Economics Online Tutor
Why a School System Should
Not Be Run Like a Business
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 taxpayer 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 and doesn't get to the part
about schools until towards the end, but I believe that this approach is
necessary in order to get the point across]
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 the competing uses of their 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 the 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 price that creates this balance is called the
market price.  The business can maximize its profits given the level of demand; the customers who want
to purchase at the market price will purchase, while others will be "priced out of the market".  They
voluntarily choose not to purchase at that price.  Instead, they simply use their budgets 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 product over another company's
product 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 materials.  It doesn't have to pay for the most skilled workers, or the labor costs (wages and
benefits) that the labor markets 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 that meets the specifications of
its target customers.
I know, you thought that this was going to be about schools.  It is, and I'll get to that shortly.  
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) had not
been used efficiently.  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 pays
all the costs associated with a business also receives all the benefits

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 of the product 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 the flu shots.  The
person who receives a flu shot will feel safer from the protection.  But even
people who don't get the 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 desired 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, those are the points that I wanted 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 a
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 of society?  I have seen many different ideas, I'm sure
you have also.  Let me offer a summary of the many different valid point on this topic.  Since this summary
includes many different points of view, it is deliberately vague.  But I believe that it gets to the point, and
is flexible.  I would summarize the goals of a school system with 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 student's preparation for this "beginning".  That is vague enough to
cover a variety of things, such as college preparation, 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 some kids will have in life.  This would 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 the resources you
put into the system, and dealing with the fact that the system does not choose its own "raw materials",
but society does.
I wrote this analysis from the standpoint of an economist using basic
concepts of economics.  I tried to keep the terminology geared as
much as possible towards those who are not economists.  I hope I
succeeded in making it understandable, but doing it this way made the
text quite a bit longer than it would have been otherwise.
Menu of opinion pieces:

on economics

on education
This page is from a section of the website that is
designed for the opinions and personal writings of the site’s creator (that
would be me, Jerry Wyant); this section is entitled “From Textbook to the
Real World”. The main section of the website can be accessed through the
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“Real World” section is an extension of Facebook pages that I have

Feel free to visit these pages on Facebook and like/friend as you see fit.

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