The Trouble with Education; W. McNicoll

330 The Trouble with Education by WilliamJ. McNicoll T he Clear Creek Independent School Dis trict (CCISD) is a public school system in Texas encompassing all or part of a dozen cities and towns, including a portion of southeast Houston. The quality of its programs places it in the upper tier of school systems in Texas. In fact, CCISD was cited in 1988as the best public school district in Texas. Each January, CCISD conducts an election to fill two or three seats on its seven-member board of trustees. This year's election attracted much more attention than usual because of a simultane ous effort by a local taxpayer group to roll back the district's tax rate, which the board had recently increased by 20 percent. The rollback issue, in fact, dominated the campaign. It prompted virtu ally everyone of the nine candidates for the board to promise, in one way or another, to "maximize the efficient use of tax dollars." None of the can didates was very specific about how to achieve this. Given the way public schools operate, a dis cussion of whether tax dollars can be used effi ciently is appropriate.

The concept of maximizing the efficient use of resources puts us in the realm of economics. To decide whether the promise can be kept we need only go back to Economics 101. The fundamental Mr. McNicollis an aerospaceengineerin Houston. and simple ideas we studied there are more than adequate to reach a conclusion. ScarceResources, OpportunityCost On the first day of class we learned that re sources are scarce. That seems very simple, but it has important implications. Resources must be consumed to produce the goods and services we all want. Resources are obviously finite. The earth has only so much min eral resource. There is only so much time and human labor available. Individuals have only a finite amount of money to spend to satisfy·their needs, wants, and desires. The fundamental prob lem of economics is that while resources are scatce, human wants, needs, and desires have no limits. We can't have everything we want; we have to choose. We must forgo some desires in favor of others.

That leads directly to the next basic concept in economics: opportunity cost. Opportunity cost is the cost of choosing one alternative over another. It is the benefit forgone when we make a choice. For example, if you have $50 to spend and want either to go to a baseball game or out to a fancy restaurant, you must make a choice. You can't do both. If you choose to go to dinner, your opportu nity cost is whatever benefit you might have gained by going to the ball game. This idea of opportunity cost helps to explain how we make choices. We act to minimize our opportunity costs, or to maximize our benefits by the choices we make. In this way we strive to achieve the greatest benefits from consuming scarce resources. EconomicDemand,Efficiency Another important concept is economic de mand. Each of us wants to derive as much personal benefit as possible from our scarce resources. But we can't satisfy all our wants and desires. Econom ic demand is our expression of what we have cho sen to do with our scarce resources. Economic demand is not just wants and desires, but also the ability and willingness to pay for what we have chosen. I may want a new Mercedes, but I'm not willing to expend the required portion of my scarce resources to obtain one. I am expressing no economic demand for a Mercedes.

It's important to remember that people express their economic demand only when they are actu ally faced with the decision of how to make use of their resources. Economic demand cannot be accurately measured by taking surveys or talking to people. Almost invariably, people will respond to questions with wants and desires, not economic demand. The concept of efficiency bears directly on the school board candidates' promise. We usually think of efficiency as some process that maximizes output of a finished product with a minimum of inputs or costs. That is perfectly valid, but there is another aspect of efficiency that concerns the val ue of the finished product, which is determined by the level of economic demand for it. If there is no economic demand for a product, then it lacks val ue, and the efforts to minimize the resources con sumed in producing it are irrelevant. The resources are wasted when the decision is made to enter them into this process.

An example might be a solar-powered flash light. (Guaranteed to meet all your daytime flash light needs!) The product has no value because no consumer expresses an economic demand for it at any price. The production process is immaterial; 331 the resources that went into this product were wasted. Producersand Consumers We cooperate with each other to derive maxi mum benefit from the resources we consume. A business is an organization that produces goods and services for other organizations or individuals. Businesses are run by people who want to ben efit just like the rest of us. They do that by provid ing products to consumers, but they concentrate on providing only those products for which there is a genuine economic demand. Of course they can confirm what is in demand only by observing con sumers and the decisions they make. Consumers make their decisions based on quality, price, and opportunity cost. This is how consumers reveal their economic demand for goods and services and maximize their benefits.

