Picking Schools is Like Picking Prisons
A criticism of the idea that choice and competition promotes quality
We are going to do a little thought experiment. Imagine that free-market enthusiasts have just taken over government and declared they will revolutionize every sector of the economy by introducing more choice and more markets. From now on, the prison system will operate like the private school system in Sweden: Every inmate gets a government voucher to pay for rent at his or her prison of choice. We add a little twist to the Swedish formula by allowing every inmate to pay extra to get a nicer prison or prison cell.
Ranking agencies will pop up, rating prisons on a variety of criteria to help prisoners pick their "dream" prison. Meanwhile, prisons themselves will compete to attract the highest paying and best behaved inmates.
What will be the outcome of this thought experiment, and why am I making this thought experiment in the first place? I am creating this thought experiment because I am highly critical of the idea that higher quality schools can be achieved through competition in a marketplace. Unfortunately, many have a hard time accepting that markets don't always lower prices and improve quality. Hence, sometimes we need extreme examples to help demonstrate why something is a bad idea in principle.
I want to explore a number of topics in the context of a competitive free market in prisons:
What criteria will be used to rate the quality and performance of different prisons by ranking agencies?
What makes a prison an attractive choice to an inmate?
What makes an inmate attractive to a prison?
How will prisons attract the most desirable inmates?
While discussing these topics, I am going to relate them to behavior in a competitive school market. Let us jump in.
How Market Competition Lowers Standards
In our hypothetical market, prisons would be incentivized to lower discipline to make prisons more attractive to inmates. Nobody would want an old fashion gorilla with a stick as prison guard? Instead, they would prefer something closer to the Nordic approach, where prison guards are closer to social workers. Yet even in the Nordic system, the aim is still to help rehabilitate prisoners. Demands are still made on prisoners to make an effort to improve. It means things like taking education, working and learning new skills. It means you are pushed to work on your problems, such as anger management. Thus, while prison guards should not be primitive gorillas primarily employed to instill fear and keep people in line, one can take reduction in discipline too far. Imagine a prison making zero demands with next to no guards? Probably not a good idea.
We have seen similar developments in the Swedish school system. Schools start lowering discipline to attract students. When students assume the role of customers, then the ability of the school to reprimand or scold them becomes limited. Remember "the customer is always right" mantra dominating free market thinking.
When students turn into customers, standards deteriorate. Students want to get as good grade as possible and will thus pick the schools with the most lax demands. In Norway, we have seen massive grade inflation in private schools. It is a rather obvious development. Students would like to pick schools which make it easier to get a high grade.
I recall this behavior from my own high school days when there was time to pick elective subjects. Many students picked subjects with low difficulty to make it easier to raise their grade average, rather than picking subjects which would be useful or interesting to study.
It was even more noticeable in a country like the US, which eagerly embrace the notion of competition and free markets. I remember getting a B on my first test at American grad school. I was thrilled because getting the second-best grade was basically the best you could ever hope for in the Norwegian educational system. Getting the top mark required exceptional performance. Maybe one or two students in your class could pull that off. I was less thrilled about that B grade when I realized that in American university, As are handed out like candy. In fact, it was a pretty common grade thanks to years of grade inflation.
How Markets Drive Inequality
A business want as many high-paying customers as possible. Private prisons and private schools would want to charge as much as they can get away with. To get the highest paying customers, the rich, you need to have something desirable to offer.
A prison could offer great facilities to attract affluent inmates. The same applies to private university. They will look to have swanky campus areas. In Sweden, schools are spending more money on getting flashy laptops and nicer looking facilities and ads, rather than spending money improving quality of teaching.
Yet, facilities alone are not enough. Students picking a school and inmates picking a prison would want to look at some kind of ranking. Organizations ranking universities are well known. They show things like average grades, published papers etc. What kind of statistics would an inmate picking the best prison look for? They want to pick a prison with low number of shankings and violent episodes. They want a prison with good rehabilitation statistics.
Prisons can, of course, have a really great system for rehabilitation and reduction in violence. Yet, that is hard. It is much easier to "cheat" by selecting the inmates who behave best. How do you get the best behaving prisoners to apply to your prison? After all, they may not be the ones who can afford to go to your posh premium prison.
Prisons can copy the system private universities already pioneered: Scholarships. It is a sneaky way of creaming the inmate population. Let the least violent prisoners with the best chance of rehabilitation enter your prison at a significantly reduced rate.
What will the long-term effects of such a dynamic? The best behaved and richest inmates will accumulate in a few expensive, posh "elite" prisons. Whenever the rich inmates commit violence they would do their best to cover that up, after all they will be the main source of income for the prison company. Don't expect the same treatment towards those who got in on a scholarship. Those inmates don't improve the profits, only the prison statistics. Hence, as soon as those inmates stop acting perfectly, they will get kicked out.
