Perfect markets versus reality

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Jonathan Calder has been discussing the government’s new education proposals and I have adding a few helpful comments, leading to this series of questions from Bishop Hill. This has made me realise I’m in danger of being misunderstood, but I thought I’d clarify what my position is here rather than there.

First of all, I think it is important to say that I’m not anti “choice” and I’m certainly not anti markets per se, indeed one of my main interests is how markets can help us achieve environmental goals in a way that simply regulating and imposing sin taxes never could. However, I’m concerned that when we talk about choice in relation to public services we are talking about real choice, rather than simply having a range of relatively neutral options. Roger Levett in “A Better Choice of Choice” (I’m sure Jonathan won’t approve of me linking to a Fabian pamphlet!) talks about “choice sets” whereby we should be enabling people to make full choices about their lives rather than make narrow decisions which close off other choices later on.

I also think that discussions about markets are essentially meaningless unless you also discuss externalities at the same time, and remain fully cogniscent of the fact that the perfect market is a myth. People who don’t I believe are open to the accusation that they are market fundamentalists, eulogising about an ideal that only has a tangential relation to reality.

So I get very uneasy when I read Jonathan writing this:

But would any schools want to grow to this enormous size? Would any parents want to send their children to them if they did? Mark’s case seems to be that governing bodies and parents are both criminally stupid and need local education authorities to save them from themselves.

This is an obtuse caricature. There are numerous examples of cases where a series of perfectly rational choices lead to fundamentally undesirable outcomes. Take bus services for instance. If significantly larger numbers of people used buses, services would be cheaper and more reliable. Unfortunately, what has happened since deregulation is that bus services have got worse, leading to more people making the perfectly rational choice to switch to using the car, leading to worse congestion and less money going into the bus service. This in turn leads to more people using their cars, and everyone suffering from worse congestion and worse pollution.

In Jonathan’s comments I included the example of local shops and post offices, to which Bishop Hill retorted: If everyone agrees that local shops are better why does everyone shop at supermarkets?

Yet this has been well documented. It doesn’t take a mass switch from local shops to supermarkets, just a critical mass which renders local shops unprofitable. This has been well documented by the New Economics Foundation’s series of reports on the emergence of “Ghost Town Britain” – a loss of just 10-20% of trade after the arrival of an out of town supermarket is enough to start shutting shops, despite the vast majority of local people actively supporting them.

Bringing all this back to education, and my quote from Jonathan above, it isn’t simply a case of governing boards deciding the perfect size of the school for them; there will always be pressure to expand. From a purely economic point of view, smaller schools are less cost-efficient than larger schools. It will be a brave governing board that chooses to remain small ahead of books and equipment. And, to use the word du jour of our Great Leader, any such school expansion will be “irreversible” – once you’ve built a new wing to accomodate 200 extra students you can hardly go back to a smaller size later.

Bishop Hill asks: Don’t you think that parents should make the decisions about how their children are educated? The children are not public property after all.

I am working on the assumption that children are the responsibility of wider society as well as parents. I’m sorry if that is an outrageously leftist notion but if it isn’t the case, then there is absolutely no case whatsoever for the state funding of education.

Should parents be able to make decisions about how their children are educated? Yes, but there are limits. It is not in societies interests to have children being indoctrinated into a cult or otherwise be kept ignorant of basic truths about the society they will have to live in for the rest of their lives. There is a liberal argument for and against disallowing children to be taught in such a way, but I trust there is very little question among liberals about whether wider society should pay, or even subsidise it.

There is also the question about whether parents are equipped, in a messy world without the market ideal of perfect knowledge, to make proper choices.

Vince Cable has recently written a Centre for Reform pamphlet entitled Public Services: Reform with a purpose. In it, he adapts a typology by Nicholas Barr to assess the suitability of public services for use of markets. This typology has five criteria:

  1. information easy to get or easy to improve access to;
  2. information easy to understand;
  3. low cost of bad choices;
  4. diversity of tastes;
  5. low transaction costs.

Vince concludes that in the case of schools, 3 and 5 are certainly not the case while the degree to which information is easy to get and understand is questionable.

You will pardon me about remaining sceptical (using the precise definition of the word) about the marketisation of education if one of the so-called arch-marketeers in the Lib Dems shares my scepticism. But what is to be done? Well, Theo Butt-Philip hits the nail on the head: it isn’t for national government to be dictating a line from above, but for local government to be given the room to experiment. Surely no Liberal Democrat would argue against that?

