Archibald and Feldman respond on education

by on February 22, 2011 at 12:52 pm in Economics, Education | Permalink

The discussion, which includes a reply to my previous post, is here, excerpt (but do read their entire response):

Next, we don’t see strong barriers to entry on the institutional side, either. In 1970, eight million students were enrolled in 2,000 American colleges and universities. Today, over 18 million are enrolled in roughly 4,300 institutions, according to the Digest of Educational Statistics. There has been a veritable explosion of places at for-profit and not-for-profit institutions alike. To take one example from the traditional nonprofit sector, the University of Central Florida has mushroomed from a start-up to one of the largest institutions in the nation in a relatively short period of time.

Competition among pre-existing universities has also grown more intense. As Caroline Hoxby has noted, the fraction of students attending schools within their own state has declined steadily since the 1940s.

"The quantity supplied is going up" does not equal "the quantity supplied is not restricted."  There is a lot more non-pasteurized cheese consumed in this country than twenty years ago, but it is still very much restricted. 

Accreditation constraints and social signaling constraints (a market failure, I might add) are two reasons why we don't see more effective competition in the higher education sector.  In what other economic sectors are the major quality players more or less the same decades later?  Apart from adding on a west coast, the list of top players hasn't changed all that much in a century.  There's something funny about this sector which we are not being told about, although I will agree the exact nature of the reputational stickiness remains a bit mysterious.  It is related to why the U.S. edge in higher education remains relatively robust, even when we have lost our edge in many other sectors.  Catch-up is hard.

On UCF, it is ranked #97 among public universities.  It seems to offer reasonable value, as such schools go, but it has hardly turned the market upside down.  George Mason also has grown from small to huge (about 30,000 students).  The question is why this kind of entry hasn't lowered prices.  What I see is lots of "more of the same" competition, little scope to experiment with true cost-cutting and different products, and so growing supply matches demand but has not been a force for major price declines relative to median wages.

The growing polarization of U.S. labor market outcomes has helped, indirectly, subsidize a lot of inefficiency in the upper tiers of U.S. higher education.  People are willing to pay for the ticket, just as the airlines can get away with more inefficiency when travel and migration demands are high. 

If I'm analyzing the high and growing prices for U.S. colleges and universities, I would start with some of these basic observations.  

1 E. Barandiaran February 22, 2011 at 9:19 am

Tyler, why do I get the impression that you're repeating a lot of platitudes from a standard Industrial Organization course? Hope you can provide specific and detailed evidence related to colleges.

2 Andrew February 22, 2011 at 9:21 am

A class should have more platitudes than a blog?

I think we found one problem!

3 Boris February 22, 2011 at 9:58 am

The thing with education is that it's akin to a Giffen good. See the incident a few years ago where Caltech got to the point where its endowment would allow it to eliminate undergraduate tuition altogether. The idea was discussed at length and rejected because it would cause people to value a Caltech education less…

4 dirk February 22, 2011 at 10:16 am

"In what other economic sectors are the major quality players more or less the same decades later?"

Hanson's recent post Status Isn't About Features, in rebuttal to Gladwell's recent complaint about college rankings, may shed some light. In other economic sectors, maintaining quality requires constant adaptation to new circumstances, and thus older firms often fall by the wayside to make way for newer ones with innovative ideas. The quality of one's education, however, is judged the same way has been for centuries: the status of the school you attended. Moreover, the status of a college grows with age. A venerable institution only becomes a more venerable institution…

5 Peter Russell February 22, 2011 at 10:30 am

The top universities are country clubs, not schools. That's the 'missing' piece from Mr. Cowen's analysis.

I went to one of them — and while the education is rigorous, you are there for who you meet.

My generation, Boomers, are the snobbiest people in US history. They want their kids to get into the top country clubs — I mean, colleges. So they will pay pretty much whatever the country clubs ask.

It's hard to start a new country club that has the social cachet of the old ones.

