Profits are progressive

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06 November 2014 by ATL
Politicians worldwide have in the past decades tried to improve their state-funded schooling systems by introducing more choice and competition. By introducing market forces, the idea is to ensure that bad schools either are forced to improve or go out of business and that good schools expand – creating a virtuous ‘race to the top’.

But introducing a profit motive in this process is still anathema, in England and in most other countries. The fear is that profit-making companies will only focus on reducing costs, thereby decreasing quality as well. Instead of a ‘race to the top’, we would enter a ‘race to the bottom’. Furthermore, people have been arguing that profits will introduce stronger incentives among providers to ‘cream skim’ the best pupils, thereby producing higher school segregation and decrease equity.

But in a competitive market, profit-making actors normally have incentives to increase efficiency – the highest quality per pound spent – while in this case also freeing up much more private funding in the state-funded education sector. We simply can’t rely on the government and philanthropists to provide all the funding necessary to build new schools and expand the good ones in future. And, of course, for-profit schools have stronger incentives to start new schools, scale down bad schools, and scale up good schools. This is because private investors may obtain potential profits in return for risking their own money in advance.

But what’s the evidence on the efficacy of for-profit schools? Well, little suggests that profit-making schools are worse than other organisations. In Sweden, research shows that both for-profit and non-profit free schools have equally strong positive effects on achievement, and indeed have prevented a further fall in the international league tables. In Chile, meanwhile, for-profit chains perform on par with the best non-profit schools (and better than state schools), while non-chain profit-making schools never perform lower than state schools. Finally, in America, the evidence suggests either that for-profit and non-profit schools are on par or that for-profit schools are better.

Here, it’s important to note that profit-making companies don’t have to provide better services than other types of organisations to be of value. Even if they produce the same quality for less money, and therefore are able to take out a profit, taxpayers have still gained in absolute terms. This is because any profits would be taxed – the income from which could perhaps be earmarked to spend on the most disadvantaged children. So as long as profit-making companies don’t provide worse outcomes, we’re all better off as taxpayers.

Furthermore, since profit-making schools have stronger incentives and better opportunities to enter the market and expand, they increase competition more than non-profit schools. The academic research on international test scores shows unequivocally that competition raises countries’ performances. The strongest paper finds that this competition benefits pupils in state schools just as much as pupils in free schools, and that competition also drives down costs. So for-profit schools can help us produce higher competition, which in turn produces better outcomes for everyone.

Of course, since for-profit free schools are banned, it’s impossible to approve all good applications that come in – the government instead attempts to pick winners and pay for all upfront costs. If profits were allowed, we could approve all good applications as long as the providers finance their upfront costs themselves. This would increase competition significantly and therefore also results.

But is there any evidence that profit-making schools decrease equity? Well, no, there isn’t. In contrast, in Sweden and Chile, profit-making schools tend to enrol more disadvantaged pupils to a much larger extent than non-profit schools. In fact, in Chile, for-profit schools even enrol more disadvantaged pupils than state schools.

This is not surprising since outcomes tend to be worst among the underprivileged – making for-profit companies more likely to focus their efforts among those least likely to move into the catchment of an already good school or to access fee-charging private schools. The poor are underserved by the current education system, meaning that for-profit companies are most important for them.

It’s therefore time to end the outright ban on profit-making schools in the state-funded English education system. Let’s start with a large-scale experiment just to be sure: allow a randomised trial and put profits to a rigorous test. If the results aren’t negative in terms of quality – which, as noted, is the appropriate litmus test – we can expand the trial, and eventually allow them all over the country.

Gabriel was on the panel at the first of ATL's Shape Education pre-election debates, which took place in London on 12 November. 

Gabriel Heller Sahlgren is research director at the Centre for Market Reform of Education and affiliated researcher at the Research Institute of Industrial Economics in Stockholm, Sweden. He’s also a PhD student at the LSE.

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