When most decisions regarding the production, distribution, and consumption of goods and services are made by private individuals or businesses operating in a market environment, society tends to be prosperous, whereas poverty abounds in countries where economic activity is largely directed by governments. Market-driven nations like the United States, Switzerland, and Singapore are affluent and attract outside investors and workers, while government-dominated North Korea is exceedingly poor and has no in-migration.
Unfortunately, universities behave more like governments (which largely finance them) than like private enterprises, which are constantly pressured to cut costs and improve product quality in order to survive. Those incentives hardly exist in the world of colleges and universities.
Giving state subsidies to students in the form of vouchers would create a potential for more market-based competition.Could more market incentives be introduced into universities? Clearly, the answer is yes.
Some policy changes would require state or federal action. For example, giving state-government instructional subsidies to students in the form of vouchers (“scholarships”) instead of to the universities themselves would create a potential for more market-based competition. The customers would then control more of the revenues needed to finance university operations. At the federal level, the disastrous student-loan program needs to be rationalized through privatization.
But let’s focus on market-based reforms that could be initiated within the universities themselves. Here’s an example: Give university units—say, the psychology department—a much larger discretionary cash allocation than they receive at present, but make departments pay for the university-provided resources they use. Rent classrooms and office space to departments. Want a huge, popular lecture hall at 10:00 AM to teach big survey courses? The rent may be high, but if you want the same room at 8:00 AM or on Saturday mornings, the rent would be dirt cheap.
If the psychology, economics, and English departments all want the big lecture hall at 10:00 AM or 2:00 PM on Monday, Wednesday, and Friday, have an auction for the space. Maybe give rooms away for nothing for summer school or during other lightly attended periods. Do that, and suddenly the concept of trade-offs will emerge in decisions regarding the allocation of resources.
The concept can be extended to professors and staff. For example, give each full professor an annual budget of $15,000, each associate professor $12,000, and each assistant professor $10,000, then make them rent their office or lab space. Charge high rent for large offices with gorgeous views of the campus but very low rent for smaller interior offices in the basement.
Do the same regarding parking. Have free parking at the stadium a long distance from the office, but charge a healthy fee to park next to the building. The concept could be extended to make professors “pay” (from their budgets) for the use of research or teaching assistants.
The first great economist, Adam Smith, suggested an even more radical market approach. Have professors collect tuition fees for their courses, giving part of them to the university for administrative expenses (e.g., building maintenance and libraries). Smith claimed that the quality of teaching fell dramatically when professors were paid salaries directly by Oxford rather than having to be faculty entrepreneurs fighting for student tuition dollars.
Perhaps professors should become more like individual educational entrepreneurs, selling their services to multiple universities.While this approach has some real limitations (for example, professors giving all “A’s” or perhaps showing mildly pornographic videos in class to get robust enrollments), it ties faculty compensation to classroom performance much more than is currently observed. Perhaps professors should become more like individual educational entrepreneurs, selling their services to multiple universities using a combination of live and computer-based instruction.
Currently, faculty often pay far more attention to getting articles published in the Journal of Last Resort, where they are considered successful if they are read by 25 people and receive one scholarly citation. Diminishing returns long ago set into academic research, but, generally, faculty research is what interests scholars far more than what society needs. The dramatic recent rise in fraudulent research findings further demonstrates the problems with the current “publish or perish” model.
And tenure—lifetime employment contracts—sometimes mutes the productivity of faculty who effectively go into semi-retirement after tenure is awarded. Substituting five-year contracts for tenure would potentially enhance the contributions of senior faculty.
Excessive emphasis on market criteria can, of course, be detrimental. A lot of the critical-thinking skills and core knowledge needed to thrive in a market environment come from learning in traditional arts-and-sciences courses, such as English composition, history, basic math, etc. Majors in English literature or composition do not fare well financially as a rule, but a near-total lack of facility in the language used in commerce and life is a recipe for failure.
Moreover, the general-education component of learning could get annihilated if the sole determination of resource usage were related to study in a student’s major. Excessive vocationalism is as much a threat to proper resource allocation as is ignoring market realities completely.
One market-oriented approach is getting increased use: the hiring of outside firms to provide a host of support services, such as food and lodging, janitorial solutions, routine maintenance, IT development and data processing, on-campus bus transportation, and even search firms to help in hiring new senior personnel. I have even heard of one university using private firms to provide valet parking services to pampered students, whose wealth-to-academic-achievement ratio is inordinately high.
Incentives matter, and inefficiency in higher education largely reflects a failure of university leaders to implement them vigorously.There is one highly visible area where markets are robustly used in higher education: intercollegiate athletics, especially at the top Division I schools that are mostly in the Power Four conferences or are seriously vying for ball-throwing infamy in the wannabe conferences. Colleges compete with other forms of entertainment for media dollars and ticket sales. There is a clear, well-defined bottom line measured in win-loss records and, ultimately, in revenues. Why do top football coaches make far more than college presidents? They bring in more revenue!
With payments to athletes in the form of NIL (“name, image, and likeness”) compensation and, soon, even some direct salary payments to players, college sports are undergoing a huge market-based transformation, with most highly aspirational schools losing millions annually pursuing Football Valhalla. A full application of market-based criteria would almost certainly lead to the abandonment of intercollegiate athletics for most schools, since few of them break even financially using appropriate accounting standards.
Incentives matter, and inefficiency in higher education largely reflects a failure of university leaders to implement them vigorously. Using market-based approaches can help colleges facing stagnant enrollments survive during the Birth Dearth of coming years.
Richard K. Vedder is distinguished professor of economics emeritus at Ohio University and a senior fellow at the Independent Institute.