William J. Corcoran
University Nebraska, Omaha
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Abstract: The essence of this paper is to advocate that all forms of government intervention into higher education be terminated, and that higher education experience completely the opportunities of the market process. We view the market process in Kirznerian terms, where entrepreneurs are alert to market dislocations, i.e., profit opportunities. This in turn provides the incentive for entrepreneurs to discover and innovate. The market process is viewed as an information producing institution. Information that reconciles the discontinuities between the values of the output, knowledge in the case of education, and the cost of the inputs. The entrepreneurs’ role in the market process is to remove the discontinuities. This paper indulges in the fantasy of an Austrian ideal that broaches what at present seems to be unthinkable: higher education institutions compete for profits in a fully competitive market process.
Keywords: market process, entrepreneur, particular information, disequilibrium.
An Austrian Fantasy: Higher Education
Higher Education (HE) is in trouble. We are seeing excessive price and cost increases, the dropout rate has been increasing, there is an increase in graduates who are either malemployed or unemployed, student loan burdens are high and the default rate on loans is increasing. In economic terms, it is apparent that resources are being misallocated in the HE sector. HE may even be experiencing a bubble akin to the recent one in real estate. Many HE institutions are in financial trouble and are predicted to fail. HE is ripe for change
There are a myriad of proposals on how to improve the situation. The purpose of this paper is not to add to these proposals or even to evaluate existing ones as likely solutions. Instead, it is to consider changing the institutional order such that whatever promising proposals appear viable an appropriate environment exists that will consider and implement them. In essence, this paper argues that HE should be completely market oriented, no government mandates or support of any kind. There should be no grants, subsidies, loans or government appropriations.
The government is involved with HE in several ways, One, it provides direct funding for students. Another involvement occurs because the receipt of federal funding to HE is tied to accreditation. Thus, accreditation acquires quasi-government authority. Also both the federal and state governments apply mandates that restrict HE. Overall, these involvements in effect lead to some degree of government control. The problems facing HE are related to this control.
For example, the student loan market with rates lower than the real cost of loans leads to an excess demand for such loans. Thus, too many students undertake a college education, and many are not fully qualified for college-level studies, which result in a higher dropout rate. Additionally, those who do graduate experience a higher level of unemployment due to excess supply.
A second example is that because of all the loans, grants and scholarships available from government excess demand occurs which in turn results in an increase in HE costs much greater than the rate of inflation.
REASONS FOR GOVERNMENT INTERVENTION
Most non-economists who support government intervention refer to it as a public good, which in their minds mean it should be supported by government. However, the requirements for a public good, that consumption by more than one person does not reduce the amount available and that free riders cannot be excluded from consuming the good, are not applicable to HE.
A stronger argument for government intervention in higher education is that it gives rise to externalities; others receive benefits from students becoming educated. One important benefit is greater productivity due to a greater amount of human capital. Thus everyone, on average, receives more goods and services.
Education is also a way of moving up, of breaking out of a lower income class status. HE provides mobility or at least it gives more equal opportunity and greater income equality.
Externalities are a cause of market failure. That is, the market in the above cases falls short of producing the optimal number of college graduates. The demand does not include the benefits experienced by other than the college student.
Market failure also occurs in other ways that involve prospective students’ decision making. One is incomplete information. Students do not have all the information to make a decision about college and its worth to them, thus college could be undervalued. Related is the tendency to focus on the present gratification over future benefits.
Another market failure occurs, it is argued, because students have no collateral. Credit markets assign them to a higher risk category that involves higher interest rates. This leads to fewer student loans and lower college enrolment.
REASONS AGAINST GOVERNMENT INTERVENTION
The first obvious argument against government intervention, especially in HE, is that it is not succeeding well in practice. Examples were given above. In addition, the percentage of monetarily poor students attending HE is declining.
A second argument is that government in general is just not good in displacing the private sector. It is not efficient in distributing or monitoring funds. Also, government tends towards bloated bureaucracies. It is clear that government must make general rules when dealing with large populations and this “one size fits all’ misses many subtle discriminations required when dealing with a large number of different individuals or firms.
Rothbard speaks to the problems of externalities. The fact that some are hurt is enough to invalidate the outcome. He argued that we are asking people to contribute who do not want the outcome. They receive no externality and they are paying for something that they do not value. Further he challenges whether a meaningful notion of social welfare can be assembled from separate sets of individual values?
Buchanan, in part, seconds this view. He points out that where there are problems of interpersonal comparisons of utility all attempts to evaluate the market in terms of a resource allocation norm are invalidated. In other words, some are hurt by the reallocation process and there is no way to measure whether the resulting gain is even a positive number.