But I accept that that is a bit of a cop-out. My honest answer is that I don’t know. What I suspect however is that the solution lies matching local accountability with a system that allows schools to innovate and allows the maximum amount of choice for parents and children while recognising that places will always be limited to some extent. I am certainly sold on the idea of school selection by lot as the least unfair way of managing demand. I also see the answer lying in lots of small schools with strong identities rather than vast sausage-factory like impersonal institutions. I just don’t believe the market, completely unaided, will be able to do this without a democratic infrastructure to nurture it.

A final point to end on though, and I should preface this by emphasising that I really do have a lot of time for Jonathan Calder’s views – he’s listed in my ‘top blogs’ with very good reason and I seem to agree with him on most things. But I do find it a little hard to take being told that any scepticism about marketising education is dreadfully reactionary while simultaneously being told that the market has no place in dictating broadcasting rights to major sporting events. If the market can’t get that right, why on earth would we want to unleash it on our children?

19 thoughts on “Perfect markets versus reality

  1. I don’t think you address Jonathan’s point about parents not wanting to send their children to huge schools, apart from referring to the public transport situation. You need to explain either why parents would choose to pack their kids off to a megaschool, or why lots of parents choosing not to do so would still lead to very large schools.

    I agree with you that small schools are a good thing. That is why the market mechanism for placing limits on school size is so important. State schools are huge because the only limits on their size are due to geographical factors and administrative convenience. The fact that parents like small schools does not currently come into the equation. I think your faith in democracy to deliver small schools is entirely misplaced – the evidence is all around you after 70 years of state education.

    Mr Cable’s theories on marketisation of public services could be used to justify nationalisation of the housing market I would say. An old-fashioned statist rather than an arch-marketeer IMHO.

    Just because cricket is not on terrestrial telly, doesn’t mean the market has got it wrong. The existence of a market implies willing buyer and willing seller. Millions of disappointed terrestrial viewers represent a willing buyer only.

    While it’s somewhat off topic, I was interested in the NEF reports. I can’t find the reference you make to it in the originals, (based on a search for “%” or “support”). Can you by any chance remember which one of the reports it’s in? Any chance of a page reference? What I’m interested in is what the authors mean by “actively support”.

  2. Parents don’t generally pick small schools, but the ones with the best reputation. Reputation is a tricky business; what might be an excellent school in 2005 might have fallen massively behind in 2011.

    While many smaller schools will often be the best, under a completely free market system they will always have immense financial pressure to expand, calculating that the “ethos” of the school will remain the same. By the time anyone can tell if that is the case or not, it will be too late to reverse the decision.

    In terms of the NEF reference, I was being somewhat vague because I couldn’t find the reference I was thinking of. But the one I did find was in the first Ghost Town Britain report (pdf), page 15, inset box “When positive feedback leads to negative change”.

  3. Sure. The size of the school is only one factor in many which might be relevant (academic reputation, extra-curricular activities, geographical proximity, class size, and so on). But the bigger the school gets the fewer points it will score with parents on that parameter. This will, as I pointed out, tend to restrict the size of the school.

    I don’t actually know whether small schools are genuinely better (in academic terms) or not. I only said that parents tend to prefer them for their children. You are right that expansion represents a threat as well as an opportunity, as it does for any business. It’s worth remembering that expansion could take different forms – larger classes, more classes, or new branches ie a new school on a different site but under the same management. It only takes one school to master this for a wave of positive change to sweep across the education world. Fear of this kind of experimentation is what is holding the education system back IMHO.

  4. The NEF piece is a rather old-fashioned in many ways. It describes as perverse the loss in local shops caused by the arrival of a supermarket. It says that nobody would want this loss of local shops. This seems to me a statement of the blindingly obvious. Who in their right mind would want to lose local shops? We all want the greatest possible choice of retail outlets. But if you don’t allow a market mechanism to operate how on earth do you know when one of these shops is no longer viable? Are you advocating subsidies? Not a liberal, surely?

    Somewhere I read a piece about the impact of the arrival of Walmart in an American town. The impact was much as the NEF describes with small groceries and food shops forced out of business. What it pointed out though was that these were quickly replaced by specialist shops and boutiques which were not competing directly with the supermarket. These were often run by the very people who had run the marginal grocery businesses previously. In essence most people ended up better off.

    I’m unconvinced by the ghost town argument. I’ve never seen one. Have you?

