How to Fix Higher Education: Bring on Creative Destruction

The economist Joseph Schumpeter coined the phrase “creative destruction” to describe the working of capitalism: the old and obsolete is destroyed by changing technology and changing tastes.  The merciless operation of the market destroys companies that can’t adapt to new circumstances.

Destruction is the operative word.  It’s not pleasant.  Vigorous and once profitable operations fade away.  People lose their jobs and their money.  Customers find their operations upset by the disappearance of suppliers.

The Digital Equipment Corporation was founded in 1957 with a $70,000 investment.  Its minicomputers became extremely profitable, and at one point, DEC was the second largest computer company in the world.  However, by the 1990s it was losing money, was swallowed up by competitors, and faded away.  A world leading company couldn’t keep up, made mistakes, and was destroyed with shocking swiftness.

Another computer company, Apple, ran into trouble in the 1990s but changed its management and business model.  Apple quickly grew to become the largest company by capitalization in the world.  In this case, adversity was the mother of innovation.

The higher education industry is heavily supported by the government.  The support comes in the form of direct subsidies, research grants, and subsidies to students, such as student loans and scholarships.

Higher education has a hierarchal status system.  The colleges at the top level of the hierarchy have far more applicants than they need to fill their classes.  Students want to go to these colleges because they are hard to get into.  A student gains status by being admitted to and by graduating from an elite college, such as Harvard or Stanford.  It is unlikely that the students in the most prestigious colleges learn more than students attending colleges of the second or third rank, but they do enjoy higher status.

Colleges, with some exceptions, are operated inefficiently and practice antiquated methods of instruction.  Many institutions, including the elite institutions, don’t demand much of their students and practice grade inflation.  A too high proportion of students major in fields that have little vocational value.  As a result, many students graduate with the combination of poor employment prospects and a large student loan debt burden.

Many colleges have a strong left-wing political orientation, very much to the left of the mood of the center-right country that supports them.  There is no constitutional right of colleges to live off the government.  The taxpayers are justified in making demands of the colleges.  Foremost among those demands should be that the colleges run efficiently and prepare their students for economic life, and that the colleges not be political indoctrination mills.

As bad as things are, a government takeover or increased government supervision of the colleges could only make things worse.  The existing level of federal supervision of colleges has been a clear disaster.  For example, the government has pushed colleges to institute kangaroo courts to bypass the legal system to handle accusations of date rape.  What are they thinking?

A non-intrusive method of sending a wake-up call to the colleges is needed.  When companies become lazy and inefficient, the wake-up call comes from the market.  The elite colleges look upon notions of efficiency and service to society in much the same manner that feudal nobility looked upon manual labor.  They consider themselves to be above such mundane considerations – an attitude that is the consequence of decades of easily earned generous subsidies.

Because the elite colleges are primarily providing status rather than practical education, and because they enjoy a large excess of applicants, the elite colleges are insulated from market forces.  They are perfectly happy to take the easy path: not innovating and constantly raising tuition, rather than cutting expenses or adopting more efficient educational methods.  These colleges are actually insulted by the idea that their curriculum should provide for the needs of society or aid the vocational aspirations of their students.  Instead, they promote vague concepts such as liberal education and the life of the mind.  The curriculum is designed for the amusement of the faculty and justified, after the fact, as if it was designed to satisfy some higher purpose.

As the economist Thorstein Veblen noted more than 100 years ago, if one engages in conspicuous consumption, the status-raising effects of the conspicuous consumption are greater the more useless and expensive the consumption is.  Thus, the founders of Google don’t ride around in a regular corporate jet, or even a custom passenger jet such as a 100-passenger 737.  Rather, they have a personal 767, one of the largest jets manufactured, a plane that could transport hundreds.

