Viewpoint: The education competition myth

Most of the fundamental conditions of capitalism don't exist in the world of public education, the author asserts..

I received lots of feedback from my eSchool News article last year, “Viewpoint: Why education is not like business,” which postulated there was a fundamental fallacy in viewing the world of public education through the lens of normal business paradigms.

An overwhelming number of the comments I received were positive and supportive (and gave additional examples of such fallacy), but a few folks thought I was just perpetuating the problem of government being resistant to change, serving its own interests rather than those of the public, and apologizing for a lack of innovation.  As I mentioned in that article, I’m a strong believer in capitalism and have devoted most of my professional life to profit-driven pursuits.

The distinction I drew was that most of the fundamental conditions of capitalism don’t exist (and we wouldn’t want them to exist) in the world of public education.  In short, it’s what defines a “public good”–just like our military or highways, which have to operate to a large degree outside of laissez faire economics.

Many readers and fellow school board members have asked me to elaborate on a specific area referenced in the previous article–the notion of competition among schools.  It continues to be a great debate within the education community as to whether competition is a good thing or a bad thing.  On the one hand, many in the field say that competition just works, regardless of the arena–the pressure to perform better is a rising tide that will lift all boats, and of course this argument is central to many in the charter school movement.

On the other hand, many educational leaders suggest that educators aren’t affected by these sorts of pressures, and that competition actually harms students.  Unfortunately, this debate misses the larger point.  In a sense, both sides are mostly wrong, and if anything, the very premise of the debate is flawed.

It’s not whether competition works or whether it doesn’t work; the question is whether it can exist at all.  Just like capitalism is predicated on the free flow of information, capital, and labor, competition has prerequisites.  In this article, I have parsed them into individual conditions required for a healthy and effective competitive environment, including: (a) Customer Switching Ability, (b) Provider Capacity, (c) Existence of Clear Success Metrics, (d) Incentives to Win, (e) Minimal Downside of Having Losers, and (f) Having a Level Playing Field.

Customer Switching Ability–The first predicate condition for competition is the ability for customers to change providers with minimal friction.  Said another way, competition is based on the premise that “customers vote with their feet,” meaning they can easily pick (and change) the services and products that they feel best serve their needs.  Implicit in this premise is the requirement that customers are able to seamlessly change their provider without incurring extra cost, hassle, or some other side effect from making such a switch.

If customers cannot vote with their feet, then competition will have no effect.  Let’s use an example of where such friction can exist.  If you try two restaurants, and you decide that the one 10 miles away from you is superior to the one a block away from you, you will still probably make the trip and go to the farther one.  The reason you can do this with minimal friction is that you don’t eat there every day, making the cost for the extra travel trivial.  On the other hand, if you were somehow required to only eat at one restaurant each and every day, it would suddenly be a burden to drive back and forth to the farther restaurant.  If physical distance is a factor in consuming any product or service, friction is created proportionately to both that distance and the frequency in which that distance must be traveled to consume the product.

Schools, unlike restaurants, must be “consumed” every day by design.  So, the choice of any family to pick schools is inherently limited–in many cases, the cost is just too high to travel every day to a distant school.  So, even if there is a “choice” theoretically or legally, there may not be one, practically speaking.  And, even if changing schools were practical, it can only be done at limited times.  Most parents would properly resist switching their children’s school in the middle of the year, and in any case switching schools in the middle of a school year is generally detrimental to a student regardless of whether they are switching to a “better” school.  Parents would also not consider switching schools at the end of every school year–further limiting the ability of competitive forces to effect a change.  Admittedly, one of the ways families can vote with their feet is by moving homes, but because where someone lives is the result of many factors (and practically, a family can only move a limited number of times), great friction still exists and any competitive pressure would operate only over a long period of time, if at all.

So, here’s the rub–with very high “switching” costs, it’s unrealistic to believe that even if one school were obviously better than another, students would have the seamless ability to pick the “better” school if physical distance is at all a factor.  What happens instead is the classic “cherry picking” effect, whereby parents who have the means (time, money, or other resources) are better able to commit to sending their child to a different school, while those without the means in practice have no such choice.  So, if your customers can’t really switch, competitive pressure is limited and very slow at best.  If anything, the pressure that should exist on poor-performing schools would be masked by the fundamental stickiness of the customers, and we create a potentially worse situation because we assume that competition will work its magic–when in reality we’re ignoring poorer performing schools whose customers ultimately have no choice.