  5. This is a post about schools, so I’ll only deal with that for now. But as for whether ghost towns exist, my parent’s village has gone from 6 shops a decade ago to just 1, which the residents had to fight tooth and nail to protect. So yes, I have seen one, and its hardly unique.

    The point is Bish, that information flows in markets aren’t instant in reality. A school could be going downhill and the parents aren’t going to know until its too late. A school could quadruple in size over a seven year period and the only recourse parents would have would be to move their kids out. Combine that with a funding system that incentivises gigantism and you have potential problems. Not neccessarily insurmountable ones, but ones that suggest that a complete switch to an unbridled free market would create severe problems and people have every right to be sceptical.

    The bottom line is that free markets have a tendency to favour gigantism for the masses and specialisms for those who can afford to pay (the “boutiques” of your example). Ultimately the best way a school can protect itself from becoming too large will be to charge higher fees, which leads the less well off with very little choice at all.

  6. You say a school could quadruple in size over a seven year period with the parents’ only recourse being to move their kids out. Firstly this kind of an increase strikes me as pretty extreme. Secondly the information flow is considerably quicker than you say. Prospective parents ask current parents what the school is like. They visit it during school hours to get a feel for the place. There is more to the information flow than just league tables. Thirdly, at least they can move their children out in extremis. This is an improvement on having to lump it, as tends to be the case now.

    I answer to your point on gigantism in schools I have already pointed out (i) that the current system already encourages gigantism and (ii) a free market will put in place a mechanism to place limits on school sizes.

    Free markets do not have a tendency to favour gigantism for the masses. Where people don’t care about the size, then gigantic outlets will have an economic advantage over their smaller rivals. I’m thinking of retail outlets for example. Where people do care then the market tends to respond. Think restaurants-the vast majority are small, intimate places because this is what consumers want from a restaurant. Giant fish and chip shops or greasy spoons are not commonplace.

  7. I go along with some of what you say. But then, I’m not arguing from an anti-market perspective, just one which believes they aren’t perfect and wants an element of both choice and planning.

    We’re just going to have to agree to disagree when it comes to the flow of market information and schools. I’m not denying that a minority of parents won’t do full, comprehensive research; it’s the majority I’m concerned about. Indeed, that’s what the concern about creating a system that advantages the “pushy parents” is all about.

    Your argument about restaurants is flawed because you seem to think “gigantism” is limited to the physical size of each individual restaurant. Just because the average McDonalds (or Harry Ramsdens) isn’t the size of a supermarket, it doesn’t mean the corporation isn’t a perfect example of gigantism, or that it doesn’t force out smaller concerns.

    Indeed, with restaurants we see exactly the same thing that I’m concerned to avoid with education: bog standard, little choice for the masses, and niche, specialities for the rich.

    All I’m saying at the end of the day is that effective local democracy is an important way of introducing longer term planning and qualititive feedback into the system that an unbridled free market would lack. It also recognises that education is not – I emphasise is not – solely the responsibility of parents and that we all pay the price if the system goes bad.

  8. The bit about restaurants isn’t flawed at all. We were talking about gigantism in relation to the physical size of establishments, not to the size of corporate bodies. If a school is part of a chain, why should that matter to parents? Chains tend to be very good at providing value for money. This is good for the poor.

    I’m amazed that you think restaurants provide bog standard meals for the poor. Where I live (in rural Scotland) even our tiny town has a choice of Indian, two Chinese, two chip shops, two French restaurants, one fast food joint, plus pubs and hotels. Pretty much all of these are well within reach of everyone.

    IMHO political involvement in the education system is the problem, not the solution. I the idea that my someone else should be able to dictate my children’s education to me rather frightening. This is a meaning of “liberty” that has previously escaped me.

  9. IMHO political involvement in the education system is the problem, not the solution. I the idea that my someone else should be able to dictate my children’s education to me rather frightening. This is a meaning of “liberty” that has previously escaped me.

    Fine. can I have my money back please? Email me for my bank details. After all, providing you with the cash is dictating your children’s education, whichever way you look at it, and that is presumably an intolerable burden for you.

    The only reason education is state funded is because it is a public good, not because it is “nice”. As soon as a parent chooses to educate their child in such a way that it ceases to be so, then the state has a right to withdraw that funding. Arguably, in extreme cases (where parents are members of an extreme religious movement for example), it should have the right to take over the care of that child if the “education” the parents want is tantamount to child abuse. Or would you support that?