The elite colleges are characterized by status-raising conspicuous consumption in nearly every aspect of their operations.  They compete with each other to demand the smallest teaching load from their employee-professors.  They have very expensive buildings designed to look impressive rather than to be utilitarian.  The colleges faithfully follow Veblen’s principle that expensive consumption of an impractical nature has the greatest status-raising effect.

Status-seeking and conspicuous consumption are not new and will not be eliminated any time soon.  However, in higher education, it is entirely out of control and is negatively affecting the future of the country and the future of the graduates.  It is one thing for a wealthy heir to while away his college years at Harvard or Yale before taking his place in society.  It is quite different and more sinister for a talented middle-class youth to waste his time and the government’s money gaining a form of status more appropriate for the idle rich.  The youth may come to see himself as a member of the wealthy upper class, except, of course, that he has debts rather than money.

If you want to wake up a lethargic bureaucracy, cutting its budget works very well.  Even a small cut will evoke a hysterical reaction and a barrage of propaganda to the effect that services that people may actually care about will be cut.  Unfortunately, in the case of government-financed and protected bureaucracies, such as colleges, sustained cuts are the exception.

Proposals for reform supported by elite academia generally involve giving more money to elite academia.  In fact, no serious reform is ever going to emerge from academia unless academics are forced by unpleasant circumstance to think, for them, unthinkable thoughts.

Here are my concrete suggestions:

  1. Target scholarship money toward students studying in fields where there are good job prospects.
     
  2. For students receiving government support or loans, require colleges to limit tuition charges to the actual cost of instruction.  The purpose of student aid is to promote education, not to subsidize college bureaucracies.
     
  3. Limit student loans to reasonable amounts commensurate with reasonable estimates of the student’s potential for future earnings.  If a student defaults on repayment, the college should be made at least partially responsible.
     
  4. Cut back research funding by 30% and target research grants to academic areas important for the national economy and national defense.  Limit overhead grants to universities to a fixed percentage of research grants, a percentage that applies equally to all universities.  Universities should not be rewarded for having extravagant overhead expenses.

These are modest suggestions of a constructive nature that would encourage reform in the higher education sector.

The economist Joseph Schumpeter coined the phrase “creative destruction” to describe the working of capitalism: the old and obsolete is destroyed by changing technology and changing tastes.  The merciless operation of the market destroys companies that can’t adapt to new circumstances.

Destruction is the operative word.  It’s not pleasant.  Vigorous and once profitable operations fade away.  People lose their jobs and their money.  Customers find their operations upset by the disappearance of suppliers.

The Digital Equipment Corporation was founded in 1957 with a $70,000 investment.  Its minicomputers became extremely profitable, and at one point, DEC was the second largest computer company in the world.  However, by the 1990s it was losing money, was swallowed up by competitors, and faded away.  A world leading company couldn’t keep up, made mistakes, and was destroyed with shocking swiftness.

Another computer company, Apple, ran into trouble in the 1990s but changed its management and business model.  Apple quickly grew to become the largest company by capitalization in the world.  In this case, adversity was the mother of innovation.

The higher education industry is heavily supported by the government.  The support comes in the form of direct subsidies, research grants, and subsidies to students, such as student loans and scholarships.

Higher education has a hierarchal status system.  The colleges at the top level of the hierarchy have far more applicants than they need to fill their classes.  Students want to go to these colleges because they are hard to get into.  A student gains status by being admitted to and by graduating from an elite college, such as Harvard or Stanford.  It is unlikely that the students in the most prestigious colleges learn more than students attending colleges of the second or third rank, but they do enjoy higher status.

Colleges, with some exceptions, are operated inefficiently and practice antiquated methods of instruction.  Many institutions, including the elite institutions, don’t demand much of their students and practice grade inflation.  A too high proportion of students major in fields that have little vocational value.  As a result, many students graduate with the combination of poor employment prospects and a large student loan debt burden.