It is argued here that the main reason against government intervention is its inability to make decisions with the full use of information. This is a much overlooked argument against government intervention. The problem with centralization of decisions is the fact that information about how things should be rationally ordered in the market is fragmented and widely dispersed such that no one individual has access to all the information. Hayek emphasizes that the main economic problem is to make the best use of the particular information of time and place. What system makes the best, most efficient use of all the relevant information? The two alternatives are central planning where decisions are made by experts or in a decentralized manner by many different individuals.
Examples of “particular information” are the differences that may exist. There may be differences in expertise, in requirements from local industries, in the options of competing or coordinating with others, in the concerns of local populations, in customers, their average incomes, in different political views, etc. The possible differences are innumerable.
The problems associated with using all the information available increase when there are changing circumstances. Changes may exist due to advances in digital technology, shifting demands, fluctuations of financial situations, variations in rates of growth and different adaptations by individuals or institutions. The necessity of taking into account individual local circumstances is increased. Awareness of all the circumstances and the best course cannot be known by the centralized decision maker.
Given differences and changes, the best solution is to have decisions being made where the problem exists, at the lowest level. Accepting this, then the question that arises is how are these low-level decisions to be coordinated with decisions being made elsewhere. Further, what is the guarantee that these decisions will move in the right direction? The answer is the market process.
THE MARKET PROCESS
Possibly the most definitive description of the market process is by Kirzner. He depicts a market in constant change. Because of these changes gaps arise between the value of products that can be produced and the value of inputs to produce them, a disequilibrium or dislocation giving rise to profit opportunities. The size of the profit opportunities is associated with the degree of dislocation that exists. Initially the full extent of these opportunities is not known. What will be the final price? How much will cost be reduced? What will the final product incorporating the new technology look like? What do consumers want?
The market process involves competing entrepreneurs who are alert to disequilibrium and who act to obtain the profits that these opportunities offer. In Kirzner’s depiction, the entrepreneur sees these as arbitrage situations. In reacting, the entrepreneur creates information about what is feasible, likely revealing even more profit opportunities. The process continues towards equilibrium where, if reached, all the discontinuities between the price of the product and the cost of the inputs are equalized. The market process moves toward the point where the value of resources in one area will equal its value of its use in another, a condition where wealth is maximized. All exchanges are voluntary and improve each party’s position. If equilibrium is reached, profits, which were the spur to carry out the possible changes, are eliminated. The benefits of the market process result in lower output prices, increased input prices, new products, and greater productivity.
Essentially the market process results in the use of given information and produces new information. It pushes the resources in the right direction by eliminating disequilibrium. It does, as stated by Hayek, what no one mind can do. It is a phenomenon that is underappreciated by many and even feared by some.
All the particular decisions at each location and at each time are interconnected with other decisions through the price system. Information is fragmented throughout and each makes the best use of it. Market success is coordinating all the individual plans and different demands.
Hayek tells us that through the use of all the widely-dispersed information not known to anyone in totality, institutions arise and adapt to serve our needs. It occurs in a seemingly irrational context, but it really is a combination of rationality and ignorance. To those uninitiated in the market process this creates unease and stretches trust. They apparently need to see rational decisions by active centralized decision makers solving problems.
Central control by government cannot make use of all the available information or give directives that would be fitting for each circumstance. They cannot generally promote or take advantage of all the options that show themselves as profit opportunities. The government or central decision maker would have to be omniscient. There is no substitute for the profit incentive within government.
When dealing with managing, centralized decision makers seem to hardly realize that they do not have all the available information. “Unintended consequences” is the term frequently used concerning government undertakings. Often they issue regulations that solve some obvious problem, then as these regulation are found lacking more are issued in turn. The process can get very complicated after just a few cycles,
THE MARKET PROCESS APPLIED TO HIGHER EDUCATION
Is the market process appropriate for higher education? HE faces many different demands: training for specific jobs, liberal arts education, remedial courses to supplement failures earlier in the educational process, mobility and access for the less privileged, equality, the needs of local businesses, producing goods citizens, etc.
In addition, HE takes many different forms: community colleges, for-profits, technical schools, schools with religious or political orientation, liberal arts, fine arts, music, and so on. Within each form, institutions have different strengths and weaknesses with programs, faculty and other resources. They have different histories and different endowments. They have wide differences in local circumstances.
The current state in HE is beset by problems requiring solutions. As stated earlier, costs are a big problem. HE institutions appear to be bloated with excess administration and increasing amenities. The proportion of low income students in HE is declining even with increases in funding. Earnings of college graduates are decreasing. And, in conjunction with the quality of education, which appears to be decreasing, questions of relevance are being raised. Further, there is the important issue of integrating new technologies.
