Before I address the many fine issues raised in the battle raging over in the comment section of Part IV, I want to address the currently preferred organization for education entities, including universities, most private schools, and most charter schools –the dreaded non-profit organization.
We have seen that the role of profit-seeking businesses is better understood when they are recognized as profit-and-loss businesses, with all the pressures and incentives created by these dual potentialities. By the same token, what are called "non-profit organizations" can be better understood when they are seen as non-profit and non-loss institutions—that is, institutions which operate free of the constraints of a bottom line.
That freedom from turning a profit has resulted in the same kind of stagnation we see in our public schools which are basically organized along non-profit lines as well.
Freedom from the bottom line does not mean that non-profit organizations have unlimited money. It just means that, with whatever money they do have, non-profit organizations are under very little pressure to achieve their institutional goals to the maximum extent possible with the resources at their disposal. Those who supply those resources include the general public, who cannot closely monitor what happens to their donations or their taxes, and those whose money provided the endowments that help finance non-profit institutions Much or most of these endowments were left by people who are now dead, who cannot monitor at all.
What would be called "losses" in other kinds of enterprises are called "deficits" in non-profit organizations and serve as reasons given when seeking donations or government subsidies to cover shortfalls. Non-profit organizations have additional sources of income, including fees from those who use their services, such as visitors to museums, audiences for symphony orchestras, and tuition from students. These fees are in fact the main source of the more than half a trillion dollars in revenue received annually by non-profit organizations in America. However, these fees do not cover the full costs of their operation—which is to say, the recipients are receiving goods and services that cost more than these recipients are paying and some are receiving them free. Such subsidized beneficiaries cannot impose the same kind of economic discipline as the customers of a profit-and-loss business who are paying the full cost of everything they get.
Adam Smith noted how academics running universities financed by endowments can run them in self-serving ways, being “very indulgent to one another,” so that each academic would “consent that his neighbor might neglect his duty, provided he himself is allowed to neglect his own.” Tenure granting lifetime appointments are common in non-profit colleges, but practically unknown in businesses that must meet the competition of the marketplace.
The fact that some organizations’ income is called profit and other organization’s income is not does not change anything economically, however much it may suggest to the unwary that one institution is greedy and the other is not.
It is the non-profit organizational nature of private schools and charter schools that has contributive to the less than ideal competitive state affairs. Charter schools are most newly entities, run by activists (not businessmen), and typically thinly capitalized. Moreover, they operate in a somewhat hostile highly regulatory environment with many regulations that tend to coerce these new entities into conforming to the current practices of public schools. We are still a long way from a competitive market in education even with the presence of charter schools.