Hundred Pockets

Felix Salmon posts his thoughts on whether private schools can really call themselves ‘charities’. Almost all private schools in the UK are registered as charities (saving a them fortune in taxes), but the Charity Commission is showing every willingness to strip them of that status in the near future.

Private schools often claim that they act charitably because they offer scholarships to (smart) children from poor backgrounds.

Private schools were already providing a public benefit [says the head of the Independent Schools Council], by educating children who would otherwise be in state schools paid for by taxpayer

Felix has little sympathy for this argument:

The whines from the head of the Independent Schools Council are not very moving… No one’s asking to abolish private schools, or even proposing that most of them lose their charitable status. They’re just asking that they do a bit more to earn it, which seems right to me.

I’m no class warrior, but Felix is certainly right to be sceptical. Solid economic theory tells us that private schools are emphatically not acting ‘charitably’ when they offer scholarships to poor children. They’re maximising profits.

But surely (you ask) it can’t be profitable to give away expensive school places, free of charge?  Ah, but it can. Dennis Epple and Richard Romano have a classic paper on this in the American Economic Review. Those with a yen for hardcore economic theory can read it in full, but the crux of their reasoning is simply stated:

Schools can charge higher fees to the parents of rich, dumb kids, if they offer free places to smart, poor kids.

Why? Because peer groups matter, and parents know it. So let’s take the rich parents of a spoilt, none-too-smart child (call them, say, Mr. and Mrs. George Bush Senior). Do they want their child to go to a school filled entirely with other rich-but-none-too-bright kids? Absolutely not. They want their child in a class of well-behaved bright sparks (even if a few of them are, regrettably, poor), because a positive classroom environment will (they pray) ’spill over’ into their own child’s grades.

Private schools know what parents want, and so they ‘optimise’ their mix of pupils. It makes perfect sense for them to offer poor-but-smart kids cheap places (even free places), because those children provide positive spillovers which the school can charge rich parents for.

Scholarship exams for top private schools are really a price discovery system: ‘Are you so smart that rich parents will pay to have their kids sit next to you?’ If the answer is yes, then they’ll ‘charitably’ offer you a scholarship. But not because they’re altruistic – rather because they’re  maximising profits.

And don’t let anyone tell you that private schools are  ‘non-profit’ institutions. Non-profits may not distribute dividends to shareholders – but there are always ways to make life more wonderful for their ’stakeholders’ (in particular the staff). Accommodation for teachers, holiday trips, sports centres, even golf courses at some of the UK’s top schools – these are all economic ‘rents’ being shared among the producers. Because they have the money. Because they’re making what would, in any other industry, be called ‘profits’.

So I say ‘more power to Felix’. (Most of Felix’s commenters are not so, um, charitable…) If private schools really wish to be considered charities, then they’ll have to do more than offer places to poor smart kids.

They could start by offering some places to poor failing kids from difficult backgrounds. Now that really would be altruism…

This entry was posted on Wednesday, August 26th, 2009 at 3:43 pm and is filed under economics, education. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.