The Profit Red Herring

I've noticed that in many discussions about topics like an education voucher system, people complain that "schools shouldn't be making a profit". I think that profit is a red herring that shuts down conversation and that it would be better if we reframed the debate in terms of "value for money".

Here's why.

Consumers generally have no idea how much profit a company is making on a particular good or service. All the consumer cares about is getting good value for money. If a company is making a profit while providing good value for money, then it's also good for the consumer because that company can reinvest a portion of its profit back into its product line. In addition, a profitable company can expand its distribution channels, hire great talent, and attract private investment if necessary.

Now let's focus on the area of education. Let's say that a government adopts a voucher system that allows a parent to send their children to any school, and allows anyone to start a school (within reasonable constraints) that can compete for the vouchers. Let's also say that the value of a voucher is equal to the amount of money that's currently spent per child so that the total amount spent by the government is the same.

Parents are now free to find schools that provide the best value for money. And like any other service, it's completely irrelevant to the parent how much (if any) profit the school is making. 

They don't care.

If a school is able to provide good value for money and make a profit, then they're a well-run business and will invest some of this profit into expanding their school(s). Which of course is good for parents, the children, and the business.

Similarly, if a school is unable to provide good value for money, it will go out of business and make room for better schools. Likewise, good teachers at that school are freed up to join better schools and poor teachers can find a vocation that suits them.

In one conversation, someone said "yes, but if the school is making a profit then the government is paying them too much and they should be able to pay them less". 

Think how silly this statement is. Paying them less would:

1. punish them from providing good value for money while being efficient
2. prevent the business from growing and providing good value to more consumers
3. encourage the business owners to leave the field of education and do something else instead

In the free market, businesses have to both provide good value for money and make a profit in order to thrive. Focusing on the profit part of the equation is a red herring. It's the value for money that consumers care about and it's the profit that allows businesses to expand.

A voucher system would move education to a taxpayer-funded, privately-run system that would unleash the awesome power of the free market. Right now, we have a taxpayer-funded monopoly that suppresses innovation and competition.

Which ultimately leads to poor value for money.

 

Comments

[Benjamin Booth]

Amen.

The US today is dangerously economically illiterate. For whatever reason, profit has become synonymous w/greed and excess.

I like the idea of refocusing on the conversation back to the simple exchange of value for $ - something practically anyone should be able to understand.

[Wodeshed]

Interesting reading on this subject in a small and easily digested volume: the classic Economics in One Lesson by Henry Hazlitt.

The goal of any society ought to be to maximize productivity, not maximize employment. Primitive societies have full employment but low productivity; industrial societies have higher productivity, and often misguided government policy leads to high unemployment.