Why Economists Dont Understand Education … but Still Try to Run It

Presentation to the NZARE conference ‘The Politics of Teacher’s Work in Aotearoa/New Zealand’, 24 August, 2002..

Keywords: Education, Governance, Growth and Innovation

Of course all economists know something anecdotally about education, insofar as they, their children and their friends went through an education system. My concern in this presentation is the deep tension between the paradigm economists practise and the paradigm educationalists practise. Indeed, an alternative title for today’s lecture might be that educationalists dont understand economics either. But being an economist I am not competent to give an account from an educationalist’s perspective. That I leave to the audience.

And it is important to acknowledge, as indicated in the subtitle, that economists are deeply professionally interested in education. That interest helps shapes the education system. So it is worth educationalists trying to grasp what economists are on about, and the limitations of their paradigm, in order that they may harness economics for the benefit of education. Indeed, many educationalists have the misunderstood the economics. By recruiting misinterpreted economics to their cause they have frequently done education a disservice.

Education in the Economy

Economist’s interest in economics goes back centuries, but in the late 1950s a couple of innovations provide much of the foundations of economist’s approach since. The first was became known as the neo-classical growth theory revolution. Perhaps the key paper is by the Nobel prize winner in economics, Robert Solow, which showed that increases in output per worker were not simply the consequences of increases in capital per worker. He estimated that only 20 percent of the increases in labour productivity could be attributed to increases in the quantity of capital. His paper described the remaining sources of output, and hence the main source of economic growth, as ‘technology’.
I am using the phrase ‘technical change’ as a shorthand expression for any kind of shift in the production function. Thus slowdowns, speedups, improvements in the education of the labour force, and all sorts of things will appear as ‘technical change’. (Solow’s italics)[1]

Both the science and the education communities were quick to seize upon this ‘technical change’ to argue that their activities were at the centre of economic growth. But Solow’s conclusion is a default. His research shows an unexplained residual in his research which he labels ‘technology’ There is no macro-economic evidence in this research, or virtually anywhere else, that gives any quantitative relationship between the amount spent on education (or research) and economic growth. However, from the time of the Currie report in 1963 it became an act of faith that spending more on education would generate economic growth.

Rich countries do spend more on education than poor country. But they also spend more on furniture. We cannot rule out from such evidence that furniture promotes economic growth. Equally we cannot rule out that education is a consumption good on which a nation spends more as it gets richer.

There is some microeconomic evidence. People with more education and vocational training tend to have higher incomes through their lives than people who do not, following a lower income and additional expenses in their years of training. This suggests that we might think of education as a commercial activity in which the young student ‘invests’ to get a higher (net/after-tax) income in later life. We can calculate the (real) return on this investment. It usually proves to be high, often over 20 percent per annum. The implication is that it is usually commercially wise for a student to acquire additional education and vocational training.

There are a number of problems associated with the calculations – for instance, part of the apparent return will be due to native ability, since the more able students are likely to stay in the education system longer. But, more fundamentally, a return need not mean that the investment contributes to economic growth, any more than a successful payoff on a Lotto ticket.

We can do a different, but related calculation. Instead of looking at the outlays of, and the return to, the student, we can look at the educational outlays of society as a whole (which includes the public spending on the student) and the return to society as whole, which includes the additional taxation he or she pays. Again the return is positive, although usually not as high as for the student. Is society getting a ‘return’ on its ‘investment’?

Neo-classical growth theory says ‘yes’, but that assumes the education process is working like for an ordinary capital investment whose return is measured in market prices which reflect the marginal value of the activity to society. While that seems to be broadly true for many activities – although, there are all sorts of caveats – it seems less likely so for education. Perhaps education is primarily a method of selecting people for jobs, rather than improving their ability to actually contribute to an economy. Last year a Nobel Prize was awarded to economist Michael Spence. An example of his key insight is that a student can signal to potential employers he or she is smart and motivated by achieving academic success in subjects which have little to do the actual job. (MIT economics professor, Paul Krugman, who can never resist a bon mot no matter how unfair, commented ‘a meaner but similar analysis [when Michael Lewis writing in Liar’s Poker] declared that would be-investment bankers studied economics in order to demonstrate their willingness to engage in boring, humiliating activities.’) What is the connection between educational outlays and the graduate’s remuneration in such circumstances? Perhaps the spending is a signal of commitment unrelated to educational achievement, just as a cock’s fine plumage may tell you little about the quality of the bird.

