The cost of a university education in the US and the UK has risen sharply in the past four decades despite the rise of costless ways of sharing information on the internet.
Why is this happening?
Defenders of the status quo argue that it’s an expression of the market. Students wouldn’t spend three-four years on an undergraduate degree if they didn’t think it was worth it.
Behind this trend is the automation of processes that previously involved human labour. Unskilled labourers have been replaced by machines in farming and construction. The decline in manufacturing in advanced economies has contributed to this trend.
Young people recognise they need the skills employers want. These now are increasingly the ability to use communications technology and to communicate effectively on and offline plus the cognitive skills that full-time education can deliver.
Conventional economists argue that paying for university education is analogous to investing in a home or a pension. Education involves creating intellectual capital that will produce a higher level of lifetime income. A person with a university degree earns more on average than one without. In the UK, the estimated lifetime advantage of a three-year undergraduate degree is about $400,000. For some disciplines – including medicine, hard sciences and finance — the returns are much higher. A graduate of a top business school can expect to get back every penny spent on an MBA within 10 years and often sooner.
Influenced by the logic of these arguments, policymakers have concluded that the returns on university education are essentially privately enjoyed. This has been compounded by government spending constraints. Public financing of higher education has been cut or capped.
Universities have started to lose faith in the idea they are institutions operating for the public good and are behaving like businesses. They are putting up fees to cover the loss of government funding.
For conventional economists, the challenge universities face is essentially about transforming themselves from being state-subsidised providers of an elite good into competitive service businesses accessible to all that want what they sell, provided they can afford to pay.
It’s a challenge that other sectors of the economy have addressed. It’s time for higher education to do the same.
This line of thinking has supply-side implications and justifies increasing pressure for university teachers to be stripped of lifetime job security. If demand for their services falls (because of changing tastes or a perception the teacher is inadequate), university teachers should suffer the judgment of the market in the way that a hamburger chain might in the same circumstances.
Allowing the market to penalise also makes it possible for it to reward. A good teacher should get higher pay and status. An institution with better teachers will attract better students or students willing to pay a bit more for quality.
For many conventional economists, this conclusion is logical but still troubling nevertheless.
Some have themselves enjoyed subsidised higher education and attended university when fees in real terms were lower.
For many in higher education, being treated like a casual employee whose job security depends upon key performance indicators is a frightening novelty. Those specialising in unfashionable subjects that offer no obvious career advantages face an uncomfortable choice between losing income and status or retraining.
For many university teachers, it’s too late to change course. Some face redundancy or impecunious early retirement.
Selfish considerations aside, the main conventional objection to a market-based approach to higher education is based on distributional concerns. Elite institutions in the US and the UK continue to provide free or subsidised access to exceptional students. But exceptional students are by definition exceptional. Higher fees in top universities with the best records of placing students in well-paid employment will make it harder for lower-income students to get into them.
Student loans help, but the crisis in the US student loan system suggests that this approach may be unsustainable.
And there is evidence that the increase in the number of people with university degrees is reducing the premium graduates can now expect. A further period of full-time graduate education, and the ensuing costs, may be necessary. This in turn will penalise low-income people unless they are smart enough to get a scholarship.
Critics of trends in US and UK higher education argue education, once seen as a way for people to advance socially and economically on the basis of merit, is becoming an engine of inequality.
Conventional economists argue that painful adjustments often accompany economic change. Universities provide a service that is essentially like any other; they should not get special treatment. Defenders of the market say the right response is to focus on pre-university education and to introduce the market into elementary and high schools. This will raise the standards of education generally and increase the chances of those in state schools getting into university, and into elite institutions in particular.
The reformers argue what’s stopping this are bureaucratic controls over schools in the US and the UK, including the debilitating influence of labour unions over employment policies. They have a point.
Education has been a political issue in the US and the UK for more than a century. The state is involved with the details of teaching to an extent that can be counterproductive.
But the intensifying debate about the future of education makes it one of the great issues of our times. And it seems economics is bound to argue that the improving influence of the market should be given a larger role; with universities being the logical first place to start.
Economics 2030 agrees but for reasons that diverge sharply with the case conventional economics implies.
The starting point is understanding how value is created.
In manufacturing, this is done by combining human labour and skill, capital and technology in a way that produces goods that have a market price higher than the combined cost of the inputs.
This process may involve exploitation (though champions of the free market say this is impossible when the market is working properly).
Conventional economists argue income and wealth distribution are, essentially, not issues that economists should focus on.
What matters are the outputs. If they are worth more than the inputs, then value has been created. The free market will ensure that the amount will be optimised and optimally distributed among input-suppliers and consumers.
In services, in contrast, value is exclusively created through constructive interaction among producers and consumers in a situation where the capital required is often minimal and technology is principally held in the brains of the participants in a service transaction.
The interaction is two-way and iterative and this undermines the idea of distinct sellers and buyers.
Inputs and outputs take the form of intangibles the value of which is only intuitively discernible. The price paid for inputs and output essentially reflects the condition of the relationship between and among the participants in service interactions.
In education, the inputs and the outputs are knowledge in the brains of teachers and students. Ideas have a fungability that exceeds in quantity and quality anything seen in the manufacturing process.
A bad teacher addressing a room full of unwilling students is unlikely to produce much value. But a good teacher working with willing students can together produce results that may serve them all for a lifetime.
It could even be the same teacher and the same students but interacting on different days.
Ideas create most value when they are freely shared. One person who knows how to produce a good Youtube video will have a minimal impact on the booming market for online visual entertainment and education. But if everyone knows, then the value created will be infinitely greater.
The logic of service-value creation suggests education generally and higher education in particular have taken the wrong route for almost 50 years by applying principles that make sense in tangible good production to value creation in universities.
Columbia University, said to be the most expensive undergraduate school in the US which now charges almost $50,000 a year for tuition, may generate more income for its employees by charging high fees. But it is restricting the amount of value that it might create by making its lectures freely available.
How can the conflict between profit-maximisation and value-creation that is increasingly obvious in higher education be resolved? There are no short-term solutions. But the direction universities are taking in most advanced economies is surely wrong in principle.
One approach might be for Columbia to allow anyone able to complete a course to be allowed admission without having to be present full-time in the campus. Lectures and other teaching could be delivered online at marginal cost, which would be, of course, close to zero.
The objection is that this could lead to Columbia and other elite institutions going out of business. The solution, therefore, might be to award Columbia degrees only to those that have paid for residential study and/or have completed the final exams (at a lower cost if they are non-resident).
But what about teachers? The reputation of a world-class teacher delivering world-class lectures online would be enormously lifted by the fact that he or she is addressing a larger audience than the physical limits of the university class room allows.
More people are likely actually to want to go to study full-time with a Columbia University teacher who is well-known online. The institution as a whole would benefit as the reputation of individual teachers and the teaching team as a whole rises.
Providing free access to Columbia University lectures would consequently increase the institution’s reputation and demand for full-time education. For those unable to attend full-time, the benefit of top-class learning could be captured through effective distance learning. And the value-creating competence of those simply wishing to learn would be increased.
The net result would be that Columbia’s elite status would be maintained, its income (if anything) would rise and the knowledge of society as a whole would be increased at little additional cost. Elite education would continue but it would be available to many more than the present arrangements permit.
Education creates the most value when it is freely available and it’s at its most freely available when it is free.
University teachers already know this, but dread the implications.
But they have nothing to fear in a world where the communications revolution has made their skills increasingly relevant, increasingly in demand and easily distributed.