In Sync: How Business Responds to Gratis Government

Whenever people criticize government provision of a product, clever analysts often demur that private suppliers who compete with government have exactly the same problems.  Part of Helland and Tabarrok‘s case for the Baumol effect in education, for example, is that prices have risen at the same rate in both the public and private sectors:

Prices are much lower at public than at private institutions. The vertical scale is a ratio scale, so equal slopes mean equal rates of growth. Thus, although prices are lower at public institutions, the rate of growth in prices has been similar at private and public institutions. Between 1980 and 2015, real prices more than doubled.

OK, let’s step back.  Picture a typical government service.  The price: gratis.  The quality: mediocre.  Private competition, however, remains legal.  Should we expect the private part of the market to look just as it would under laissez-faire?

No way.  Unless the government rations the free mediocre product, consumers have virtually no reason to ever pay for products of mediocre or lower quality out of their own pockets.   At minimum, then, government’s gratis products kill private production of all products of equal or lower quality – a textbook case of predatory pricing.

That’s not all.  Gratis production also effectively kills private provision of products of moderately higher-than-mediocre quality.  After all, if you can get a C+ product for free, who wants to pay full price for a B- alternative?  With gratis public provision, private providers must convince consumers that the marginal quality improvement is worth the total price of the product.  A tall order.

What does this mean?  Well, if public schools add more low-value services, private schools must keep pace in order to compete.  If public schools add more sports, more specialized teachers, or more courses, private schools that fail to keep up will lose their customers.  The first rule of private competition against gratis government is: Always keep your product quality well above the government’s.  This remains true even if the government adds services that consumers value well below cost.  If you can get them for free from the government, why pay extra for a private school that refuses to offer them?

The lesson: When government supplies free (or highly subsidized) products, we should expect private suppliers to supply gold-plated versions of the standard government-issue.  As a result, their prices and costs will be closely synced.

There are admittedly some exceptions: If government is spending money for no gain at all, private competitors needn’t bother.  If government supplies numerous expensive low-value services, private competitors might decide to just outshine the government on other dimensions.  Most realistically, if government refuses to provide some cheap, highly-valued options (such as religious education), then private competitors can win customers by filling the gap.

Yet overall, when there is a dominant public sector with a private fringe, we should expect the Helland-Tabarrok pattern – without or without a Baumol effect.  Given the pathologies of the public sector, it’s nice to have a private option, but don’t get too excited.  The private options will generally be extravagant, because gratis government strangles budget-friendly alternatives.  Tragically, this in turn sustains the illusion that in the absence of government, only the rich would be able to afford whatever the government now provides.

P.S. Another reason to expect public and private education to closely resemble each other is that both are almost always non-profit.  Morally, yes, there is a major difference between public and private non-profits.  Economically, however, they’re very much alike, because both give managers flimsy incentives to raise value or cut costs.

Open This Content

Education Entrepreneurs Are the Only Ones Who Can Disrupt the Status Quo

Transforming entrenched systems and industries comes through disruptive innovation and entrepreneurship. Coined by Harvard Business School professor Clayton Christensen, disruptive innovation is the process by which new ideas and inventions create value and ultimately topple existing competitors. A visionary individual or group spots opportunity and develops new solutions that meet consumer demand faster, better, and more cheaply. This innovation improves our lives through efficiency and cost-effectiveness, allowing us to keep more of our hard-earned money with better service and satisfaction.

Independent and Innovative Education

It shouldn’t come as a surprise that most of the organizations I highlight in Unschooled are independently run. Disruptive innovation may originate with individual ingenuity, but it is fueled by consumer demand and value creation within the private sector. Not that the public sector hasn’t tried. Back in the 1960s and early 1970s, there was a surge of interest in reforming mass schooling from within. The Open Classroom movement emerged, encouraging less restrictive classrooms and more choice and freedom for students.

In Philadelphia, Pennsylvania, in 1967, the city’s public school system launched its Parkway Program, sometimes known as the “school without walls,” in which young people were able to select their own classes and learn throughout various spots across the city, including private businesses, museums, local universities, and public spaces. In 1970, the New York Times called the Parkway Program “one of the nation’s boldest experiments in public education,” noting that over ten thousand students applied for only five hundred available slots.

Any meaningful and lasting transformation in American education must come from the private sector.

Within a decade, though, momentum for programs like Parkway waned. New public education fads appeared and old ones faded. Ultimately, Parkway was reabsorbed into the larger school district, becoming indistinguishable from Philadelphia’s other public schools.

