The Wisdom of the Market

July 17, 2015

Design vs Experience

(Guest Post by Jason Bedrick)

I’m humbled that Andy Smarick thinks I “offered the most compelling philosophical explanation for a system of choice” among the recent Fordham Institute Wonkathon participants. However, he misreads me when he states that my “professed ‘humility’ (we don’t know everything) came across as agnosticism (we can’t know anything) given that we’ve learned gobs about choice over twenty-five years.”

Nowhere do I claim “we can’t know anything.” Of course we do, and of course we can learn more. But questions remain: who are “we,” what do “we” know, and is that knowledge sufficient to achieve “our” ends?

By “we” Smarick seems to have in mind “policymakers and wonks” and the “what” that “we” supposedly know is that markets alone just don’t cut it so some very, very smart people must bend schools to their will impose government regulations to ensure accountability. To bolster his case, Smarick cites a recent article in National Affairs by Chester Finn and Bruno Manno on the lessons they’ve learned from their decades of experience studying charter schools:

Both strongly support school choice, but they concede the “vexing reality” that “market forces alone can’t reliably generate academic effectiveness.” Overconfidence led to accountability getting short shrift early. “Those present at the creation of the charter bargain (ourselves included) paid too little attention to how authorizing would work.”

Throughout the article, the [Finn and Manno] explain how events played out differently than expected. Because they assumed “a barely regulated marketplace would provide more quality control than it has…we focused on quantity rather than quality.” They were excited by policies that would spur “infusions of capital and entrepreneurialism,” but “we didn’t take seriously enough the risk of profiteering.”

Smarick claims that my Wonkathon entry’s “sanguine title, ‘Let the market work,’ runs headlong into Finn and Manno’s reflections.” As Justice Scalia might say: pure applesauce.

It may or may not be true that “market forces alone can’t reliably generate academic effectiveness” but Finn and Manno cannot draw that conclusion from experience in the charter sector because charters are not operating in a free market, never mind a “barely regulated” one. Charters are secular public schools that can’t charge families tuition, can’t devise their own criteria for admission, they have to meet certain state standards, and they can be shut down by their “authorizers” even if a sufficient number of students and parents prefer the charter to make it financially viable.

In other words, charters provide more choice and competition than the status quo, but charters are not operating in a market. The lack of a price mechanism alone should make that apparent. Drawing any conclusions about what an actual market in education would or would not produce based on the charter experience is ludicrous.

There’s some truth to Smarick’s contention that “theory without experience is [mere] intellectual play,” but he’s drawing the wrong lessons from Finn and Manno’s experience. Although it’s impossible to draw solid conclusions about a market from a non-market, the charter sector has much to teach policymakers about the chasm between policy intentions and policy results.

For example, Finn and Manno lament that “charters in many places are hobbled by many operational constraints, too little money, and, often, insufficient attention both to the delicate balance between quantity and quality.” These constraints often stem from the very regulatory framework that was intended to ensure quality. A 2010 Fordham study found that “state laws were the primary sources of constraint on charter school autonomy, accounting for three-quarters of the infringement that these schools experience.” This year, an American Enterprise Institute study found that “one-fourth of average charter application contains inappropriate and onerous requirements,” and that authorizes “sometimes mistake length for rigor” and “often prize innovation less than they say they do.”

The fatal conceit of the charter school agenda was that granting schools a bit more autonomy and granting parents a bit more choice in a controlled environment would create a true “market” in education. But a market requires a price mechanism, a means of channeling dispersed knowledge. Smarick accuses me of believing that “we can’t know anything” but that’s not so. Policymakers can’t possibly ever know enough to design the education system from the top down but the market can channel dispersed knowledge to produce higher quality through experimentation, evaluation, and evolution.

Smarick confuses the technical knowledge of experts for the dispersed knowledge of the entire system. Sure, technocrats have learned “gobs about choice” in a quarter-century, but they can’t possibly know enough to design the most effective possible education system. Likewise, a panel of a dozen Nobel-prize winning economists certainly knows “gobs” about how markets function, but they cannot possibly know enough to effectively set the price of tin on any given day.

