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Who Do Economic Profits Belong To? by Sandy Ikeda

Do we deserve to keep the profits that result from our actions?

Most libertarians would maintain that any economic profit — the residual of revenue over cost — that you earn from voluntary exchange is indeed moral and rightly belongs to you. The puzzling thing is that standard microeconomic theory, which libertarians as well-known as Milton Friedman have used to defend their free-market beliefs, is completely irrelevant in justifying that belief.

I attended a talk recently given by Professor Israel Kirzner in which he addressed the question of whether economics can tell us who does and doesn’t deserve profit. I won’t summarize the entire lecture here, which I expect Professor Kirzner intends to publish, but I will touch on an important and often-neglected point he made.

Specifically, it’s that because microeconomic theory is utterly useless in morally justifying economic profit, we need to look beyond one of the most cherished slogans of economics: There ain’t no such thing as a free lunch, or TANSTAAFL for short. Indeed, in order even to begin seeing economic profit as moral, you have to set TANSTAAFL aside. (I wrote on a related theme in “But There ARE Free Lunches!” in May 2011.) Now, how does that relate to the question of who, if anyone, deserves economic profit?

The Value of the Marginal Product

Let’s say you want to sell a new kind of musical instrument. You buy or hire every single ingredient you need to produce it: the various kinds of skilled labor and equipment, the working space, management and financial knowhow, and whatever computing and power needs you require. You also contribute to production as the owner of the firm, and your contribution includes the risk you take to start the business as well as your industriousness, tenacity, and courage.

You then pay each and every one of these factor owners, including yourself, its “marginal value product,” which is the revenue the business earns from selling what each input produces. You pay wages or rents to everyone and a return to yourself to compensate for the resources you bring. Economists since John Bates Clark have used the marginal value product and continue to do so to explain how income from production is distributed. But there’s a problem.

Suppose, after paying all the input owners including yourself, there’s still something left over. That something, the residual of all actual revenue over all actual costs, is economic profit.

Again, you’ve paid every factor owner all of what each has contributed to the value of the musical instruments produced. That means that the value of the marginal product, the central concept in the modern microeconomic theory of income distribution, cannot explain who deserves to keep the economic profit because it cannot explain profit.

It’s important to keep in mind that economic profit is not “earned” in the same sense that wages and rents are earned. It is what’s left over after all other earned income has been paid out according to the value of its marginal product.

To whom then does economic profit properly belong?

The Concept of Entrepreneurship Offers a Clue

For Kirzner and other economists working in the tradition of Austrian economics, the key to answering that question, though not the complete answer, begins with the concept of discovery.

There is knowledge that we don’t possess because we choose not to know it. If someone asked me for the phone number of a person whose name is drawn randomly out of the New York City telephone directory, the chances are very good that I won’t know it. Although I’m aware of the existence of the directory, I haven’t memorized it, simply because I haven’t deemed it worthwhile. I’ve chosen not to know.

But if I didn’t even know of the existence of such a directory and I needed to call a particular person, my learning about the directory would come as a revelation. Moreover, I would have found out that I didn’t even know what I didn’t know — what Professor Kirzner calls “sheer ignorance.” He then defines entrepreneurship as that aspect of human action that discovers, and thereby removes, sheer ignorance.

What does the discovery of sheer ignorance result in? Economic profit!

Why marshal all the resources to produce a new musical instrument? Because you believe you see what no one else sees. You believe that it offers a better investment for you than what you’re doing now. Why do you think that? Because you’ve realized — made the discovery — that after compensating all the factors of production with the value of their marginal product, there will still be a pure residual left over that you couldn’t have gotten doing anything else. If you’re right, you get that residual, the economic profit; if you’re wrong, you suffer the economic loss.

This means, of course, that TAANSTAFL is wrong. Opportunities to make economic profit do exist. There are free lunches. In fact, in a world of sheer ignorance, such as ours, free lunches are everywhere.

Toward an Answer

I haven’t mentioned how Professor Kirzner addresses the issue of whether economic profit is moral or deserved. To get a good sense of what he says in the remainder of that lecture, have a look at his 1989 book, Discovery, Capitalism, and Distributive Justice.

(Also, see this book review by FEE writer Charles W. Baird.)

