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An Economic Rationale for Public Schools: The Search Continues

by Edwin G. West - 1986

It is argued that "Why Educational Vouchers May Be Bad Economics," by Michael Krashinsky, fails to account for numerous variables and is inconclusive given the lack of supporting evidence. (Source: ERIC)


The older discipline of basic or traditional economics confined itself to the study of rational behavior by individuals who relate to each other through one particular social mechanism, the market. There is little remaining disagreement on some of its essential findings, including especially the conclusion that government-created monopoly imposes welfare costs on consumers. The public school monopoly is no exception. Krashinsky concedes that “the free market works reasonably well in supplying a wide variety of goods and services . . . to reject vouchers seems to reject basic economics.”1 His criticism appears to be that, although vouchers would indeed combat the public school monopoly, a complete evaluation needs to extend beyond basic economics to an analysis of relevant nonmarket interactions. In particular we should examine unique public, as distinct from private (market), benefits from education.

Modern economics does, however, embrace this public nonmarket dimension. New additions to the discipline such as “the economics of politics,” “public choice,” and the government expenditure side of “public finance” are all devoted to this task. Krashinsky’s reasoning in fact is located in the latter, more modern, area of economics. And within it the differences among economists do not imply that economics is fruitless or unscientific. It is not universal agreement but rather the willingness to consider all the evidence and all the variables that constitutes the scientific approach. I shall argue, indeed, that the differences between Krashinsky and myself stem from the fact that, in my opinion, he has not considered all the economically relevant aspects of the question. His reasoning, in other words, seems to me to constitute an economics that is incomplete.

As is well known, the modern form of the discipline is conventionally divided into positive and normative economics. The former contains the strictly scientific aspect and attempts to answer the question of the true nature of existing economic reality. Normative issues, however, such as those that involve the question of “what ought to be done,” also require economic analysis. The usual requirement here is an examination of the most efficient means for attaining clearly defined social ends. Since Krashinsky’s critique involves both normative and positive economics it will be appropriate to deal with each. The next section of this article will examine the arguments from normative economics; this will be followed by a review of positive economic “predictions.” The section following will focus attention on the legal or constitutional barriers to vouchers that are peculiar to the United States, and the last section presents my concluding comments.


Choosing the most efficient means for clearly defined ends in education raises several questions about Krashinsky’s reasoning. In particular we may first ask whether the goals he mentions are clearly defined. He admits himself that the public external benefits that are central to his analysis are hard to measure objectively and that the ingredients of a quality education that embraces public benefits are difficult to write down. I shall, nevertheless, postpone this line of criticism and assume that the public benefits he speaks of are unambiguous.

The essence of Krashinsky’s argument can then be stated in terms of what in economics is called “joint supply.” Education simultaneously produces two distinct goods: private benefits and public benefits. This is perfectly analogous to the classic joint-supply example in economics literature of the sheep producing two goods, wool and mutton. The question is how to determine the correct product mix, bearing in mind that this is a joint-supply example where variable proportions are possible so that a switch from one breed of sheep to another will result in a better quality of wool and a lower quality of mutton and vice versa. In other words, the cost of higher quality wool is the inevitable reduction in the quality of meat (and vice versa). I shall argue similarly that, under Krashinsky’s assumptions, the cost of more (or better quality) public benefits from education appears in terms of fewer (or worse quality) average private benefits.

Accepting for the moment Krashinsky’s proposition that public benefits are best supplied by public schools, the cost of obtaining a marginal increase of such benefits (by an enlargement of the public sector of schooling) appears in the form of a marginal reduction of average private benefits per unit of expenditure because the resultant switch from private to public schools strengthens the monopoly elements in education. Krashinsky accepts that there are what he calls “problems within public education.” He agrees that  “public producers can be unresponsive and inefficient.” Most economists recognize that such inefficiency stems from the monopoly structure and is absent (or much less serious) where competition prevails, as it does for instance in a private system of education.

