considered how schooling affects such diverse things as the character of international trade and the choices families make about investments in their own health. The results of this work have not been adequately incorporated into the nation's thinking and policies toward schools. Most strikingly, standard economic principles are seldom applied to policymaking or to the administration of schools.

This paper grows out of the efforts of a panel of economists to bring economic thinking in its various forms to the reform of American schools2. Its purpose is to develop the policy conclusions that logically flow from existing evidence about the role and operation of schools. It does not point to a specific program or reorganization of schools that will solve all of the problems in part because single answers do not appear to exist. Instead, it points to an overall approach, strengthening performance incentives, and a set of decision rules, comparing benefits with costs, that have proved extremely useful in enhancing business performance, even if they have been largely ignored by schools. It also highlights the necessity of learning from experience enriched by a well-designed program of experimentation. These ideas seem noncontroversial, yet they are noticeable in their absence from current education debate and policy.

Reform—in education as in other areas—is often thought of as the process of securing more resources. Here our panel breaks with tradition. Analysis of the history of schools in the twentieth century does not suggest that American society has been stingy in its support of schools. Quite to the contrary, funding for schools has grown more or less continuously for 100 years. The fundamental problem is not a lack of resources but poor application of available resources. Indeed, there is a good case for holding overall spending constant in school reform. Not only is there considerable inefficiency in schools that, if eliminated, would release substantial funds for genuine improvements in the operation of schools, but there also is a case for holding down funding increases to force schools to adopt a more disciplined approach to decisionmaking. Schools must evaluate their programs and make decisions with student performance in mind and with an awareness that trade-offs among different uses of resources are important.

The plan is not a substitute for goals and standards—the centerpiece of much recent policy discussion—but a way of achieving those goals. In simplest terms, the identification of curriculum, assessment, and achievement goals will not in any automatic way lead to achieving them. Instead, new and different approaches that actively involve students and teachers in attaining these goals are required.


The Panel on the Economics of Education Reform (PEER), which met over the period 1989–1993, included Eric A. Hanushek (chair), Charles S. Benson, Richard B. Freeman, Dean T. Jamison, Henry M. Levin, Rebecca A. Maynard, Richard J. Murnane, Steven G. Rivkin, Richard H. Sabot, Lewis C. Solmon, Anita A. Summers, Finis Welch, and Barbara L. Wolfe. Its final report, MakingSchools Work: Improving Performance and Controlling Costs, was published in October 1994 (Washington, D.C.: Brookings Institution).

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