A good economist needs to have a firm grasp on standard microeconomic theory: supply-and-demand analysis and all that. At the same time, it’s important for her to appreciate its limits, which are severe indeed on the question of the morality, or even the origin, of economic profit.

Sandy Ikeda
Sandy Ikeda

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

Filthy Stinking Profits: Entrepreneurs have a nose for potential by DANIEL J. SMITH, ZAC THOMPSON

Imagine a product that leaves your home covered in soot. Worse, imagine it makes your entire neighborhood smell like rotten eggs. The stuff discovered in Lima, Ohio, did just that. “Even touching this oil,” writes historian Burton Folsom, “meant a long, soapy bath or social ostracism.”

Why even bother to pump such “skunk oil” out of the ground?

When John, an entrepreneur, brought a new “investment opportunity” to the board of his company, suggesting that it spend millions of dollars to buy and store the stinking Lima crude, they must have thought it was the dumbest idea they’d ever been asked to risk money on.

But John was confident that a technology could be found to make the rejected oil usable. Many successful entrepreneurs can sympathize with how he must have felt. They likely have been in similar situations, where no one else saw the hidden potential they did in an idea or innovation.

In fact, Sam Altman, the president of the famous Silicon Valley business accelerator, Y Combinator, revealed that to make profits, his firm specifically searches for companies in which other investors don’t see the hidden potential. “We don’t want ideas that are whatever the current fashionable thing is,” says Altman. “So by the time everyone is already starting something in some category, it’s too late.”

Altman goes on to explain that to make a profit, you have to find ideas that look like bad ideas to most people, but have the potential to actually be good ideas. That investment strategy resulted in the creation of successful companies such as Dropbox, Airbnb, and Reddit.

The most assured way to become rich in a market society is to discover a new idea that can enhance the lives of millions of consumers and be the first to invest in it. As soon as the pathbreaking entrepreneur demonstrates an idea’s potential by earning profits, other investors will quickly enter the market. The increased competition will quickly spur innovation, quality improvements, and lower prices, benefiting millions of consumers in the process. In fact, William Nordhaus estimates that, while initial innovators do earn handsome returns, consumers are overwhelmingly the primary beneficiaries of innovations; innovators receive only about 2.2 percent of the total value to society generated by their innovations.

Even computers and televisions, goods and services that, with perfect hindsight, should have been seen as obvious profit opportunities, demonstrate the skepticism that often surrounds new innovations. Ken Olsen, the founder of Digital Equipment Corporation, famously predicted in 1977 that “There is no reason anyone would want a computer in their home.” Darryl Zanuck of 20th Century Fox figured people would “soon get tired of staring at a plywood box every night” and predicted household television would never take off.

The path to enhancing the lives of millions of consumers isn’t always obvious or easy. It is often fraught with great personal risk and financial peril, and met with great skepticism.

Perhaps no one exemplifies taking the risky and difficult path to improving others’ lives more than our skunk-oil entrepreneur: the world’s first billionaire, John D. Rockefeller.

While some have heard of Rockefeller’s humble background and the hard work he devoted to building his fortune, few people know the incredible foresight he exhibited in pursuing ventures that nearly every other investor believed to be bad investments, allowing him unexpectedly to improve the lives of ordinary people.

When it came to skunk oil, Rockefeller saw an opportunity to employ resources that no one else saw a use for. He was convinced that he could purchase up the dirt-cheap crude oil and then invest in discovering a technological innovation that would make it usable. When Standard Oil’s board initially refused to finance the risky project, Rockefeller declared that he would stake some of his own personal fortune, some two to three million dollars, eventually causing the board to grant Rockefeller permission. The investment proved lucrative, as Rockefeller found a technology that would refine the oil while neutralizing the horrid smell. The discovery brought the price of kerosene down to record lows, benefiting millions of consumers (not to mention helping save the whales in the process!).

Rockefeller had a knack for seeing the hidden potential in opportunities that no one else saw. When the Mesabi iron mine was discovered in Minnesota in the late 1800s, investors avoided what they considered to be a risky venture because Mesabi’s ore was notorious for clogging drilling machines. Even iron and steel experts such as Andrew Carnegie saw the ore as worthless; he, too, chose not to invest in the mine. Only Rockefeller made the bold move of investing in the mines. As with skunk oil, he was certain that this ore could be refined and made useable with, at that time, nonexistent technology.

