THE UNIVERSITY of N O R T H C A R O L I N A at C H A P E L H I L L DEPARTMENT OF PUBLIC POLICY ABERNETHY HALL CAMPUS BOX 3435
T 919.962.1600 F 919.962.5824
[email protected]
CHAPEL HILL, NC
dddill.web.unc.edu
27599-3435
DAVID D. DILL Professor Emeritus
Higher Education Markets and Public Policy1 David D. Dill Abstract: In the major reforms to higher education being introduced throughout the world, market and “market-like” policy instruments are assuming increasing importance. Long perceived as a unique characteristic of the US system of higher education, experiments with market competition in academic labor markets, institutional finance, student support, and the allocation of research funds are now evident in the higher education policy of many different nations. Ironically, the overt rationale for these reforms is not only the traditional argument of economic efficiency -- with its supposed corollary benefits of institutional adaptation and innovation -- but increasingly a resort to market competition as a means of achieving equity in the form of mass higher education. The paper explores the nature of markets in higher education, the policy mechanisms related to their implementation, and some emerging questions regarding their impact. Academic systems in the developed countries, which only a decade ago were perceived as possessing uniquely different traditions and structures (Clark, 1983), are now confronting similar forces of competition and social demand (Goedegebuure, et al, 1994). Comparable trends are visible also in the developing world (Neave and van Vught, 1994). As a consequence many countries are now engaged in vigorous policy debates about the appropriate balance between social demands, governmental regulation, and university autonomy. In these debates policy instruments based upon concepts of competitive markets are playing a central role (Dill and Sporn, 1995). The relationship between government policy and market behavior is intimate. Truly competitive markets would be an under-supplied good without the supporting policies of governments to define property rights, combat monopoly behavior, and enforce contracts. This is clearly so in the case of higher education, which in no country -- including the US -- is treated exclusively as a private good, and in many countries is or has been treated exclusively as a public good. That is, as a government controlled monopoly. The policy reforms of national governments are therefore a major focus of the current debates about the introduction of competitive markets into higher education, although the intensity of the argument sometimes obscures the larger economic forces that are playing a role in the changing 1
This paper was published in : Higher Education Policy, 1997, 10(3/4): 167-186. 1
both the institutions of government and of higher education throughout the world (Thurow, 1996). In the sections that follow the nature of markets in higher education will be examined, followed by a review of the forms of market-oriented policy instruments now being employed in many countries, and a concluding discussion of some problems in the application of the logic of markets to higher education. The analysis attempts to be fair-minded, neither supporting nor condemning market-oriented policy instruments per se, but seeking to better understand both the nature of these policies and their possible effects. THE NATURE OF HIGHER EDUCATION MARKETS Formally speaking a market is a means of organizing the exchange of goods and services based upon price, rather than upon other considerations such as tradition, or political choice. The use of the term market in higher education often implies, but does not always specify, the additional assumptions of perfectly competitive markets, under which conditions the allocation of goods and services will supposedly be optimally efficient for the larger society (Leslie and Johnson, 1974). When examining the dynamics of a particular sector such as higher education it is also important to recognize that there is not a single market, but rather multiple and interrelated markets. These include the market for programs of tertiary edition, but also the separate market for research, and the labor market for academic professionals. Theoretically the encouragement of “perfect competition” in any of these higher education markets lessens the probability that society will over-invest or under-invest in higher education relative to the social benefits actually produced, or relative to opportunity costs foregone in areas such as social welfare, health, or primary and secondary education. Thus encouraging competition among a sufficient number of both buyers and sellers in higher education supposedly assures that competition among them will provide discipline to institutional decisions about costs, prices, and product quality. Further, perfect competition assumes that purchasers of goods or services have sufficient information about the qualitative characteristics of goods and services to make economically “rational” choices. Finally, perfect competition assumes that the prices of goods and services effectively capture all the costs of production as well as the private benefits to be derived by consumers. These elemental points of microeconomics -- distinguishing between expected behavior in non-market, market, and perfect market conditions -- are in fact at the heart of contemporary debates about higher education policy. For example, many