for-profit education

In 1993 a question of for-profit education came up, which prompted me to analyze the workings of capitalism a little more broadly. Given school choice, how would parents react?

I agree with Kevin’s analysis last month. Your company is working hard to provide what the customer wants; the problem is that the customer is stupid. The right thing is to fix the stupidity.

Just for balance, let me analyze a problem with capitalism. Example 1: Suppose you can’t tell whether Jiffy Lube is truthful when they say you need a new air filter. To protect yourself, you have to learn about air filters—you have to cure your ignorance as a customer. In this case, though, you can argue that that millions of drivers have to waste time learning useless information that ideally only auto mechanics should have to know—only to avoid being cheated. No fun.

Example 2: Sometimes markets turn upside down. Luxury goods often have high prices only because they aren’t perceived as luxuries when they’re cheap. [These are technically called Giffen goods.] It wasn’t long ago that Porsche lost sales by lowering their prices—oops. Until recently, there was a nasty inversion in a segment of the software market. Businesses did the most buying of software packages, and (forgive me if I simplify reality) many used a heuristic to choose what to buy: quality is proportional to price, at least up to a certain level. Software companies could not sell cheap software; they were forced to raise prices to give the impression of quality. This inversion stuck around until the latest round of computer price wars, which brought in enough price-sensitive customers to make cheap software packages viable again (though some software companies have been slow to notice).

Conclusion: The free market puts a heavy burden on the customer. It gives customers what they want, and when the customers are stupid enough to want something bad, that’s what they get. In a free market in education, parents would be the customers, under all proposals I’ve seen. People have been focusing on how schools would react to school choice, but I think it’s more important to focus on how parents would react. If parents are smart, schools would be pretty much forced to give a good education (at least in cities, where there’s a big enough market that people would have real choices). If parents turn out to be stupid, results could be worse, in a way that depends on the amount and kind of stupidity. Another view: This is basically the argument between “paternalism” (a dumb word, but I can’t find another that means what I want) and individual responsibility. You can let people choose for themselves, and risk that they may choose unwisely, or you can try to guarantee wisdom by choosing for them, and hope that you don’t mess up any worse. You can believe in freedom or fixative.

Original version, June 1993.
Updated and added here January 2012.