The technocrats’ approach is attempt to define quality, measure it, and shut down any school that doesn’t live up to it — even against the will of parents. As Finn and Manno wrote:

Charter doctrine is clear: Bad schools should be closed (or “non-renewed”) by their authorizer. Yet it turns out to be as hard to close bad charters as traditional district schools. Hundreds of kids are affected, and the alternatives for them are often no better than the troubled charter. Furthermore, parents are almost universally hostile to the demise of their children’s current schools.

First, why are those parents “almost universally hostile” to closing down their chosen school? Could it be because “the alternatives for them are often no better” and probably worse? Could it be that the schools are effectively providing some things–safety, discipline, good values, a love of learning–that the parents legitimately prioritize over test scores in a few subjects?

Attempts to define and measure quality too often come at the cost of innovation. At present, states’ standardized testing regimes assume that all students should progress at the same pace across all subjects — a system that is anathema to reforms like competency-based learning which dispense with Carnegie units. Moreover, the focus on a few subjects both creates a perverse incentive for schools to focus on those subjects to the exclusion of others and overlooks the other, often more important areas where a school may be performing quite well. As AEI’s Michael McShane wrote:

Recently, I have been influenced by the work of Northwestern University economist Kirabo Jackson, whose fascinating NBER working paper calls into serious question policy’s recent overreliance on math and reading scores as the primary measure of the “goodness” of schools and teachers. As it turns out, teachers have important and measurable impacts on both the cognitive and non-cognitive development of students. While it’s certainly true that test scores can tell us something important about a teacher, what is troubling for the test-score types is that it looks like (1) non-cognitive scores are better predictors of later life success (completing high school, taking the SAT, and going to college) and (2) that it is not the same set of teachers that is good at raising both cognitive and non-cognitive measures.

Such has to be the same for schools, right? If there are teachers that are increasing non-cognitive, but not cognitive skills, surely there are schools that are doing the same. As a result, trying to assess if a school is “good” or “bad” relies on a complex web of preferences and objective measures that, quite frankly, cannot be taken into account in a centralized accountability system. We need something more sophisticated, and something that can respect a diverse conception of what “good” and “bad” means.

This is not to say that there should be no standards or accountability. The question is who imposes the accountability on whom. As I’ve noted previously, the absence of a government-imposed standard does not imply the lack of any standards. Rather, it leaves space for competing standards, which in turn fosters innovation and diversity. Parents can then evaluate the quality of education providers based on their own experience and the expert evaluations of appropriate external providers, and the entire system evolves as parents select the providers that best meet their children’s needs.

So yes, policymakers should be humble about what they know or think they know, but we can have greater confidence in a system that channels dispersed knowledge to produce greater quality and innovation. This is more than mere “intellectual play.” It’s the process by which we’ve seen enormous gains in productivity and quality in nearly every other sector in the last century — not top-down technocratic tinkering but bottom-up experimentation, evaluation, and evolution in a free market.

Texas Pummeling of California Begins to Resemble Child Abuse

May 8, 2014

(Guest Post by Matthew Ladner)

So you’ve probably all heard that Toyota is moving their HQ from California to Texas (their moving trucks will be driving right through **ahem** Arizona and New Mexico btw) but that is old news.  Now comes word that Houston has outdone the entire state of California for new housing starts.



Brilliant Health Care Solution Discovered!

April 3, 2014


(Guest post by Greg Forster)

Shorter Yuval Levin: The Feds couldn’t make the Obamacare website in three years, then they outsourced the job to the private sector, which did it in six weeks, and are now bragging this proves Big Government can do the big jobs after all. So the obvious thing to do is outsource the actual provision of the health care to the private sector, declare victory and go home. The Gordian Knot of Big Government, cut at last!

Refuting Rauch and EPI on the Economics of Productivity

December 12, 2012

Hard Work U 3

(Guest post by Greg Forster)

Many readers of JPGB will be familiar with the hard-left, union-friendly Economic Policy Institute. A recent article by Jonthan Rauch uses some EPI graphs to argue that the U.S. economy no longer rewards working-class employees for productivity. Over on Hang Together, I say the graphs are deceptive. The problem is a decline in productivity in the workers, caused by – JPGB readers will be shocked – lousy K-12 schools (and also a loss of the older religious work ethic).

If you’re familiar with EPI’s work, you won’t be surprised – Jay, Marcus and I took on some very shoddy work they did on teacher pay back in Education Myths.