On the same reasoning, the further expansion of the public system in the quest for public benefits will be obtained at an increasing price of education as the public monopoly is progressively strengthened. In technical terms the relevant concave production possibility curve relating to private and public benefits will shift inward. Meanwhile, since both types of benefits produce welfare, the marginal rate of substitution relating to them will be negative. Any plausible set of social indifference curves will thus be convex to the origin. Maximum welfare will occur at the tangency between one such indifference curve and a production possibility curve that relates to something less than a full monopoly public system. Society will choose a combination of a given quantity of public benefits with a given quantity of private benefits consistent with a simultaneous choice of some private and some public schooling. There will be no absolutes: Public benefits will not be considered to the exclusion of private benefits and vice versa. Instead, a “compromise” will be settled on. A policy of vouchers that ensures some maintenance of competition, and therefore typically of some significantly sized private system, is thus consistent with a state of social optimum even on Krashinsky’s own assumptions.

In a world (apparently preferred by Krashinsky) where no private schools are allowed, the complete public school monopoly would (jointly) supply x units of public and y units of private benefits per dollar of public expenditure. Consider next the probable effects of a proposal designed to encourage (with the aid of a voucher plan) the entry of competitive private schools to cater to approximately 20 percent of the total school population. On Krashinsky’s assumption, while the overall volume of private benefits would rise, that of public benefits would fall since the new private schools are less able to generate them than are the public schools.

Notice, however, that the total private benefits would increase because of the improved efficiency within the public schools as well as of the contribution of the new competitive private schools. Public schools would in fact begin to compete with each other as well as with the new local private schools. The increase in private benefits from public schooling would manifest itself, among other things, in the improvement in students’ verbal and written skills. (As we shall see, a nontrivial number of individuals at present go through the public school system without even attaining functional literacy.) Now since literacy is usually a necessary condition for the generation of the public benefits that Krashinsky speaks of, the increase of it following the introduction of a competitive private system by means of vouchers would lead to gains in public as well as private benefits from education. It is surely plausible that these gains could more than outweigh any reduction of public benefits caused by the migration of some students from public to private schools. (In technical terms, the production possibility curve would shift to the right.)

In these circumstances, and provided the voucher plan was designed to be pro-poor in all other respects, it would be entirely negative to oppose it since this would be to aquiesce in blocking serious improvements in the educational opportunity of all children (and especially the poor), as well as in the prevention of the enjoyment of increased public benefits from education by all citizens. Even if the net result were a marginal decline in public benefits, society might be resigned to it if the increase in private benefits provided sufficient compensation. Krashinsky appears to give the impression that in the joint-supply situation education’s public benefit (analogous, e.g., to mutton) is somehow “more important” than its private benefit (analogous to wool). In fact, as just demonstrated, a trade-off is required between them, just as happens in the markets for wool and mutton, and it is for society, not Krashinsky, to determine what this trade-off is. Economics, meanwhile, is useful in pursuing its normal task of attempting to identify all the costs as well as all the benefits.

Similar comments can be made about Krashinsky’s proposition that the public benefits are so subtle that the transaction costs are too high for the government to contract out to private suppliers. Even if this were the case, family consumers of private benefits from education could also claim that the education quality they are seeking is so inarticulable that the transaction costs of delegating the task to governments are prohibitive. In any case a state government still faces similar transaction costs in issuing instructions to thousands of school districts, which in turn face even higher costs in supervising tens of thousands of individual public schools.

There is another component of Krashinsky’s logic that makes the trade-off still less inimical to vouchers than he appears to believe. He argues that one of the public (external) benefits from education is that of increasing economic growth: “Since this education has significant private benefits, the public interest is identical to the private interest and parents will themselves seek to ensure this type of education.” The public interest here is obviously that of encouraging an educational supply that generates the largest output (and therefore the largest rate of growth) for a given expenditure (or produces a given output for lowest cost). The appropriate choice of institutions in this case is obviously the free market, for—compared with the public school monopoly—this will yield the most efficient results in terms of private benefits and ipso facto in terms of the public benefit of increased growth. It follows that Krashinsky’s preference for a public system will, on his own logic, result in the pursuit of some kinds of external benefits (e.g., the diffusion of common values) to the detriment of others (e.g., economic growth). A further type of trade-off is therefore required and a weighting system is needed to indicate the relevant priorities between the separate externalities themselves. Again a compromise is called for, and one that, for reasons stated previously, is not likely to dictate one form of supply exclusively over another.

