I’ve got a bunch of new faces in my RSS reader thanks to great lists from Ben Miller and Linda Perlstein. One of the new ones is Walt Gardner, who writes
This attitude calls into question whether proprietary schools are more interested in making a profit or providing education and training.This type of statement perfectly illustrates the difference between those who can’t stand for-profits, and those that think for-profits are very useful (I have no idea which camp Walt is in as this was the first post of his that I have read).
The primary purpose of any for profit institution, whether a school or a bakery, is to make profit. In a well functioning market for education, the only way to obtain sustainable profits would be to create value (a good education for the price), just as the only way to make a sustainable profit in the bakery business is to create value (a good baked good for the price).
But we don’t have a normally functioning market for higher ed. We have a system where the quality of education provided is unknown and outcomes (such as job placement rates and average salaries) are deliberately hidden. This means that profits and value creation do not necessarily go together.
Those who can’t stand for-profits see profits and say “How terrible. Money that could have been used to teach students is lining the pockets of corporate shareholders instead.” Those who hold out hope for for-profits see this and say “That’s unusual. There must be something dysfunctional about the functioning of higher ed.” They then look for peculiar aspects of the industry to explain the anomaly. They aren’t hard to find (see number 25 or our recent project for a brief introduction to them).
Given the loose connection between quality and profit, there are probably lots of examples of undeserved profits out there. But obsessing over their existences is akin to worrying about the symptom rather than the disease. The same system that allows for undeserved profits for for-profit schools also allows for them in public and private-non-profit schools. While they don’t distribute their “profits” to shareholders, as Richard Arum and Josipa Roksa have shown, they aren’t using them to provide an education either.
Instead of trying to banish the symptom (what we think are undeserved profits), we should treat the disease that allows them to exist. If we create a system where the connection between profit and value creation is strong, then the only way for-profits can make a profit will be to provide a good education. Importantly, such a strong connection would also fix the dysfunctional incentives of public and private-non-profit schools.
We can either fix the incentives of the system, which would lead to better for-profit, public and private-non-profit institutions alike, or we can continue in our quest to eradicate the for-profits, letting the dysfunction in public and private-non-profits fester. Doesn’t seem like a hard choice to me.
4 comments:
"But we don’t have a normally functioning market for higher ed."
That this is true, I grant. But let us not make the mistake of thinking that we know all we need to know about "markets," and that there are "normally functioning" markets.
Too often markets are idealized in some way that ignores the granularity of economic transactions. The neo-institutional critique of economics, for example, or Herbert Simon's bounded rationality, or modular economics all point to reasons why the necessary conditions for Coase's theorem is not met -- not ever -- in actuality.
On the other hand, it is clear that schooling and employment skills are now almost entirely de-coupled from each other. I think this fact -- this fact alone -- should cause us to step back and to step beyond common economic assumptions about markets and market failure in order to appropriate more meaningful models to explain what we are observing empirically. Don't you agree?
People going into a store and paying for the merchandise they have in their basket is a "normally functiong market." Running out of the store without paying for your merchandise (like the federal government) is not a normally functioning market (all other things equal).
"Too often markets are idealized in some way that ignores the granularity of economic transactions. The neo-institutional critique of economics, for example, or Herbert Simon's bounded rationality, or modular economics all point to reasons why the necessary conditions for Coase's theorem is not met -- not ever -- in actuality."
You don't say? Citing Coase's theorem is very abstract and one would be hard pressed to explain how it fits in your idea/vision of markets.
"On the other hand, it is clear that schooling and employment skills are now almost entirely de-coupled from each other. I think this fact -- this fact alone -- should cause us to step back and to step beyond common economic assumptions about markets and market failure in order to appropriate more meaningful models to explain what we are observing empirically. Don't you agree?"
Answer: No. Not until you can substantiate what you call "facts". Your "facts" sound more like a strawman than facts at this time. I believe you would do well to familiarize yourself with the way markets actually work outside of the inefficient institution I call High Ed. Man cannot live by textbooks alone.
Hi RWW.
I was attempting to draw out some of the assumptions underlying this blog in as gentle a way as I can.
These assumptions -- often described as "orthodox" or "free market" economics -- can be summarized in references to "markets". The orthodox view has come under increasing attack from a number of approaches, including neo-institutionalist economics, systems theory and anti-rational choice theory folks in sociology. And I would like to see this blog respond to some of these critiques.
So, in one sense you are right, this is very much an academic conversation. And I am attempting to understand both sides. For example, the Coase theorem is bedrock for conservatives wishing to lower transaction costs, such as the tuition costs for higher education in the US. But the same conservatives are ignoring two important things, at least.
First, activity and transactions that occur in modern society are conducted in and through large organizations, heavily bureaucratized and highly stratified. Arguably, when you walk into Malmart to make a purchase, you are engaging a massive marketing and distribution organization. It is a highly efficient organization, but it is not a market in a strict Coasian sense. There are no Coasian markets that I know of in this sense, although the internet can greatly reduce transaction costs. E-commerce can lower costs that may reduce the fraction of total productive effort required to operate the economy, but not the distribution of goods.
The second point is a paradox, or rather a contradiction that is posed at the heart of this blog like a very sharp dagger. It is this: suppose higher ed costs can be brought down to the point where no one is barred from entering college. This seems to be the eventual goal of this blog, right?
However, universal access to higher ed and an almost unlimited production of college degrees would render those degrees almost completely worthless simply because everyone would have one. The value of a degree lies in its relative scarcity and not its overabundance.
We are already seeing something like this happening in connection with law degrees -- the value to the holder of a law degree has declined significantly, and, as it was reported today, LSAT and law school application levels have started to drop.
Unlimited degree production also fuels credential inflation, which
devalues the hard-earned degrees of those currently possessing them, especially minorities. Obama and the economists at this blog are ignoring these results of open access policy, which some would argue are far more deleterious in the long run than limiting enrollment in some way.
Another counter-argument, for what it's worth, is that more transparency about tuition means more information -- something that is not always a good thing. You have probably heard of information overload (or, in conversations, "TMI" - too much information).
Well, it turns out that too much information paralyzes decision making, effectively shutting down price information flow and the buying process. The result is greater, not less, economic modularity.
Even greater transparency will be modular, not atomistic -- new information has to be carefully produced, packaged and distributed. These are all highly structured processes, and the information itself will be purposefully deployed by each institution. The "medium IS the message" in this case.
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