The Normandy District and Creative Destruction

The fate of the Normandy School District is very much in question. But for all of the uncertainty and upheaval the district is going through, School Choice is working as intended.

Proponents of School Choice talk of applying “free market discipline” to education. The phrase is benign, but generally the discipline they are talking about is the possibility of failure – if a company is unable to sell its products it goes out of business. Customers go elsewhere, sales drop and eventually the company is forced into bankruptcy. School districts have typically been protected from failure – students couldn’t go elsewhere no matter how bad the education being provided.

The school transfer law, while undoubtedly a blunt tool, ends this protection. Under the transfer law, students in underperforming districts can choose to go elsewhere and take their tuition money with them. Underperforming schools would either suddenly become very nimble and adjust to the reduced tuition revenue or would run out of money and be forced to shut down. Normandy School District, unfortunately, is heading towards the second outcome – with a budget shortfall of $5 million, it is in danger of not even being able to complete the current school year.

In the free market, the options for a company in this situation are fairly straightforward. If there is no chance of saving the company it takes a chapter 7 bankruptcy and the assets are liquidated, paying secured creditors first, unsecured creditors next and distributing what is left (if anything) to the shareholders. The remaining customers of the company are forced to take their business elsewhere. However If someone believes the company can be saved it typically goes into a chapter 11 bankruptcy, a reorganization instead of a liquidation. Additional funding is brought in though “debtor in possession” financing and the company is reborn in a different form, usually with different management and new owners.

As the situation at Normandy illustrates, the dynamics of the business world do not fully translate to education. Students do not correlate to customers and parents don’t quite match up to shareholders. It’s hard to think of the free market equivalent of the property owners that pay for a portion of the education received by the students. As such, the incentives are different. The people that provide debtor in possession financing to save failed companies do so in anticipation of the profits they will receive when the company is turned around. At Normandy there are no future profits to be had, and as the head of the Missouri Department of Education has made clear, no ready source of financing to bridge the $5 million funding gap.

In the free market if a company shuts down a competitor is always happy to pick up the company’s customers and revenue – the competitor and its shareholders make more money. But the goal of a school is to educate its students, not to make money. The parents of the surrounding districts, the “shareholders” don’t necessarily benefit from taking in the students from Normandy – doing so won’t improve the education for their children.

The complexity of the situation is apparent in the range of proposed fixes for the Normandy District. The state is exploring everything from taking over the district itself to breaking it up into individual schools to dissolving Normandy and expanding surrounding districts to turning the school buildings over to a charter school operator. At this point there is no clear best answer and no clear source for any necessary financing.

“Creative Destruction” is a term economists use to describe the progression of economic systems and the process that happens under capitalism. The horse and buggy industry was destroyed by the rise of the automobile and automobile industry. Buggy manufacturers went bankrupt and buggy craftsmen become unemployed while auto manufacturers increased sales and add auto workers. Something existing was destroyed as something new and better was created.

The Normandy School District is about to go through the process of Creative Destruction. As the “Destruction” part of the phrase suggests, it’s a fairly harsh process. But that we are at this point illustrates the depth of frustration with educational improvement in our country. For all of the efforts at incremental change we have not managed to improve education for students in underperforming districts. It’s hard to know what will happen in the Normandy District. But school choice has achieved its first goal – a forced process of change has started.

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