Consider now the remaining public benefits that Krashinsky admits are hard to measure objectively. These include the alleviation of poverty, equal opportunity, and the teaching of common values. On the matter of poverty alleviation and equality of opportunity, Krashinsky is on very controversial ground. Friedman, the originator of the voucher idea in its modern form, claims that he too is in favor of the reduction of both poverty and unequal opportunity and that in both respects the voucher system would improve upon the present state of the world.2 In Friedman’s work, liberty, equality of opportunity, and the reduction of poverty are complementary and not competitive goals of his voucher system.3 The main argument is that lower-income families, who are usually trapped in large-city ghetto schools, would benefit the most from vouchers: “Are the supermarkets available to different economic groups anything like so divergent in quality as the schools? Vouchers would improve the quality of the public schooling available to the rich hardly at all; to the middle class, moderately; to the lower-income class, enormbusly.“4

Krashinsky may respond that such a view is merely one opinion. Yet his own position is simply that of an implicit assertion that public schools do in fact promote equality of opportunity better than a voucher system would. In order to decide between competing propositions we need some kind of evidence. While there is none to be found in Krashinsky’s essay, some empirical material is now appearing that would seem to support the Friedmans’ diagnosis. The 1983 Gallup Poll, for instance, showed that while 51 percent of the total population were in favor of a voucher scheme, of black respondents 64 percent were in favor. In the same year the U.S. Department of Education published the results of an elaborate survey on tuition tax credits (which have the same general purpose and effects as vouchers) with the following similar conclusion: “The inclination to take advantage of a tax credit was greatest among two groups of public school parents—nonwhite and lower-status parents who are currently under represented in private schools and those with prior interest in and knowledge about private schools.”5 Judging from this evidence, therefore, the majority of the poorest educational consumers do not believe that the present public education system is more conducive to their interests than a voucher system would be. This finding is in striking conflict with Krashinsky’s view.

Consider next his argument that children should be exposed to majoritarian values, since some sharing of values is necessary in a democratic society. The implicit assumption here is that children in public schools are exposed to such values because they inevitably contain a fully representative population. I have already pointed out, however, that, because of residential stratification, public schools do not typically contain a cross-section of the population. In fact, considerable polarization according to class, race, and income takes place in the public system.

Krashinsky argues, in the same vein, that education produces the external benefit of providing the informed and literate electorate necessary for a democratic society. This appears to be another testable hypothesis. No evidence is given, however, to support it. This is not surprising since the claim that public schools have been producing a literate electorate has been seriously challenged by recent findings of four major national studies on public education published in 1983.6

The National Commission on Excellence revealed that about 13 percent of all seventeen-year-olds, and 40 percent of minority youth, are functionally illiterate. Krashinsky’s implicit claim that the public schools are adequately producing an “informed electorate” is severely weakened, therefore, when we appeal to the facts. The prediction concerning any monopoly is that, compared with competition, all outputs will be produced at a lower quality for a given expense (or at a greater expense for a given quality). In this case the lack of efficiency of a monopoly school system in producing literacy is a reflection on its ability to produce the other public benefits mentioned. Indeed, some might argue that the very ability of a public school system to fail to produce an informed electorate is one reason the voucher system in the United States has not so far had much success.


The focus now will be on the argument made by Krashinsky that, were the cost savings to be anything near the magnitude quoted by voucher supporters, politicians espousing vouchers would obtain more votes from householders than they would lose from the special-interest groups comprising administrators and others employed by the public system.

One response to this proposition is that today economists are not necessarily surprised at the lack of progress in establishing vouchers. Most of them no longer see the political process as an all-powerful God who shares their preoccupation with efficiency. The political process, in fact, also considers values other than efficiency and especially those of income redistribution. But the income redistribution that results does not derive from some common ethic that sees virtue in redistributing income more equally. As George Stigler recently observed:

The beneficiaries of income distribution in a modern state include an unbelievably varied assortment of groups: oil millionaires, the largest banks in the nation, the elderly, families without male heads, airline pi lots, Harvard professors, government employees, city landowners, and beekeepers. The losers include automobile drivers, small bank depositors, young workers, owners of television sets, landlords, non-minority students and employers, Grumman Stockholders and owners of some California coastal lands.7

Among the government employees who are among Stigler’s above-quoted beneficiaries of income redistribution, workers in the public education sector comprise a significant proportion. To balance this on the losing side Stigler would, presumably, include parents and children.