It could be worse. The theory requires that the incomes of graduates reflect the value of the ir activity to the public. But there may be a considerable monopoly element in the pricing, as professions restrict entry and use other devices to maintain high remuneration. Perhaps education is a part of the profession’s conspiracy against the public, in which case the prices they charge and the resulting income are not good indications of social value.

Is Education Only About the Economy?

Moreover, education has benefits which are not easily incorporated into an economic framework. The most disturbing critique arises in John Stuart Mill’s Utilitarianism where he tries to make rigorous the theories of his father James Mill and his father’s mentor Jeremy Bentham.

Mill could see a flaw in the early utilitarian hedonism which underpins so much of today’s neoclassical economics. It assumes that all pleasures were of the same quality. He wrote ‘it is better to be a human dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides.’ Mill’s critique undermines the welfare propositions of market economics. Even if the positive assumptions of neo-classical theory were approximately true, it is difficult to argue that the growth is necessarily beneficial, since the market ranks all pleasures on the same dimension, so that the demands of a happy pig have exactly the same status as those of an unhappy philosopher.

While differing qualities of understanding – of enlightenment – is central to our liberal notions of education, much of which aims to transform satisfied piglets into dissatisfied philosophers, such concerns were far from the minds of those whose rhetoric is that education promotes growth. There was a practical reason why they did. State provided education was getting increasingly expensive. When the Fraser-Beeby notion of the aims of education were articulated in 1938 the education vote amounted to 2.5 percent of GDP. Today, state education costs almost 6.5 percent of GDP. That education was an investment in economic growth is used to justify this huge increase (although a similar expansion in public spending on health services did not use this justification).

There is another role of education which economists have long known – and forgotten: socialisation. It returned to prominence in the 1990s with the fall of the iron curtain. Expectations of positive economic performance that would arrive with the introduction of capitalism have been dashed, as Russia has collapsed into an ugly regime of economic corruption, still producing less than it did under the communism whose poor economic performance was a factor in bringing the old order down.

What these unsavoury goings on reminded economists is that critical to the success of market capitalism is a whole range of social institutions – interactions, values and understandings – which are difficult to define but are clearly crucial. Sometimes they are referred to as ‘social capital’, sometimes ‘trust’, sometimes ‘civil society’, sometimes ‘social coherence’. It is intriguing how little reference there is in economists’ discussions to education’s role in inculcating these social institutions, especially for the young moving out from the family into the wider society. Were the educational system to focus only on the vocational aspect of its function, and ignore its socialisation role, it seems likely that economic output and, indeed, human happiness would suffer.

The Demand Side Implications of the Economic Paradigm of Education

By uncritically making economic growth as the justification for education, many educationalists were adopting an economic paradigm, the policy conclusions from which they would not like, as the economic paradigm overwhelmed the educational one.

The salient example is in the 1989 Review of Post-Compulsory Education and Training (the Hawke Report) which said that public policy should not distinguish between education and vocational training.[2] As a consequence, tertiary education policy increasingly focussed upon the vocational function of the system to the exclusion of any other educational objective. But what the economy wanted was well-trained happy pigs, who are easier to supply as consumers, and easier to manage as workers. So that the parts of tertiary education which are concerned with enlightenment rather than training found themselves increasingly squeezed.

Moreover, when economic policy was redirected in the 1980s towards increased the privatisation of social activity, the education system was captured by economists and by educationalists who thought that economics was the answer was put under the same pressure to privatise and, where that was immediately impractical, to commercialise. Again it was the tertiary system where the most extreme change occurred. The logic of a commercially driven vocational tertiary system is that students are investing in higher future earnings, the training should be dominated by user pays. Since it is impracticable to fund from private sources on the prospect of a return from additional human capital, the government introduced a student loans scheme. An uncritical adoption of an economic model led to a policy which leaves many educationalists (and New Zealanders) uncomfortable.