Even for the parents who can exercise this choice, the situation is not all positive. If we give an incentive for them to travel to a more distant school, we potentially make it more difficult for them to actively participate in their children’s education–by volunteering at school, on PTAs, and just being present on campus, especially in the lower grades.  Often one of the main factors separating high performing schools from their lower performing counterparts is the partnership a school has with its parents.  Choice associated with greater physical distance only hampers this partnership.

Provider Capacity–In addition to having an environment where customers can seamlessly switch providers, another condition of successful competition is the requirement that the competitors can add capacity to meet the new demand (and/or raise prices) from these new customers who vote with their feet.  That’s relatively easy for most businesses, but fairly difficult for a school whose service capacity is largely based on its physical capacity (and certainly a public school can’t regulate demand by price).  And there is a limit to the number of schools that can practically be in the same community before the student population is so far divided among those schools that diseconomies of scale would dwarf the potential benefit of competition (making it more akin to a “natural monopoly,” which I discuss in more detail below). So, at best, even if competitive pressures were to exist and customers could switch seamlessly, the actual providers–the schools–could only change very slowly to meet such demand.

Existence of Clear Success Metrics–The next condition of competition is to have a scoreboard.  Unlike Charlie Sheen, you have to be able to define what is “winning.”  In business, this is fairly simple.  A corporation’s duty is to maximize shareholder value.  So, putting any other measure aside, one wins by increasing one’s stock price and providing a strong return to investors.  Of course, this is related to other business fundamentals such as revenue, growth, margin, and other metrics, but at least almost everyone in business agrees on the set of metrics that make up the scoreboard.

This is not true in schools.  People often point to standardized test scores, but as metrics they are limited in many ways, including the fact that standardized tests measure only a small fraction of the value that schools deliver, and test scores more often reflect the population of the students than the quality of the school or its teaching.

And perhaps most importantly, the value provided by schools is created over–and is only evident over–a very long time horizon, making it extremely difficult to effectively compare institutions.  Yes, all things being equal, higher scores are better than lower ones, but a singular reliance on them is not only deficient, but dangerous–at the end of the day, it doesn’t actually tell you how a school is teaching, and certainly does not indicate how your child is learning.

Lastly, we must ask to whom such value is delivered.  As a stockholder in a company, it is fairly clear that I personally receive value when my stock’s price goes up, whereas the stakeholders in the success of public schools are much more diverse.  Of course, the student receives a bulk of the value, but so does everyone else in the community.  In fact, the entire value proposition of public education is based on the notion that the public is better off when it pays to educate all of its future residents. How do we measure the value flowing to everyone else?  This is the nature of a public good and why we provide the service through tax revenue rather than through direct purchase from the consumer.  I am the first to say that we need a better set of metrics to measure the value being created by schools, school districts, and even individual teachers.  But in the absence of a clearly defined scoreboard that measures the multiple dimensions of value delivered to the multiple beneficiaries, parents really don’t have full, complete, and comparative information to make informed “buying” decisions that theoretically drive such competitive pressure.

Incentives to Win–But let’s assume we can somehow define “winning” (and despite my criticism of it, let’s imagine that test scores can indeed define it).  The act of winning must deliver some benefit to the winner, because without which, the pressure of competition wouldn’t have any effect as there would be no reward for behavioral change.  In the private sector, this usually means financial gain for the company, for its shareholders, and even for its employees.  As Apple Inc. developed winning products, its stock price rose to make it the most valuable company in the world, and of course that enriched its shareholders and its employees (and in particular, its management).  Naturally, there can be non-financial rewards as well from winning–career advancement, fame, etc.  These personal rewards–whether they be financial or otherwise–are essential to driving behavioral change and creating a direct effect on how employees conduct their day to day business.

In public schools, it is rare that such benefits exist to any significant degree.  Certainly there could be “bragging rights” for being in a high-performing school, but I would suggest that pales in comparison to the incentives that exist in the private sector.  Of course, the natural question then is, “Why don’t we change the compensation system to create these benefits?”  I agree that the traditional compensation system in public schools needs to be reformed, and I would certainly like to see compensation more aligned with merit and performance (how we measure that is the subject of a whole other article) as opposed to tenure and the more traditional methods, but as a school isn’t inherently a profit-maximizing business, such incentives will always be limited relative to private sector counterparts.