Rockefeller was, once again, proved right when he was later able to provide cheap and useable ore to steel manufacturers after a technology was discovered that made the ore usable. His ability to see a profit opportunity where no one else saw one substantially reduced the costs of steel manufacturing. Cities such as Pittsburgh and Birmingham exploded in economic growth as new factories were opened to utilize the new source of ore. A reduction in steel manufacturing costs allowed for the construction of new railways, bridges, the first skyscrapers in Chicago and New York, and an overall greater infrastructure. Carnegie came to regret his initial judgment and eventually bought the mine’s entire output from Rockefeller.

Not just hardworking and thrifty, Rockefeller also had a natural inclination to see profit where other investors and entrepreneurs saw nothing. Just as importantly, Rockefeller was willing to take great risks investing in projects that no one else dared to invest in. He recognized, as entrepreneurs do today, that substantial profits can only be made by discovering the hidden potential in opportunities that others did not see. Once the first pathbreaking entrepreneur realizes profits, additional investors enter the field, quickly driving down costs and dissipating profits for new investors, all to the benefit of consumers.

Entrepreneurship, when left unfettered, is a continuous process that encourages the creation of seemingly impossible products and services that enrich the lives of billions.

ABOUT DANIEL J. SMITH

Daniel J. Smith is an assistant professor of economics at the Johnson Center at Troy University.

ABOUT ZAC THOMPSON

Zac Thompson is a graduate of the economics program at Troy University.

Profits Are the Only Business of Business by D.W. MACKENZIE

Forty-three years ago today Milton Friedman published his article “The Social Responsibility of Business Is to Increase its Profits.” It is to Friedman’s credit that most of this short article rings as true today as it did on September 13, 1970. It is at the same time disappointing that this piece remains timely precisely because too few Americans have understood and accepted Friedman’s arguments against corporate executives promoting social welfare over private profit.

How do the specifics of Friedman’s article look today? Does an executive who spends profits to promote “social ends,” to fund education, or to “fix the environment” impose what amounts to a tax? Yes, Friedman is correct.

Is the imposition of such a de-facto tax undemocratic? Perhaps it is. Friedman admits that the shareholders could fire a CEO for imposing a de-facto “social responsibility tax”- so the shareholders can vote against their CEO. Legally, the CEO is an agent of the stockholder, their employee. However, proposals to spend part of corporate profits on socially responsible ends aim at overriding the interests of shareholders; it undermines the democratic element of corporations.

Do arguments for redirecting corporate policies toward social responsibility erode personal liberty, aim at conformity, and promote socialism and collectivism? Yes. Stockholders invest in a corporation for profit, for personal gain. If the CEO starts aiming at social ends at the expense of private shareholder interests, then the corporations is effectively being run as if it were owned by society. This is, in effect, socialism. As Friedman put it, the social justice doctrine “would extend the scope of the political mechanism to every human activity.” The idea of aiming at social responsibility actually means directing corporate funds toward one person’s particular opinion about the interests of “society.” Social welfare and social justice are, at very best, vague concepts. As Ludwig von Mises put it in his 1949 treatise, “under socialism one will dominates.”

Friedman also claims that taxation by the state is the legitimate mechanism for collecting funds to promote socially responsible ends. We have constitutional, legislative, and judicial mechanisms to collect and spend legal tax dollars. Is this claim true? Are legal tax mechanisms better at promoting social responsibility than the illicit use of corporate funds for these purposes? Friedman notes, quite correctly, that people who push for socially responsible corporate policies are those who have failed to convince their fellow citizens to support their personal version of social responsibility. Having failed in an attempt to use the political mechanism, they resort to trying to politicize the market mechanism. Friedman is right, but this brings us back to my assessment of Friedman’s article: Friedman has himself failed to convince his fellow citizens that his view of profit is correct.

I agree that democracy can only work if public discourse works. The best ideas will rise to the top of an open and free debate among rational, reasonable people. I agree that people who press for corporate social responsibility are usually collectivists who press for conformity and disdain opposite points of view. However, the fact that political debate involves a high degree of intransigence and emotion means that the democratic process does not function very well.

Consequently, I must disagree with Friedman’s assertion that the public sector can work effectively to promote social responsibility. The fact that so many people continue to press for social responsibility and economic justice against Friedman’s advice shows that his support of government taxation for social responsibility is unfounded. Friedman is correct in noting that the great merit of private enterprise is that it makes people responsible for all their actions, either selfish or unselfish. However, lack of personal responsibility in the public sector does not promote responsibility in thinking about how to best use tax dollars in a socially responsible manner.

