Thursday, August 19, 2010

Academic Bankruptcy

New York Times OpEd "Academic Bankruptcy" (August 14th, 2010) makes the argument that colleges are spending too much, without really considering the economic landscape for such institutions.

Rather than learning to live within their means, Columbia University, where I teach, and New York University are engaged in a fierce competition to expand as widely and quickly as possible.

The article continues, mustering projections for future tuition without considering the forces at work:
With unemployment soaring, higher education has never been more important to society or more widely desired. But the collapse of our public education system and the skyrocketing cost of private education threaten to make college unaffordable for millions of young people. If recent trends continue, four years at a top-tier school will cost $330,000 in 2020, $525,000 in 2028 and $785,000 in 2035.

The "paying customers" of a college are its students. As the figures below make clear, college enrollment has continued to increase over time (click to enlarge 1, 2).

Given the acknowledged increase in the price of tuition, and the increase in the amount of college degrees purchased, we can conclude with certainty that demand for education has been increasing over time, as supply-and-demand are partially identified.
In addition, a high tuition price does not make education "unaffordable." When students see that the returns to skill are high (that education is valuable), they can borrow against their future earnings until it is not worthwhile to do so. What determines the price of education? In a human capital model (rather than a signaling model), the price of education will be equal to the value of the increase in productivity it provides students. This increase is determined largely by faculty quality. While talented faculty are scarce, but provide students with a high increase in productivity, the price of tuition will remain high.

Nothing in the article ties the price of education with increases in the productivity of students. If students see that they are not learning anything, and so realize that their future wages will not increase enough to justify tuition, they will not attend college. An aggregation of such decisions will decrease the demand for education and cause tuition to fall.

1 comment:

  1. Funded by direct government subsidies and indirectly through government subsidized loans the colleges and universities, particularly elite colleges and universities, have experienced essentially no push back on their pricing power. Consequently they have done exactly what the businesses that academicians generally despise would do - raise prices, expand production capacity and milk the cow. No such bubble can continue indefinitely so this will fail eventually but like home-builders or derivative-sellers or dotcom CEOs as long as there is a market the universities will sell product like mad. It would be nice to see a genuinely disruptive technology arise - for example, an on-line education product as comprehensive as the best university using teaching sessions that are honed, using graphics and multidimensional teaching tools beyond the average or even the best of in-university levels coupled with full testing and certification to eliminate the whole bricks and sticks advantage of universities or at least reduce the time on campus dramatically and reset the market at a much lower price level. The Duke University Global MBA program combining on-line classes with truncated focused on-campus sessions is a step in this direction but much more can be done.