economists argue for government policies that deregulate higher education and permit private colleges and universities to compete with publicly funded institutions, because this would supposedly enable developing countries to make the transition from elite to mass systems with a more efficient allocation of scarce public resources (UNESCO, 1995; World Bank, 1994). As a second example, countries such as the UK have introduced competitive, “quasi-market” schemes for allocating public funding for both university places and research grants as a means of increasing efficiency or “value for money” (Williams, 1996). A third example is the rapid diffusion throughout the world of public policies requiring assessments of the quality of institutions and subject fields, as well as the public provision of the results of these evaluations (Westerheijden, Brennan, and Maassen, 1994). Implicitly if not explicitly these new policy instruments rely upon economic arguments, derived from the logic of perfect markets, that students and their parents have insufficient information to make effective choices among colleges and universities (Dill, 1995). Finally, the growing 2
interest in introducing or raising student fees (e.g., tuition) in public sector higher education and reallocating government support from institution-funding systems to student-funding systems, both reflect a desire to stimulate market-like behavior in higher education (Williams, 1996). Thus higher education policy in many countries is increasingly driven by the belief that freeing, facilitating, and simulating markets in higher education will provide academic institutions with incentives to improve the quality of teaching and research, to enhance academic productivity, and to stimulate innovations in academic programs, research, and services of benefit to the larger society. As noted above, much of the literature on markets in higher education focuses on the single market for academic programs. For example, Breneman (1981) attempted to assess the extent to which the salient features of a competitive market exist for academic programs within the United States: * The “firms” in this industry are not seeking to maximize profits or to minimize costs for a given level of activity.... It is not clear what objectives guide the behavior of colleges and universities, although some observers suggest that prestige, status, and quality are the central goals animating most academic behavior.... * The educational services produced by colleges and universities are not priced to the student at marginal cost, or even full cost. Instead, a wide range of net prices exists in this industry, reflecting more than cost or quality differences. The crazy-quilt pattern of subsidies to institutions and to students must give pause to anyone who would argue that prices do perform the task of allocating resources efficiently within or among institutions in this industry. * The information available to students about colleges can hardly be considered complete (or even adequate) in many cases; and because each student usually buys only one college education in a lifetime, he cannot easily correct initial errors by switching brands until he finds the best product. * Some firms in this industry (the state institutions) receive substantial public subsidies, whereas comparable firms (the independent institutions) do not. As a result, the prices charged for comparable services differ. They may also vary depending on the student’s place of residence (in state or out of state) (Breneman, 1981, p.25). Essentially Breneman argued that even in the US, historically the most market-oriented of higher education systems, there are a number of factors that contribute to “market failure,” that is the inadequacy of prices to efficiently allocate academic programs. Over the last two decades, however, US federal and state government policies have generally had the effect of increasing the degree to which prices have become a meaningful framework for organizing the distribution of academic programs. In the 1972 re-authorization of the Higher Education Act Congress rejected the entreaties of the higher education community to enact formula-based, enrollment-driven federal aid to academic institutions (Leslie and Johnson, 1974). Instead, legislators argued that providing aid directly to students was the most efficient and effective means to equalize opportunities in higher education and to harness market forces for enhancing the quality of higher education. At the state level, partly as a response to federal student assistance policies, and partly as a result of global economic competition which has placed great 3