    Having thought it over some lunch, you’re right that I rather overegged the pudding on my restaurants argument. A stronger argument would have been to look at those criteria I quoted from Vince Cable’s book that you took exception to, in particular “low costs of bad choices” and “low transaction costs”. In both cases restaurants meet the criteria and schools don’t. We’re talking apples and oranges here. People don’t pick schools the way they might choose a sandwich, and there is both much less pressure for restaurants to grow large and much more pressure on them to remain small.

  10. “Fine. can I have my money back please?”

    Only if I can have my taxes back!

    Obviously the state has a right to step in in cases of child abuse. Otherwise I would say that from a liberal perspective one should trust people to seek and obtain the education that suits them.

    I don’t understand the relevance of the Cable book to the sizing of schools, which was what we were talking about. High transaction costs and high cost of bad choices would not lead to giant schools would they?

  11. “I do find it a little hard to take being told that any scepticism about marketising education is dreadfully reactionary while simultaneously being told that the market has no place in dictating broadcasting rights to major sporting events.”

    Eh? Nowhere have I said either of those things. Wouldn’t it be more useful to engage with what I actually say rather than offer a caricature of it?

    I am more interested in exploring my opinions than in narrow conformity, but it seems to me that I am being consistent in calling for a variety of providers in both broadcasting and education.

  12. Bishop,

    You accept the point about extreme cases, but do you accept my point about education being a public good?

    The point I was making in contrasting restaurants with schools (originally your comparison, mind) was that the market in restaurants is much more dynamic than the market in education. Positive feedback is much easier to deal with for a restaurant than a school, because it arrives more rapidly and payment is more closely linked to feedback. If people don’t like a meal/service, they simply won’t come again and restaurants will see demand trailing off relatively rapidly. If a school is giving poor education, it won’t be obvious for months, even years and the person receiving the service (the child) is not even the same person as the one authorising the payment (the parent).

    But we’re going round in circles here. It is clear that you will not accept that information flows in the education market is anything less than perfect, and that I disagree. Can’t we just leave it at that?

  13. Jonathan,

    My post began with a direct quote from you:

    Mark’s case seems to be that governing bodies and parents are both criminally stupid and need local education authorities to save them from themselves.

    … I hardly own the monopoly of arguing against caricature if that is what I’m guilty of.

    That said, your overall stance on marketisation of education is distinctly “drawbridge down” while your stance on marketisation of cricket coverage is distinctly “drawbridge up”. That would appear to me to be a major discrepency, particularly given the relative importance of education compared to cricket.

  14. Is your case that if someone is “drawbridge down” on one issue then he must be so on every issue to avoid being inconsistent? Surely it depends upon the starting position?

    If education is a state monopoly and cricket broadcasting is a private monopoly, what is wrong with questioning the existence of the monopoly in both cases?

  15. I take your point about starting position. But so far, all you have emphasised in your blog are the potential benefits of marketisation of education, and none of the potential problems, not least of all the risk that it would lead to many (particularly rural) areas replacing a state monopoly with effectively a private one. Fundamentally though, I think we agree that offering a wider choice than at present is desirable and that the current Lib Dem position is too rigid. It’s the emphasis I’ve been taking issue with.

    And you haven’t IMHO thus far put forward a strong case that cricket is a public good that requires government interference.

  16. Is education a public good? A little. From an economic point of view the evidence suggests that education is a means of filtering out clever people from not so clever people. It probably doesn’t lead to overall increases in wealth. The main beneficiaries of education are the people who receive it rather than society as a whole. See Alison Wolf’s “Does Education Matter?” if you are interested. So I would argue that state funding is not desirable here.

    I haven’t at any point questioned the flow of information in an education market, although I think you are overstating the case. Let us accept that the flow of information is worse than in some other markets. I still don’t understand why a school getting worse means that it will get bigger, even with a poor flow of information. If it has 500 pupils at the start of the school year, the loss of a good headteacher might lead to a fall in standards by the end of the year. The school might trade on its reputation for the following year and expand its intake. Let’s say 550. The following year prospective parents have two factors which will disincline them to send their children. The school is bigger which they tend not to like. And after two years, some word of the decline in standards will have leaked. As you point out in your previous post, it may take months. It’s too much to expect it to be kept secret for years.

    Like you, I sense this thread needs to draw to a close. It’s been fun!

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