All local knowledge must be included as part of the solution. Between making decisions at the local level and by a centralized decision maker it is clear decisions must be made at the level of the HE institutions. Each educator, researcher, department, college within a university and each university can evaluate from their position of knowledge and resources and decide on how best to proceed given the recognized demands and the particular circumstances they face. However, decisions made at the level of the HE institution must have some bearing on the overall requirements of other sectors of society. This is done by the price system within a market process.
HE will compete on price. They will undertake consideration of innovative proposals. They will consider these proposals within their unique circumstances. The array of proposals available will not be suitable for every HE institution.
It is more likely that the few centralized decision makers will overlook possible solutions that the many minds of a decentralized framework will not. This is a loss that is usually not accounted for and does not fit well when considering externalities within the conventional analysis. Within the market process solutions by one institution, if they are not unique to a particular case, can, when they are not constrained, be copied by others that find them useful. Potentially they can be transmitted to all.
The proposal by the Obama administration for HE with an overall theme to “pay for value” moves in the wrong direction. They are considering applying some method of rating colleges by access, affordability and outcomes and then rewarding or penalizing accordingly with the use of federal funding. This necessarily will involve arbitrary criteria with arbitrary weightings. They will likely be generalized measures based on statistical averages that will miss the particular information facing individual HE units. Or alternatively page after page of rules trying to meet the impossible task of covering every distinction will emerge.
Let’s reconsider the market process in the HE context. On first take, given current popular thinking about markets, it can be anticipated that there will be resistance to subjecting the noble goals of learning to the selfish interest, profits, of commercialization. The word greed often is used when criticizing the market process.
What are profits? In the market process, they arise because a need within society is being overlooked relative to the cost. The more urgent the need the greater the profit opportunity. Profits are a measure of the value created in satisfying that need. The more the HE condition is in disequilibrium, out of whack, the greater the incentive in the market to provide solutions. When profit opportunity exists it is a signal that inputs such as faculty, administration, supporting staff, is being unproductively used. The profits disappear as solutions are being made.
With a free market in HE students will be confronted with the real opportunity cost of an education. To the extent that the student is a consumer of education then he/she simply decides whether the benefits of the education is worthwhile in relation to the cost. If the education is seen as an investment then the student decides by comparing the present discounted value of the educational dividend that he might expect to the full opportunity cost.
Some argue that the student may be unaware and not be so forward looking to appreciate the possible future returns. In this case one can expect that HE institutions following their self-interest within the market process will seek out likely students and make them aware of their prospects.
Further entrepreneurial activity on the part of the HE institutions will likely bring about alliances with businesses to secure employment for their graduates.
What about the students who are poor? Students who are qualified for college work are likely to be recognized in the primary and secondary levels of education. Again, the entrepreneurial initiative on the part of HE institutions will impel them towards seeking out these students. And, they will carry out fund raising activities for donations to help support them. Where the government is out of the picture, private donations are likely to increase and go much further.
The current system of accreditation appears to be deficient. Gillan et al (2010: 48) tell us:
Our current system of higher education accreditation is broken. The system is mired in secrecy, delivers imprecise and largely unhelpful information, is clouded by possible currents of self-interest, restricts entrepreneurial initiative, is often costly to administer when all costs are considered, and is not sufficiently outcomes based. It does a poor job of conveying important information to those funding it, including the customers themselves (students) as well as major donors (governments, private philanthropists). Its relevance as a quality control and enhancement device is at best marginal.
Why do HE institutions accept the current state of accreditation? Essentially because government funding is associated with it and accreditation acquires quasi-government power. This association should end, and the power of accreditation as it currently exists will disappear.
However, there is still a need for accreditation by prospective students needing information and by HE needing to have its strengths verified. Where there is a need (demand) the market process will respond. Here again one cannot claim to know what will be the structure of a fully market-oriented accreditation system. It is likely to be voluntary and satisfactory to all parties.
There are many solutions to the problems of HE in the literature. Looking at some of them as impressive as they seem one gets no sense of which ones will be taken up and by which institutions? How will they be ordered in terms of priority? What will be the motive force to undertake them? How will choices coordinate with the plans of others? Just asking these questions hints about the overwhelming complexity involved. The market process at the institutional level gives the solutions.
Gillan, A., Bennett, D. L., and R. Vedder. 2010. The Inmates Running the Asylum: An Analysis of Higher Education Accreditation. Policy Paper from the Center for College Affordability and Productivity.