The main elements of Friedman’s article are correct. The sum of these elements is highly questionable when it comes to his confidence in political mechanisms. Profits are the only business of business. Social responsibility should be the business of government, but it is time to recognize that the modern tax and regulatory state has failed in this endeavor.

ABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

The Pursuit of Profit Is Pro-Social by Matthew McCaffrey

A value-creating business is “social” whether it pursues an explicit social agenda or not.

You can’t throw a rock these days without hitting someone who’s talking about entrepreneurship and why we need to encourage more of it. In the public and private sectors — especially in higher education — innovation, enterprise, and entrepreneurship are buzzwords like never before.

A big beneficiary of this trend is the field of social enterprise. Unlike ordinary businesses, the conventional explanation goes, social enterprises use their commercial activities to promote a broader aim of human well-being rather than simple profit maximization. An example is Jamie Oliver using the restaurant business to provide culinary training to disadvantaged youth or sell food that encourages healthier living, even if doing so hurts the bottom line. Because of these kinds of expansive goals, social enterprises tend to be looked on favorably by business students, governments, and the media.

But while social enterprises certainly do create value, emphasizing “social” goals over profits can be misleading because it implies that traditional profit-seeking entrepreneurship fails to produce wide-ranging benefits for large numbers of people. Thinking of social enterprise as distinct from conventional business helps obscure the vital truth that profit seeking is not only compatible with increases in human welfare, it is probably the most powerful force for producing them ever devised.

In fact, that’s the beauty of free-market enterprise: it’s social whether it pursues an explicit social agenda or not. Critics of government intervention often point out that good intentions don’t equate to good policies. Likewise, the absence of good intentions doesn’t equate to bad policy, and lacking a specific social goal doesn’t make entrepreneurs antisocial. Think of Adam Smith’s observation about the butcher, brewer, and baker, which reveals that commerce is social because it’s mutually beneficial, not because entrepreneurs necessarily have a larger agenda.

When a company like Uber charges a price for its services, it’s being social in the sense that it’s creating value for consumers, not just for itself. And the market is simply an elaborate network of voluntary exchanges in which buyers and sellers constantly make each other better off — which is why they do business to start with.

Free enterprise is therefore social enterprise, but the reverse is true as well: enterprise is social if and to the extent that it’s free. We are truly social when we choose our relationships and refrain from choosing our neighbors’. In a free market, the term “social enterprise” is redundant because it’s in the marketplace that human beings express some of their most fundamental social instincts. Buying and selling teach us about peaceful interaction for mutual gain — and reveal to us just how profoundly our well-being depends on our commitment to benefiting others.

However, if we choose coercion over peaceful cooperation, we abandon hope of a working social order. Any social enterprise worthy of the name is therefore hostile to economic intervention, because every intervention is a step away from social cohesion and toward conflict.

Unsurprisingly, the corporate state is the primary cause of antisocial tendencies in real-world enterprises. Take, for example, intellectual-property law. What could be more antisocial than prohibiting people from sharing ideas and using them to improve the welfare of others? Yet many who promote enterprise take it for granted that “protecting” ideas is an essential part of entrepreneurship.

This attitude hints at a broader institutional problem: the sort of enterprise supported by public rhetoric is rarely the kind of healthy economic activity that would be produced in a free economy. Instead, public support for enterprise tends to mean support for a few privileged ventures at the expense of others. Sadly, it’s common for governments the world over to emphasize the need for more entrepreneurship while simultaneously promoting policies that distort, penalize, or even outlaw it. That’s why it’s more important than ever to be wary of the different meanings attached to words like “social” and “enterprise” and how these useful terms come to be associated with harmful economic ideas.

If economics tells us anything, it’s that we can’t effectively promote enterprise without first abandoning the networks of privilege and regulation that undermine entrepreneurship and divert human talent into destructive practices. A vital step toward that goal is seriously considering the rhetoric we use to describe the market. Language radically alters perceptions of commerce and can make the difference between thinking of enterprise as zero-sum profit seeking or as the key to the countless benefits of peaceful exchange.

ABOUT MATTHEW MCCAFFREY

Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.

