Our Universities: Academic Market Forces

The marketplace of higher education is special, unique, and provides something unlike any other enterprise. But, it is a marketplace nonetheless. Universities are subsidized by the state and therefore are obliged to respond to the social and economic needs of the state. Unfortunately, that is not always the case.

“The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or more properly speaking, for the ease of the masters.”

Adam Smith


In 1970:

– A gallon of gas cost 36 cents. The average price in 2011 was $3.50, an increase of nearly 1000% according to the US Department of Energy.

– The average home price in the U.S. was $25,000. When the bubble burst in 2006, the price topped $300,000, and has now shrunk to about $250,000, another 1,000% hike says jparsons.net.

– One ounce of Kellogg’s cornflakes cost 2.1 cents. Those same cornflakes are now 31.6 cents per ounce, an increase of 1,500% reports foodtimeline.org.

– Typical tuition and fees at public four-year institutions was about $425/year, now approximately $8,900/year, a 2,000% increase according to The College Board. Adding salt to the wound, they say “Average published tuition and fees at public four-year colleges and universities increased by 19% beyond the rate of inflation over the five years from 2003-04 to 2008-09, and by another 27% between 2008-09 and 2013-14.”

None of these prices are adjusted for inflation. If the market forces at work are similar across all enterprises, it appears that universities are like cornflakes.

While the price of college rises, increases are not inconsistent with the costs of other goods and services in the marketplace. This is not to suggest that universities should relax or take comfort. A 2010 Goldwater Institute study says, “Universities have in recent years vastly expanded their administrative bureaucracies, while in some cases actually shrinking the numbers of professors.” In the five years ending in 2007, enrollment rose by 14.5%, but administrators and bureaucrats per 100 students rose 38% and spending on non-teaching personnel by 66%.

Prices, fueled by omnipresent loans for any student wanting one, and universities willing to accept any student with a loan, have allowed a form of leadership and management slovenliness to prevail, compounded by increasingly laborious reports purportedly to assure accountability. Adam Smith’s masters seem asleep at the switch and awakened only to personal proclivity, rather than being purposefully responsive to market demands. All this accompanied by a throbbing disregard for the welfare of the student shrouded in trumped-up national purpose and the social/economic benefit of college degrees for all. The appearance of accountability absent real results yields little to nothing except increased costs.

Caroline Wolf Harlow, of the Bureau of Justice Statistics of the U.S. Justice Department says, “68% of state prison inmates did not receive a high school diploma.” This brittle phenomenon buoys leaders who proclaim that people with university degrees will not end up in prison. Therefore, it makes good policy to get more people degrees regardless of ability, preparation, motivation, or field of study: a limp cornflake.

Until recently state and federal taxpayer funds flowed freely to universities to offset rising prices, meet social demand for a better educated workforce, and, some would argue, inflate the cost of higher education just because the funds were there. In many states, post-secondary institutional funding is increased or decreased regardless of mission or effectiveness.

Gas, housing, and cornflakes impact the cost of university operations but labor costs — especially those of faculty and administrative salaries — account for the greatest increases, too frequently regardless of performance. To be sure, facilities add to the mix, some essential, such as libraries, classrooms, labs and technology, some less central but of value: athletics facilities, better housing, and improvements to the grounds. These are funded by long-term debt or the state, paid for by increased student tuition and fees in the first case and tax dollars in the second. The Goldwater Institute suggests that disproportionately puffed up salaries and administrative costs raise the price of college. Who can argue that? Smith’s masters may have lost track of purpose.

Our universities must responsibly serve authentic markets. Leadership should focus every ounce of attention on students and doggedly reward achievement.

We are not making or peddling cornflakes.


5 thoughts on “Our Universities: Academic Market Forces

  1. Good discussion as usual. Here are two related thoughts to ponder that reflect points you are making Walter:

    -the first was in an interview with an economic researcher who specializes in education (can’t remember his name off hand) who said something to the order of “20/30 years ago you might have been able to argue that college was an ‘investment’…but honestly looking at the cost and earnings data and the market for the majority degrees produced, you don’t want to be considering college as an ‘investment’. It’s not an accurate representation for most degree types. You can still go…but know it’s not so much an investment as a very expensive hobby.”