More recently, a fully self-directed district high school that I also write about in Unschooled was set to open this fall in Somerville, Massachusetts, a city just outside of Boston. Powderhouse Studios had everything going for it, including relief from onerous public schooling requirements under the state’s Innovative Schools legislation and a $10 million grant from XQ Super School, an organization co-founded by Laurene Powell Jobs, wife of the late Steve Jobs of Apple, Inc. After seven years of concessions and compromise by the school’s leaders, the city’s school committee ultimately voted unanimously this spring not to approve Powderhouse’s opening.

Private Sector Reforms

As much as many parents and educators would like to believe that meaningful reforms can occur within the mass compulsory schooling model, real education innovation occurs most successfully and enduringly through the private sector. Free from state curriculum requirements, standardized testing mandates, and restrictions on hiring and firing, private educational organizations are able to experiment and innovate, with parents as the key stakeholders to ensure accountability.

Many of these schools and organizations are tiny non-profit enterprises that serve a small group of children and are often financially inaccessible to many families. But disruptive innovation in education has the capacity to bring real change to the masses—if educators embrace an entrepreneurial, free-market mindset.

In his book, Conscious Capitalism: Liberating the Heroic Spirit of Business, Whole Foods co-founder John Mackey writes about his early days immersed in the left countercultural movement of the late-1960s and 1970s. He lived on a commune in Texas for two years and became active in the local food co-op movement.

Entrepreneurship and Capitalism

Mackey writes in the book’s introduction:

Politically, I drifted into progressivism (or liberalism or social democracy) and embraced the ideology that business and corporations were essentially evil because they selfishly sought only profits. In contrast to evil corporations, I believed that nonprofit organizations and government were “good,” because they altruistically worked for the public interest, not for profit.

The longer Mackey was part of the non-profit food co-op movement, the more disenchanted he became with its ideology. He writes:

I ultimately became disillusioned with the co-op movement because there seemed to be little room for entrepreneurial creativity; virtually every decision was politicized.

Discovering the power of free-market capitalism, Mackey was able to scale his vision for healthy food and a healthier planet in ways that small, local, non-profit food co-ops were unable to, leading many more people to have access to organic food and many more jobs created to provide that food.

Mackey writes about his path from progressive anti-capitalist to proud entrepreneur:

I learned that free enterprise, when combined with property rights, innovation, the rule of law, and constitutionally limited democratic government, results in societies that maximize social prosperity and establish conditions that promote human happiness and well-being—not just for the rich, but for the larger society, including the poor. I had become a businessperson and a capitalist, and I had discovered that business and capitalism, while not perfect, were both fundamentally good and ethical.

Education needs its own Whole Foods moment. It needs entrepreneurial innovators to move small, non-profit organizations into larger-scale, profitable enterprises that serve more families and students with better outcomes and lower costs. Now with Amazon’s acquisition of Whole Foods, the potential for greater accessibility at lower costs increases.

Seeds of an enterprising moment in education are beginning to sprout. Acton Academy is a low-cost, self-directed network of private schools, often operating on a hybrid homeschool model, that is expanding across the country by educators committed to entrepreneurship and educational creativity. In an article for Forbes, Bill Frezza describes Acton Academy’s potential to remake the educational landscape. He writes:

With the right program as a model, anyone who home schools his kids can operate an Acton Academy. And not just for his or her own children, but for a schoolhouse full of them. Run the numbers and you can even make a lucrative living while charging tuition well below than that of most conventional private schools.

Standardized Equals Restrictive

Similarly, the Academy of Thought and Industry is a for-profit network of schools that could trigger necessary disruption in education. Founder Michael Strong acknowledges the power of profit-driven free enterprise to create lasting educational change that is higher-quality, lower-cost, and ultimately scalable. He says:

Any time something is profitable, that is what makes it able to go to scale. The reason we have low-cost groceries now (compared to 100 years ago) is because it’s profitable to bring food to millions and millions of people.

Any meaningful and lasting transformation in American education must come from the private sector. Public schools have tried to innovate; yet compulsory mass schooling has become more restrictive, standardized, and all-consuming of American childhood than at any other time in our history. To enact real, scalable change in education—just as Whole Foods did with the organic food movement—entrepreneurial parents and educators will need to imagine and implement new models of learning. These models must be rooted in the time-tested principles of free-market capitalism, or what Mackey describes as

the heroic nature of business, its essential virtues, and its extraordinary potential to do more good for more people in a sustained manner than any other social or economic system ever invented by humankind.

Entrepreneurs can help to replace an obsolete schooling model of education with a new learning one fit for the innovation era. In fact, they may be the only ones who can move us from where we are to where we could be.

Listen to Kerry McDonald discuss unschooling with FEE president emeritus Lawrence Reed (12:00 mark):

Open This Content

The Business Models of Sports Leagues

Most pro sports in the US are built around business models that make no market sense. They are quasi-monopolistic guilds classified as non-profits but run for profit.

