Can Teachers Own Their Own Schools?: New Strategies for Educational Excellence

Can Teachers Own Their Own Schools?: New Strategies for Educational Excellence

by Richard K. Vedder

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Despite more than 15 years of effort, it is widely acknowledged that internal reform of the public schools has produced little, if any, success. This has led to renewed interest in alternative forms of educational delivery to devolve decision-making through charter schools, public and private voucher plans, contracting out educational services, and home schooling.


Despite more than 15 years of effort, it is widely acknowledged that internal reform of the public schools has produced little, if any, success. This has led to renewed interest in alternative forms of educational delivery to devolve decision-making through charter schools, public and private voucher plans, contracting out educational services, and home schooling. However, such reforms have largely been resisted by public school interest groups, including teacher unions, state departments of education, colleges of education, and school board and administrator organizations that have fought any but the most benign changes. Less attention has been given to another option that has been quietly growing in importance: private, for-profit schools. Firms in the private sector are typically more productive and responsive to consumer demands than their public sector counterparts. Historically, for-profit schools have had a good track record and they are increasingly common today. Can Teachers Own Their Own Schools? examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective educational quality, and attract the additional funding and expertise needed to revolutionize school systems. Drawing inspiration from Margaret Thatcher’s privatization of government council housing in England, privatization reforms in Latin America, and the E.S.O.P. (Employee Stock Ownership Plan) movement in the United States, Vedder presents a bold plan in which teachers, administrators, and others involved in the educationalprocess would become the owners of schools, acquiring an attractive financial stake in the process. Such privatization reforms could pave the way for new, cost-effective means of improving educational outcomes. As a result, schools in which teachers, administrators, and parents have a significant financial stake would foster vibrant school communities with increased parental involvement and the innovation and efficiency essential to produce educational excellence.

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Independent Institute, The
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Independent Policy Reports
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Can Teachers Own Their Own Schools?

New Strategies for Educational Excellence

By Richard K. Vedder

The Independent Institute

Copyright © 2000 The Independent Institute
All rights reserved.
ISBN: 978-1-59813-268-7



This Independent Policy Report examines the concept of employee-owned for-profit schools, showing that it is an idea with strong historical roots that was hastily discarded more than a century ago, despite evidence that it was improving literacy. For-profit education is again on the rise in America, and is a form of delivery that deserves serious consideration.

For at least the past two decades, there has been mounting concern that U.S. youth are being poorly educated. Americans fare poorly on international tests in math, science and other subjects. An education reform effort begun in the early 1980s has met with, at best, limited success in terms of improved student outcomes, despite a huge increase in resources devoted to public schooling. Educational efficiency (outcomes related to costs) has by many measures declined significantly.

Piecemeal reforms such as strengthened teacher certification, merit pay, decentralized management, reduced class size, public-school choice and curricular innovation (e.g., whole language approach, block scheduling, Core Knowledge) have had limited impact. Accordingly, in recent years, attention has increasingly focused on the creation of new and more market-based approaches to delivering education services. In part, this has taken the form of increasing privatization of education with the use of public funds, such as the outsourcing of school services to private firms and proposals to use vouchers (scholarships) to allow students to attend private schools. A further approach has been charter schools, which seek to free public schools from many of the bureaucratic and regulatory restraints that inhibit education innovation. Finally, a growing number of parents have become so disenchanted with all conventional schools that they have been teaching their children at home.

Historical and contemporary evidence suggest that for-profit education often yields improved student outcomes at reduced costs. Thus education productivity improves. The discipline and incentives of the marketplace lead to behavioral modification that promotes both learning and efficiency.

Another argument in support of for-profit education relates to the fact that other reform efforts (e.g., vouchers, independent charter schools, home schooling) have been fought bitterly by groups with a special interest in maintaining the status quo, including teacher unions, but in some cases also state department bureaucracies, PTAs, school boards and administrator organizations, etc. Opponents have generally succeeded in fending off vouchers, constraining charters and watering down other attempts at radical reform.

For-profit schools deal with this political problem by changing the delivery system in fundamental ways while simultaneously offering the potential of financial rewards for teachers and others who feel threatened by change. One approach is to make school employees (and perhaps others who are closely involved with the schools) part or full owners of privatized, for-profit corporations. In return for a transfer of wealth to these employees, they would be invited, tempted, or, under some scenarios, obliged to go along with a shift to competitive for-profit delivery systems. The method of transfer to private ownership might vary, but could well be similar to the Employee Stock Ownership Plans (ESOPs) that are commonplace in American business.