That's the real story behind the explosion in prices.

6 Slocum February 22, 2011 at 10:45 am

The question is why this kind of entry hasn't lowered prices.

Because accreditation doesn't permit much in the way of innovation, and this is a barrier that is maintained because the existing players want it that way — any new entrants will be required to use the same time-worn, inefficient methods as the existing players and have little room for lowering costs. This applies to a substantial degree to online courses as well, where the virtual organization mimics the bricks-and-mortar. I have friends who have taken online university courses and they were graded in part based on attendance and participation in weekly 'chat' sessions with the instructor and other students in the section. There was no classroom to heat, but the other inefficiencies remain.

What is REALLY needed is the ability to course credits and degrees by demonstrating proficiency rather than putting in seat time (whether that is a physical or virtual seat). That would truly be a revolutionary advance in efficiency and would upend the existing model — and so existing institutions will fight it to the death.

7 dirk February 22, 2011 at 11:00 am

"What is REALLY needed is the ability to course credits and degrees by demonstrating proficiency rather than putting in seat time (whether that is a physical or virtual seat). That would truly be a revolutionary advance in efficiency and would upend the existing model — and so existing institutions will fight it to the death."

I agree. But I don't see how to solve the problem of allowing one to obtain credit for online tests considering the ease of cheating.

Instead of accredited schools we need accredited testing services. You want a degree in civil engineering? Pass the 5 day test. Use whatever study materials you want, however many weeks or months or years it takes you, whether that means attending formal classes at a university or not. Separate those who teach from those who test.

8 AnotherPhil February 22, 2011 at 11:26 am

"You don't go to university to get an education. You can quite literally get the equivalent of an undergraduate education in any subject online now.

You go there to get a credential, like a passport or a driver's license or citizenship papers, without which certain aspects of life are much, much more difficult."

And at some schools, ironically the more prestigious ones where grading is far less important than holding the proper political or social views, and where any sort of heterodoxy is punished.

your credential isn't even that. Its a pedigree indicating proper breeding and socialization.

9 Steve Sailer February 22, 2011 at 11:40 am

If I buy a Chrysler and it turns out to be a lemon, I might have some incentive to lie about it to improve the resale value of my Chrysler. But it's not that big an incentive most of the time, and besides, my friends can see it's a lemon because it's always in the shop.

If I go to Harvard and get a lemon education, what incentive do I have to put the word out that Harvard's no good? I'll have "Harvard" on my resume for the rest of my life. A lot of employers and dates are impressed by that word, and even if I try to set them straight, they'll just think I'm being modest.

10 Andrew February 22, 2011 at 11:47 am

Steve,

I think you just described what I like to call "the Master's degree."

11 dirk February 22, 2011 at 12:38 pm

Perhaps a practical way for a "testing college" to get started is to be sponsored by an existing high-status school. For instance, MIT offers tons of free online course material. They would seem like a natural to offer an alternative independent study degree for those who can pass the tests. The reason they would be a natural, beyond the fact they seem predisposed toward providing free online material, is that since the "alternative MIT degree" wouldn't have the status of a traditional MIT degree, it wouldn't likely undermine the status of a traditional MIT degree. It would, however, compete with the status of degrees from lesser institutions. By the same token, lesser institutions would be more likely to shy away from offering alternative degrees because they would be more likely to bring down the reputation of the whole school. MIT's reputation probably isn't in any danger.

I see that sponsored-by-a-very-high-status-university scenario a more plausible path toward an accredited alternative college degree than one where a new university starts from scratch with a radical model and hopes to attain accreditation. Also, without the affiliation of a high-status college such degrees could become a race to the bottom, where "schools" would simply try to grant many degrees cheaply and easily and make money on volume (fears of which would likely prevent such schools from achieving accreditation in the first place). Dependence on sponsorship by a name brand school could keep their quality in check.

12 anonymous February 22, 2011 at 12:54 pm

Peter Russell has a point. There's that whole "it's not what you know, it's who you know" aspect of it, the old boys' club social networking that opens doors later in life.