    -the second one is a point I bring up in conversations all the time. Anyone looking at how education has developed over the last half century has to admit that our current educational system is much more concerned with serving the needs of the adults in the system rather then the ‘children’…and it is secured as a monopoly at all levels (but k-12 especially) using the threat of force and asset confiscation to keep out competition. It’s just a fact.

  2. I think it should be noted that all three of the markets to which you compared education have been significantly manipulated in ways that are at least uneconomic, if not unethical. Grain subsidies prevent us from knowing a true market price for breakfast cereals at any point during the term. In 1970, OPEC had not yet been formed, so, while the 1970 price may represent the market clearing price of a commodity, since1973, with centrally directed constraints on production, we can’t really compare the situations. The boom in housing was brought about largely due to unscrupulous lending practices and a general change in our perspective on housing from primarily shelter to primarily investment. These price changes resulted from discontinuities, not normal inflationary pressures.

    So, while it could be said that University pricing is in line with these others over the period in question, that doesn’t say much for the honesty of the university pricing model.

    • Wow. Great point. I hadn’t even considered that I think in terms of the legitimacy of those markets those products represented. Of course these weren’t inflation adjusted dollars…but that we have inflationary dollars to the extent where noting can be so important, speaks to a primary mechanism for manipulating those markets as well. The process of QE and it’s influence in asset valuation is an obvious current example but similar schemes have worked over the last 40 years to juice various asset classes.

      I’m not even going to pretend I need to know about college for my kids right now. 30 years ago it would seem irresponsible “not to be planning for their future” when real returns on the cost of college had been historically realized. That perspective is diminishing rapidly. And we are typing on keyboards right now that have access to the largest library in human history…seemingly instantaneous in it’s access. That’s a “Black Swan” league transformation…up there with the printing press, learning to write and learning to speak in communication history. And it is in its infancy. The breakdown of gatekeeper control is amazing to watch…as it has already effected centralized media production and distribution as it is education…and the legitimacy of political and economic systems. My kids are over a decade from entering college. Why would I buy in to a state run college “savings account” or whatever marketing euphemism they are using. 🙂 I can trust the state to manage my savings…yeah, right. lol I’ve thought about an amount of cash and an offer…go to college or be entrepreneurial. And by then what we imagine as “higher education” today could by like visiting a historic recreational site. There’s a supposed Chinese (probably started in England:-) curse/proverb (both) that goes “May you live during interesting times.” We most certainly do.

      Good stuff AO.

  3. A great discussion indeed. This is one I have had frequently with various people concerned with their children going to college, choosing a field that will allow them to get a job and pay off their loans. Quite a tall order indeed. Students can’t afford to major in their area of interest anymore thanks to the corporatization of the university. They must choose one that makes sense financially. I myself wonder if my child will even be able to attend college in 10 years without living at home forever. It’s sad that many decisions being made seem to be to protect the power and privilege of the upper echelon without any regard to the teaching faculty or students. As quality of teaching goes down ( it has already) due to increased workloads of willing tenure track faculty, less students will be willing to pay for the product. In addition, students are dissatisfied with courses taught by T.A.s I have heard many say if they could go back they would attend a less expensive educational setting for their undergrad. studies rather than going to a more prestigious university to be taught by students who recently completed the class themselves. Cutting the support staff and teaching faculty that enables the machine to run and produce quality students is short sighted. Plus….. we are the lowest paid employees. You get four of me for one administrator who generates no income at all and has one to three secretaries to do all of their work for them. This path will have a dead end.

    In terms of education I completely agree that it is a system based on benefitting adults involved in the process. I have been researching critical thinking and how to teach it in k-12 and beyond. The foundational research is still pretty much cutting edge and was written in the 1950’s-1980s. We have known how to teach all along so why are we teaching this material in the way we are at the lowest level of Bloom’s? Because it would require thinking, collaboration, and legitimate continuing education….. which is work. Enough of the thinking for today and for me thus ignoring the future of our country!
    The Roman empire lasted about 1500 years and laid groundwork for future thinking and innovation. We have managed to ruin just about everything in about 200.

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