Jordan Increased Income Inequality on the Bulls while Making All the Players Wealthier

July 11, 2012

(Guest Post by Matthew Ladner)

Fun piece by Matthew Schonfield in the Journal today. Strangely the guys riding the pine on the Bulls in 1998 making four times as much as their equivalents in 1984 did not feel the need to bang on drums to protest income inequality. Also read Iowahawk’s particle physics/health care mashup.

Excellence in Failure

October 18, 2011

It’s long been a goal of mine to be so awful at a job that they have to pay me to leave.  Unfortunately, excellence in failure is something that has escaped me — even though I normally seek excellence in all things.

But you’ll be happy to know that football coaches, superintendents, CEOs, and even large corporations have all too often perfected the art of sucking so bad that people pay them for that failure.

These large severance packages are generally a problem when the people offering the package are doing so with OPM — Other People’s Money.  Athletic directors, school boards, boards of directors, and the government find it so much easier to be generous when the money they are offering to their failed coaches, superintendents, CEOs, and large corporations is not their own money.

The Occupy Wall Street folks have (rightly) highlighted the sweet deals offered to failed CEOs and corporations from tax funds, but they tend not to mention the frequency with which superintendents are given large severance packages with OPM.  Yes, the average size of the superintendent packages tends to be much smaller, but there are so many more of them that it adds up to real money.

A Chicago Tribune analysis last summer found:

The newspaper’s review of more than 100 superintendent contracts, financial records and severance agreements over a decade revealed that boards have handed out six-figure separation checks; district-paid health care; cash or retirement credit for hundreds of sick days; and, in one case, a Mercedes — all to be rid of superintendents….

“Boards have not been held responsible because they do not care about taxpayers, period. … They do not care about how much money they spend,” said Kenneth Williams, board president in Thornton Township High School District 205, which recently approved a $350,000-plus severance package for J. Kamala Buckner, a veteran superintendent. Williams tried unsuccessfully to rescind the package in May….

Using available state data, the Tribune tracked the number of superintendents in Illinois school districts from 2000 to 2010, finding nearly half had gone through three or more superintendents.  That turnover not only fuels buyout deals but can take a toll on issues ranging from policy to student achievement….

Changeover also means some superintendents get multiple severance payouts.

Rosemary Hendricks got a $132,000 settlement in 2009 after filing a lawsuit against Hoover-Schrum District 157, where she had served as superintendent about a year. Earlier, she had gotten a $75,000 settlement in Bellwood District 88, where she had a short stint as superintendent, records show. She is back as Bellwood superintendent.

Of course, sometimes these generous severance packages are the fault of boards, not the departing executive.  Boards sometimes choose to get rid of someone on a whim or simply because the majority composition of the board changes.  These reckless changes by boards to get rid of someone under contract or who could justly sue for wrongful termination, force boards to fork over large sums of OPM to avoid litigation.

My point is the irresponsibility that OPM encourages.  OPM encourages organizations to write contracts that are excessively long and generous and then require large severance packages to get out of them.  OPM encourages changing leadership without cause and at great cost.  OPM makes it so much easier to justify the bailout to avoid “systemic risk” or to promote “stability.”  And of course OPM facilitates coaches, superintendents, CEOs, and corporations to make unreasonable demands, take unreasonable risks, and fail catastrophically.

OPM encourages excellence in failure.

Classic: Milton Friedman Versus…”Michael Moore”

August 3, 2011

(Guest post by Greg Forster)

Do not, I beg you, do not go another day without watching this:

The young man asking the question, and persistently coming back time and again for more punishment, is Michael Moore someone who reminded the original YouTube poster of a young Michael Moore. This is circa 1977-78.

[Update: Below, commenter Alsadius reports this isn’t Michael Moore after all. Sure enough, the original YouTube poster has changed the video description to clarify: “I thought the metaphor would be obvious, seeing as how the kid is a skinny redhead, while Michael Moore… well, isn’t a skinny redhead. I apologize for the confusion.” It was too good to check! ;) I’ve amended the post title. FWIW, the video’s worth your time even if only one of the interlocutors is an intellectual titan of the 20th century.]

Milton does not have the world’s most highly polished interpersonal skills, but he cares deeply about ideas and he desperately, desperately wants this highly motivated young man to broaden his horizons and begin to understand the buried assumptions in his thinking and the real stakes involved in these issues. Too bad he didn’t take the opportunity.

HT Outside the Beltway


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