“Have you ever noticed how statists are constantly “reforming” their own handiwork? Education reform. Health-care reform. Welfare reform. Tax reform. The very fact they’re always busy “reforming” is an implicit admission that they didn’t get it right the first 50 times.”

-Lawrence Reed


The education system in the United States is failing us, according to the media. Various reform proposals are floated to fix this problem. It’s a cultural issue, or we need vouchers, or we need to look to foreign systems. Or maybe we need more funding, smaller classrooms, reforms for teacher compensation or tenure rules, and so forth. Yet all of these proposals will fail to fix the problem, because the fundamental issue is not understood. That problem is the lack of economic calculation.

Briefly, what exactly is economic calculation and why is it needed for the provision of education? Economic calculation is the process by which individuals determine what is the most cost-effective and productive use of resources. The concept was first outlined by the economist Ludwig von Mises in his 1920 article Economic Calculation in the Socialist Commonwealth, and expounded upon by his protégés F. A. Hayek and Murray Rothbard in later works. As Murray Rothbard explained the concept, Mises went beyond the incentive problem of socialism (wherein if one is compensated “according to their needs,” what incentive do they have to produce “according to their ability”?) to

“[s]uppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?”

In this vein, it becomes clear that despite any good intentions of the teachers, administrators, and bureaucrats that make up a public school system, the success of such an operation is (unlike a market system) essentially based on luck. Should we spend our money on textbooks or more teachers? Which textbooks are best? Should we build a new school, or expand the facilities we have? Spend more on arts or technology classes? Chalkboards or whiteboards? Replacing equipment for the physics labs or uniforms for the football team? Increase teacher salary, or hire more teachers for smaller class sizes? Buy cheap, low-quality desks, or spend a bit more on higher-quality desks? All of these potential options (and more) depend on the conflicting use of scarce resources, and all have different pros and cons relating to the educational success of students. But the monopolized compulsory public school system, where students are forced to attend and money is obtained via taxation (instead of tuition payments), has no way to ferret out the best configurations in this regard. It is a private, market system that can do this. If one obtains revenue by selling educational services, the incentive is to provide the best possible education for the money that one can, so as to get the most students.

But it is the competition, rather than the incentive, that provides the ability to solve this economic calculation problem. It is the fact that many groups (not simply one) are trying different methods to reach that goal, and the ones that do the best will succeed more than the others. As a result, the market naturally configures and reconfigures the educational system to meet the needs of its students in ever better ways, despite the fact that those needs are always changing based on what is needed to be learned in order to become successful. Nor can this form of competition be replicated in the state school system. As the source of funding is not the consumer purchasing education, even a competition for funding initiated by a bureaucratic program would not solve this problem. The bureaucrat, then, is deciding what is most “successful,” rather than people noting previous levels of success from graduates and current students. As a result, the bureaucrat becomes the focal point for the calculation problem. Instead of dispersed information and desires congregating through the decisions of millions, just a few individuals are deciding what is best.

This applies not only to K-12 but also to higher education. College costs rise faster than other prices precisely because college is substantially socialized. You see the same thing in every other semi-socialized good or service. Take health care. Prices go up and quality goes down, because the people consuming it aren’t the ones paying for it. You don’t have to produce a quality product to make money. You can raise prices without losing customers. And the value of a college education will plummet even further — the more people who have it, the less they can be differentiated between on the market.  The typical statist take away is that ‘investing’ in education is money well-spent on creating an educated workforce. The first problem with this assumption is that it implies only government can do the investing. Perhaps more relevant to the topic at hand is the fact that there aren’t many jobs for which college actually prepares you. In most pursuits, having a degree merely signals your capacity for work and commitment. However, when all the competition also has a degree, that’s no benefit. If everyone has a degree, no one does. People will be getting a degree not to gain an advantage on the market, but to get rid of a conspicuous disadvantage.

Say making widgets is a $100k/yr job for whatever combination of reasons. Government says, “Holy cow, if we made everybody a widget-maker everybody would be very well off, let’s send everybody to widget-making school!” The price of those schools would skyrocket. The quality of its product (the education) would plummet. The market would be flooded with widget-makers. The wages of widget-makers would correspondingly plummet, and the whole rest of the market, the production of all other goods and services, would suffer as everybody stops making whatever else they might have made in pursuit of widget-making. Because it’s not ultimately about money, which is just a proxy. Real factors of production — buildings, people, supplies, equipment, etc., are being diverted from where they would otherwise have been used (see Bastiat and Hazlitt).