 

Life Without the McDouble:McDonald’s is just one example of how enterprise makes our lives less nasty, brutish, and short by Jeffrey A. Tucker

It thrills me when McDonald’s burgers get the attention they deserve. This happened last year when Stephen Dubner, co-author of Freakonomics, made the provocative statement that the McDouble is the cheapest and most nutritious food in human history.

That we dare to recoil at such a claim indicates how spoiled we truly are. In a state of nature, getting food is the single greatest challenge. You can find shelter and it endures for a time. Clothing made of animal skins can be scarce, but once acquired, it lasts too.

The thing about food is that you have to get it every day. And without tools, you can only eat things that are stationary or very slow-moving. Once you learn to kill, preserving the meat is not easy, which is why salt has been one of the most valuable commodities in the history of humanity.

That most everyone has access to food now is one of the great triumphs of history. As Dubner points out, the McDouble provides 390 calories and 23 grams of protein divided between meat and cheese. All told, one hamburger provides a half day of all the stuff we need to sustain human life, and all for a bit more than a buck.

That McDonald’s can do this as at a profit is wonderful. Its profit margins are variously reported to be around 6% percent—this is an extremely hard business, as any franchise owner can tell you—but many of its most popular products earn no money whatsoever.

The masses of McDouble buyers are being subsidized by customers who buy higher-end products like the Bacon Clubhouse and the super-sized value meals. The best deals are designed to get you in the door in the hope that you will, every so often, splurge just a bit.

Dubner’s thesis got renewed attention in the week following my own renewed love affair with McDonald’s while in Las Vegas this summer. This is a place that picks your pocket at every turn. Okay, granted, every dime spent in Vegas—apart from high taxes and ridiculous union wages—is coughed up by willing buyers. Still, there is an air of voraciousness about the place that seems inescapable.

After days of feeling fleeced for food and drink, I finally found a McDonald’s. The prices were not Vegas prices. The dollar meal was still there. The coffee was delicious and cheap, which is an incredible relief in a city where every cup otherwise runs $5. The breakfasts are wonderful and satisfying. If “healthy food” is your thing, go for the salad, which can’t be beat for the price.

In one food court I entered, there were a dozen establishments, but McDonald’s had the longest line, and consistently so. This makes complete sense to me. Reflect on the ingredients of the Big Mac or the Clubhouse and it just blows your mind. The meat alone is a miracle. Meat wasn’t available for the masses of humanity until canned meat was invented in the the middle of the twentieth century; preserving and transporting it was an extreme challenge.

There is a reason that your knees don’t fit under the desk you found at the antique store, and it’s because of the meat-driven growth in human height we’ve all experienced since World War II.

There is a reason that knight armor at the museum looks like it belongs to a member of the Lollypop Guild—again, it’s because we have access to meat, and those tough guys in the Middle Ages had to live off whatever grew around them.

There is a reason that the average Japanese person is 3.5 inches taller now than 50 years ago, and it comes down to a gigantic dietary change due to the availability of meat and cheese.

In addition, there is bread (if you take that for granted, try growing your own wheat), lettuce (again, only refrigeration made this available for most people), cheese (cows are incredibly expensive to raise), bacon (food of the gods, courtesy of the pig), pickles (the time structure of production here is lengthy), and various sauces that originate in seeds from all over the world.

Somehow they manage to get all of this to you in a small package that costs you a dollar.

But let’s focus for just one moment on the least-appreciated ingredient in ketchup and on the burger itself: the tomato. Surely it has always been with us, right? Anyone can grow tomatoes in a pot on the back porch. That wasn’t true until the sixteenth century, when Europeans had their first wide exposure to the tomato. Spanish explorers brought the fruit back from Latin America. Before then, there was no such thing as the tomato in the Italian diet.

It was trade that brought the tomato to the whole world for the first time in the Renaissance period. Without trade, without travel made possible by technology and capital investment, we’d never know how one tasted.

This reality never occurred to me until I read A Splendid Exchange: How Trade Shaped the World, by William Bernstein (2008). It turns out that staples such as coffee, beef, and the potato, and the existence of practically everything in your refrigerator, is owed to trade, technology, and therefore to the existence of free enterprise.

I was once lecturing to a group of students about the problems that come with the state of nature, of just trying to survive based entirely on the resources around you, while fighting off nature’s penchant for exterminating human beings that don’t fight back. I asked the group what people invented some 150,000 years ago in order to survive in the face of massive privation and the growing scarcity of food.