This study provides a detailed discussion of how ESOP-type schools might work, and identifies some of their problems and potential benefits. It shows that profit is not a new concept in U.S. schooling and that there are both historical precedents and contemporary examples of successful proprietary schools. It suggests that moving to an ESOP approach for primary and secondary education might approach what economists call "Pareto superiority," a situation where some people will be better off and no one is worse off than before. This cannot be determined for certain, however, without a serious and properly designed experiment with the ESOP approach.


American Education: Poor Outcomes and Declining Efficiency

By most indicators, American children, nearly 90 percent of whom attend government-operated public schools, learn less than their counterparts in other highly developed countries. By some indicators, they learn less than they did thirty years ago, and even where there are signs of improvement in knowledge, they are small. In the best case scenario, education outcomes have improved very modestly, while the costs of obtaining them have soared. Inputs (resources) are rising faster than outputs (student learning), so efficiency has declined. Even with the best case scenario, a large percentage of Americans at the completion of secondary schooling lack the skills needed in today's knowledge–intensive workplace. While recent experience may call the conclusion into question, at least one scholar has attributed America's productivity slowdown after 1973 to a decline in student academic performance.

Figure 1 shows that from 1967 to 1997, the average composite SAT score fell in the United States. The drop was pronounced between 1967 and 1980, and then shows a partial recovery since. The math scores have risen more than verbal scores, which still languish well below the levels observed in 1967. ACT test scores showed a similar decline in the 1970s as well. The findings are not much better if one uses alternative indicators. For example, the National Assessment of Educational Progress (NAEP) has tested U.S. students for more than three decades at the fourth, eighth and twelfth grade levels. In reading, there have been very slight gains in average NAEP test scores from 1971 to 1996, but some of them (e.g., for seventeen-year-old students) have not been statistically significant. The picture in math is much the same. International test comparisons show even more dismal results. For example, of the forty-one nations reporting eighth grade mathematics test scores on the Third International Mathematics and Science Study (TIMSS), the United States ranked 28th.

The lackluster American education performance level is not because of a deprivation of resources. Figure 2 shows that real per pupil current spending in 1997 dollars in public schools (enrolling nearly 90 percent of all students) almost tripled from 1960 to 1997, and this gain is probably undersated due to the tendency for price indices to exaggerate inflation. American spending on public schools is high relative to other nations, including countries whose students tend to outperform those in the United States. As Figure 3 shows, spending per pupil at the secondary level was significantly higher in the U.S. in 1994 than in such European nations as France or Sweden, and dramatically higher than in Korea or Hungary, nations that in general have students who outperform Americans.

The data show that U.S. students fare poorly in school, that performance has changed little over time and that the costs of education are rising sharply and are high by international standards. This evidence, of course, does not prove that America's education delivery system is the culprit; perhaps the decline in the nuclear family, anti-intellectualism in American life, too much TV watching or other factors explain both the trends within the United States and the international comparisons. Nonetheless, taken alone this evidence lends support to those arguing that U.S. K–12 schooling is both ineffective and costly.

Other things being equal, this evidence strengthens the case for seeking new ways of promoting education and delivering education services. One such approach is the for-profit school, owned in part or whole by its employees, the so-called ESOP approach. We now turn to describing the theory of for-profit education and the advantages it offers to students, teachers and the public. We look at historical and contemporary evidence. We then examine several alternative methods by which such a system might be implemented.


Long Term Benefits of the For-Profit Approach

Student Benefits

The for-profit approach largely replaces centralized bureaucratic control of schools with a decentralized delivery system where consumer choices enforce standards and accountability. In virtually every other field of human endeavor where private for-profit corporations have existed alongside publicly owned and managed business, the for-profit private businesses offer a superior product, often at a lower price. Thus Federal Express and United Parcel Service have captured a large amount of business from the U.S. Postal Service, and more people visit tourist attractions of the Disney Co. in Florida and California than National Park Service sites with great natural beauty such as the Grand Canyon.

These commercial successes reflect inherent advantages of the market approach. The discipline of the market provides incentives for producers to offer a high quality product, while economizing on the resources used. In education, several factors enter into customer satisfaction. Non-instructional factors are relevant and sometimes important, parents prefer to send their children to schools with successful sports teams, pleasant physical facilities, and a low incidence of crime. Most parents, however, are primarily interested in their children receiving a "high-quality education," by which they usually mean acquiring knowledge and academic skills. A successful for-profit school must have satisfied customers, which means it must demonstrate that it is offering positive learning experiences to children.