The incumbent advantages and tribal fandom means they aren’t going anywhere soon. Still, there’s so much room for innovation, and I love thinking about changes to existing leagues, or brand new leagues, or even brand new sports.

The first thing I like to think about is more market mechanisms and fewer central plans. Price floors and ceilings and collective bargaining could get scrapped. The draft order being pre-ordained for losing teams could be scrapped. Imagine if draft picks had a true open market, and rookie contracts too. Teams would be forced to choose whether to keep a player or sign a new one. Picks would be weighed against free agents equally, with no bargain deals for new draft picks. This would be great for sports fans and media, because we’d get to have endless debate about whether a guy coming out of college was really worth picking up at the same price as an aging star. Comparison is the cash crop of sports talk.

I think about college sports a lot too. They’re a total corrupt racket top to bottom, and the players get the rawest end of the deal. Not getting paid by the school is one thing, but being banned from accepting pay to do commercials or other off-field/court activity while the college forces you to shill for their fundraisers? Sheesh. More talent will and should opt out of this high risk low reward charade if they have an alternate way to develop skills and transition to the pros.

Obviously, competing with college by creating a minor league is an uphill slog. Few things run deeper than college fan loyalty. I’d love to see some enterprising university sell their sports team. Split if off. Privatize it. Let it run as an independent business, paying the players, negotiating TV deals, etc. Let them keep the records, tradition, history, and mascot. Let them play in the on-campus stadium. Let students get discounted admission, and pay the university some fee every year.

You could turn pre-pro sports into something far more rational. Pro teams and scouts could get involved without scandal. Shoe deals could be made. Players could be traded. Players would do so much better for themselves, and fans would get to keep the same loyalties and colors and rivalries. Colleges would lose their stranglehold of control over the team, it is true. But they’d get great PR, avoid dirtiness of dealing with scandal, exploitation, fake-passing athletes in classes, coaches high salaries making professors envious, etc.

That’s just scratching the surface. I have a whole mental folder of ideas for leagues and sports, including some far-future ideas about gravity-free environments and what kind of sport works best with an extra degree of movement freedom.

Open This Content

This One Weird Trick for Legalizing Marijuana

Governor Andrew Cuomo “insisted Monday (April 1) that New York will pass a law to legalize recreational pot before the Legislature adjourns in June,” The New York Post reports. He’s been promising legalization for some time. Many New Yorkers had hoped the measure would be included in this year’s state budget.

What’s the hold-up? “You still need to control and regulate,” says Cuomo. “You don’t want 14-year-olds having access to marijuana, so how you do it is frankly the tougher part of the equation. In the rush of the budget, we couldn’t do it intelligently.”

News flash for Governor Cuomo and New York’s legislators (and for politicians in all the other states lagging the legalization trend): Those 14-year-olds already have access to marijuana. So does everyone else.

Sure, the price of “illegal” marijuana might be slightly higher than the price of “legal” marijuana (to make the profits worth the risk of going to jail), but anyone who wants a bag of weed can get one in a New York minute.

And they’ll still be able to get it after legalization, no matter what byzantine regulatory schemes the politicians come up with and no matter how solemnly they aver that those schemes are “for the chilllllldren.”

Here’s a weird trick for legalizing marijuana:

Legalize marijuana.

Yes, that’s really all there is to it.

If you feel some irrational need to “protect the children” from a plant, set an age limit. Problem solved.

Yes, they’ll ignore it.  Just like they ignore the age limits on alcohol and tobacco. They’ll ignore it even if you only allow it to be sold in licensed facilities. They’ll get fake IDs, or find helpful adults, or just buy it on the black market like they do now. They’ll ignore it, and they’ll ignore you. But hey, knock yourself out.

Confused about how to tax marijuana? Fine — DON’T tax it. Or at least don’t tax it any differently than any other similar plant. Deem it a non-taxable food, or a taxable confection, or a taxable houseplant. There, you’re done.

There’s nothing complicated about this. People have used marijuana for millennia. New Yorkers have used marijuana since there have been New Yorkers. They’re using marijuana now and they’ll be using marijuana a hundred years from now.

The only relevant question is whether or not they should go to jail for using it.

The only correct answer to that question is no, they shouldn’t.

Legalize it, New York. All you other states, too. Let’s get this silly war on a plant over with. The plant won. The plant has never not been winning. Surrender already. It’s good policy, it’s good politics, and it’s just the right thing to do.

Open This Content

Liberty isn’t Utopia

Statists. You can’t even get them to ask (or acknowledge) the right questions.