The scheme’s logic can be readily extended to all post-compulsory education, including that at secondary school. But why stop there? The human capital model says all education is an investment. Should not all state-provided education be funded on the same basis as tertiary education with all students paying fees funded by loans? The first step might be vouchers which can be used to ‘purchase’ education. Ostensibly they are about making the supply of education more competitive, more efficient and more responsive to consumers. But suppose parents are allowed to top up the value of the state-supplied vouchers with private cash. By squeezing the value of vouchers, the top-ups can be made to increase in value and become more widespread. That will force some families to borrow to fund their children’s education, and so move to the commercial logic of the narrow human capital theory model.

There would considerable political resistance to this, but is there an alternative philosophy? The Fraser-Beeby principle is a good start, with its firm statement that each New Zealander has an entitlement to education. Social entitlements were increasingly abandoned under the policies of the 1980s and 1990s (other than entitlements that could be purchased by private income). Suppose the Fraser-Beeby principle were reinstated. How many years of education would a New Zealander be entitled to? Presumably in a wealthy economy any educational entitlement goes past the age of 16, and involve an entitlement to tertiary education.

The Fraser-Beeby notion of entitlement – the creation of opportunity for education and life paths – has a direct economic element. There is some research – the best I know contrasts Germany and England – which suggests that economic performance may be influenced by the quality of education among the least educationally able. While the top quartile of the two nations have roughly comparable attainment – on certain educational measures – the bottom quartile of German students do considerably better than English students. It is argued that this translates into better performance on the shop floor, because German workers have a better understanding of the technical issues involved. Vocational training in New Zealand seems to follow the elitist English rather than the comprehensive German approach. The cost of that strategy may be poorer economic performance. (This is a topic I am going to be working on over the next year, where I hope to do some comparisons of secondary school attainment.)

Entitlements, opportunity, and life paths do not fit easily with the traditional utilitarian approach which underpins so much economic policy. This economic utilitarianism has been challenged by Amartya Sen who starts with the notion of ‘functionings’ which summarise the life a person might lead. Some functionings are elementary: being well nourished and disease free. Some are more complex: having self respect, preserving human dignity, taking part in the life of the community. Sen then introduces the key notion of ‘capability’ which refers to the alternative functionings (‘life choices’) a person might have, indicating the freedom of choice a person has over their life. Material consumption is only a part of that totality, while opportunity and an individual’s life path and the inclusive society are an integral part of it. The Fraser-Beeby principle is an educational articulation of Sen’s approach. Sen was awarded a Nobel prize in economics for his contributions, although disappointingly his insights are yet to be incorporated into public policy.

The Supply Side Implications of the Economic Paradigm of Education

The extremists wanted to commercialise the supply side too. Vouchers are a part of that strategy, but a number of other measures actually introduced aimed to make schools run like businesses in an environment in which they competed for students and resources.

There is chapter in my book,The Whimpering of the State, which evaluates the underlying economic model which influenced the education reforms.[3] Schools were to be treated like businesses, on the argument that maximum performance would be obtained by putting them into a competitive market environment with principals having the powers of a chief executive with the freedom to manage the inputs of the firm (including the teachers – remember bulk funding?), and the parents having market choice.

Yet there was a weakness in my critique. Systematic modelling inevitably involves making simplifications. (So does unsystematic theorising, but the assumptions are more obscure, and the simplifying harder to identify.) There is a danger of oversimplifying – rigour to the point of rigor mortis. A model needs to be empirically tested: as does its critique.

So I was delighted by When Schools Compete: A Cautionary Tale.[4] The American authors, Edward Fiske and Helen Ladd, spent five months here in 1998 assiduously examining the outcome of the reforms, including interviewing almost 200 people involved in education and visiting almost 50 schools. Their conclusions are a damning indictment of a market-led education system. The book is one of the most compelling critiques of New Zealand’s commercialisation.

However, this fine piece of work wont convince the economic fundamentalists, who can always explain the defects of the reforms by them being incomplete, and not pursued to the bitter end. ‘If only’, they will say, ‘there had been full commercialisation’ – they mean privatisation – ‘then the benefits we predicted would have appeared’. They are already using that argument to explain the obvious failure of their economic and health reforms. To rebut the reformers it is necessary to place the evidence of failure in the context of a failed theory.

Are Schools Businesses?

If the commercialisers have not been not very explict about the theory they are using, it is because creed overwhelms analysis. Theirs is a blind faith in the merits of business forms of economic activity. So what the chapter in The Whimpering of the State does, is try to describe the model of a school as a business.

