Download the full paper, published by the American Enterprise Institute
AEI’s Private Enterprise in American Education Series
April 2011
Executive Summary
The role of for-profit companies in public education–education financed by the government–has attracted increased scrutiny over the past few years. Though for-profit entities such as textbook companies have had contracts with public school districts for decades, recent controversy over what government officials and others perceive as low graduation rates and questionable marketing practices within the for-profit higher-education space has drawn significant negative attention. As this controversy heats up, it is prompting a wider debate about the role of for-profit companies in education–a debate too often characterized by faulty assumptions and misunderstandings on both sides.
Many in public education assume the worst about for-profit corporations, arguing that they are money-grabbing entities that will shortchange the public good if it means increased profits. Critics see no place for for-profit providers in American education. Supporters view for-profits as a force for good that can harness the profit motive to attract top talent and scale quality in public education. The government often perpetuates these divides by drawing lines in the sand of what activities companies can and cannot do based on their corporate structures. Despite these views on for-profits, however, the reality is different. Policymakers, officials, providers, and other members of the debate would do well to keep three key points in mind:
First, for-profit companies are not inherently good or evil. Rather, these companies do what their customers offer incentives to do–not much more or less. To say that for-profits are evil or poor quality misses the point because quality is defined by what a customer will pay someone to do. In the case of higher education, for example, government policies have historically defined the job to be done as expanding access–and have tied government dollars to this explicit goal. For-profit institutions, then, should not be faulted for focusing on access. The government and society have offered incentives for this behavior. Blaming for-profits for doing what we have asked and paid them to do from the outset makes little sense.
Second, there are far fewer inherent and predetermined differences between for-profit companies and their nonprofit counterparts than many assume. 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?
Third, 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. Specifically, for-profit corporations have owners or shareholders; nonprofit corporations do not. 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. Nonprofits do not share this natural pathway. Conversely, not having shareholders allows nonprofits to play a critical role and remain invested in a sector even in the absence of a viable market–a circumstance from which successful for-profits retreat, as they will not be able to provide meaningful returns for their owners.
Ultimately, the government and education stakeholders 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. Moving beyond the tired debates of for-profit versus nonprofit can result in a much healthier debate over the end goal of policy. 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–just might start to move us closer to those elusive solutions that could greatly benefit society.
