Tuesday, November 13, 2007

Creative Destruction and Managerial Incentives in Higher Education

By Richard Vedder

I always rather liked Joseph Schumpeter's term "creative destruction." In competitive market capitalism, firms flourish and become wealthy at the same time others wither and die. Just like the human life cycle, firms are born, grow, decline, and die. The death of firms teaches lessons, and punishes firms that are not meeting consumer wants or failing to reduce costs and achieve the efficiency levels needed for profitability.

The not-for-profit sector is heavily subsidized by third parties, and one effect of that is that institutions seldom die. It was big news when Antioch College announced it was "temporarily" closing its flagship Yellow Springs campus. Antioch is an old school with a venerable tradition, offering progressive education to those wanting something a bit different from that available at most other alternatives. Now the third parties --in this case Antioch alums -- have come through with millions of bucks, and it appears there is a decent chance that the institution will survive.

Antioch pushed a flaky, counter-culture approach to higher education at a time (the 1980s through the present) when students were becoming more conservative and vocational in their orientation. It ignored the country club dimensions of life that students want these days -- the hot tubs, climbing walls, air conditioned dorms, etc. It overextended itself with new campuses across the country, ignoring its major brand identity. In the private for-profit sector, it would pay for it --and die. However, it will likely survive and live another day. I love diversity (true intellectual diversity, not the racist/sexist kind revered by college administrators), so I think there ought to be an “Antioch” around. Nevertheless, I also think that, on balance, probably more colleges should die, and more should be born as well (and that process is currently controlled by a form of academic birth control called accreditation).


Poor performance often escapes adverse consequences in higher education, but apparently good performance is increasingly rewarded. The new Chronicle survey of university presidents shows continued real salary increases of a fairly sizable amount, with median salaries at research universities rising at a compounded annual rate approaching 7 percent a year over the last five years. But how do we know these people are doing a good job? What performance measures do most schools employ in evaluating presidents? At least the football coaches have a win-loss record. As the million dollar president becomes commonplace, I ask: what happens to bad presidents? How do we know a president is worth a million dollars? As we drop more money out of airplanes, the academy is increasingly rewarding itself very well for a performance level generally unknown --and most colleges seem to want to keep it that way. Shame.

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