14 August 2020

Universities face a reckoning – it’s time for a radical degree of reform

By Dr Stephen Davies

Today universities and Higher Education (HE) in general are in crisis, on both sides of the Atlantic.

The immediate crisis is a financial one, triggered by the covid-19 pandemic – although the impact has been seismic because problems have been developing for some time.

Beyond the financial problems, HE in the Anglo-Saxon world faces a more profound and troubling set of questions – about its nature and purpose, its place in society, and the experiential value of a higher-level education for those who receive it.

Combined, these speak to the deeper, more fundamental crisis, which the financial rupture caused by covid will force all of us to confront. Failure to do so will have potentially disastrous results for society at large.

Most of the headlines at the moment are about the impact the pandemic has had on universities – which has indeed been dramatic. Institutions have been shuttered and work moved online, most programmes in the coming academic year will be radically disrupted due to continued social distancing measures, many overseas students have withdrawn and are unlikely to return, and there is the prospect of continuing impact on longer term demand for places. All of this has produced a massive and acute cash flow crisis for many institutions.

However, this is not simply the product of an extreme event upon a fundamentally sound system. The financial hit is severe because much of the sector was vulnerable due to overextension, excessive borrowing and a decline in both demand and the value of its product in terms of the return brought. In short: Covid has laid bare problems that already existed.

It has burst a bubble, one that has been steadily inflating for over four decades and one that has been identified by a number of authors, including Bryan Caplan, Phil Magness and Jason Brennan.

The most obvious facet of this is the relentless rise in tuition costsparticularly in the US, at well above the rate of inflation or income growth. Another is the equally relentless rise in costs and spending, on buildings and facilities but also on salaries, particularly of administrators. These may seem like signs of success – particularly when we note that another feature is a sustained rise in the number of people in HE, most notably in the UK – but they’re not.

Crucially, the growth in university attendance and costs has not created a more skilled and productive workforce. It has not improved social mobility, rather the reverse. There is no evidence that it has led to higher GDP growth. The reality, as Caplan points out, is that the growth of HE is all about labour market regulation. It is about controlling the access to high paid and (more importantly) high status occupations by making it dependent upon acquiring the certificate of a degree – in any subject.

The value of most degrees today is not inherent (which would make them a good in themselves, a pure consumption good) nor because of an enhancement of human capital that brings higher income. It is as a signal of mostly pre-existent qualities and attributes that make the holder a good bet for employment. At one time, for most students doing a degree was an end in itself with benefits such as greater knowledge and wider horizons. But as the signalling model became dominant from 1980 onwards, this became steadily less important as a motive for going to university.

For some students this remains the case, and a degree is a consumption good with an inherent value. For most, however, the reason for going to university now is simply to get a degree so as to get a higher paid and (more importantly) higher status job. This is highly regrettable and a corruption of the university’s mission, but it was also inevitable once acquiring a signal became the main selling point.

The results have been disastrous. The incentives created by producing a product that is mostly signal mean there is no competition over things such as price or type or quality of product or price differentiation, as we find in normal markets – at least not between institutions of the same status (largely a matter of inherited reputation). Instead the competition is over things like the non-educational experience and facilities, the perceived status of institutions, and the networking effects of attendance.

All this produces phenomena we are well aware of. In addition to inflation of both costs and expenditures there is also inflation in grades in a failed effort to raise the value of the signal – failed because everyone does it so the outcome is everyone getting higher grades. This in turn produces qualification inflation, with jobs that needed a first degree now requiring a post-graduate qualification and many moving from only needing a secondary level one to requiring a degree.

Yet the jobs themselves are not demanding any greater level of skill or capacities that can only be acquired at university. There is a marked decline in the quality of the academic experience in itself, for both students and faculty. Most seriously the real payoff for graduating is declining as numbers increase, with 35% of recent UK graduates now in non-degree level occupations and the income premium for most degrees falling sharply on both sides of the Atlantic, to the point where the lifetime earnings premium (if any) on most US degrees no longer covers the cost or provides anything like a return.

Covid has toppled this Ponzi scheme. Many institutions are insolvent and will go bust or merge. Governments should not bail them out, nor should they look to slim down the sector so it can go on as before. From a societal perspective this has happened just in time, as we are facing a serious problem of elite overproduction, which historically has never ended well. We should see this as an opportunity for rethinking the role and purpose of higher education and maybe rediscovering some old verities.

Dr Stephen Davies’s new report, To A Radical Degree, can be downloaded here.

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Dr Stephen Davies is Head of Education at the Institute of Economic Affairs

Columns are the author's own opinion and do not necessarily reflect the views of CapX.