Those who are successful at supplying whatever is in economic demand in an efficient manner will be rewarded with profits. That's all profit is, a reward for meeting the economic demands of con sumers. A large profit suggests that you are doing a very good job of meeting consumer demand without wasting resources. On the other hand, a business that loses money is doing so because it isn't doing a good job of meeting consumer demand. It is producing a prod uct for which there is little demand, or it is produc ing it so inefficiently that the cost exceeds the mar ket price. In either case, the losses it suffers encourage the business to stop producing that product and stop wasting resources. But even a profitable business situation can come to a swift end if somebody else comes along and provides an equivalent product at a lower price, or a better product at the same price, there by allowing customers to satisfy their demand while consuming fewer resources.

This interchange between consumers and pro ducers (and we all are both) is a communication system. In it, information is carried by prices. Prices are determined by the economic demand for goods and their relative supply. Profits and losses show whether resources are being used effi ciently. This communication system leads to the satisfaction of economic demand in the most effi cient way possible, meaning that the fewest resources will be consumed.

332 THE FREEMAN • SEPTEMBER 1991 PublicSchools Now consider the particular case of public schools and whether we can maximize the efficient use of taxpayer dollars. Public schools are fundamentally different from businesses. The biggest difference is that the com munication system just described doesn't exist! It doesn't exist because it isn't allowed to exist. Instead, public schools are financed by taxation. Money is simplytaken from people without regard to economic demand or opportunity cost. There is, however, a non-economic communica tion system between the education consumer and the provider. Unfortunately it's not a very good system. Information on the best use of resources is incomplete and garbled as if by static. Some need ed information doesn't get through at all. Since it doesn't operate by consumers making choices, this communication system cannot carry information on economic demand or quality or on how resources should be allocated to maximize bene fits. It can carry only wants and desires.

Furthermore, it doesn't carry information from all customers for the product, as the communica tion system for private businesses does. For this is a political system. A businessman needs to listen to all his customers if he wants to be rewarded with profits. The people in charge of the public school system (politicians, not businessmen) can survive quite nicely by listening only to those people they choose to hear. Some people, no matter how hard they try, won't be able to communicate over this system. Complaints that special interests are met while the general interest suffers are valid. It is in the nature of the system. To stay in office, school board members have to be reelected periodically. They make promis es to achieve their re-election, and making good on these promises costs money. Those people with influence over the board members can get their wants and desires (but not their economic demand) granted this way. The result is a parade of new programs and services that are of dubious value, but carry a very real cost.

Another difference between public schools and private businesses is competition. Because public schools deliver their product at no direct cost to the consumer, any competition is at a severe disad vantage. Few consumers are willing to pay both school taxes and private school tuition. The kinds of improvements in quality that arise through busi ness competition are almost nonexistent in public schools. The result in our system of public schools should be easily predictable. Since no information on eco nomic demand is available, it is inevitable that ser viceswillbe provided for which there is little or no economic demand. This is a major cause of waste in the public school system. Costs continue to rise at alarming rates because of the effort to satisfy a wide array of wants and desires, without any pro cess to reduce those wants and desires to genuine economic demand. They're making solar-powered flashlights, but get no market signals to stop.

Can the candidates' promise be kept? Clearly not. Under the present system, it isn't possible to "maximize the efficient use of tax dollars." In fact, no system can maximize efficient use of tax dollars. Consumer dollars come with an indication of their most efficient use. Tax dollars do not. To solve a problem, we must first understand its cause. We have recognized a serious problem in education throughout this country, yet no sig nificant progress has been made toward solving it. I believe this is because so few people under stand the source of the problem. (Some don't even want to understand.) The greatest part of that problem is explained by this simple econom ic assessment. From a sound understanding of these difficulties, it should be a simple matter to proceed to a solution. Achieving that under standing is the hard part. As for the CCISD election, the available seats were won by two gentlemen who opposed the tax rollback effort and believed that the education problem is caused by inadequate funding. Two months later, the tax rollback succeeded. D 333 The Case for Being Insensitive by William B. Irvine A t the university where I teach there recently was an uproar when a white dean allegedly said that a black faculty member is paid as much as he is because he is black. Although the dean ultimately was cleared of the charge of racism by a university committee, there were those who nevertheless held him to be guilty of the lesser crime of "insensitivity."