

But then the question would arise, if we are not to drive those suppliers into bankruptcy, who would com pensate them? Probably it would be the taxpayers. So, in such a situa tion, we would come full circle. While there would be no apparent subsidy to the educators, at least not in terms of hard cash, it would exist, one step offstage. Under our present subsidy sys110 THE FREEMAN February tern, educators have opted for the "backdoor" method of controlling prices-controlling the effects of prices rather than prices them selves. But the result is exactly the same: to eliminate direct accounting to the market, which free prices re flect. In one sense, any coercive inter ference in the natural functioning of the price system can be regarded as a form of price control inasmuch as the essence of a price control is an effort to mask market prices. In the sense that subsidies achieve this masking, they are as much price controls as are prices by edict.

The subsidy-masked "low" price of education has remarkably negative effects. 1. There is little incentive to con trol costs. When costs are already perceived as low, it is natural not to worry about them. Why sweat and toil to reduce the costs of education when one feels he will not substan tially suffer by leaving things as they are? Even the threat of a taxpayer revolt is not all that frightening; af ter all, taxpayer revolts have a his tory of fleeting success; the attitude is to "wait out" the revolt and things will return to normality! Even where communities and school districts have made efforts to cut costs, it must be remembered that the efforts remain rooted in a basi cally noncompetitive, subsidized system. Only where pricing has been partially freed of the system, as with "performance contracting" (where some services are competitively con tracted out to private firms), have lasting savings been achieved. De spite these successes, they are nec essarily stunted; the partially free never grows as well as the fully free.

2. There is little incentive to pro mote innovations in education. Since educators do not have to bear the true price of education on their shoulders, they feel that innova tions are not worth the price. This is not exclusive to educators; it is a generally applicable economic fact. People innovate much more readily when they feel the necessity of giv ing people "their money's worth" the worth which higher prices de mand if the potential innovator is to keep his customers. If he does not innovate, in a free market the higher prices he's receiving will eventually go to someone else who will inno vate. 3. There is little incentive to pro vide quality in education, to match results (performance) with inten tions (educational goals). The prin ciple is the same as in point number two above. If educators do not expe rience the prod of true market prices, if they don't have to answer to the things prices say about how well they are doing their jobs, if they can coast on the feeling that they will get paid unless they are grossly incompetent rather than competitively compe1983 THE PRICE OF EDUCATION 111 tent, they will not feel impelled to give students their money's worth in quality.

4. There is little incentive to re spect the student. The student is the "customer" of education. In a free market, when educators must al ways perceive the full cost of educa tion, there is strong reason to treat the customer well. If educators do not treat a customer with respect, the customer is apt to shop else where for his education (or in the case of young students, the parents are apt to shop elsewhere). This im petus simply does not exist when the price of education is misperceived to be lower than it really is. The atti tude becomes, "Why should I respect this customer when he's paying so little anyway?" By analogy, a store keeper will put out much more effort to keep the purchaser of a television or other expensive items happy than he will to keep a nickel-and-dime customer happy. Greater effort to please and show respect for a cus tomer follows a perceived higher price from the customer; a perceived lower· price generates less effort in that direction.

This last point is particularly im portant because it is a psychological orientation which feeds back, strongly affecting the other three points. Lowered respect for the stu dent-customer means that at the outset of its relationship with stu dents (and their parents), the educational establishment has what one might call a bad attitude, an atti tude which says, "Don't worry too much what all this costs; don't worry too much about doing anything new; don't worry too much about qual ity-because the customer isn't really worth it!" In other words, a misper ception of lower prices paid by the student economically translates into a lower estimate of the worth of the student and consequently to a lower desire to cater to the student's needs. In a subsidized system, students and parents also tend to misperceive prices. When they do not have to di rectly bear education costs ("Educa tion? It's free!"),they will see the price as very low-even though they con sciously know that it all comes out of their pockets in taxes. This mis perception is a natural reaction and leads to lowered respect for the edu cational system. Human beings just never muster the same respect for things they perceive as cheap, i.e., very low priced-because a per ceived low price carries the implica tion that the good or service is easily replaced. We do not value easily re7 placed items as much as we do hard to replace items. Value is what prices in a free market accurately reflect.

Under our tax-subsidy system, the reflection is badly distorted. Do we hear teachers today com plaining that students and parents "don't care enough," don't respect the education system enough? Of course!

112 THE FREEMAN It's merely the other side of the coin from the complaints of students and parents that teachers "don't care enough" about doing a good job. The coin of this educational realm is: subsidies discourage anyone from giving proper care and respect! Market Principles Apply Let me emphasize that the prin ciples of pricing as applied to edu cation are principles of economics which apply to all fields of produc tion and services equally. There is a tendency, for various reasons, for educators to believe the market does not (or should not) provide their professions with price incentives. All one can say to that is that it is the same argument every monopoly in history has used (most recently heard from utility industries). But there is no special reason why education should be immune from the mar ket-unless, as Robert Ringer so aptly put it in his book, Restoring the American Dream, one believes the primary purpose of a government education is to make sure a child "will grow up learning ... from the government's point ofview."6 And let me emphasize also that, yes, there are many good, conscien tious people in our educational es tablishment. This paper has not been meant as an attack on them. But from an economic viewpoint, the re sult of a wrongly viewed estimate of the price of education will, in the long run, tend to result in all of the pro foundly negative effects mentioned.

And it is the conscientious educa tors, the most competent in the field, who suffer the most. It is they who must carry more and more students on their backs through the deepen ing swamp of a publicly-subsidized system. It is they who must increas ingly feel the weight of trying to provide a good education to students while surrounded by a tenured, bur eaucratized establishment which feels less and less incentive to im prove or maintain educational stan dards of excellence. It is for the ed ucators of ability who are not afraid to let their merits speak for them and for the students-that we must return educational pricing to the free market. It is for the best in educa tion, and the best that can be in ed ucation, that we must end the sub sidies which eventually encourage the worst in education. i) -FOOTNOTESIJohn Chamberlain, ''The Public School Mo nopoly," The Freeman, September 1982, p. 573.

2Samue l Blumenfeld, "The Victims of 'Dick and Jane,' " Reason, October 1982, p. 22. 3Roger Freeman, "Education Tax Credits," cited by Chamberlain, op. cit., p. 575. <!Thanks to President Reagan, thousands of student loan defaulters are finally being made to pay back their loans-though the adminis tration admits millions of dollars will never be recovered. 5Friedrich A. Hayek, The Road to Serfdom, University of Chicago Press, 1944, p. 49. 6Harper and Row, New York, 1979, p. 179.