Economists have been arguing for years against several other inefficiencies produced by government legislation, including those stemming from minimum-wage laws, rent controls, agricultural marketing arrangements, and several other government monopoly creations or regulations. The fact that, despite the economists’ criticisms, such phenomena have not yet disappeared does not lead them to abandon their logic or cause them to assume that perhaps after all they have overlooked some hidden advantages in government-provided arrangements. To do so in all cases, indeed, would imply the assumption of a perfectly competitive political process. In fact, it is now acknowledged that the process is imperfect or biased.

Krashinsky appears to believe that because “there has been little practical enthusiasm among states . . . for vouchers” this represents the typical wishes of the democratic electorate. In fact, he openly states that “vouchers have not been adopted because voters are concerned about protecting the public interest in education.” Yet the Gallup Poll mentioned above showed 51 percent of the total population in favor of vouchers. Surely such discrepancy between state action and voters’ wishes is one measure of the imperfection in the political process (although, as we shall see, it is inaccurate to assert that all states have shown no enthusiasm for vouchers). Krashinsky himself recognizes some of the reasons for distortions in the democratic machinery: Taxpayers are widely dispersed and the transaction costs of organizing them politically are enormous compared with those involved in organizing special-interest groups such as teacher organizations. It is always possible, however, that public debate, such as that being conducted here, has a chance of reducing the information gap. If it succeeds, the political equilibrium will alter.

As previously explained, positive economics, which attempts to understand the world as it is, uses facts to test hypotheses. We have already appealed to evidence with respect to numerous propositions. Consider now some facts associated with the struggle for vouchers that happen to go in the opposite direction from those expected from Krashinsky’s view of the world. In 1985 four state governors—two Republicans; Alexander (Tenn.) and Janklow (SD.), and two Democrats, Perpich (Minn.) and Lamm (Colo.)—openly advocated educational vouchers as a means of educational reform. Three out of the four introduced bills into the 1985 sessions of their legislatures. In California a new initiative is being submitted this year under the title “The California Schools Voucher Act.” Some element of the voucher system, meanwhile, actually exists in parts of Connecticut and Maine.8 The Department of Education is now introducing its own voucher plan.

Vouchers in principle and practice can appear under disguised forms. Any government arrangement that makes it easier for parents to purchase private education has voucher-like results. The practice, for instance, in many countries outside the United States of subsidizing private schools in proportion to enrollment has economic consequences that are in the same direction. Consider an educational voucher worth $2,000. This would allow a family to purchase up to $2,000 worth of education at the (inspected) private school of its choice. The revenue of such a school would therefore be a positive and constant function of enrollment.9 Compare this with a general system of public funding of private schools. Suppose the funding is on the basis of $2,000 per student. The decision of a family to choose one particular school over another will trigger a mechanism that will direct $2,000 to the chosen school in the same way as would a voucher of that value. In both cases the school’s revenue is a positive and constant function of enrollment.

Public funding of private schools occurs in most other countries in the developed world and no longer provokes widespread controversy.10 In Canada it is to be found in Quebec, Manitoba, Saskatchewan, British Columbia, and Alberta. Coming from Toronto, Krashinsky will be aware that Ontario citizens have the option of directing their tax contributions to a separate (Catholic) school system. In none of these other parts of the world does there seem to be significant inhibition in contracting for the production of public benefits from education outside the public system, a fact that challenges both the generality of Krashinsky’s central theory and his statement that “neither have educational vouchers been adopted in most other countries.”


In the United States, the main barriers to voucher systems (and their variants) are often legal rather than political. Thus in the early 1970s, while there was a strong political willingness to introduce vouchers in states in the Northeast, the opposition came from the courts (see, for instance, Committee for Public Education v. Nyquist, 413 U.S. 756 [1973]). This brings me to the special circumstances surrounding the current attempt of the Department of Education to launch a special voucher system of its own. According to Secretary Bennett, this new interest in vouchers has been “quickened” by the Supreme Court’s decision on July 1985 in Aguilar v. Felton (U.S. [1985] LW 5014).11 That ruling struck down a New York program that sent public school teachers into private and parochial schools to provide Chapter 1 remedial services to educationally handicapped and low-income children. The decision was based on the application of judicial criteria previously laid down in Lemon v. Kurtzman (411 U.S. 192 [1971]) and especially on the charge of what the Court calls “excessive entanglement” between church and state.

