The Weak Case for Public Schooling

Capital Market Failure

by David Friedman

The special problems of investing in human capital are sometimes offered as an argument for government intervention in schooling. If I wish to borrow money to pay for a profitable investment inbuilding a factory, I can offer the factory as collateral. If I wish to make a profitable investment in my own education, I have no similar option. Under the present legal rules of the U.S. and most advanced countries, I can acquire the education and then wipe out the debt by declaring bankruptcy. So profitable investments in human capital may fail to be made if the human in question cannot finance them himself.

How important this argument is depends on whether the unit of analysis is the individual or the family. If it is the family, then the argument applies to only a small fraction of the population. Most families can pay the cost of schooling their children out of current income. Indeed, most families do pay the cost of schooling their children out of current income -- in the form of taxes to support government schools. Such expenditures might be harder for those with large families and low incomes than they are now, and easier for those with small families and high incomes. On the other hand, there is evidence that private schools provide a given level of education at a considerably lower cost than government schools. If so, most parents would face a lower burden under a completely private system. The market failure argument would then apply only to a small fraction of families at the bottom of the income distribution.

So far as that part of the population is concerned, several points are worth noting. The first is that it makes very little sense to construct a government school system for everyone in order to subsidize investments in human capital for a few percent of the population. The second is that the present system does a very bad job of educating just those people who would have the hardest time educating themselves, which casts some doubt on the idea that it is, for them, an improvement on a purely private system.The third is that the evidence of the nineteenth century suggests that even quite poor people are able to provide their children at least a minimal education. British workers of the early nineteenth century were very much poorer than the inhabitants of America's inner cities at present. Yet the evidence suggests that most were able, without government help, to buy enough education for their children to provide at least minimal literacy -- more than many inner city children get now.

Additional issues arise if we consider the problem from the standpoint of the child rather than the family. Most families can afford to pay for schooling their children, but very few children can afford to pay for schooling themselves. A private system depends, for almost all children, on parents caring enough about the welfare of their children to be willing to pay the cost of their education.

Most parents, in most societies, do care for the welfare of their children. In part this may be explained by altruism, itself explainable on evolutionary grounds, and in part by the desire of parents to have children capable of supporting them in their old age.These incentives are not perfect -- there are parents who sacrifice the welfare of their children to their own welfare. But the alternative to allowing parents to make decisions for their children is not, as a general rule, having the decisions made by the children -- five year olds lack not only income, but information and political power as well. The alternative to having a child’s parents make decisions for him is having other adults -- school administrators, politicians, voters -- make those decisions. Parents may not always be altruistic towards their children, but a child’s parents are, of all adults, the ones most likely to be. The argument against letting the parents make the decision is an even stronger argument against letting anyone else make it instead.

Here again, the empirical evidence is striking. Under circumstances of poverty difficult for most of us to imagine, British parents of the early 19th century managed to send almost all of their children to school -- not for as long as our children go to school, but for long enough to acquire at least minimal skills. In this country a century later, immigrant parents routinely sacrificed themselves to promote the education of their children. We have yet to see any similar level of altruism on the part of those who control the government schools -- say a teacher strike aimed at lowering teacher wages in order to leave more money to pay for books.

David Friedman
July 7, 1993