Super-Size It

by Richard Vedder

I am writing this on a boat on the Rhone River in France (the life of a college professor is tough), just having lunch with a retired McDonald's franchise holder. McDonald's became the most successful food chain in the world by selling standardized products of high quality in huge quantities. They were successful by keeping the number of items they sell at a small number, by offering goods of the same quality at every location, and by having thousands of restaurants and gaining economies of large scale operation.

The same thing is true about other products, such as automobiles and computers. A small number of companies dominate the market making a few standardized products and selling them in huge quantities. It is even true in retail trade—Wal-Mart became extremely profitable exploiting economies of scale.

But what about higher education? Does bigness increase success? Of course, measuring success is harder in a sector where most providers do not have a clear "bottom line." But most of the successful names—the Harvards, the Stanfords, the Northwesterns, the Dukes—are of moderate size and not growing much over time. They see disadvantages to expanding, such as by growing existing campuses or adding new ones. That is true for many of the great state universities as well. There is only one "University of Virginia" or "University of Georgia," for example. Even those schools with multiple campuses, like the University of California, are located in usually no more than 10 or 20 sites. And there is no indication that multiple campus schools like the University of Texas, State University of New York, the California State University system, etc., are more efficient or produce better outcomes than single campus schools with much smaller total enrollments.

There is one huge exception to this rule: For-profit higher education exhibits enormous economies of scale. The University of Phoenix has hundreds of thousands of students (more than any other school) and makes huge profits. Newer schools (Bridgepoint Education comes to mind) typically lose money in their first years and show ever growing profit margins as enrollments grow. Bigness breeds and augments success.

Why are the traditional universities so different from both the McDonald's/Wal-Mart model, and the model of the large proprietary schools? The for-profit schools have a clearly defined bottom line—profits—that is maximized by doing two things: cutting costs and increasing revenues. Traditional universities often deliberately limit their revenues by turning customers away, and, unlike McDonald's that accepts any customer than can pay, the Harvards of the world increase prestige by rejecting more customers.

To keep costs down, both McDonald's and the University of Phoenix offer a relatively modest number of products and produce them efficiently in a highly standardized way. The traditional universities teach thousands upon thousands of courses, most of them unimportant either to learning skills or understanding and advancing Western civilization, but are taught because the employees want to teach them. They are not standardized because that would be a violation of academic freedom, allegedly.

Maybe it is time traditional universities learn something from both McDonald's and the University of Phoenix (and Bridgepoint, Kaplan Higher Education, Corinithian Colleges, etc.). Why not do what Vance Fried proposes, and offer an $8,000 or $10,000 full cost per student university, offering a limited but adequate number of courses to give a solid education and even some vocational skills, but cut out all the rest?