How frustrating to read an economist’s paean to competition — only to have it followed by a policy proposal that misses the point he set out to make. In 1999, Nobel-prize-winning economist Gary Becker gave a talk at the Heritage Foundation simply titled “Competition.” It started off promising.
Becker begins by saying he relishes talking about this topic “because I have felt for some time that the role of competition is widely misunderstood.” Competition is built on exchange, and he points out that before Adam Smith, people widely believed that exchange was exploitative, one person’s gain being another’s loss. Since Smith’s work on economics, Becker writes, competition is understood as disciplining exchange by putting boundaries on what can be feasibly asked for products. No one will pay Jones $10 for a product if he can get it from Smith for $8.
Unfortunately, Becker’s analysis of competition is incomplete. While it is true that competition tempers asking prices (as well as bids), any exchange that occurs in the absence of coercion is good for both parties. As Ludwig von Mises would say, we can be absolutely certain about that, because the exchange would not have taken place otherwise. The act tells us that in the eyes of the parties, the two things exchanged are of unequal value. Each wants what he gets more intensely than what he gives up. If any other state of affairs obtained, no deal would have been struck.
Becker doesn’t quite see this. After pointing out that thinkers such as Montaigne believed that all exchanges were zero-sum (a loss for every gain), he writes, “Starting in the early 18th century in Europe, a few pioneers recognized the flaws in this system and in the zero-sum approach to transactions. They saw clearly that transactions could be mutually beneficial and that regulating transactions through the discipline imposed by competition was much better than using the heavy hand of government.” (Emphasis added.) Why does he say “could”? This implies that sometimes transactions are not mutually beneficial.
Another problem is that Becker seems to see competition as something that overlays and disciplines market transactions. For him it consists of the availability of alternative suppliers, regardless of how those alternatives got there. In fact, competition is nothing more than the freedom to engage in transactions with whoever is willing in an environment where property is secure. Competition doesn’t exist apart from the transactions. Where competition is not allowed, freedom to transact is not allowed. And where there is no freedom to transact, there is no competition. Competition is a process, not an end-state.
The difference is subtle but important. Becker’s approach to competition focuses on actual alternatives (whatever their source) available to buyers. The process approach focuses on freedom in two respects: the freedom of consumers to buy from whomever they wish and the (legal and political) freedom of sellers to enter the market. Let’s call it demand-side and supply-side freedom. Both aspects of freedom are essential to competition. Without either one, the result is an ersatz competition.
Because Becker’s approach to exchange and competition is unsatisfying, his application of these ideas is also unsatisfying. After his opening remarks, Becker suggests that competition be applied to areas where it is normally thought inappropriate. The area we are interested in here is education. Before getting on to education, Becker properly refutes those who think that competition means a “race to the bottom” regarding “the quality of attributes that are not easily observed by consumers.” Not every buyer needs to have elaborate knowledge of the goods and services he buys. Buyers with inferior knowledge will “free ride” off those with superior knowledge. “When suppliers try to gain the patronage of informed customers,” Becker says, “they offer better products and better terms to the poorly informed as well.” This is merely one “positive externality” that the market provides.
Becker begins his section on education by lamenting the virtual government monopoly: “These locally protected markets enable teachers’ unions and government officials to capture the governance of public schools and manage them in their own rather than students’ interests.” He notes, correctly, that low-income people get the worst of it. The affluent can afford to pay for private education on top of their school taxes, and upper middle-class folks can avoid the worst government schools by buying homes in the right areas. The people with no choice whatsoever are the very ones the statists claim to care about so much. Becker also makes the valuable observation that per-pupil spending, class size, and the age and location of school buildings do not correlate with educational quality; in these respects, Catholic schools compare “unfavorably” with the government’s schools, yet do a better job of educating.
Becker notes that in recent years parents have become increasingly dissatisfied with the government schools, and he is pleased that “in response to this pressure, school choice and school competition have multiplied.” What competition is he referring to? “Sometimes students can attend public schools outside the neighborhood where they live, or families can form their own publicly funded ‘charter’ schools and choose their own teachers and principals.”
Thus Becker counts as competition other public schools and charter schools, which are extensions of the public school system. Charter schools are financed through the tax systems and must have their missions approved by government school authorities. If they do not live up to their mission in the eyes not of parents but of the authorities, their charters can be revoked and the schools closed. The charter-school movement touts the experimentation that the reform will stimulate.
But how daring will experimentation be when it is ultimately controlled by the very bureaucracy that would be threatened by real competition and experimentation? Real experimentation in education requires demand-side and supply-side freedom. As Joseph Priestley observed, education is an art requiring “experiments and trials,” “unbounded liberty, and even caprice.” He added that “from new and seemingly irregular methods, perhaps something extraordinary and uncommonly great may spring.” As a founder of modern chemistry and the discoverer of oxygen, he was in a good position to know. He never studied chemistry formally. The path to his greatest accomplishments began with the wafting of gas from the brewery next door.
It is Becker’s pallid notion of competition that leads him to optimism about these alleged alternatives to government schools. We’ll see later that the notion of competition as demand-side and supply-side freedom leads to something other than optimism about “school choice.” In truth, the arrangement Becker favors is reminiscent of the “market socialism” touted by socialists in response to Mises’s demonstration that central planning is impossible. The market socialists imagined that the government planning bureau could play entrepreneur and simulate the results of real competition. Hayek showed that to be a chimera.