Minimal Downside of Having Losers–If competition breeds “winners,” it assumes it’s acceptable to have “losers.”  If one retailer goes out of business, I’ll buy from another.  In schools, even if we knew with certainty that a school was underperforming (despite the problems with measurement and the time horizon mentioned above), do we want the school to lose?  Losing often takes years, and we may find out years later that, although we put competitive pressure on the schools and eventually migrated most students to a better school, we sacrificed those kids who didn’t (or couldn’t) defect to the “better” school.  It’s a pain if I spend some money on a product that didn’t work and then the company goes bankrupt, but it’s a tragedy to fail certain kids waiting on the pressure of the free market to work its magic.  Kids only go through school once–we rarely get a “mulligan.”  For me, a better question is: “How can we create an environment that allows all schools to be winners?”

Having a Level Playing Field–As discussed in “Viewpoint: Why Education is Not Like Business”, one of the fallacies of comparing business to public schools is that the former can pick its customers, whereas public institutions need to serve everyone.  Inherent in the notion of competition is that you’re competing for someone–a certain sub-set of the population.  If schools could freely compete like businesses (let’s say in a purely voucher system), there would be a big segment that no one would fight for.  Those kids and their families would be left unserved or underserved.

But there is a better analogy in the private sector–natural monopolies.  Natural monopolies are companies like utilities where the cost of creating competition is actually higher than the value of such competition (imagine five companies running electric power to your house–the massive inefficiency would dwarf the value of competitive pressure).  That is why certain companies like utilities are allowed to keep their monopoly status but are regulated instead.

In markets where natural monopolies exist but “alternate” providers were allowed to compete, amazing unintended consequences emerged.  When AT&T was broken up in 1984, the resulting seven “Baby Bells” were each required to provide service to every household in the country (“universal service”), while at the same time the market was deregulated to allow other providers to compete while not being subject to the same restrictions.  The Baby Bells had to effectively “cross-subsidize” the costlier (often rural) customers from the more lucrative business customers, while the new firms didn’t need to.  Guess what happened?  New start-up telephone companies grabbed the lucrative business market, offering a better value as they weren’t forced to cross-subsidize.  This wasn’t competition on a level playing field.  Sound familiar?  In many ways, this is exactly what private schools and charter schools do in relation to the overall public school system.  They don’t create competitive pressure—rather, many schools just cherry pick and create a larger burden on the public entity, which is required to serve all children, many of whom require substantially more resources.

Many may view this article as one bashing charter schools.  To be clear, it is not.  Many school districts (including ours) have high functioning charter schools, and I value them for the potential “laboratory” they create to test out new teaching and learning materials, technologies, methodologies, and personnel management strategies.  However, we should not be under the illusion that charter schools create competition.  Certainly one can point to examples where the existence of a charter or private school made the community put pressure on the public schools to improve, but due to all of the fundamental lack of conditions to fulfill what is otherwise the beauty of competition, such examples will always be the exception rather than the rule.  But then, it begs the question, if the primary value of charter schools is flexibility and value of experimentation, why don’t we just give most public schools that same ability?

Also, nothing above should suggest that pressure to improve doesn’t –or shouldn’t–exist in public schools.  It absolutely must to motivate school boards, superintendents, administrators, principals, and teachers to do the best job they possibly can.  Many studies show that the difference in teaching quality is greater among the teachers within a single school than the difference in average across schools.  So then, how can we build a system to better reward excellent teaching and to create the appropriate peer pressure on the entire team to be at peak performance?

And just because we can’t define “winning” very well doesn’t mean that we don’t hold teachers, principals, and school districts accountable.  But this is the fundamental role of our local political system.  Each community needs easily accessible and useful information with multiple measures of success, and community members must stay involved and hold its schools accountable though their elected representatives.  So, instead of pitting every school against one another, let’s give schools the resources–and then hold them accountable–to ensure that they are doing the best they can to help all of their students reach their potential and provide the “public good” benefit to all of us from a well-educated citizenry.

Seth Rosenblatt is a school board member in San Carlos, Calif., and he also serves on the board of the San Mateo County School Boards Association. For his day job, he is a strategy and marketing consultant for technology companies.

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