First and foremost, for-profits must show their success by having students demonstrate learning skills on objective measures of performance, such as state tests and university entrance exams. Secondarily, the profit motive encourages schools to engage in curricular and institutional innovation. A successful school may attract students by offering state-of-the-art distance learning opportunities, by using traditional learning approaches favored by many parents (e.g., teaching phonics or multiplication tables) and by introducing foreign language instruction in early grades. Teaching what parents want taught, not what bureaucrats dictate, simultaneously increases consumer satisfaction and the school's financial success.

Benefits to Taxpayers

In the current public education environment, the costs of schooling are increased by the fact that few persons have much incentive to conserve on resources. There are no extra dividends or capital gains associated with reducing costs. The discipline of the market changes that, and in the long run increases incentives to run schools economically. Even in the non-profit sector, costs per private-school pupil tend to be well below those in public schools. In the long run, one would expect that for-profit private schools would tend to curb such costly practices as teacher tenure and extremely small class size and instead seek effective but more economical ways of providing instruction and minimizing such non-instructional costs as administration and transportation.

Benefits to Teachers

As discussed in detail below, a teacher receiving stock in a for-profit educational corporation might expect to derive substantial financial benefits. But finances aside, many teachers today are dissatisfied by the central control over their classrooms and their limited ability to select curriculum, discipline students and participate meaningfully in the school community. In a school substantially owned by teachers, this will work very differently. The sense of community is apt to be keen. We already know that teachers in private settings are more content with their working conditions, and the for-profit nature of the offering potentially could boost their satisfaction. It's also noteworthy that schools with a strong sense of community tend to have better academic performance.


A Historical Perspective on For-Profit Schools

The concept of for-profit schools goes back thousands of years. Andrew Coulson notes that in ancient Athens, schooling was private, with many instructors operating their schools on a for-profit basis. The schools of Isocrates and Aspasia were well known, successful and distinctive (Isocrates's emphasizing practical knowledge and Aspasia's opening her doors to women). According to Coulson, Athens reached its pinnacle of cultural and economic success with a system of private schools, many of them operating on a for-profit basis, while Sparta languished under its system of government-run schools with a rigid curriculum and no parental choice.

Early in the nineteenth century, most people in Great Britain and the United States who were educated at all were educated privately, very often in schools operating for profit. In England, there was virtually no public support for education before 1830, and such support was very limited before 1870. This is interesting in that most economic historians believe the Industrial Revolution was effectively completed by the mid-nineteenth century. Thus the powerful economic forces that led to the first sustained growth in income and output in world history were unleashed during a period when knowledge was transmitted from generation to generation by private means. As late as 1875, total education expenditures by the central and local governments in England and Wales were below five million pounds sterling, less than half of one percent of total output and less than one pound for every child between the ages of five and fourteen.

The private schools took many forms. A large number of students attended small schools operated by teacher-entrepreneurs whose income came from the tuition collected. In some schools, private philanthropy created endowments to fund some or even all education costs. But, as Adam Smith noted in 1776, "the endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers." In other words, where the income of teachers was solely dependent on payments made by the customers (the students), they tended to apply themselves more.

Despite government's absence, Britain's education participation and attainment levels both advanced. From 1818 to 1834, school enrollments soared from 478,000 to 1,294,000. In 1840, probably nearly two-thirds of English adults could read and/or write, while by 1870 that proportion had reached at least 75–80 percent. So even before there was significant governmental involvement in education, most people learned to read and/or write and voluntary participation in schooling was on the rise.

David Mitch has analyzed the impact of public versus private schools on literacy in England, and concluded that the private schools seemed to impact quite positively on both men and women, in contrast to public schools. This is consistent with an observation by Adam Smith more than two centuries earlier: "Those parts of education, it is to be observed, for the teaching of which there are no publick institutions, are generally the best taught."

The picture in the United States is more complex, owing to the federal structure and the variation among states. New England became fairly heavily involved with public schooling even in the colonial era, but most states in the new nation had largely private education in the early nineteenth century. Many schools were in fact hybrids, nominally private institutions with some public funding. For example, in the 1820s in New York City there was a Free School Society that received some tax monies and served broad public purpose, but it was privately run and controlled. For every student in a Society school, there were three in private schools, many of them run for profit. As in England, public schools were considered necessary only to supplement private ones, mainly in rural areas with few schools. The New York Commissioners of the Common Schools reported in 1812 that: "In populous cities, and the parts of the country thickly settled, schools are generally established by individual exertion."


Excerpted from Can Teachers Own Their Own Schools? by Richard K. Vedder. Copyright © 2000 The Independent Institute. Excerpted by permission of The Independent Institute.
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