Specialization in a competitive education industry: areas and impacts.

• Author: Merrifield, John

Even in relatively backward societies, extensive division of labor and specialization of function is required to make effective use of resources.

--Milton Friedman (1962: 12)

In most of the economy, competition forces producers to specialize. And it is well known that specialization within firms and by firms is a cornerstone of high productivity and innovation. But education economists give school differentiation little attention; there is little discussion of the degree to which various K-12 reform proposals might prompt the development of specialized schooling options. This article argues that increased specialization by schools either in what is taught or how it is taught has significant policy ramifications.

Parental choice debates and research suffer from the intellectual inertia that results from the minimal specialization present in the current K-12 system, especially in the attendance zone public schools that enroll the vast majority of school-age children. The academic literature, influential newsletters, and the popular media virtually ignore the contrast between an economy fill of competing business firms that often differ almost as much as their customers, and schools that differ much less than children. The reform debate, especially the discussion of parental choice, is much the worse for its inattention to specialization.

The literature only barely recognizes that the relative uniformity of the K-12 system is sufficiently unusual to warrant some explanation. For example, none of the many esteemed members of the Koret Task Force on K-12 Education, whose aim was to "describe and assess the current state of American education," thought the system's relative uniformity was worthy of mention (Mot 2001: xxi). The lone, noteworthy exception is an article by Byron Brown (1992) that argues that the "comprehensive uniformity" of the current system is a result of popular will and political agreement. (1) Another explanation is that the existing relative uniformity is a default outcome that results from the public school system's public finance monopoly (Quade 1996) and the political strife over education policy (Arons 1983), not something that occurs independent of those factors (Merrifield 2001: 107-9).

This article aims to show how attention to the specialization issue would change the school reform debate, how it would help academic researchers greatly improve their models, and why it would make parental choice policies more attractive, especially proposals that would establish a competitive education industry (CEI). To set the stage, the next section reviews the essential elements of a CEI.

Keystones of a Competitive Education Industry

Because the issues described in economics principles textbooks do not penetrate the school reform debate very often, this section briefly reviews the essential elements of a competitive education industry (CEI). Careless use of the term "competition" in the context of K-12 reform discussions is a serious problem. Even some economists have alleged that modest additions to the competitive fringe of a "dominant firm" (the public school system) with a huge price advantage, or that slight reductions in that advantage among a few select families, (2) would establish competition. Noneconomists are even less likely to differentiate between policy options that introduce some limited rivalry and options that would foster genuine competition. In a nutshell, genuine competition results from low entry barriers, market-determined prices, and a minimum number of informed and mobile parent-consumers.

Low entry barriers are the most critical element of genuine competition. Low formal and informal barriers tie each school's market share to efficient provision of services that are superior in some valued attribute(s). Free entry does not exist if the government favors some schools. In the United States, and many other countries, the key entry barrier is informal, the result of discrimination against parents who prefer private schools. Those parents must forgo their top school choice or pay tuition on top of the taxes that pay for "free" public schools. The resulting requirement that private schools compete with a "free" service severely limits school entrepreneurs' ability to open new schools. Very few unsubsidized schools can survive such a funding disadvantage. Biased regulations can also reduce entrepreneurs' ability to establish new schools, especially if the rules favor certain types of education providers, or significantly raise start-up costs.

Many buyers and sellers--a large number of schools and families with children--are a desirable attribute, but not critical to a competitive education industry. Economists have shown that if market share is contestable (lack of experience and reputation is all that handicaps well-capitalized new sellers), markets with only a few sellers can still be quite competitive. However, while market share contestability with few actual competitors can produce market outcomes associated with competitive behavior, the number of actual competitors will probably influence the degree of specialization, (3) especially since fewer competitors will most often arise in smaller market areas. As is already the ease with a wide variety of goods and services, larger metro areas would support more diverse schooling options than would smaller areas. In some rural areas, all the children would go to the same small school, but the absence of entry barriers (contestability) would allow easier replacement of a low-performing school.

Without a minimum level of consumer mobility and informedness, families cannot reward superior performance or escape inferior performance. The minimum level of mobility and informedness for conscientious, competitive behavior depends on fixed costs as a share of total costs, which depends on several factors including capital intensity, and the salvage value of the firm's capital. The higher the fixed cost share, the more profitability varies with the number of customers. Since schools require a significant amount of capital with little salvage value--school buildings and equipment are not readily adapted to alternate uses--a relatively few quality-conscious parents will be enough to drive conscientious educator behavior.

Price movement is another critical element of competitive settings. We know from centuries of experience with price controls--for individual goods or economy-wide--that price change is the source of critical information and incentives. The critical effects of price movement are virtually absent from K-12 education because the children who attend public schools pay a tuition-price of zero. And most existing voucher programs and prominent school choice proposals curb price-movement effects by prohibiting private schools from cashing vouchers unless they accept them as full payment, or a fixed percentage of the full cost. Price movement's long-time absence from the K-12 system may be why there is little discussion of the benefits of introducing it, even by economists. That blind spot exists even though we have centuries of evidence that serious inefficiencies arise whenever price change is absent (Shuettinger and Butler 1979). Consistent with that experience, the K-12 system's serious problems have survived and, at times, grown in the face of decades of intense reform efforts (Ravitch 2000).

Specialization Defined

Specialization exploits differences in producers to increase total production and address the significant differences in consumers. It complements other catalysts like leadership changes, additional resources, and higher academic standards.

Children are incredibly diverse, even within families. (4) They differ in the rates and ways they learn, the subjects that interest them, the subjects they struggle with and excel at, and the physical environments that support or distract their efforts. (5) The key environmental factors include school size, class sizes for some topics, structure, and discipline. Some children learn more on their own than directly from their teachers and books. For some children, direct instruction from a teacher is not as effective as high-tech instruction. Those children learn more through interaction with machines that have infinite patience and move to the next item only when they are ready. Tangible examples are becoming increasingly evident even within the severe limitations of the current system; for example, cyber charter schools and former Secretary of Education William Bennett's Internet-based K12 program. (6)

What schools do and how they do it could vary in an infinite number of ways that change almost as fast as children and technology change. We certainly see that in higher education where there is choice, where prices vary, and where prices reflect market forces to a much greater degree than in K-12. Specialization would occur through emphasis on specific subject areas like business, health, social studies, or athletics. But specialization would mean much more than that. To address the diversity in how children learn, how schools deliver information would vary widely. Indeed, subject-emphasis specialization is likely to be relatively unimportant in the early grades when children acquire basic skills. Specialization based on learning-style differences would probably define the schooling choices of younger children.

What Stifles Specialization

Specialization and the innovation that constantly redefines it is hard work. In most of the economy, competition provides the necessary incentives. But the public schools' public funding monopoly and joint control of clusters of schools organized into districts greatly weakens the incentive to have nearby schools develop sharply different curricula or teaching styles.

The long-standing practice of assigning children to a neighborhood public school is another significant specialization deterrent. Attendance zones have diverse student...