Jamie Whyte: Profit-seeking and preschools go together

Kindergartens, like most enterprises, need capital and labour. The capital pays for the buildings, equipment and so on. Photo / Thinkstock

On these pages late last year, Linda Mitchell, an education lecturer at Waikato University, lamented the role of profit-making companies, such as Evolve Education, in providing preschool education.

She claimed the quest for profits damages the service provided. Or, as she put it, an interest "in making profits for owners or shareholders positions Evolve Education Group at odds with more community spirited aims to invest fully in the service itself".

That profits injure consumers is a familiar idea. But this should not blind readers to its absurdity.

Kindergartens, like most enterprises, need capital and labour. The capital pays for the buildings, equipment and so on, and provides cover for "rainy days" when costs exceed revenue. The labour at a kindergarten is mainly teaching but people also work on administration, cleaning and maintenance.

Ms Mitchell is right that if the people who contributed capital were not paid for it then more could be spent on educating the children.

Yet the same is true of those who provide labour. Imagine a kindergarten with four teachers. If they all took a 20 per cent pay cut, they could hire a fifth teacher on the same pay and give more attention to each child. If they worked for nothing, they could hire even more extra teachers and pay for all sorts of other services that might benefit the children.

Why does Ms Mitchell not lament the fact that teachers are paid for supplying labour? Why is paying teachers not also "at odds with more community spirited aims to invest fully in the service itself"?

Perhaps Ms Mitchell realises that if teachers were unpaid, they would be reluctant to do the job and, in the end, children would be worse off. Yet the same goes for those who supply the capital. If they were not paid to do so, they would not supply it and, again, the children would be worse off.

Of course, capital can be supplied by the government. Though she did not say so explicitly, I suspect this is Ms Mitchell's preferred alternative to private capital and the profits required to attract it. But there are (at least) two problems with government-supplied capital.

First, it is the opposite of "community spirited". Government-owned enterprises need not make a profit because their capital comes from taxation. The taxpayers who supply it have no choice in the matter.

Evolve Education attracts capital by offering those who voluntarily invest a 4.65 per cent dividend, should things work out. The government raises capital by threatening to imprison you if you do not hand it over. It is perverse to regard this method as the "community spirited" one. You might as well say slavery is more community spirited than attracting voluntary workers by offering wages.

Second, eliminating profit harms the intended beneficiaries: in this case, children receiving preschool education. A kindergarten that gets its capital from profit-seeking investors must provide a good service. If it doesn't, parents will take their children elsewhere and profits will decline. If the kindergarten performs very poorly, it may even go out of business and lose its shareholders the money they invested. A privately owned kindergarten, like any privately owned enterprise, has a powerful commercial incentive to provide a good product or service.

A kindergarten funded with money confiscated from taxpayers lacks this incentive. The "investors" have lost their money from the start. It makes no financial difference to taxpayers if the kindergarten they have "invested in" thrives or goes out of business. So it makes no financial difference to them whether or not the kindergarten provides a service that parents value.

An enterprise relieved of the need to attract investment from profit-seekers is an enterprise relieved of an important reason to provide good products or services. Unlike privately owned firms, state-owned enterprises can persist indefinitely despite providing a service that people value less than the cost of supplying it. They go out of business only when government ministers give up on them - which they almost never do, if only because it would amount to an admission that they have wasted money confiscated from taxpayers.

Ms Mitchell pointed to the insolvency of ABC, an Australian preschool company, as evidence against private ownership. This is the crowning glory of her confusion. That underperforming private firms are subject to insolvency is a virtue of private ownership, not a vice.

It is no wonder that so many people want to work with capital that has been confiscated from taxpayers. It relieves them of the burden of providing something that people value. But they should not pretend that this indulgence is a virtue. It harms everyone but them.

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