With the cap on charter schools being lifted some for-profit charter school companies may be encouraged to enter the Tennessee market and after the hoopla over Virtual Public Schools Act, it is important to have a proper understanding of the role of for-profits in the education marketplace.

Profits are neither good nor evil.  In a free market society profits are the result of a mutually agreed upon transaction.  When a school is built, it is built by a for-profit construction company.  When a school purchases books, cafeteria food, janitorial supplies and just about most other items, they are purchased from for-profit companies.  If one of these for-profit companies fails to provide a good or service to the school’s expectations the school is free to choose another vendor.  So it is unclear to us why a for-profit education provider can suddenly be assigned nefarious motivations. 

One often hears the argument that profit is a motivator to “cut corners” or provide an inferior product or service in order to “enhance profits.”  However, unlike our monopoly public education system where a school can continue to get new students and new funding year in, year out, despite failing to adequately educate or graduate children in a free market system a for-profit MUST make their customers happy because said customer is free to choose their competitor if unsatisfied.

The same is true of a for-profit charter school provider.  Children are not conscripted to a charter school.  A parent chooses a charter because they feel some aspect of it can better serve the needs of their child than their zoned public school.   If the charter fails to meet their expectations, the parents are free to return their child to their zoned public school.

The American Enterprise Institute released a special report on just this issue titled:  Beyond Good and Evil, Understanding the Role of For-Profits in Education through the Theories of Disruptive Innovation and we are going to paste a few snippets from this report below.  It is available to read in full Here.  It is only 14 pages long and easy to read.  While the report was geared more to the for-profit university, much of it can be equally applied to any for-profit education provider.

Both for-profits and nonprofits have business models, and there are many examples of corrupt nonprofits.  Whether a company is a for-profit or nonprofit does not, in and of itself, mean that it will or will not be corrupt. Categorizing the world as one of for-profits versus nonprofits distracts from what the real question should be: are companies, regardless of corporate structure, delivering on what society is paying them to do, as specified in the law? Even more broadly, is the law asking them to do the right thing?

The biggest inherent differences between for-profits and nonprofits stem from their fundamental corporate structures, which determine what they do with their profits—and thus affect their ability to attract capital and scale—as well as what opportunities look attractive. This means that for-profit corporations do not reinvest all their profits into their core business as do successful nonprofits, but this is not a bad thing. Returning money to their owners provides a natural pathway for for-profits to attract even more capital to grow and scale operations and attract more top talent when there is a viable market.

Ultimately, the government and education stake-holders should not discriminate between for-profits and nonprofits. Policies and purchasing should instead focus on and define the desired outcomes from government spending without specifying the processes or inputs used to achieve those outcomes. They should also reward those entities—regardless of corporate structure—that do the best at achieving the outcomes for the best price relative to the competition and, in cases like education where the purpose is to serve an end user in addition to society, align those outcomes with what the end user actually needs.

But there are some important differences between for-profits and nonprofits in their fundamental corporate structure that allow for-profits to more readily address the struggles faced in education—from finding sources of capital to sustainability and scale.

Whenever the government creates a market as the customer for services, by allowing for-profits to compete it creates a multiplier effect, whereby private capital comes in on top of the government’s funds to create scale. As a result, if they are performing a valuable service that society considers “good” and there is a robust market opportunity, then for-profits have a more natural ability to scale a solution.

In the absence of perfect foresight, the best the government can do in creating a market to solve a problem is to be clear about the goals and spirit of its policy and proceed with a measured approach to creating new programs by recognizing that they may not be successful. In addition, creating policies that first and foremost reward and pay for outcomes, as well as efficiency or productivity—and do not regulate the inputs or processes to achieve those outcomes—is vital, as it will align the interests of for-profit companies around the correct end goals.

Although for-profits are not a panacea for what ails society, using what they do well in conjunction with policy that rewards the right outcomes—and is open to an honest debate about what those should be—can start to move us closer to solutions that have a far better chance of working at scale.

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