Tuesday, January 27, 2009

Are Profits in Higher Ed Distasteful?

by Andrew Gillen

Over at the Quick and the Ed, Chad Adelman becomes deeply distressed that people can profit from providing an education (or claiming to provide one).

knowledge and learning should be freely acquired rights for all people. It strikes me as utterly distasteful that a profit can be made off these things like other on commodities. They're not shoes, and they shouldn't be treated as such.

I normally find Adelman insightful and correct, so I was slightly taken aback to see him make such a statement.

My immediate instinct was to reference the famous Butcher quote from Adam Smith, which is important, but I want be very clear here.

Chad’s problem is that something as essential as “knowledge and learning” should not be left to a market where people might profit. But what about things that are even more essential? Using Maslow’s hierarchy of needs as our default, things like food and shelter are more essential than “knowledge and learning” (I’d put them in one of the top two categories). It seems odd to me to argue that it’s OK to profit from providing food and shelter to others, but that educational services are too essential to allow someone to profit by providing.

So why do we allow profit making by providers of food, shelter, and shoes, and by extension, why should we allow profit by providers of education?

We like things that have positive net value (benefits in excess of costs) and dislike things with negative net value, so it would be just super if there was a way to distinguish between the two. Well, profits and losses can serve precisely that purpose. Moreover, they provide incentives to expand profitable activities, and shut down unprofitable ones, helping to ensure that resources are reallocated into more productive uses.

When there are profits to be made, there is a constant search for ways to create net value. Without profits, most traditional schools didn't realize that there was an unmet need for night and weekend classes, and classes tailored more towards workplace skills, until the for-profits discovered a niche in them. This competition as a discovery process is one of the most important functions served by profits.

Students are well served by such competition, but unfortunately, this competition is currently limited largely to scheduling and "add-ons" (recreation, entertainment, etc.) since, as as Kevin points out:
since few colleges provide any kind of objective, comparable, reliable information about how much students learn while they're in college, what's left is a huge mass of largely undifferentiated degrees from non-selective institutions.
When you’ve got degrees that are undifferentiated, you cannot fully exploit the informational, coordinating, and incentivizing functions of profits (and losses). But that is an argument in favor of providing “objective, comparable, reliable information about how much students learn while they're in college”, not getting rid of profits. The more important the item, the more crucial it is to make maximum use of the information, coordination, and incentives that are embodied in profit making. It is precisely because knowledge and learning are so important that we need to make use of the profit system to creatively destruct our way towards better ways of providing them.

Moreover, the for-profits don’t seem to be the most profitable institutions of higher education – the publics and non-profits just don’t call it profit. Just compare the values in figure 4 of the new Delta Cost Project report to the values for education and related spending in figure 7. The difference between giving “profits” to shareholders, or spending it on auxiliary enterprises and massive presidential and coaching salaries seems a little... shall we say, blurred.

Is the system perfect? Heavens no, as recent events have helpfully reminded us. The profits of finance types, in retrospect, were not signaling that finance had such high positive net value, but that financial innovations got very good at making negative net value things look like positive ones. But to make some slight modifications to another great quote, capitalism is the worst form of societal organization except all the others that have been tried. Socialism sounds good to many, but the old joke that everything is free… but you get what you pay for, is just too true.

Are profits distasteful? I don’t know. But even supposing they are, they are much too useful to give up for that reason alone.

Through email Chad says:
here's how I see it: companies make profits off higher-order needs like food and shelter by marketing their products and convincing someone to pay for the good. The individual transactions are small. Companies making profits off higher education (what I consider a need but lesser than food, clothing, or shelter) market their products just as craftily and often more aggressively. The costs they demand are much higher, and much of their revenue comes directly from taxpayers. It isn't just a matter of individuals parting with their own money, because they're really spending a fair amount of John Q. Taxpayer's in the process. So, when I found out they're (accused of) manipulating students to keep this business model intact, it does strike me as distasteful.

I used the example of shoes deliberately. Some shoes are marketed at populations that have no reasonable justification for purchasing them, but yet my reaction isn't to try to stop the shoe sale. I may shake my head at their financial decisions, but I feel it's entirely a personal matter, and I leave it at that. But education is fundamentally different because of cost and the public interest at stake.

The topic of the public having an interest because of public financing is worth commenting on, but will have to wait for another time.

In retrospect, I certainly should have mentioned somewhere that fraudulent profits from misleading students, such as the story that spurred Chad's post are bad/distasteful.

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