By way of introduction, consider attempts by economists to estimate a production function for schools. The implicit assumption is that if we can treat a school like a business, then it has inputs combine in a production function to give an output. There is a well established econometric method in which the data of inputs and outputs from businesses in the same industry are pooled to get a business production function which, among other things, tells us what is the contribution of each input to the output of the business. Why not estimate production functions for schools?

When they did, economists found production functions of sorts. But they often had counter-intuitive conclusions. For instance, it often appeared that better teachers, measured in various ways, do not markedly enhance a school’s output. Sometimes they appear to have no effect at all, the implication being that better teachers (in the way that such things are measured) could be replaced by inferior teachers and the school would suffer no loss. (Which may provide some justification for bulk funding.)

But how do we measure the output of a school? In these studies the school performance is assessed by examination attainment. But is that the sole goal of the educational system? Recall the doubts that education is solely about qualifications. All such doubts are ignored in this econometric studies. The schools’ performance is being measured on but one dimension.

An even more extraordinary lacuna is the measure ignores the differences between students, just like those misleading league tables which newspapers use to rank schools by the exam attainment of their students there is no acknowledgement that the differences may reflect the degree of privilege and deprivation in the student’s life outside school rather than the school’s teaching performance. In economic terms, the studies treat gross output as if it was net output, which means they are not measuring true productivity. In educational terms they confuse attainment with achievement. In the end the studies tell us much less about the effectiveness of inputs – of the effect of different quality teachers for instance – than they can possibly claim. (What then the justification for bulk funding?)

What actually is a school’s output (to continue to use economists’ terminology)? If a school is a business, what is it producing? Is it a shop selling credentials, like a furniture shop sells furniture? Are the pseudo-universities which sell internet degrees the ultimate end of a commercialised education system? Or perhaps they are not selling to students, but processing them, like a freezing works. Instead of cows in, beef out, we get students in, graduates out. Even that it is not quite right because all cows are much the same (we breed them that way) whereas students are very different (for we breed humans for diversity).

Moreover students interact between themselves: an exceptional class may result in ordinary students doing well; a difficult class and the best students will suffer. (The unspoken point of those newspaper league tables is they enable us to tell where the good students are, and – if we care – send our children to the schools where they will benefit from good colleagues.)

If economists find it difficult to characterise the reality of the school and its teaching as a business producing something or other, the puzzlement is not peculiar to my profession. While writing The Whimpering of the State I had my attention drawn to Yeats’ poem Among School Children, in which he meditates as he walks ‘through the long schoolroom questioning’. Its final lines, which I quoted at the beginning of the chapter on core education, are
‘O body swayed to music, O brightening glance,
How can we know the dancer from the dance?’

How can we know the educated from the education process? Exactly.

In defence of economists, I think it was absolutely right to test the scientific hypothesis that schooling could be characterised by a production function, just like other industries. Since the hypothesis is not supported by the evidence, a scientist would ponder the relevance of the theory. But if it was right for economists to test this scientific hypothesis, it was absolutely wrong for them to pursue policies based on the truth of a hypothesis for which there was so little empirical support.

Professionalism in Education

The education reforms changed the environment in which the schools operated by opening them up to competition. There was also a deliberate attempt to change the way schools were internally administered. It was not just increasing the power of the board. There was also an attempt to fundamentally change the relationship of the principal to the professional teaching staff.

One effect of the reforms of the core public sector has been to undermine personal responsibility and professionalism. As American expert Alan Schick reported, there appears to be an unaddressed tension between the reform’s managerialism with its emphasis on accountability, and professionalism with its emphasis on responsibility.[5] It is the dichotomy in management theory between the ‘scientific management’ and ‘human relations’ approaches. Scientific management emphasises a pyramid of control topped by a single chief executive, with a need to provide mechanisms to ensure that those at lower levels do what is required. The human relations approach was a reaction, arguing that effective work processes require a more decentralised management style, in which social norms and non-economic rewards are crucial, and collegial relations important. The public sector reforms were dominated by scientific management notions.

