For-profit schools are making a comeback.

• Author: Vedder, Richard K.

Private for-profit schooling has grown rapidly in the United States in recent years. In many respects, this development marks the revival of a form of delivery of educational services that has existed for several millennia. In this article, we review the historical experience, assess the present situation, and speculate about possible future trends. We conclude that the future of for-profit schools is relatively bright, despite powerful forces aligned against them.

The Crisis in American Public Education

Before discussing private schools, we need to review the condition of government-provided education in the United States. Others have done so far more comprehensively than we can here (Chubb and Moe 1990; Finn and Ravitch 1987; Hanushek 1994; Hirsch 1996; Lieberman 1993; Stevenson 1992). The evidence is clear that productivity in American public education has been falling in terms of most ways economists define and measure productivity. Caroline Hoxby puts the decline over the past generation in excess of 60 percent (2001, 2). Inputs per pupil have risen in real terms by a factor of two or three over the past four decades, but output per pupil has not risen correspondingly and, by some measures, has declined. Although the measurement of educational performance is a tricky business, only a handful of supporters of the current system of educational delivery argue that productivity is rising or even staying constant (Bracey 1998). One of us frequently tells legislative groups that with the possible exception of prostitution, teaching is the only profession we know of that probably has had no increase in labor productivity in the 2,400 years since Socrates was teaching the youth of Athens.

Contemporary American government schools resemble the mode of economic organization prevailing in the Soviet industrial economy of say, 1970, more than they resemble contemporary American industry. Like old Soviet firms, U.S. schools are government-owned and government-operated enterprises with a good deal of direction from distant bureaucracies. As in the old Soviet system, government-school policymakers historically have measured performance in physical units of output, such as the number of students enrolled or graduating, rather than by qualitative measures such as learning per pupil or indicators of student or parental satisfaction. As in the USSR, consumer sovereignty is essentially an alien concept, especially among the poor living in central cities. The customers are often treated indifferently, if not with contempt. Like the old Soviet managers, government-school administrators have few incentives to reduce costs per unit of output, and in any case political forces keep them from radically altering the mode of service delivery in order to introduce market forces or otherwise enhance efficiency.

Within five years of the October Revolution in Russia, Ludwig von Mises ([1920] 1935) was arguing that rational economic calculation was impossible in a socialist economy, and he predicted many of the woes that would beset the Soviet economy during the seven decades of its existence. Although a review of the socialist-calculation debate lies beyond the scope of this article, we can note that even opponents of Mises, such as Oskar Lange and Fred Taylor ([1938] 1964), recognized the need for the introduction of prices and market-style incentives in order to overcome the calculation problem. Many of today's so-called radical reformers accept the central role of government in education and merely want to do in the schools what socialists such as Lange and Abba Lerner would have done in a command economy such as the Soviet Union.

Ultimately Mises and F. A. Hayek were proven right, and communism died in Russia with a whimper, not a bang. Will the government schools of the United States, which in so many respects mirror Soviet economic organization, meet the same fate? U.S. education may be less rigidly socialist that the old Soviet enterprises, with approximately iS percent of education provided by private-school alternatives, but even the Russians had their private vegetable plots--the Soviet agricultural equivalent, perhaps, of home schooling in contemporary U.S. education. More important, nearly the entire Soviet economy suffered from socialist inefficiency, whereas in the United States the relatively inefficient educational system receives ample subsidies from the large, efficient private sector.

Nonetheless, lessons may be learned from the socialist-calculation debate. Government schools are becoming extremely costly in relation to services they render. The inability or unwillingness of entrenched monopolists to change their ways, given the apparent lack of adverse financial consequences for inadequate performance, has doomed some well-meaning but inherently inadequate attempts to reform existing modes of service delivery. Hence, dissatisfaction with the status quo will probably continue to grow, eventuating in calls for more radical change. This outlook brightens the prospects for private for-profit schools.

Five Trends Favoring For-Profit Education

Five trends arguably presage marked expansion of private education in general and of for-profit education in particular.

First, barring some unanticipated disaster, real incomes will continue to rise over the long run, and the demand for high-quality education is fairly "income elastic." The move to the suburbs has no doubt been significantly affected by the desire of parents to move their children from mediocre central-city schools to better suburban ones. Schools that are perceived to be good create higher property values in their vicinity, a sign that school quality itself is highly valued (Bogart and Cromwell 2000; Oates 1969). As incomes continue to rise, parents will continue to strive for better education for their children, and the price resistance associated with paying the significant private marginal costs associated with private-school tuition may decline. The increase in demand for private education will likely induce a supply response, as private entrepreneurs perceive growing profit opportunities. Given the relatively high-price elasticity of demand for private education, the augmented supply should lead to significant increases in equilibrium quantity. The rapid growth of for-profit education in the past few years, to be discussed shortly, is consistent with this hypothesis.

Second, a pronounced movement has taken place within the public-school system to reduce spending differentials between schools, typically resulting in successful lawsuits to declare existing funding mechanisms unconstitutional. As it so often does, California led the way in this movement with the Serrano v. Priest decision more than two decades ago. Although economic theory is ambiguous as to the effects of school-finance equalization, considerable empirical evidence indicates that attempts to force funding equalization reduces political...