The standard way of thinking about school finance has been to consider expenditures per student. If schools are doing a good job of using the money allocated to them, then the level of expenditures should provide a readily available index of school quality. This index could then be used to judge equity in schooling and could also be the basis for state-level policy decisions about schools. This way of thinking assumes that schools are doing a good job of using money. But, as we will see, they are not. Therefore the prevalent use of information on school expenditures in state legislatures, in the courts, and in general policy discussions is inappropriate.
Research into the determinants of students' achievements takes a variety of approaches, but the most useful, from the point of view of economics, is the input-output approach. In this, primary attention focuses on the relationship between school outcomes and measurable inputs into the educational process.
The origin of input-output relations in schools is usually traced to the U.S. Office of Education's study, Equality of Educational Opportunity, commonly known as the "Coleman Report," issued in 1966. This was not the first such effort, but it was much larger and more influential than any previous or subsequent such study. The fundamental contribution of this study was to direct attention to the distribution of student performance--the output with which we are concerned. The Coleman Report was much discussed because of its conclusions: It found that schools are not very important in determining student achievement; families and, to a lesser extent, peers are the primary determinants of variations in performance. These controversial findings immediately led to a large research effort to find additional evidence about input-output relationships in schools.
The results in terms of school resources of the many such studies now available can be summarized succinctly: There is little reason to believe that teacher-student ratios (i.e., smaller classes), teacher education, or teacher experience (all of which involve costly inputs into the educational matrix) have positive effects on student achievement. The same applies to other expenditure factors, including administration, facilities, teacher salaries, and expenditures per student. Despite differences in the ways the various studies were structured and tabulated, a consistent conclusion emerges: There is no strong or systematic relationship between school expenditures and school performance.
This conclusion implies that there is significant inefficiency in the operation of schools; it also has obvious and profound implications for the discussion about altering school finance
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