For Becker, the most interesting competition for the public schools comes from something other than the sources mentioned above. “The most radical step,” he says, “gives tuition allowances or vouchers that families can use to send their children to public or private schools of their choice.” He adds, “Vouchers are the best way to bring the innovations and competition of the private sector into a government-funded school system.” This very phrasing illustrates the arbitrary limits on competition that Becker embraces. Why be satisfied merely with bringing features of the private sector “into a government-funded school system”? Anyone who favors competition should sense that the real thing could not come from such an arrangement.
The deeper question is, Would vouchers produce real competition for the government’s schools? In Becker’s view, they would because they would open alternatives that are today closed to many parents. Alternatives equal competition. But unless we know what kind of alternatives vouchers would produce, we can’t really answer the question. Under a voucher plan, government money in the form of tuition certificates is given to parents, who may use it to send their children to private schools. The theory is that vouchers will provide parents a route out of the government’s schools and, by so doing, will put pressure on those schools to improve. Some voucher advocates privately hope that the stimulation of choice and competition will someday drive the government’s schools out of existence.
Becker wants vouchers for poor families only. (As noted, he thinks that more-affluent families already have school choice.) He says that “it makes little economic sense to first tax everyone and then hand the revenue back as vouchers.” But Becker ignores an important feature of vouchers. Any voucher program would include a cross-subsidy from people who pay higher taxes to people who pay lower taxes: Everyone would get a voucher equal in value to everyone else’s no matter how much he pays in school taxes — hence the subsidy. Vouchers have an intrinsic welfare aspect to them.
While Becker would prefer vouchers for the poor only, he would settle for a universal system because that “would be much better than continuing to offer ‘free’ education to all public school students.” But how would vouchers differ from “continuing to offer ‘free’ education to all public school students”? It’s not clear that it would differ at all.
First of all, the money would still come from a government entity, whether federal, state, or local. Even though most people pay school taxes, they will not see the voucher as a refund of their money. Voucher advocates apparently don’t want people to see it that way. If they did, they would advocate not vouchers, but exemption from school taxes for people who don’t use the government’s schools.
Since the money will be perceived as “public funds,” we can be sure that strings will come attached. “We must have accountability where our children and public money are concerned” — we are sure to hear such statements. And the controls won’t be over financial matters only. Schools’ curricula will also be of interest to those who control the public purse. Courts have already ruled that religious schools can be included in voucher programs only when students are able to opt out of the religious part of the curricula. For many religious schools, that would require wholesale revamping of their programs — or else parents could not use their vouchers there.
We should not be surprised that with money come conditions. Is there an older principle of human relations? And we know from experience in Europe and elsewhere that when government undertakes to subsidize private schools, those schools inevitably lose their autonomy. We should be amazed if that did not happen.
Becker and others praise the competition that occurs in higher learning, but we should be wary of that example. Strings accompany federal money, which is why Grove City and Hillsdale colleges refuse to let students use government scholarships there. Moreover, we can expect much more control over curricula in elementary and secondary schools than in colleges because, first, younger children are involved and, second, the teachers’ unions are powerful enough to influence the writing and implementation of any large-scale voucher legislation.
The upshot is that vouchers will not produce independent, innovative competitive schools. They will produce, at best, safe schools — safe in the sense that they will not threaten the existing system, on which so many people depend for their livelihood.
No one should be surprised that champions of public schooling are beginning to see the potential value of vouchers for expanding the government’s educational system. As they point out, what matters is not who nominally owns the school, but who funds it. (The Democrat Leadership Council, for example, favors vouchers, as long as they include conditions that would make private schools mere extensions of the government’s system.)
Here is where differing conceptions of competition come into play. For Becker, the mere existence of additional schools to which parents may send their children satisfies the criteria for competition. That the schools are ultimately controlled by the government — their voucher eligibility could be withdrawn — doesn’t much matter. It also seems not to have occurred to Becker that schools operated by a bureaucracy cannot be expected to respond to competition as a private entity would.
Under the conception of competition as demand-side and supply-side freedom, vouchers look mighty impotent. On the demand side, parents may choose only from among the options offered on the government-approved menu. Moreover, they do not fully control the money. They merely pass government certificates along to the schools. There is no opportunity cost connected with the use of the money because they must use it for what the government defines as education. If parents had to spend their own cash without strings, they would be free to search entrepreneurially for alternatives, realizing that spending their money in one manner entails forgoing other opportunities. The experience of forgoing valued opportunities would instill in them a direct concern for their children’s education. When we actually pay for something, we value it in a way that we never value something that appears to be free. The great tragedy of “free” government schools is that they have depreciated education and in that respect have made parents irresponsible.
On the supply side, vouchers would confine education entrepreneurs to forms of schooling that can qualify for vouchers. Entrepreneurs who wished to venture outside the government’s “box” would find an artificially limited market, because parents would have to lay out money that they could retain if they sent their children to voucher schools. The cost of vouchers, then, is what Fràdàric Bastiat called “the unseen.” Innovations that would have been offered in a free, competitive environment constitute the real cost of this political gimmickry.
In sum, competition is indeed good and would be good for education. But real competition is not the mere existence of apparent alternatives. It is freedom of action — property rights — both for suppliers and buyers. Thus if we are to have real competition in education, we need complete freedom for entrepreneurs and parents — in other words, separation of school and state.