We see the same effect in the American university system. The highest talent is drawn into expensive universities through scholarships, while all sorts of backdoors are made to allow poorly performing and badly behaved rich students to enter. Whenever they behave badly, the university is eager to paper over it. You don't want to lose high-paying customers. Donald Trump is perhaps an excellent example of how rotten this system is. He was a terrible, substandard student with significant behavior problems, you may recall his history of violence against teachers. Yet, Trump got into a prestigious school like Wharton, nonetheless. It is believed he cheated. Why was that not uncovered when the school saw how badly he performed in class? It is hard to get a school to uncover cheating when the school profits from cheating.
I know, from speaking to people who worked abroad in private schools, how they at times were instructed to not fail underperforming students. Doing so would cut into profits. I don't know if there is a relation, but I was surprised by how much less strict exams were in the US when I studied there. For instance, I noticed cheating was far more prevalent than I had experienced in Norway and later in the Netherlands. There were also far more opportunities to allow underperforming students to pass. If you did badly on one test, you could always make up for it by doing extra work assigned by your professor. Students naturally don't question such practices because it benefits them. Yet, this one of many ways in which schools can lower the difficulty level to avoid loosing paying customers.
The flip side of this system is: What happens to all those who don't get into the prestigious institutions? The inmates who are poor and only have average good behavior will be the big losers. They may be better behaved than the rich inmates at posh prisons, but the posh prisons will not want them, as they offer no opportunity to improve statistics or extra profits. Instead, these inmates will end up in the most violent and poorly run prisons. Without the ability to attract high-paying customers, prisons will instead focus on cost reduction to profit. That means reducing standards to the bare minimum. They will have given up on rehabilitation and doing anything for prisoners. What is the point? Crowded with the most violent inmates, the prisons will have minimal attraction value. They only take the people who cannot go anywhere else.
There will likely be some mid-tier prisons for people with some money and half-decent behavior. What we end up with is a highly stratified and segmented system. Differences between inmates will be amplified. The "good" inmates will improve from being around a lot of other well-behaved inmates. The rich inmates will benefit from a much better environment than everybody else. The worst inmates will be concentrated in very low standard prisons, where they become even worse.
Market-oriented systems tend to amplify differences in this way. A classic example was covered by Malcom Gladwell in Outliers. He found that Hockey players in the NHL tended to be born in between January and March. The effect is apparently more extreme in soccer. Why on Earth would your birthdate decide if you are good enough to get into the NHL? Let me quote from Outliers:
Canada also takes hockey really seriously, so coaches start streaming the best hockey players into elite programs, where they practice more and play more games and get better coaching, as early as 8 or 9. But who tends to be the "best" player at age 8 or 8? The oldest, of course -- the kids born nearest the cut-off date, who can be as much as almost a year older than kids born at the other end of the cut-off date. When you are 8 years old, 10 or 11 extra months of maturity means a lot.
Thus, small differences are amplified over time by giving better conditions to those who are slightly better and thus ensuring that their advantage grows.
The same effect has been observed in the Swedish school system. Inequality has started to rise quickly after market reforms and privatization got introduced. Perhaps we could have tolerated this development if it actually improved school quality. Yet, the majority of differences between schools is simply because students have been separated by skill, not because some schools are organized better than others. Let me quote from a Forbes article, Do Universities Provide Reliable Signaling?
Were graduates from the best universities better performers than their peers from less prestigious institutions? Not really. While students from the best universities did perform better than their peers, the improvement was actually incredibly small.
This was found when considering the academic performance of a student before entering University. Yet, elite universities still matter because of the prestige and status that comes with it:
The researchers highlight that hiring a graduate from a university ranked in the top 10 in the United States would require paying nearly 50% more than if you had hired graduates from colleges from within the City University New York (CUNY) system, who are ranked in the top 100 but not towards the top.
We see the same in professional sports. Richer teams buy better players, which means they win more, which means they can buy even better players. Hence, the difference in performance gets amplified over time without there necessarily being any qualitative difference in how each sport team organizes things.
How Markets Create Red Tape
Let me start by quoting wikipedia on red tape:
Red tape is an idiom referring to regulations or conformity to formal rules or standards which are claimed to be excessive, rigid or redundant, or to bureaucracy claimed to hinder or prevent action or decision-making. It is usually applied to governments, corporations, and other large organizations.
Imagine some prisons have a large number of inmates escaping each year due to lax security. The number of escapes is recorded by the ranking agencies, so inmates can look at escape statistics to judge which prison to apply to. Which prison do you think inmates will favor? The ones which are easy to escape from naturally. In typical market fashion, prisons would respond to meet customer preferences by lowering their security standards. Maybe one prison could really market themselves as the prison "without walls".