The answer I was looking for was this: They invented private property to allow them to domesticate animals and enclose spaces for agriculture. But the first answer that was offered from the audience was: Create a government. My mouth fell open in amazement. But after just a few moments, the student starting laughing and then everyone joined in.

Why laugh? Because creating a government—assigning a small group to control a geographic space with a monopoly on weapons and allowing them to pillage and kill as they see fit—does absolutely nothing to solve the core problem that humanity faces. Just stating the answer this way illustrates the absurdity. Our problems as a species are solved when we figure out how to get more of what we need and want. Governments, on the other hand, only redistribute what already exists.

Governments come and go, but the achievements of trade and private enterprise last generations and then even become permanent features of the world. Once a good is transported, once a technology is invented, it becomes part of the capital stock of civilization to be enjoyed by every generation thereafter.

That we were born now and live now to enjoy the massive beneficence of the struggle of thousands of years to bring us things like the tomato, beef, cheese, bread, and to wrap it all up in a tiny package and make that available to us for a dollar in nearly every city in the world, that this comes to us with no work on our part, is a gigantic privilege afforded us by virtue of accident or providence (depending on your religious views). To whatever force you attribute your good fortune, we should recognize it as such.

The McDouble does not appear in nature. That we can laugh at it, put it down, sneer at it, and even denounce the company that brings it to us is a wonderful privilege of the ungrateful. Those who know and understand don’t have to eat at McDonald’s, of course. But everyone should at least recognize its restaurants as symbols of what humankind can achieve when we are given time and freedom to make great things happen–and to overcome the grueling state of nature that has pervaded all but a small fraction of the history of humanity.

I’m only asking that we think about that seriously before we sneer.

20121129_JeffreyTuckeravatarABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and publisher at Laissez Faire Books. He will be speaking at the FEE summer seminar “Making Innovation Possible: The Role of Economics in Scientific Progress.”

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Profiting Off of the Children by CATHY REISENWITZ

Writing at Salon, David Sirota is horrified that capitalists are supposedly making money off school choice initiatives. Amazon and Microsoft prompted the horror by contributing to a recent campaign to expand school choice in Seattle. Sirota is convinced that the companies are giving because “lucrative education technology contracts” are “much easier to land in privately run charter schools because such schools are often uninhibited by public schools’ procurement rules and standards requiring a demonstrable educational need for technology.”

Last year Microsoft alone raked in $77 billion in revenue. Seattle’s public school system is set to spend $6 million on tech upgrades. Bill Gates alone spent $2 million on the initiative. In no universe does the math work out that Gates and Amazon are promoting school choice to make money.

What’s much more likely is that these companies are sick and tired of the public education monopoly’s horrifying results—especially for poor and minority students.

School choice programs consistently produce similar or better results for much less money.

Voucher programs offer significantly higher levels of high-school graduation and college matriculation, with private schools achieving better results at about half the cost per pupil.

2009 review of the global research literature found that every study to measure efficiency in education returned a statistically significant positive result for markets.

Perhaps that’s why polling data shows strong support for vouchers among Latino voters. In fact, a large number of minority families are entering charter school lotteries and more than 500,000 students are on charter waiting lists nationally. Even President Obama likes the concept of school choice. He’s spoken well of charter schools while spending millions in federal funds to expand them in minority communities.

The problem of public education money misspent on technology is a serious one, and Sirota is right to make an issue of it. But Sirota’s distrust of the profit motive causes him to miss the solution. Rather than use arcane procurement rules to attempt to force schools to spend wisely, simply look at expenditures versus results—you know, like Microsoft and Amazon do. School choice means that schools that waste money on useless toys will lose students, while smart spending schools will gain them.

Rather than an attempt to grab “lucrative” contracts, it’s much more likely that Microsoft and Amazon are applying what they have learned in the marketplace, that competition and choice spur innovation, which improves products and services. They want to apply those forces to education. If only critics like Sirota could do the same.

ABOUT CATHY REISENWITZ

Cathy Reisenwitz is an Associate at Young Voices and Editor-in-Chief of Sex and the State. She will be speaking at the FEE summer seminar “Are Markets Just? Exploring the Social Significance of a Free Economy“.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.