Free Trade in Higher Ed?...Not Likely in the Age of Massive Subsidization

by Daniel L. Bennett

Ben Wildavsky has an interesting essay in the Chronicle this morning in which he calls for free global trade in higher education.

The globalization of higher education should be embraced, not feared. The worldwide competition for human talent, the race to conduct innovative research, the push to extend university campuses to multiple countries, and the rush to produce knowledgeable and creative graduates who can strengthen increasingly knowledge-based economies—all of those trends are hugely beneficial to the world.

Just as free trade in manufacturing provides the lowest-cost goods, benefiting both consumers and the most efficient producers, global academic competition allows for the free movement of people and ideas, on the basis of merit, with enormously positive consequences for people, for universities, and for nations.

I'm all for free and open global competition in higher education and ideas, and generally think that protectionist measures that restrict the number of students, scholars or colleges that can be traded (imported/exported) do more harm than good. There may be one factor that contributes more to the protectionism than anything else: the fact that many governments subsidize higher education extensively.

The public subsidization of of higher ed creates many perverse incentives that work counter to free trade.

First, public subsidies are intended to serve domestic interest. Many taxpayers support the subsidization of higher ed because they want it to be affordable and accessible for domestic students. If colleges supported by taxpayer money were to tell the public that they plan to reject many more domestic students in order to open more seats to foreign students based on merit, and that the taxpayer funds would used to pay for these students, then I suspect that the public would soon begin to demand that the taxpayer funds be re-allocated in order to serve domestic interests (FYI, a similar scenario has been taking place at the prestigious public state universities for some time).

Second, subsidies create barriers to competition. Domestic industry players (i.e. - colleges and their associations) would be, and have been, opposed to new market entrants. This would mean more competition for students, faculty and especially public resources. Higher education has substantial lobbying efforts to impose barriers to entry and protect its interests, mainly just to deter domestic competition. Introduce foreign competition, and the stakes become much higher.

Third, public subsidies distort market prices. It is impossible to have a global free market in higher education when the industry is so heavily subsidized and consumers rarely incur the full costs, especially when the subsidies from different governments are in various amounts. This prevents normal supply and demand conditions from establishing a market-clearing price, even in a domestic market.

While I laud Wildavsky for his desire to create a global free market in higher education, it is not quite a realistic goal in the era of massive public subsidization of the industry. However, there is some optimism that globalization may help turn the page on affordability:

a new corporation is promising that American college students can get a year's tuition, room, board, airfare, and support services for that price ($12,750)...Just one catch: It's all in China.

(Note: this list of perverse incentives created by public subsidies is certainly not exhaustive)