Over the past few years, I have often complained about a hidebound culture that prevents many newspapers from responding to the challenges of new technology. There is, however, another hidebound American institution that is also finding it difficult to respond to new challenges: our big-city schools.

Today, for example, the United States is home to more than 2,000 dysfunctional high schools. They represent less than 15% of American high schools yet account for about half of our dropouts. When you break this down, you find that these institutions produce 81% of all Native American dropouts, 73% of all African-American dropouts, and 66% of all Hispanic dropouts.

At our grade schools, two-thirds of all eighth-graders score below proficient in math and reading. The average African-American or Latino 9-year-old is three grades behind in these subjects. Behind the grim statistics is the real story: lost opportunities, crushed dreams, and shattered lives. In plain English, we trap the children who need an education most in failure factories.

Last August, Education Secretary Arne Duncan said that our students have "stagnated educationally." The College Board recently put this into global perspective when it reported that we've dropped from 1st to 12th place in the percentage of people between the ages of 25 to 34 who have a college degree. America is now in danger of producing a new generation that will be less educated than their parents.

Clearly it's not for any lack of money. Over the past three decades, we've nearly doubled spending on K-12 education in real terms. So President Obama was absolutely right to declare the other day that "we can't spend our way out of this problem." Which begs the question: How can we spend so much with so little to show for it?

The answer is that while the system is failing our children, it works very well for some adults. These adults include the leaders of the teachers unions. They include the politicians whom the unions reward with their cash and political support. They include the vast education bureaucracies. In business terms, we have a system that rewards the providers and punishes the customers.

Davis Guggenheim won an Academy Award for producing Al Gore's "An Inconvenient Truth." So you might think that the two of us don't have much in common. But his latest film on our public schools, "Waiting for 'Superman,'" brings home the way the status quo betrays our highest ideals and results in an almost criminal waste of human potential. On this issue, there is no light between us.

So how do we fix it? Clearly a big part of the answer is giving parents more choices for their kids. For choices to mean anything, however, parents also need transparency so they can make real comparisons.

The Los Angeles Times just gave us an excellent example of this kind of transparency when it published a database of about 6,000 third- through fifth-grade teachers ranked by their effectiveness in raising student test scores. If you are a mom with a son or daughter in one of these classrooms, you know this information is vital. Unfortunately, it's the kind of information that seldom sees the light of day.

The reason is that the adults who are doing well by this system don't want it out there. The local teachers union, for example, blasted the Times for what it called "the height of journalistic irresponsibility" for bringing this material to the public. My view is that American schoolchildren need more such irresponsibility.

Occasionally we hear the leaders of the teachers unions say they too support reform. But Michelle Rhee, the chancellor fighting to reform D.C. public schools, made a telling point recently during a televised exchange with the head of the American Federation of Teachers, Randi Weingarten. Ms. Rhee was talking about the union's decision to slap her with a class-action grievance after she dismissed more than 200 bad teachers. "The bottom line," said Ms. Rhee, "is that if these people are ineffective, and if, as President Weingarten says, nobody wants ineffective teachers in the classroom, then you can't fight us every step of the way when we're moving in that direction."

We all know that good schools begin with good teachers. We also know there are many heroic teachers. Unfortunately, our system is set up to protect bad teachers rather than reward good teachers.

In the existing system, we have incentives for almost everything unrelated to performance (seniority, tenure, etc.) and zero incentive for adapting new technologies that could help learning inside and outside the classroom. On top of it all, we have chancellors, superintendents and principals who can't hire and fire based on performance.

We have tougher standards on "American Idol." And so long as we refuse to measure success by what our children are learning, we're going to have higher performance standards for pop stars than for public schools.

We all know the economic returns on a good education. That's true for societies as well as individuals. According to one study by McKinsey, if we had closed the gap in educational performance between ourselves and nations such as Finland and Korea, our GDP would have been as much as 16% higher in 2008. Imagine that kind of gain compounded over time, and you begin to appreciate why other nations are putting such a premium on their school systems.

The flip side is that there are also huge economic downsides for a society that consigns millions of its population to the margins of prosperity. When we allow the children of other people to fail or leave school without an education, they do not disappear. They become adults who cannot provide for themselves. And guess what? The costs will be borne by our children.

Many years ago, the great teacher and union leader Albert Shanker put it this way. "As long as there are no consequences if kids or adults don't perform, as long as the discussion is not about education and student outcomes, then we're playing a game as to who has the power."

It's time we stop playing power games—and begin ensuring that every boy and girl who enters a public school leaves with the same shot at the American Dream we insist on for our own sons and daughters.

Murdoch is chairman and CEO of News Corporation, which owns Fox News. This article was published in the Wall Street Journal and is adapted from his remarks this week to the Media Institute in Washington, D.C.