Let the Market Work

This is the ninth entry in Fordham’s education savings account Wonkathon. This year, Mike Petrilli challenged a number of prominent scholars, practitioners, and policy analysts to opine on ESAs. Click to read earlier entries from Michael Goldstein, Seth Rau, Matthew Ladner, Jonathan Butcher, Tracey Weinstein, Andy Smarick, Neerav Kingsland, and Lindsey M. Burke.

Earlier this month, Governor Brian Sandoval signed into law the nation’s first nearly universal education savings account (ESA) program. Education reformers are right to be excited, but now comes the hard part: resisting the temptation to overregulate.

At the core of the market-based approach is a deep epistemological modesty. We do not know the best way to educate students, or even if there is a “best” way. There is a legitimate diversity of views regarding what students should know and how to teach them, and different children have different learning needs.

For education savings accounts to achieve their full potential, policymakers will have to give the market space for experimentation, evaluation, and evolution.

There is no perfect system. All our institutions are constructed from the crooked timber of humanity. Ultimately, there will be failures in the private sector, just as there are in the public. Education providers will try new things only to discover that they do not work. Models that worked under certain conditions will disappoint elsewhere. Providers will close down. Some children will suffer the consequences.

Whenever there is failure, people demand action. However, it is inappropriate to compare the market against some unobtainable, utopian ideal. Rather, we must compare it against the status quo—which fails children greatly every day—and against other realistic possibilities. In doing so, we should be cognizant of the limits of technical knowledge. As AEI’s Rick Hess wrote recently:

[We] should be really cautious about claiming to have deciphered complex social phenomena or extrapolating the findings from a given milieu or time period. We suffer from an excess of overheated claims about what “works” when it comes to pre-K, extended learning time, turnarounds, teacher evaluation, and much else. In reality, when dealing with complex systems, it’s tough to be sure that you have studied things properly, have made the right assumptions, or know how things will translate to different circumstances.

Experimentation, evaluation, and evolution

The best we can hope for is a system in which the inevitable errors are more localized and easier to correct. When decision making is centralized, the negative effects of an error are widespread (think New Math). And the further removed the decision-making authority is from those who feel its effects, the weaker the feedback loop and the more difficult it is for those affected to change the system.

Instead, what we need is an education system that would, as Yuval Levin has described, “channel social knowledge from the bottom up” through a process of experimentation, evaluation, and evolution, “rather than…impose technical knowledge from the top down”:

Markets are ideally suited to following these steps. They offer entrepreneurs and businesses a huge incentive to try new ways of doing things (experimentation); the people directly affected decide which ways they like best (evaluation); and those consumer responses inform which ways are kept and which are left behind (evolution).

This three-step process is at work well beyond the bounds of explicitly economic activity. It is how our culture learns and evolves, how norms and habits form, and how society as a general matter “decides” what to keep and what to change. It is an exceedingly effective way to balance stability with improvement, continuity with alteration, tradition with dynamism. It involves conservation of the core with experimentation at the margins in an effort to attain the best of both.

This process builds on strengths and corrects errors in a more effective manner than regulatory fiat. When education providers prove effective in a market, they have a strong incentive to expand their operations. Less effective providers must either go out of business or imitate their more successful competitors. The freedom to innovate is a messy but necessary component of this process.

Unfortunately, some will see only chaos and pine for the false security of “accountability” mandates. But policymakers must resist the technocratic temptation of trying to regulate the system into perfection. It’s not only an impossible feat, but the very regulations intended to “guarantee” quality may well have the opposite effect. As Jay P. Greene has warned, education reformers must avoid “pursuing reforms that are likely to re-create the same dysfunctional system they oppose.”

Avoiding unintended consequences

Perhaps the most common “accountability” proposal is a testing mandate. The logic behind such proposals appears compelling at first blush. If parents are to be informed consumers in an education market, they need information. Testing is an objective way to provide parents with that information.

However, because testing drives what is taught and how it is taught, mandating a single test would hamper the ability of educators to innovate. Even mandating that education providers administer and report the results of one of several nationally norm-referenced tests could create a perverse incentive not to serve disadvantaged populations. Moreover, a testing mandate on education providers is not practical when families are acquiring education a la carte. When a student is learning from three education providers, which one should administer the test?

Nevada wisely avoids imposing a testing mandate on providers, but it still requires that ESA students complete either the state test or a nationally norm-referenced test in math and English and report the results to the Nevada Department of Education. The DOE will aggregate and report these results, but education reformers should be cautious in interpreting them, as they will not be able to demonstrate causation.

Some may argue that this does not go far enough. The aggregate test results will not tell parents anything about the effectiveness of particular providers. They will have access to their own children’s test results, but these will only be retrospective and in two subjects. Moreover, the quality of math and English instruction may tell us something about the quality of instruction generally at a school, but it’s of much more limited value to an ESA student learning from multiple providers.

Fortunately, there are ways to address information asymmetry without clumsy government mandates.

Market solutions to market imperfections

The market can overcome the information asymmetry problem either through private actors who provide access to expert knowledge or reviews based on user experience.

Expert knowledge: The market can channel expert knowledge through private certification, as is offered by Underwriters Laboratories and Good Housekeeping, or through expert reviews, like those made famous by Consumer Reports and Zagat. Similar organizations could certify or review educational products and services.

User experience: Technology has made it easier than ever for end-users of products and services to provide reviews. Amazon, Angie’s List, Yelp, and other websites allow consumers to rate the products or goods they used and share their experiences with other potential consumers. A similar platform for education providers could provide a much richer picture of the value a school, tutor, or educational product provides than testing alone.

That the market can provide these vital services does not mean that it will, at least not right away. But these are areas where education reformers can make a difference. Organizations like the Fordham Institute or the Gates Foundation would be wise to direct their resources toward creating private certifiers and expert reviewers of educational products and services, as well as platforms for users to share their personal experiences.

The role of the state

This is not to say that the government has no role in providing accountability. The state has a duty to ensure that taxpayer money is being used for its intended purpose. Ideally, the state would work with banks to provide ESA families with restricted-use debit cards, as is the case in Arizona. Either way, the state should conduct audits to ensure that the funds are being used appropriately.

The state should also provide clear guidelines regarding which products and services are eligible. The process for vendors and parents to request the inclusion of additional educational products and services should be transparent and user-friendly. Ideally, the DOE would make the approved list and approval process available to parents online.

The Department of Education could also serve as a repository of information. It could provide ESA families information about what schools and other education providers are in their area, and inform them about reputable private certifiers, expert reviewers, and platforms for user reviews.


ESAs have the potential to radically remake the educational landscape. But for ESAs to achieve their full potential, policymakers will have to give the market space for experimentation, evaluation, and evolution. That will require resisting the temptation to impose regulations that would stifle innovation or create perverse incentives. Instead, education reformers should direct their energies toward market solutions that provide families with access to expert knowledge and consumer reviews.

The state should limit its role to ensuring financial accountability, setting clear guidelines for spending ESA funds and providing families with information about education providers. Ultimately, though, ESAs place the primary responsibility for ensuring every child receives a high-quality education exactly where it belongs: with their parents.

Jason Bedrick is a policy analyst with the Cato Institute’s Center for Educational Freedom.