Friday’s post, Parable of the Corporation, was a somewhat tongue-in-cheek restatement of the last four years’ political battles in terms the private sector. My intent was to illustrate that business-minded conservatives would be appalled by the actions of Congressional Republicans had they taken place within the board of a major corporation. The larger moral of the story, however, was that private interests often seek to infiltrate the public sector to reinforce their own parochial concerns.
Higher education is one such example. The slow march of corporate interests in colleges and universities has created, in a disturbingly large number of cases, a symbiosis between corporate money and the education and research mission of institutions of higher learning. Many corporations now sponsor labs and the research that takes place within them, creating conflicts of interest so blatant that they must be concealed by funneling money through innocuous-sounding industry front groups.
At Penn State, for instance, the Energy and Mineral Engineering School is flooded with money from top energy companies: Chevron, BP, ConocoPhillips, Chesapeake Energy, and others. A consortium of natural gas producers, the Marcellus Shale Coalition, funds research into Pennsylvania’s vast shale reserves. Research from the university shows the Marcellus group the best locations and techniques to drill. Researchers from Penn State are also used to actively promote the industry to potential investors and to provide cover against environmental criticism.
This type of “academic capture” has become distressingly common, and their success has emboldened business forces to seek greater control over university administration. The erstwhile firing of University of Virginia President Teresa Sullivan last month represented the largest attempted power grab to date. Sullivan, a popular administrator with a distinguished record of service at several top public institutions, had been in the office less than two years before the business-dominated Board of Visitors forced her resignation. Her crime, which only trickled out after a series of leaked emails, was a lack of “strategic dynamism” — corporate lingo that means very little outside of the halls of McKinsey and Co. and probably just as little within.
Sullivan was reinstated after an overwhelming public backlash, but not before issuing this make-no-mistake rebuttal to those who engineered her ouster:
Corporate-style, top-down leadership does not work in a great university. Sustained change with buy-in does work.
I have grown up around universities my entire life, either as a student or a child hanging around my parents’ faculty lounge. Sullivan’s statement makes intuitive sense to many who know that environment. For those who don’t, it begs the question, what makes universities different than corporations? I will attempt to answer a slightly different, albeit related, question: Why can’t higher education be left to the free market?
The answer is that college education is subject to inevitable market failure, which would leave society less educated and less well-off than it is now (a sobering thought, no doubt.) This can be shown through basic economic reasoning.
Firms, in a competitive market, take the prices determined by supply and demand. They produce at the level where their marginal cost — the cost of producing one additional unit — equals marginal revenue. After that point, there is no more profit to be made from additional production. In an efficient market, the collection of firms that make up the market will satisfy the aggregate demand of consumers at the price where no economic profit is to be had.
Despite competition among thousands of relatively similar institutions, higher education is not an efficient market. If left to supply and demand, the market would underproduce education. That’s because consumers — students, in this instance — set their demand curves based on their expected personal return on their educational investment. If the return is greater than the financial costs of attendance and the opportunity costs of four years of foregone wages, then the rational consumer will choose to attend college.
The system breaks down, though, when the spinoff effects, or positive externalities, of higher education are considered. Society benefits when more people go to college — not only do college grads create more wealth (and taxes) for others, but they are statistically more likely to use fewer government services. They also provide qualitative benefits through patronage of the arts, activity within their communities, etc. The educated individual does not directly reap these positive effects, thus excluding them from the “benefit” calculation of his or her cost/benefit analysis. In other words, students would bear the entire costs of their education but accrue only part of the benefits. The market demand for higher education would be less than the socially optimal level, and the rest of us would suffer the consequences. For society to attain the most efficient level of education, the costs must be publicly defrayed.
Stated another way, we all benefit from someone else’s education, so it is only fair for us to pick up some of the tab by creating public universities, offering tax breaks to private ones, and providing loans and grants to students. Of course, much of the profit is still pocketed by the college grads themselves — most estimates say $1 million in additional lifetime earnings — so it is reasonable to ask individuals to bear some of the cost of their own schooling. The debate over how much rests on our political values, but we would all suffer if higher education were left solely to the devices of the market.
Market failure doesn’t end with the decision of whether to attend college. The market also breaks down when students are deciding where to attend.
The law of demand — a fundamental principle of economics — states that as price of a good increases, the quantity demanded will decrease. If hamburgers get more expensive, I’ll eat more hot dogs instead. The demand for higher education often defies this principle. Tuition increases should decrease demand, but many universities receive more applications after they raise their sticker price. Part of the explanation lies in product differentiation. A degree from Harvard will usually result in better employment prospects than one from Mississippi State, so students will be willing to pay more for it.
But a larger, more counterintuitive explanation is that the people who make the decision of where to attend college — high school seniors and their parents — often have little information about the relative academic quality of institutions, especially those in the second and third tiers that don’t have national reputations. Tuition is often viewed as a proxy for quality: the most expensive schools must also be the best. Like a rare set of goods including designer handbags and fine wines, universities often race to the top instead of competing for the lowest price.
The fees introduction in the UK provides a good illustration of this “Giffen” effect. University attendance was free until 1998, when the Blair government allowed schools to charge students up to £1,000 annually. The cap has been raised several times, most recently by the current Cameron coalition government, which tripled it to £9,000. The expectation was that few universities would charge the maximum fee — competition would drive tuition down, and those schools that overcharged would lose out to cheaper universities.
The opposite has happened. Sixty-four universities have set their fees at the £9,000, provoking large street protests from students who reached the wrong age at the wrong time. The fact is, outside of Oxford, Cambridge, and a handful of others, few British universities can certify their academic quality on reputation alone. Price has become an indicator of status, and those that charged less than £9,000 were perceived less favorably than those that maxed out.
In the mid-20th century, the United States revolutionized higher education around the globe by combining the dual principles of high quality and high access. The retrenchment in public funding for higher education and exploding costs for students threaten that consensus, one that has been as influential as any in fostering the nation’s economic vitality. This post only touches the surface of these issues, but it hopefully provides a foundation for future discussion on this blog and elsewhere about the risk of conflating the missions of our institutions of higher learning with those of the private sector.