What do you think happens over time? Newspapers will write stories about how many inmates escape, and the public would get outraged. Government will be pressured to act. Yet, the free-market enthusiastic government in our though-experiment are not ready to give up on markets. Instead of ending the market for prisons, they decide to apply a bit of regulation.
Perhaps many inmates escaped because prison walls were too low? Let's mandate a minimum height on the walls. Prisons comply, but figure out that a good way of getting through the mandate is by making walls so thin that inmates can knock holes in them. Now a new regulation is put in place: Walls must have a minimum thickness. Hah, they didn't say anything about material used. Clever prisons make thick and tall walls made of porous material which is easy to dig through.
We can imagine numerous scenarios like this. What is the fundamental problem? The interests of the prisons don't align with the interests of society at large. Prisons will have a constant incentive to work around regulations. After all, they profit from being easy to escape from. The end result is that we end up with a very complex set of regulations.
Now imagine 20 years have passed, and the prison market is a mess. Countries with publicly run prisons perform much better, and the prisons cost much less to operate. Free market enthusiasts will not be deterred: Instead, they will argue that the reason prisons do so poorly in their country is because of the government. It is excess regulation and red tape by the government which is at fault. If only there was a true free market, these for-profit prisons would perform remarkable.
Does any of this sound familiar? It should because it is precisely what has happened in the American health care sector. For-profit health care is fundamentally at odds with the interests of society. The more sick the population is, the more money they make. Hence, there is no real incentive to make health care good. It is a bit like how prisons benefit from prisoners escaping.
Rather than ending for-profit health care, the US sought to regulate its way out of all the problems. People naturally got outraged over people dying on hospital steps because they couldn't pay. Because taxes are so unpopular in the US, the government didn't offer to pay for the people dying on the hospital steps. Instead, they slapped on more regulation, requiring hospitals to treat them free of charge. Naturally, this is not in the interest of for-profit hospitals which found numerous ways around these requirements which caused the creation of more regulations.
This has been the reoccurring theme in US health care in every possible aspect of health care delivery. Government has sought to slap on regulation to circumvent the fact that the wishes of society and the interests of health care corporations are completely misaligned. Thus, ironically you end up in a situation where privatized health care has far more complex regulation than public health care, which doesn't have the same process to amplify the need for red tape.
Why Do Markets Sometimes Fail?
Free market economics has undoubtedly helped achieve a lot of prosperity. But if markets have been so great at making better cars, phones and houses, why does it fail at making better prisons, education, and health care? The problem stems from a combination of badly aligned incentives and basic limitations of us humans.
The premise of free market economics is that companies compete to provide the highest quality product or service at the most reasonable price. We may articulate this a bit better by noting that markets will always be stratified. Not everyone can afford products and services at the same price. Hence, there are several markets operating at the same time for any given product category. Different companies are competing at different price points.
For instance, there is a market for cars, but this market is segmented into premium brands and mass market brands. Toyota and Nissan do not compete for the same customers as Mercedes and BMW. Likewise, Rolls-Royce and Bugatti compete for very different customers from Fiat. However, within each segment, there are numerous companies trying to make the best possible product at a given price point.
The theory is that because customers will buy the products and services which have the highest quality and reasonable price, the bad companies will get outcompeted or must up their game by offering better products next year. Hence, an arms race in quality develops, which favors the consumer.
Why does this beneficial mechanism fail to materialize in health care, education, prison systems and many other areas of society? Because consumers are not Godlike omnipotent creatures who know everything, there is to know about every product and can judge the merits of different features in a completely cool and rational manner. In reality, us consumers are rather stupid most of the time. We are easily swayed by ads which offer zero useful information about a product. Marketing companies discovered long time ago that objective facts were of little value in ads. What matters is our emotions. Hence, ads today are all about manipulating emotions rather than appealing to our cool rational intellect.
Secondly, we humans are terrible at making decisions which are a benefit to ourselves long term. If we were actually good at this then none of us would be smoking, eating junk food and drinking too much beer. Instead, we would be eating broccoli, carrots, and fish every day of the week. We give into indulgences which give short-term pleasure, while giving long-term misery. I, personally, eat too many chocolate bars and drink too much soda. I know it isn't good for me, but like many others, I give into short-term urges.
The net effect is that companies are not really trying to make objectively good products and services, but things which will be perceived as good or desirable by us. Thus, nothing stops the market from pushing out companies making genuinely good products and services in favor of companies making mediocre ones. If products are not such that they get perceived as good and desirable, then it doesn't matter that they are actually good.