It is interesting to note that the Aguilar decision was based on a bare majority vote. The extent of the minority’s intensity of feeling against the above arguments in Aguilar is revealed in the words of Chief Justice Burger, one of the four dissenters:

I share Justice White’s concern that the Court’s obsession with the criteria identified in Lemon v. Kurtzman, has led to results that are contrary to the long-range interests of the country. . . . Our responsibility is not to apply tidy formulas by rote; our duty is to determine whether the statute or practice at issue is a step toward establishing a state religion. Federal programs designed to prevent a generation of children from growing up without being able to read effectively are not remotely steps in that direction. . . . The notion that denying these services to students in religious schools is a neutral act to protect us from an Established Church has no support in logic, experience, or history. Rather than showing the neutrality the Court boasts of, it exhibits nothing less than hostility toward religion and the children who attend church-sponsored schools.12

Another dissenter, Justice O’Connor, described the Aguilar judgment as “tragic.” More than 20,000 New York City schoolchildren would be deprived of a “meaningful chance at success in life. ” These were the children who were located in cities “where it is not economically or logistically feasible to provide public facilities for remedial education adjacent to the parochial school.” On the central doctrine on which Aguilar was decided, O’Connor objected: “I disagree with the Court’s analysis of entanglement and I question the utility of entanglement as a separate Establishment Clause standard in most cases."13

According to Krashinsky, two unique and important external benefits from a publicly supplied education are a reduction of poverty and the promotion of equality of opportunity. Yet the Department of Education’s current voucher proposal is aimed at these very objectives, objectives that, in the form of remedial education, can no longer be accomplished by the previous means for many children following the Aguilar decision.

Positive economics, to repeat, recognizes that governments operate to redistribute income as well as to promote efficiency. We have seen that redistribution is not always based on any clear criterion such as the moral desire to protect the poor, but is partly the consequence of political lobbying by special-interest groups whose concentrated benefits from that activity outweigh the costs of organization. The Department of Education’s bid to re-establish educational aid to some of the poorest of the poor through the spread of the voucher plan, in fact, already faces stiff opposition from the educational establishment and its allies in Congress. Teachers’ unions and public officials from big cities, including New York, have been quick to denounce the plan, saying it would undermine public education.14 Their objective, therefore, appears to be not the pursuit of those ends of education that Krashinsky outlines, but the protection by all devices of one particular means (the public school system) that is alleged to attain them. This may be good politics (for the participants mentioned), but, especially in the context of Krashinsky’s assumed social goals, it is difficult to see how he can describe the department’s current voucher plan as bad economics.


Much of Professor Krashinsky’s critique has a legitimate basis or beginning in theoretical economics. In my opinion, however, he needs to develop his reasoning still further and to take into account the numerous additional variables that I have outlined. It is wrong to attribute to all economist students of the voucher system the view that “the transaction costs associated with public production are so much larger than those associated with contracting through the marketplace that one is safe to assume that the latter are essentially zero.” Modern economists acknowledge that transaction costs involved with most institutions are positive. The appropriate search is for the institution with the least cost for a given output. What is required in the final judgment is an appeal to systematic evidence—evidence that should include empirical findings on conventional as well as on transaction costs. Since other economists have attempted such evidence it is erroneous for Krashinsky to claim that there is merely a “conviction” that government is “inevitably” costly and inefficient. Several systematic empirical studies have reported that public supply of a variety of goods and services is dearer than private supply.15 My research and that of Sonstelie has shown that this is also true with respect to public education.16 Such work cannot be brushed off by arguing that voucher advocacy is “one part of a reaction against big and, supposedly, inefficient government.

If Krashinsky objects to available systematic empirical studies of relative costs he should produce his own. Otherwise his position is inconclusive, as is his statement that the transaction costs involved in using markets “can be” more significant than those that occur when production takes place within the public sector.

Finally, the major empirical weakness in Krashinsky’s essay is his failure to give evidence supporting his implicit claim that public schools are actually and efficiently producing the “subtle” public benefits that he is so concerned about. In the absence of such evidence, he may well be chasing a will-o’-the-wisp.

Cite This Article as: Teachers College Record Volume 88 Number 2, 1986, p. 152-162
https://www.tcrecord.org ID Number: 585, Date Accessed: 10/28/2021 3:25:41 AM

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