The misallocation of resources in state education

The British government spends a staggering £90 billion per annum on education. It is the largest item after health and welfare. However, there is relatively little discussion of whether resources are being allocated efficiently. Are current patterns of spending on education justified by the economic returns? There are good reasons to be sceptical.

Economic theory suggests that a highly politicised, bureaucratic and centrally-planned ‘one-size-fits-all’ approach is likely to be a poor way of allocating scarce resources. Incentives to maximise returns are weak, the scope for market segmentation is severely limited and officials cannot access relevant information. Such a system is also prone to capture by groups promoting particular ideological agendas and/or the interests of producers at the expense of efficiency.

In this context, it is unsurprising that the misallocation of resources appears to be endemic under the current state system. Firstly, a relatively high proportion of young adults leave school having failed to gain basic skills. For example, a recent study found that 17 per cent of school leavers in England were functionally illiterate. It is difficult to argue that the vast cost of such pupils’ schooling is delivering significant economic benefits. Then there is another large group, partly coinciding with the first, consisting of those who move on to work in low-skilled occupations demanding little of the knowledge learnt (or not) in thirteen or fourteen years of compulsory education. People who spend long periods outside the labour market comprise a third group for whom the returns on investment are questionable.

Finally there is the issue of opportunity cost, of which the current system takes little account. For some pupils, the time spent in compulsory schooling might be more profitably spent on alternative activities. The mechanically talented could perhaps benefit more from learning workplace skills, while the academically or artistically gifted might thrive by developing their own interests rather than studying the National Curriculum. There is relatively little scope to make these trade-offs within the existing approach. Moreover, it is important to consider the marginal benefits of state spending on schooling rather than focusing simply on the final outcomes. Children pursuing alternative paths would not be consigned to some kind of educational vacuum; they could learn from parents, siblings, peers, books, computer software and various other sources (note the work of Ivan Illich on learning webs).

Restoring resource-allocation decisions to parents and extended families would help to resolve the problems associated with state education. The financial incentives to avoid squandering resources would be very strong indeed, since there would be a direct effect on household budgets. And competition among providers for parents’ fees would facilitate entrepreneurial discovery, innovation, cost savings and a high degree of market segmentation. Educational services could therefore be more precisely tailored to a child’s circumstances and abilities. Perhaps most importantly, those closest to the child will tend to know most about his or her potential and will make spending decisions accordingly.

‘Free-schools’ policies also have the potential to increase market segmentation and drive up standards through enhanced competition, but continued state control and the constraints of government funding mean that a high degree of resource misallocation remains. Voucher systems may be more effective, particularly if paid at a relatively low rate with families allowed to pay ‘top-up’ fees. However, the potential economic gains from vouchers could be undermined if schooling remained subject to intrusive regulation that restricted choice and hindered the market discovery process. Moreover, these handouts would inevitably distort the incentives facing children and parents with regard to the trade-off between formal education and other options, particularly if government placed strict controls on their deployment.    

Egalitarians will of course object to the potential for inequality in a genuinely free-market system. Yet pronounced inequality is already very evident in state education. For example, wealthy parents buy into the catchments of good schools via the housing market. Moreover, under a voluntary, non-state system there would be enormous scope for philanthropic activity, such as scholarships for bright children from poorer backgrounds. Finally, any potential impact on equality must be set against the wider economic benefits of a more efficient allocation of resources in the education sector and a potentially very large reduction in government spending.

An earlier version of this article appeared on the IEA Blog on 16 May 2014

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