FMF Policy Bulletin: Abolish compulsory schooling laws

Subjective theory of value

In 1871, Carl Menger articulated a new theory on the origins of prices, maintaining that they are the consequence of the subjective judgements of individuals. Menger’s insight was to profoundly change economics. A simple description of the theory is that value is in the mind of the consumer and not in the nature of the product or service. Earlier economists believed that the price of a product was to be derived from the cost of its inputs, or that it was the result of supply and demand (although they did not have an explanatory theory), or that it was a result of the labour that had been expended upon it. The ‘consumer sovereignty’ view of price is now generally accepted, although labour unions continue to be attracted by the labour theory of value. The latter is easily shown to be wrong: people dive for pearls because they command high prices, they do not command high prices because people dive for them (Jevons, 1871).

The importance of the subjective theory of value to our study of education is that economic activity, including education, functions effectively only when the prices involved in that activity are ultimately determined by the value judgements of consumers. In a market for schooling, the costs of inputs such as the labour of teachers and administrators, the school buildings and educational materials would be determined by the prices parents paid for schooling. If they considered the price to be too high, they would decline to purchase the schooling and seek an alternative elsewhere. This would be standard consumer behaviour in a market economy. In an unhampered market for schooling, the cumulative consequences of the prices paid by consumers of schooling would determine the prices of all the factors involved in its supply.

However, a survey of countries that have mostly free economies reveals that, without exception, they have government-monopoly schooling systems in which consumers do not determine what is to be paid for schooling services. The consequence is that the prices of the factors involved in the production of schooling are not determined by a competitive market but by government planners.

The cost of so-called ‘free’ schooling is paid from taxes. There is no direct relationship whatsoever between the amount of tax that an individual pays and the amount of schooling that his or her family utilises. Even if there were, there would still be no causal relationship between the amount paid and what that person would be prepared to pay for that particular schooling in a competitive schooling market. Parents whose children attend private schools do pay fees, but the total market for schooling is so dominated by government policies and regulations that their schooling purchases can do little to affect and correct the pricing of the factors involved in its production.

Schooling constitutes a very substantial part of economic activity in most countries and it is incongruous that citizens as voters and parents should be content to allow this important activity to function outside the competitive market. No economic activity can function effectively unless, within that activity, ‘the ultimate source of the determination of prices is the value judgements of the consumers’ (Mises, 1949). Government planners, as we will discover, do not have the necessary information, and are not able to obtain the information they would require to emulate the functioning of a competitive market. They suffer the same consequences as planners in other socialist arrangements in which economic calculation is impossible.  

Source: This article is extracted from the book Unchain the child published by the Free Market Foundation and it may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Policy Bulletin

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