You're not paying for knowledge, that's available for free these days. You're buying into a Facebook friends list of the future powerful.

13 JimD February 22, 2011 at 1:41 pm

BB and Peter Russell have it right. I teach at a public "teaching" university where the cost is low and the education is OK if you work at it. People go to more expensive colleges (much of the time) for signalling and all the various social opportunities.

This is why I don't get all this talk about education bubbles. It's like looking at the price of a Mercedes and concluding that there's a bubble in car prices. Do people really think that there won't be rich people willing to send their kids to Harvard in the future? Marginal private universities might be at risk, but even there I think an increase in population could support them.

As for why the elite colleges are elite – it's because they're elite! If the top 1% want to go to college together, it doesn't matter where they go as long as they agree where that is. Deciding on which new (cheaper) university to go to is a difficult coordination problem. It's easier to agree to go to the existing elite college.

14 Bill February 22, 2011 at 2:02 pm

Agree with dirk, with a limitation and a modification to his comment:

"Perhaps a practical way for a "testing college" to get started is to be sponsored by an existing high-status school. For instance, MIT offers tons of free online course material. They would seem like a natural to offer an alternative independent study degree for those who can pass the tests."

The first place it might start is at the low end, not the high end.

State funding for smaller state schools may be cut, so states are looking for ways low attendance but mandatory courses (Calc III, Linear Algebra, etc.) necessary for taking, say, engineering classes at the main state campus will be taught locally via the internet.

15 JLo February 22, 2011 at 2:53 pm

In what other economic sectors are the major quality players more or less the same decades later?

Two thoughts:

(1) Education is one of the oldest, most mature industries around. The University of Cambridge was founded in 1209. The University of Oxford can trace its roots back to 1096. If we compare the education biz to, say, the oil business, the two will look pretty similar. The same players have pretty much been at the top for decades on end. The only new entrants are state-owned oil companies that exist outside the competitive framework of world markets. There is, however, a big difference between the two, which brings me to my second point.

(2) Prestigious educational institutions are all non-profits that have numerous stakeholders, none of whom have any incentive to see their institutions acquired by a competitor. In most industries, operational and financial excellence allows a corporation to buy up its competitors. In the oil industry, we have recently seen Exxon acquire Mobil, Chevron acquire Texaco, and Conoco acquire Phillips. No matter how financially successful the University of Phoenix is, we will never see Harvard or even some minor prestigious school like Dartmouth added to the Apollo Group. This is because none of Harvard's most important stakeholders — its professors, students, administrators, and alumni — own Harvard. These stakeholders interests are purely in the prestige driven by their association with Harvard. This prestige would be greatly diminished if the educational equivalent of McDonald's took over Harvard, and so they would never allow Harvard to be acquired by a competitor.

16 Roger Sweeny February 22, 2011 at 3:57 pm

Imagine a business which you cannot enter unless you agree to run your firm the way everyone else in the industry does. Then, every ten years a committee of industry insiders inspects you to make sure you have kept your promise.

This is essentially what accreditation agencies do in the ed business. No wonder there is so little innovation.

17 Yakov A. February 22, 2011 at 5:19 pm

I tend to agree with Bill at Feb 22, 2011 2:56:42 PM. Basically, you have a differentiated market, where the competition isn't really with other schools but other schools that compete for your students.

I'll make 3 points though:

1) A university is basically a place conjoined with a concept that is not easily reduced. Part of the innovation universities undertake is to define and sell what they do. Competitors that are not universities simply change the mission of the university.

For example, we have seen major changes to higher education as a signaling device. One only has to look at the proliferation of the SAT, ACT, LSAT, GMAT, GRE, MCAT and DAT as examples of the traditional certification/testing role being usurped and at very low comparative cost. (I'm curious if anyone disputes that standardized testing has caused universities to look to focus on defining themselves by factors other than testing.)

