The role of prices in education

The government’s Free Schools policy is widely regarded as a significant innovation; a radical shake-up of state education. The next logical step – permitting for-profit providers to deliver state-funded education – is still hotly contested and is unlikely to emerge in this parliament.

Yet even if profit-making providers were able to deliver state-funded schooling, this would hardly represent a free market in education. For one thing, almost all discussion of voucher schemes and for-profit provision assumes that prices will be capped.

This misses one of the most crucial benefits of allowing markets to operate. As we know, prices adjust to supply and demand, and in doing so they send out powerful signals to market participants about where they should invest their resources, thus ensuring that demand is met.

Last week, shadow education secretary Stephen Twigg accused the government of ‘ignoring’ what he calls a growing crisis in primary school provision:

Across England we need nearly half a million more primary places - the equivalent of building an extra 2,000 primary schools between now and the general election.

At the moment, the government has only promised an extra 100 new free schools, many of which will be secondaries.

The government seems oblivious to the problem, preferring to focus on pet projects rather than real need.

If we are to improve the number and quality of our primary schools, the government needs to start rolling up its sleeves.’

The problem with providing school places through the public sector is that they have to compete for resources with a whole host of other demands – not just the cost of creating Free Schools or other education priorities, but against healthcare, infrastructure, the armed forces and so on (not to mention that all-consuming budget deficit).

This is a problem for two reasons. Firstly, spending decisions are influenced by political, rather than economic, rationales. That means that fashion, horse-trading and what is likely to have the biggest impact in the polls or at the ballot box have more impact than the real wants and needs of citizens. Secondly, even if this were not the case, politicians simply cannot know what the right level of funding is. This knowledge, as Friedrich Hayek explained, is dispersed among the populous and cannot be consciously gathered by central planners.

By comparison, markets enable all that knowledge to manifest itself through the price mechanism, and ensure that the relative prices that result reflect the real (‘revealed’) preferences of the populous, rather than the preference that politicians assume (or, for that matter, the preferences of the politicians themselves).

Mr. Twigg’s claim that ‘the equivalent of … an extra 2,000 primary schools’ is needed by 2015 probably escapes the full force of Hayek’s knowledge problem (which is the Achilles Heel of most central planning) because the government does have good information on the number of school entrants in 2015 since it knows the number of births in 2010/2011. However, the knowledge problem does still affect where the schools are needed, as nobody can know where in the UK those children will be living in 2015.  

What is more, if Mr. Twigg is right that England faces an imminent shortfall of 450,000 school places, it is surely a damning indictment of the system of centrally planned provision that has prevailed for decades. It is unlikely that simply changing the plan is going to solve the problem.

By comparison, were a real market in education to exist, any shortage in supply would signal to education-entrepreneurs that future demand would be higher, which would either mean that margins or supply could rise – either of which will encourage providers to expand provision, thus quickly meeting rising demand and restoring prices to the equilibrium level. A shortfall in supply would have been swiftly and spontaneously met.

Yet, when the argument finally begins in earnest over for profit provision, there is one thing of which you may be certain: the idea that prices should be allowed to fluctuate freely will be utterly ruled out. 

The government should get out of the way and give tax credits to those who take their kids out of the state schools. Private providers would spring up quickly to meet demand, and state-sector schools would wither away. Eventually the tax credit could be eliminated and tax rates lowered. Why is the IEA accepting the premise that schools should be state-funded? Education is the parents' responsibility and no one else's.

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