Whether the topic is “borders”, drugs, guns, rights, or socialism, they address all kinds of peripheral questions which seem to legitimize more statism when answered, but they avoid the real questions which would completely invalidate statism.

Is it intentional or are they really that ignorant? I honestly don’t know, and suspect it is some of both.

For example, I recently heard one arguing against ending prohibition because when the “laws” against Cannabis are loosened and the cartels’ profits go down, the cartels turn to smuggling opioids. What? How does that justify propping up the failure which is prohibition? All you’ve managed to point out is that if you relax prohibition in a piecemeal way, the cartels will focus on those areas where the profit motive is still high due to continued prohibition.

When you sink that deep into statism, you can’t seem to see beyond statism.

So, look at my crude graph . Sorry, it’s not to scale or painted (a lame Back to the Future joke).

See how I readily admit there are still problems with a condition of zero statism (total liberty)?

So?

Utopia isn’t an option.

But statists don’t like that admission and it’s a deal-breaker for them. Liberty would have to be Utopia with no problems at all for them to accept it in place of their favored statist Dystopia– no matter the specific issue.

Obviously, death– with no more problems for the dead– will result from increased statism long before total statism (whatever that may be) is achieved, but the exact place where that happens will vary from individual to individual and is hard to pin down. Use your imagination to adjust the exact scale of the graph.

We live somewhere along the line between zero statism (liberty) and total statism. The exact spot is debatable, but it’s irrelevant for my point. Wherever we are, there are problems– more problems than there would be under liberty. But statists don’t like liberty so that option is unthinkable and invisible to them. They advocate more statism to solve the problems which exist; most of which are worsened due to statism. They will claim that with added statism, the total problems will decrease. That’s not reality. More statism equals more problems.

But, because there are problems, and they can see ways to justify more statism because of those problems, they are blind to solutions which don’t mean more statism. They won’t even ask questions which might risk opening their eyes to the reality.

Open This Content

Without Profit, There Would Be No Investment

Among the numerous fallacies embraced by socialism, one of the most notable is completely ignoring the value of investment and risk. Socialists love to talk about the value of “labor” and how profit is made on the backs of “labor,” but they ignore the fundamentals of human nature and of how the market actually works.

Labor doesn’t invest in building a widget factory. Labor doesn’t take the risk of widgets going out of style or being supplanted by something new in the market. Labor doesn’t pay for health and safety inspections. Labor doesn’t take the hit of depreciation.

Labor is paid first, before any profit is seen. Labor loses nothing when the factory burns down. Labor makes no investments and takes no risks, and therefore labor is not entitled to share in the reward. Labor makes a direct trade of time and skill for money. Beyond that, labor has no claim on the possible profits which a capitalist’s investment and risk may generate.

To be a laborer rather than a capitalist is a choice. It is a safe choice in which risk is traded for certainty and the possibility of profit is traded for the guarantee of wages. Most people are both laborers and capitalists. We engage in some direct trades of time and skill for money but we also make investments—be it in the stock market, bonds, cryptocurrencies, or even a loan (with interest) to a friend or neighbor.

Profit is not earned through labor. Wages are earned through labor. Profit is earned through investment and risk. The socialist sees this as unfair, but the socialist cannot explain why anyone would undertake a risky investment if there were no possibility of profit. Instead, the socialist is forced to embrace central planning as an alternative to all the productivity of the free market.

The socialist would have “the state” take on all the risk of investment in industry, infrastructure, research and development, and all other such things and then selflessly distribute the profits it will theoretically generate to the people—the laborers—regardless of what role or lack thereof they played in the generation of said profits.

What could possibly go wrong?

Everything, as it turns out. Unlike capitalists, who regularly fail, go bankrupt, and lose everything, the state cannot afford to take such significant risks. The state lacks the motivation of the capitalist and so it recoils when faced with the same odds at which the capitalist would jump. Even if one ignores the corruption and inefficiency which are endemic to all states, the state is just too risk averse to make meaningful gains in any sectors where it has primacy.

The possibility of profit is what makes investment and risk worthwhile. Without it, there is no incentive for investment and risk, and without investment and risk, there is no societal advancement, no innovation, and no wealth creation. People aren’t going to risk their resources unless the reward for doing so outweighs the risk. That’s basic human nature.

Contrary to what you may have heard, socialism doesn’t “work on paper” any better than it works in practice. It just doesn’t work, period. Attempting to remove profit from human existence removes the motivation which drives humanity to improve itself. Even if socialism didn’t fail catastrophically (as it always has when put into practice), it would, at best, still lead to the devolution of mankind as productivity ground to a halt. That’s not a future anyone should advocate.

Open This Content