2) Any innovation at a university is usually pretty easy to copy, as capture would conflict with the public mission of universities. Harvard cannot really patent a method of giving lectures it deems more effective and stop other competitors from using it without undermining its mission to educate the masses. Accordingly, there really isn't much incentive to offer such innovation and when it is offered, the leader of the pack can usually copy the model.

3) University pedigrees, from a non-academia employer's standpoint, are really only useful in the context of other established actors. Unless the degree says "A" is better than "B", "C", and "D", it isn't of any value. Accordingly, any incremental changes to the brand aren't really of much value. Effectively, gains can only be made if they are huge or if they are recognized by other universities. Basically, only parents, academics and students care enough about US News rankings to remember any one but the top 10 and the one or two top local schools.

18 Ed February 22, 2011 at 5:41 pm

"You're not paying for knowledge, that's available for free these days. You're buying into a Facebook friends list of the future powerful."

This point has been made several times above, but this "service" currently provided by higher education in the U.S. may eventually be undermined by the very thing prompting it, the increasing concentration of power and wealth and the decline in social mobility.

The current idea may be to send your kid to the same college as the rich and well-connected, so they will make connections with these people. But what if social mobility declines to the point where you can't even get ahead using that route? What if the well-connected already have their networks in place pre-college and aren't interested in extending it to relative outsiders? This may be what finally bursts the higher education bubble.

19 a February 22, 2011 at 11:47 pm

I also like the suggestion where non-university students are allowed to take exams in order to qualify for a university degree. It only would take one high-status institution to break ranks.

The ideal solution would be for the high-status institution to force its own students to take the same test, so that grades can be compared. If you accept this, the natural universities to institute this would be either Oxford or Cambridge Universities, where the final exam of students already determine their degree status. I'd suggest a high cost – maybe something like 2000 GBP – to take the exam (to limit the number who take it, as well as paying for the correction), at least at first, to see how the system works.

20 Donald A. Coffin February 23, 2011 at 8:06 am

A comment I have made elsewhere, but which is relevant here as well.

If we look at private, for-profit firms, we frequently observe that firms offering high value-for-the-price (Wal-Mart, McDonalds) or high value, at a price (Neimann-Marcus) expand, not by expanding one location but by adding locations. yet in higher education, many of the high value institutions seem to restrict themselves to single sites. (While the "chain" schools seem to provide significantly lower value.)

And so harvard remains on the Charles River; stanford remains in Palo Alto; Sarah Lawrence remains in NYC; the University of chicago remains in Chicago. Why haven't these high prestige, high-quality institutions opened campuses in other parts of the country/world?

The population of the US is more than 60% larger today than it was in 1960. Average family income has more than doubled. Do the elite institutions enroll 60% more students? The number of qualified students from the rest of the rorld has mushroomed, with population and income growth. Have the elite institutions matched this growth?

To my mind, the puzzling question is the unwillingness of elite institutions to leverage their brand names in the presence of extraordinary growth int he demand for enrollment at elite institutions…

21 Dan H. February 23, 2011 at 9:50 am

Steve Sailor said:

If I go to Harvard and get a lemon education, what incentive do I have to put the word out that Harvard's no good? I'll have "Harvard" on my resume for the rest of my life. A lot of employers and dates are impressed by that word, and even if I try to set them straight, they'll just think I'm being modest.

The answer's obvious – hire undercover Yale Grads to enroll in Harvard and critique it, and undercover Harvard Grads to check out Yale. Then both of them will be downgraded to the status of the local auto mechanic's school, and tuition will plummet. Win-Win for everyone.

22 Andrew February 24, 2011 at 2:39 am

"There is an entire industry for this in place."

"Andrew, what I'm suggesting is an industry that awards you an entire degree after taking a series of exams."

I understand. I'm just saying that there is already a system used by these very universities that they trust for admissions and certification. So, the mechanics is already there, all that would be required logistically is to expand the offerings.

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