Many colleges have a strong left-wing political orientation, very much to the left of the mood of the center-right country that supports them.  There is no constitutional right of colleges to live off the government.  The taxpayers are justified in making demands of the colleges.  Foremost among those demands should be that the colleges run efficiently and prepare their students for economic life, and that the colleges not be political indoctrination mills.

As bad as things are, a government takeover or increased government supervision of the colleges could only make things worse.  The existing level of federal supervision of colleges has been a clear disaster.  For example, the government has pushed colleges to institute kangaroo courts to bypass the legal system to handle accusations of date rape.  What are they thinking?

A non-intrusive method of sending a wake-up call to the colleges is needed.  When companies become lazy and inefficient, the wake-up call comes from the market.  The elite colleges look upon notions of efficiency and service to society in much the same manner that feudal nobility looked upon manual labor.  They consider themselves to be above such mundane considerations – an attitude that is the consequence of decades of easily earned generous subsidies.

Because the elite colleges are primarily providing status rather than practical education, and because they enjoy a large excess of applicants, the elite colleges are insulated from market forces.  They are perfectly happy to take the easy path: not innovating and constantly raising tuition, rather than cutting expenses or adopting more efficient educational methods.  These colleges are actually insulted by the idea that their curriculum should provide for the needs of society or aid the vocational aspirations of their students.  Instead, they promote vague concepts such as liberal education and the life of the mind.  The curriculum is designed for the amusement of the faculty and justified, after the fact, as if it was designed to satisfy some higher purpose.

As the economist Thorstein Veblen noted more than 100 years ago, if one engages in conspicuous consumption, the status-raising effects of the conspicuous consumption are greater the more useless and expensive the consumption is.  Thus, the founders of Google don’t ride around in a regular corporate jet, or even a custom passenger jet such as a 100-passenger 737.  Rather, they have a personal 767, one of the largest jets manufactured, a plane that could transport hundreds.

The elite colleges are characterized by status-raising conspicuous consumption in nearly every aspect of their operations.  They compete with each other to demand the smallest teaching load from their employee-professors.  They have very expensive buildings designed to look impressive rather than to be utilitarian.  The colleges faithfully follow Veblen’s principle that expensive consumption of an impractical nature has the greatest status-raising effect.

Status-seeking and conspicuous consumption are not new and will not be eliminated any time soon.  However, in higher education, it is entirely out of control and is negatively affecting the future of the country and the future of the graduates.  It is one thing for a wealthy heir to while away his college years at Harvard or Yale before taking his place in society.  It is quite different and more sinister for a talented middle-class youth to waste his time and the government’s money gaining a form of status more appropriate for the idle rich.  The youth may come to see himself as a member of the wealthy upper class, except, of course, that he has debts rather than money.

If you want to wake up a lethargic bureaucracy, cutting its budget works very well.  Even a small cut will evoke a hysterical reaction and a barrage of propaganda to the effect that services that people may actually care about will be cut.  Unfortunately, in the case of government-financed and protected bureaucracies, such as colleges, sustained cuts are the exception.

Proposals for reform supported by elite academia generally involve giving more money to elite academia.  In fact, no serious reform is ever going to emerge from academia unless academics are forced by unpleasant circumstance to think, for them, unthinkable thoughts.

Here are my concrete suggestions:

  1. Target scholarship money toward students studying in fields where there are good job prospects.
     
  2. For students receiving government support or loans, require colleges to limit tuition charges to the actual cost of instruction.  The purpose of student aid is to promote education, not to subsidize college bureaucracies.
     
  3. Limit student loans to reasonable amounts commensurate with reasonable estimates of the student’s potential for future earnings.  If a student defaults on repayment, the college should be made at least partially responsible.
     
  4. Cut back research funding by 30% and target research grants to academic areas important for the national economy and national defense.  Limit overhead grants to universities to a fixed percentage of research grants, a percentage that applies equally to all universities.  Universities should not be rewarded for having extravagant overhead expenses.

These are modest suggestions of a constructive nature that would encourage reform in the higher education sector.