I have long had an interest in user experience and design. In a former life, I was actually head of user interface and experience at a company. An interesting factoid many are not aware of us that simple and easy to use products don't actually sell well. If you sell a product with very few buttons, customers will perceive it as less advanced than a poorly designed product with lots of buttons. Ironically, we choose needless complexity over simplicity. I can almost hear you shouting, "What about Apple! They prove you are wrong!" Indeed, and here is the kicker: They way to sell simple and easy to use products is to design them as luxury items. If a product looks too simple, you can compensate by using more expensive materials and thus signaling that despite apparent simplicity, this product is actually a quality product.
Financial institutions and banks exemplify a variety of this problem. It is hard to show how good a bank is compared to how you can show how good a phone or car is. Thus, financial institutions prefer impressive buildings and employees in impeccable smart dresses and expensive haircuts. It is all about image creation because consumers cannot actually perceive directly the quality of your services.
That is a general problem with complex services such as health care, education, and prison. Observing quality is hard. That means such markets become broken and perverse incentives are easily created. As we covered in this story, the issue isn't merely that markets are ineffective, but that they are directly harmful. The act of competition actually drives down quality and increase red tape.
In my field of software development, this problem has been observed numerous times. Initially, one tried to measure programmer productivity by counting the number of lines of code written. Developers responded by a lot of inefficient, sloppy copy-paste coding. The absurdity would be uncovered each time a developer reduced the number of lines of code while adding more features and improving performance of the program. By the logic of the reward system, the programmer should have been penalized for reducing the number of lines of code, yet managers could clearly see that he had improved the software.
Then they tried to measure programmer productivity by number of bugs (defects) fixed. That also failed, as programmers would just introduce easy to fix bugs while coding for them to be fixed later.
All complex professions have this kind of problem. In the US, the police are often rewarded by number of arrests to incentivize better performance. The result is that they arrest insignificant small fish doing minor crimes which are easy to process, while the big shots are ignored.
The teaching profession has seen similar issues. Eagerness to measure performance leads to lots of test taking in school. The result is that teachers increasingly stop teaching and start teaching to the test. These are some examples of how an excessive free market and competition oriented approach to improve quality can end up achieving the direct opposite.
Conclusion
There are no quick fixes. Health care, prison, education, policing and many other common public services are extremely complex and difficult to get right. Sprinkling some magic free market fairy dust on top will not work wonders. No, let me correct that. It is not merely that it doesn't work, but that it actively makes things worse.
The flawed underlying assumption is that humans can only be motivated by monetary selfish greed. While humans are not entirely unselfish, most of us do have altruistic traits and actually want to do a good job if given a chance. Thus rather than measuring results to death one may be wiser to focus on feedback from the people doing the job whether prison guards, teachers, police, or doctors. Make sure these people like their job and are motivated to do their job as well as possible.
An occasional test to check if one is on the right track is fine, but excessive testing leads to the classic Heisenberg problem: A system under observation changes. If you push performance measurement and rewards hard, the whole system will change in unhealthy ways. If you measure lines of code written by a developer on a rare occasion, then it is a semi-decent proxy for how productive that coder is. However, if you frequently measure it and clarify that his bonus and salary depends on it, then the measurement will quickly cease to have meaning.
Race to the bottom is not a good analogy because the purpose of the process is to come out with a credential or the knowledge putting one on the path to more lucrative/higher status/personally enjoyable jobs, unlike with prison. If schools lower standards too much, the value of that credential is lost, or the truth comes out in standardized tests or work performance (if you can't do the job your school indicated you should be able to do, you'll get fired quickly and haven't really benefited). There may be an issue with time delay there, but civil torts might fix that: former students or their parents could sue schools for failing to uphold their end of the deal.
With that said, there are some subjects which are taught because they create positive externalities, not benefits to the individual: primarily, the knowledge needed to participate in representative government beneficially. What's covered in the standardized tests might take care of that, but it's a valid objection to school choice.
The inequality issue is a real one, but dragging some down in equality's name is not useful. Also, what you described happens currently in less direct ways, a big example being schools being funded by local property taxes from areas with zoning that prohibits low-cost housing. Even if you changed school funding to fix that, voluntary donations through social pressure could have a similar effect.
If the red tape issue is applicable to schools, why aren't all private schools in America drowning under red tape? Also, the issue in your analogy would have a simple solution: a law that a prison's operators have to pay a fine every time a prisoner escapes, or that any prison with above a certain rate of escapes is automatically shut down, instead of mandating a bunch of specific ways to prevent prisoners from escaping. As I noted above, test scores are the equivalent to this for schools.
Poor information, poor decision making, and perverse incentives in markets are problems as applied to schools, but again, test scores.
The purpose of public education is to socialize children to the needs of the State. Apparently that now includes convincing them to hate white people and submit to sexual mutilation. I think market forces prevent that sort of true evil from occurring. People who talk about “market failure” generally mean that the market did not deliver the specific results that THEY wanted.