A common objection that arises when someone criticizes the current education system from a free market perspective is that by not subsidizing or “investing” in education that those who won’t end up going to college will be out-competed by those with degrees and so lose out on jobs. This is certainly a valid concern, but let us look at it economically again. The value on the market of a college education corresponds with its price  which — as it should — limits the number of people who pursue it. How much of an advantage does a high school education give you? At what kind of job would you put “High School Diploma” on your resume and expect an employer’s ears to perk up? Even now the number of taxi drivers or bartenders with degrees is astounding. That will get orders of magnitude worse under fully socialized education. In some cases where formal education is required to get the job, that requirement was put in place by fiat. If I were an engineer looking for a job without formal education I’d have to find some other way to persuade potential employers that I know what I’m doing, and they would also want to know this. Formal education is more about signaling than anything else — used as a proxy, an almost-too-easy way to make a decent guess about whether somebody can do the job. Thus, whatever you may ask about constitutes somebody’s demand, which puts it in somebody’s interest to produce a supply. In this case the simplest solution will be for the prospective employee to produce the solution, but if that proves difficult to do in a way that satisfies the employer’s demand, that’s where 3rd parties come in and (for example) certify potential employees through a testing program, such as RedHat or Cisco. For most jobs, having a degree may still confer a small advantage with other things being equal, but much less of an advantage than if you’d spent those same 4 years actually working in that field, or, in some cases, working at all.

Prices are set by supply and demand. Giving away “free” things drastically increases demand without any increase in supply. As the government limits the supply of education through things like accreditation and licensing of teachers, there won’t really be any increase in facilities. Such a policy leads only to ever reduced quality and ever higher prices.

Granted, education can be argued to be more important than, say, cell phones or clothes, thus “government involvement is necessary.” Yet, isn’t education something that takes scarce resources to provide? Are there not finite amounts of school supplies? A finite number of teachers? Administrators? Facilities? If so, then economics applies. Scarcity is an immediate factor whenever anybody is foolish enough to employ intervening laws to any commodity or service. There are no solutions that can be provided by a central planner to address this. None. The economic calculation problem stares the central planner in the face and forces him to adopt a solution that does not fulfill his fanciful promises.

As such, a public and subsidized school system is guaranteed to fail, and will become worse as time goes on. For one thing, you allocate your own resources a lot more carefully than you allocate those of others, or more carefully than you would if you could. People do a cost-benefit analysis before spending their own money, but in the political sphere people can’t even comprehend the concept of “worth it”. If they consider something good, in politics, they don’t even count the zeros in the price tag. But that’s not even the most important part: Politicians lack even the knowledge to allocate resources effectively. Everything you need to know to do this is built into prices, and without prices it cannot be done. And without capitalism there are no prices.

The only way to reliably provide a robust and useful education to individuals is through the free market. And the objection that this will not help the poor is just plain false. Bear in mind that public school, like public anything, is something you pay for whether you use it or not. And it gets more expensive (its budget increases, even if you don’t get an itemized bill) every year, while quality keeps rather famously declining. This doesn’t happen with private goods subject to competition. It’s the opposite. As for how exactly private schools would be more affordable, we can look at history and the current state of affairs. Even lousy public schools spend more money per student than good (maybe not elite) private schools, with far inferior outcomes. That’s the current state of affairs. Historically we can look to what was going on when public schools were first introduced, at the private institutions that were displaced by them. One of the fastest-growing models was so efficient, so cheap, so effective that schools routinely offered their services for free to poor people because it cost them so close to nothing to do it and it earned them a great deal of good will. The gist was, junior students paid to attend and learn the basics, and as they learned and advanced, they earned their keep by tutoring the younger students in subjects they had mastered, in exchange for scrip (a kind of currency that could only be used at the school, to pay for its services, to pay other tutors, to buy pencils and so on).

This same type of innovation has been applied in our day in examples such as  Khan Academy, homeschooling, private schools that aren’t tied to a state curriculum. Ideally, private schools would be less broken themselves as they wouldn’t be pressured to try and run just like public schools for accreditation, to give an example, and there would be far more competition as they cease to be crowded out by schools you have to pay for whether you use them or not. Competition, in this process, would provide more of a service until demand is met, for both the rich and the poor. The wasteful nature of a system devoid of economic calculation only makes it impossible for the poor to actually afford quality services.