Tuesday, February 05, 2008

Creative Destruction in Higher Education

By Richard Vedder

Markets work by rewarding and punishing participants in exchanges. Those who produce quality products at low prices which people want to buy make good profits and get rich; those who try to sell something not desired, or too shoddy, etc., lose money, prestige, job security, etc. These incentives and punishments propel market economies to serve consumers well, promoting prosperity, even longer life expectancies. That is why Joseph Schumpeter extolled the virtues of "creative destruction."

Unfortunately, we see little of that in higher education. And the lack of strong incentives --of carrots and sticks --is an impediment to growth (the exception, of course, is the for profit higher education companies).

In the last twelve months, titans in charge of three top Wall Street firms --Citicorp, Merrill Lynch and Bear Stearns -- have all lost their jobs because they misjudged the subprime mortgage and private equity markets, getting caught up in an unsustainable and dangerous euphoria. They were punished --heavily --and their companies will get religion and become more conservative in their practices. Many companies in the Fortune 500 50 years ago are dead or merged today --and others, like US Steel and, dare I say, General Motors, are pale versions of their former selves. Many of the top companies of today --e.g., Microsoft, Intel, Apple --were non-existent even 30 years ago. Such is the dynamics of American capitalism.

Yet a list of the top 100 colleges or universities in American higher education would be far more stable --do you know of a major, large university that has closed its doors? The leaders of the 1950s or 1960s measured by prestige, enrollment, budget size, etc. are pretty much the leaders of today. There are few incentives to be too innovative, too bold, etc. --it just does not make much difference. There is no bottom line, no rewards for success and, above all, little or no creative destruction.

To be sure, occasionally a university president gets the bounce --but as often as not it is internal politics, not external market pressures, that does him in. Take Larry Summers at Harvard. Under his tenure the institution's reputation reached an all time high, endowment soared, the school added important new faculty, etc. Yet he was canned because he said the unspeakable -- things like men may have a greater aptitude and interest in math than women, and he did not kowtow to the liberal faculty elites. He told a black prima donna he should do more research and spend less time doing rap songs (or something of that nature). That is a big, big no no. Horrors --he asked a professor to do his job instead of pontificate on matters on which he knew little!!!

Cayne at Bear Stearns left more because the value of the company fell by roughly one-half in the last year. He hurt stockholders and directors of the company, and they no doubt encouraged him to ease out of the role of running the company. His firing was for objectively valid reasons. We need more creative destruction in higher education.


Shown Poolack said...
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DC observer said...

You ignore the consumption/value time problem. Unlike in other industries, education is a good that one can't immediately value when consuming (only after finishing one's career can they retrospectively determine if they got the value they thought they were getting). This goes a long way towards explaining why there exist perverse outcomes to the low-cost/high-value market reward model you describe.

Cowboy said...
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Cowboy said...

Recession Fears Intensify
Service-Sector Index Hits Six-Year Low;

Further Rate Cuts Seen as Dow Drops 2.9%

"In the U.S., among the 15 service industries included in the ISM survey, only two -- utilities and educational services -- reported growth in business activity last month."