This diminishing of role of professionalism as a core value and the abandoning of the related human relations approach to management has seeped through to the education system. Again bulk funding is an indicator of the scientific management approach. Once more we meet the problem of what is the educational production process as it applies to teachers. Can it be properly characterised in an hierarchical pyramid of control, or are collegial relations critical?

Conclusion: The Political Economy of Education Reform

This paper has tried to engage with educationalists as to the relevance of economic models in the educational system. Unfortunately the approach of too many economists – fortunately not all of them – has been to ignore the educational paradigm and impose their own. I was alerted to this by the infamous second volume of the 1987 Treasury Post-Election Briefing, which was devoted exclusively to the education sector.[6] On reading it a number of senior members of the education profession went ballistic. The most cogent critique of the commercialisation as it applied to a particular sector is from those educationalists. The history of that resistance is yet to be written, but one cannot help noticing that a goodly number of the critics have since taken up prestigious positions overseas, indicative of their international quality. On that test economists need to take notice of them. Perhaps it is a good thing for the confidence of the economics profession that there is no history of the resistance to their proposed reforms.

Not all the arguments used by the critics were valid. But enough were, and some engaged with some parts of the economics paradigm, although there are still those in the educational sector who adopt the economics perspective uncritically, and some in its extreme commercialist form. The most notable group to do so have been in the tertiary sector, who saw it as a way of increasing their funding. To do so, they had to largely ignore their own departments of education, who were cautioning against the uncritical acceptance of the economists’ account of education.

But even the most cautious must recognise that economists are not going to leave education alone. Undoubtedly education impacts on economic growth. Even if it did not, at around seven percent of GDP education is one of the largest users of resources in the economy, a very substantial proportion of its funding coming from the state.

What economists have to be reminded is that we know very little about the exact linkages from the education system to economic growth and that, as attractive as neoclassical theory is at hiding our ignorance, it depends on a series of assumptions which do not reflect the reality of education. They also need also to be reminded that while schools behave like businesses is a hypothesis that is largely rejected by the scientific evidence. Imposing business models on the education sector despite this failure is quite unacceptable, and almost certainly will damage the education process, any economic growth it might contribute to, and the higher goals of society. Economist’s acknowledgement of the importance of education may actually damage the activities on which they place so much faith in.

Because their trade is about economic growth, economists need to be reminded that education (and society) has goals other than economic growth, which generate outcomes which economists practice in their private lives much like the rest of the community, even if they ignore them in their theories. Among those wider goals are enlightenment, social coherence, and entitlements, opportunities and life paths. They are not to be dismissed lightly for they are at the heart of living in a society.

But whatever criticisms one may have for economists, more culpable are those educationalists who have adopted the economists’ model. Economists may have nothing better. Educationalists have no such defence.

Ultimately there has to be an engagement of the two paradigms, which will result in an economics which offers a richer and more realistic account of the world, and an education system which better meets needs of the economics and non-economic goals of the nation.

1. R.M. Solow, (1957) “Technical Change and the Aggregate Production Function”, Review of Economics and Statistics, August 1957, 39, p.312-20.
2. Hawke, G.R. (1988) Report on Post Compulsory Education and Training in New Zealand, Government Printer.
3. B.H Easton (1999) The Whimpering of the State: Policy after MMP (Auckland University Press), especially Chapter 12.
4. E.B. Fiske & H.F. Ladd (2000) When Schools Compete: A Cautionary Tale (Brookings).
5. A. Schick (1996) The Spirit of Reform: Managing the New Zealand State Sector in a Time of Change (State Services Commission).
6. Treasury (1987) Government Management, Post Election Briefing to the Incoming Government: Volume II Education, Wellington.

The website also contains the following related papers:

The Commercialisation of New ZealandChapters 12,13.
The Whimpering of the State: Policy after MMP Chapters 12,13.
Education Factories
Economic Growth
Science and Nationbuilding
Education & Skills
Reviews of Two Books on Labour Skills and Social Progress
Mind Your I’s and Q’s
Management & Professionalism
href=modules.php?name=News&file=article&sid=33>Does Professionalism Matter? NZIPA paper
Does Professionalism Matter? ‘Listener’ column
Two Styles of Management
Sen and Mill
Being and Doing
Development as Freedom
Of Pigs and People
Student Loans
The Debt Burden of Students
The Sustainability of Student Loans
Capital Cattle