The CMIE Consumer Pyramids data shows the fraction of household expenditure on school/college fees. Households that spend nothing are those that have no children, or those that are fully served by government schools/colleges. The CMIE data separates out expenditures on stationery, books, private tuitions, etc., so what is observed here is just the pure payment to the school/college. It shows:

The overall average expenditure per household in the survey is Rs.86,228, so 2.82% of this is Rs.2400 a year or Rs.200 a month. This, of course, reflects a split between some households who use government facilities (who spend nothing) and others who use private facilities (who spend more than Rs.200 a month).

An incipient academic literature shows that learning outcomes from the weakest private schools broadly replicate learning outcomes from government schools even though the resource outlay of government schools is 3x to 10x bigger. If this evidence was correct, private schools would not have gained market share. Poor people have been spurning government schools with zero tuition fees and free meals, and choosing private schools where significant payments have to be made. There are two possible explanations: either the parents are not understanding how best to take care of their interests, or the econometricians are not understanding what parents are thinking. I am biased in favour of the latter explanation.

Like all incumbents, public sector producers of educational services resent competition, and particularly competition that is gaining market share. With the Right to Education Act, the government has armed itself with new powers to force `unrecognised schools’ to close down. This is similar to the Department of Posts trying to prevent private firms from carrying letters. This is going to shape up as one of the most important battlegrounds in Indian education. So far, the broad story was that the government floundered and spent ever larger sums of money, but did not prevent `unrecognised’ schools from coming up. Now it is shifting gears from category 3 (”State Production But Do No Harm”) to category 4 (”State Production While Damaging the Private Sector”).

As Lant Pritchett has emphasised, countries like Chile which have a fully competitive framework, where parents choose between public and private schools, have a bigger market share of public schools as compared with India, where the main approach of the State is to pretend that private schools don’t exist, or to try to force them out. This ought to trigger off fundamental rethinking about what we are doing in the government. This rethinking has not begun, and the customers are quietly voting with their feet, switching their children to private schools. Despite the huge increase in funding to public schools, the market share of private schools is rising every year.

In this setting, it is worth attending the School Choice National Conference 2009 which will be held in Delhi on 16 December. And, do read The Beautiful Tree by James Tooley.

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There are several pillars to free market economics. Among these are private ownership of property, price regulation though market action and competition among firms for profit. Given the centrality of competition, one would expect many works out there on how it functions, but the truth is, there are relatively few. Oh, there are tons on how to become more competitive, either overall or in specific areas, and there are countless justifications of the need for competition. But actual examinations of competition per se?

The Red Queen among Organizations: How Competitiveness Evolves is one such book. In it, author William P. Barnett examines competition among organizations. One of his central tenets is implied in the metaphor that provides his title: as the Red Queen in Alice in Wonderland ran faster and faster to stay in the same place, so firms must compete more and more intensely to stay even with their competition. On one hand, that sounds frustrating, but on the other, this continual attempt to accelerate is, quite literally, the price of doing business.

Before I go on, let me be clear on one all too painful subject: Barnett is an academic. While this means he engages in careful research and took the time to let his theories evolve, this means several things for potential readers of Red Queen. First, know that the book is difficult to read. These difficulties range from (unnecessarily) dense prose delivered in smallish font to curious organizational choices in manuscript organization—referring readers in Chapter 3 back to a diagram in Chapter 1 rather than replicating it, for example. Second, Barnett examines two fields in meticulous detail: the commercial banking industry and computer manufacturers. From a learning perspective, I welcome Barnett testing his concepts so thoroughly; as a reader, I got bogged down. Third, the balance is off. At various points Barnett touches on genuine breakthroughs, but he stays so wedded to working out his core ideas that he doesn’t follow them up in the detail they deserve. A prime example of this is Barnett’s discussion of organizational learning. He argues that organizational learning occurs through competition and that individual members of the organization need not be consciously aware of what was learned so long as organizational behavior changes to match market pressures.

That extended caveat out of the way, there are a number of useful points about Barnett’s study. He approaches market competition through an extended ecological metaphor and treats market niches like ecological niches. An advantage here is that it frees you up from overly limited understandings of your competition. Firms don’t just compete against firms in industries formally named as the same; niches shift and blend as the new forces move through the economy.

Second, Barnett’s emphasis on competition as (among other things) a form of learning means that there is a limit to how completely a firm can research a market niche before it enters. Economic action is a kind of study and leads to the purest form of market learning. Though he does not explore it in detail, this suggests the limits to economic intervention by the government. It also suggests that, as in ecological matters, there will always be unexpected side effects to economic intervention. Barnett also sketches in how organizational actions that are justified in terms of learning, such as a firm forming partnerships with others, may actually thwart organizational learning. (If you don’t compete, you don’t have to develop the capacities competition would force you to.) He spends more time on competition works to create economic/ecological fitness.

Third, his discussions of the “logics of competition” of individual markets and his insistence that competition is always multiple and changing rather than binary and fixed provides a much richer and more accurate framework for understanding competition.

Fourth, these combine via Barnett’s ecological thinking: just as a successful organism changes its surrounding environment and so changes the pressures on it, so organizations change their markets and the logics that run through them. Whether they win or lose, their actions in turn change their market.

Fifth and finally, throughout the book, in approaches ranging from the schematic and theoretical to the historical and specific, Barnett discusses, describes, and analyzes not just how competition works on organizations when they are competing against one another, but also how competition functions within organizations. He shows how this competition drives innovation—this is especially clear in the discussion of the computer industry—and change the economy. All this is very useful even if it only allows readers to better understand the effort involved in…standing still.

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