No one – not me, not you, not Jeff Bezos or Warren Buffett – really knows how to spend money.
Imagine that you’re a teacher. You’re sitting in your classroom and looking at the textbooks from which you are supposed to teach your students.
“If only I could get some better books,” you think. “Something that would engage them!”
As a teacher, you know that the thing stopping you from getting books isn’t that your school doesn’t have enough money. More likely it’s that your school wastes the money it has.
Your school forces you to go to professional development sessions in which you listen to someone tell you things you already know.
Your students have to complete rounds of standardized tests, each of which is unreliable and takes too much time.
There are too many bureaucrats in your district’s central office, and none of them seem to do anything but add to your workload. The list goes on.
Thus, the reason you can’t get better books is not that your school needs more money—schools have money. In fact, we spend about 60 percent more per student than the average OECD (Organisation for Economic Co-operation and Development) country despite the fact that we’re below average in math, reading, and science.
The problem—the reason you can’t get those dang books—is that schools spend money poorly, specifically on oversized administrative staffs and largely useless professional developments, neither of which seem to have had any positive effect on student learning outcomes.
But why do schools spend money so poorly? With all our research and knowledge, why don’t they know how to spend to improve outcomes?
No One Knows What Anything Is Worth
In his seminal work Socialism, Ludwig Von Mises articulates a simple but hard to appreciate point—no one actually knows how much anything is worth or how to spend money.
Consider that business owners all have the same goal: to make as much money as possible. Still, most businesses fail at that goal. Why? Because it’s hard to know what to spend money on.
Where should Amazon open its next headquarters? What should Popeyes spend its research and development money on? How many flowers should you buy your girlfriend or wife to avoid her wrath on Valentine’s day?
The simple truth is that no one in any of those situations really knows.
If people knew for certain how to spend and price, Toys R Us would still exist, my grandmother wouldn’t have been texting me about Sears selling jeans for 90% off, and we all would have bought Bitcoin in 2010.
That doesn’t mean data doesn’t inform choice. Local tax laws, environmental conditions, wealth concentration, population density, education level, etc.—all these data points can inform a business owner about the value of a venture in a specific area.
But things change. Politicians become hostile to conglomerates. Restaurant chains pull a chicken out of their hat and see 255 percent growth in a single quarter. Snowstorms go where they shouldn’t, governments are overthrown, tax codes rewritten—all this helps or hurt businesses, whether or not they were doing everything right.
No one—not me, not you, not Jeff Bezos or Warren Buffett—really knows how to spend money.
The Market and the Force
But even though we don’t know how to spend money, the market is like the Force from Star Wars. It seeks balance. It pushes money where it should go and pulls it away from where it shouldn’t.
Thus, even though individuals don’t know how to spend money, in a market, only the right expenditures are rewarded. For example, while you may not be certain if you’re opening your restaurant in the right place, consumers will show you by going to it or staying away from it. Over time, businesses learn from what customers respond well to and they either replicate these things or fail.
This prevents societies from wasting resources.
The Government and the Sith
But when the government spends money foolishly, it’s like the Sith (I’m hopeful that our culture has been sufficiently nerdified)—it resists and manipulates the force rather than submitting to it.
The problem is that there is no corrective to bad government spending. People don’t lose their jobs, government offices don’t close, politicians and bureaucrats don’t suffer wage cuts.
Despite the fact that Medicare and Medicaid cost $1.412 trillion dollars in 2019, the average cost of healthcare has risen so much that someone on Medicare or Medicaid will save $0 compared with what they would have paid (in inflation adjusted dollars) for the same service in 1965. At the same time, anyone not on Medicare/Medicaid is paying 80 percent more than they would have paid in 1965 (again in inflation-adjusted dollars).
Despite our spending more on education than ever, standardized test scores are no better now than they were forty years ago. And let’s not forget the SSA and USPS.
The takeaway from these examples is clear. Whereas foolish business ventures go bankrupt, foolish government spending seems to continue indefinitely.
In education this means that if a school district begins an ill-conceived and costly policy (say, not firing ineffective teachers) the only way to change this policy is through producing documentaries and letter writing campaigns, electing new officials, and withstanding burdensome teacher union strikes. It’s so difficult to change such policies that it almost never happens.
Contrast that with an inefficient business model; once a business model becomes obsolete, it shrinks and then vanishes. No matter who is praising or lauding it (does WeWork ring a bell?), if a model doesn’t work, the market will get rid of it.
The Solution
Many educators are aware of this problem. They see it in “PD days,” standardized testing, lousy textbooks, and incomprehensible curriculum.
But as much as they are aware of the problem, most educators do not seem to be aware of the right solution.
Many educators seem to think that we can create a different kind of feedback system, one as good as or better than the market. This is actually the purpose of standardized testing. Standardized testing is the way the central government generates feedback about the efficacy of its programs.
The problem with this (besides the obvious fact that standardized tests are an unreliable waste of time) is that even if testing could signify which pedagogies work and which don’t, it couldn’t show how much to spend on any specific pedagogy.
For example, which one should a school spend money on – a $10,000 professional development that shows teachers how to teach math 50 percent faster, or a $10,000 PD that shows teachers how to teach reading 50 percent faster? Which does society need more—a kid who knows everything there is to know about computer science or a kid who is well balanced across disciplines?
For moral as well as practical reasons, those questions can only be answered by consumers via the market. A consumer’s decision to spend money on one of those programs is what signifies which one is worth more to them.
What we need to do, then, is to make the education system responsive to successes and failures, both in the appropriate amount. Practically, this means opening schools up to market competition, such as through robust voucher systems.
Successful schools will grow, unsuccessful schools will fail, and consumers, that is, students, will ultimately reap the benefits.
Written by McKinney McKinneyr for the Foundation for Economic Education ~ February 28, 2021