strain on state budgets, governments have increasingly turned to a “high tuition-high aid” model of financing public sector higher education.2 This has led to a more even and competitive playing field between public and private institutions in the pricing of educational programs. Finally, both federal and state governments have been encouraging and in some cases requiring the publication of qualitative information by academic institutions in order to assist students in making choices among programs and institutions (Dill, 1997). The demand for this information has also been suggested by the emergence of a “secondary market” for academic quality information within the United States -- commercial publications such as US News and World Report and Money Magazine -- that attempts to lower the costs to consumers of obtaining information necessary to make “rational” academic choices. In sum, recent trends suggest that the logic of competitive markets is becoming more, not less, relevant to the organization of the US system of higher education. More significantly research on the activities of academic departments suggests that academic behavior can increasingly be explained in terms of self-interest.3 As James (1978, 1986, 1990; James and Neuberger, 1981) has illustrated in a number of influential articles, US colleges and universities are multi-product firms, producing both education and research. Thus colleges and universities compete in at least two divergent markets for goods and services at the same time.4 The nature and degree of competition in these two markets varies. For example, in the US a highly competitive market exists for the contracting of university research by both the federal government and private corporations, a market which features very sophisticated assessments of the potential benefits of alternative research “products.” As Breneman emphasizes with regard the market for education programs, however, there is insufficient information for students and their parents to make accurate assessments of the value added by differently-priced academic programs. As a result, while there is competition in both the research and academic program markets in the US, the former is more perfectly competitive than the latter. This discrepancy has significant implications for academic behavior. Faculty members, particularly in universities, tend to value research over teaching, because of its intrinsic interest, because of its clear contribution to unit reputation (which in the US is a major proxy for academic quality), and because in the competitive research and labor markets characteristic of the US system time spent on research can lead to increased grant revenue and future earnings for the individual faculty member (James, 1986). Because the decision-making process of most contemporary US universities tends to provide substantial authority to the department level, where faculty members operate much like a nonprofit labor cooperative, the faculty have significant control over the factors and consequently the costs of 2
The high tuition-high aid argument is based on claims of both efficiency and equity. The efficiency argument is that an undifferentiated subsidy for higher education may lead to overproduction of academic degrees beyond a socially optimal level, and that tax funds released by such a policy could be reassigned to an area of greater social benefit. The equity argument is that much of the benefit from earning a higher education degree is private, rather than public, and those with the capacity to pay for this benefit should be required to do so, reserving public support for those with demonstrated financial need. For an articulation of this position, see McPherson, Schapiro, and Winston, 1993. 3 The pursuit of self-interest by both administrators and faculties may lead to inflated costs in higher education. For a discussion of the rapid growth in US administrative costs, see Leslie, 1995. 4 Colleges and universities are also traditionally argued to provide “service.” In the instances of faculty clinical work in the health professions and faculty consulting in business and industry this service can often provide a separate, highly competitive market, and a highly lucrative opportunity to individual faculty members. The analysis that follows focuses on the respective markets for teaching and scholarship/research, because almost all faculty members and academic institutions are involved in both of these markets.
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production. In this context, absent close monitoring and valid measures of what students actually learn (both of which are rare in US higher education), faculty members will choose to “satisfice” the quality of their instruction, to limit their time investment in teaching, and to maximize their time investment in research. As Massy (1996) has argued: While faculty in research-intensive institutions do not usually neglect their teaching, it does not represent their prime objective, and this has profound implications for educational quality. Hence [satisficing] represents an agencytheory problem when viewed from the vantage point of funders concerned with undergraduate education (p. 83). In effect, faculty members act individually (and collectively) to cross-subsidize their research activity with revenues provided by government and tuition paying students principally for teaching. James (1986) tests this model by examining the trends in the percentage of self-reported faculty time devoted to teaching and in the average teaching loads at universities during the period 1953-1965, when the US higher education system evolved from an elite to a mass system. Her analysis confirms a decline in reported time spent teaching in major universities from 69 percent to 46 percent and a decline in weekly teaching loads over an equivalent period from more than sixteen hours to eight hours. During the same interval the proportion of time faculty members spent on research rose from 16 percent to 29 percent (James, 1986).5 More recent studies (Clotfelter, 1996; Fairweather, 1996; Getz and Siegfried, 1991) suggest a continuing trend toward teaching cross-subsidizing research. James’ analysis of academic organizations and the potential for cross-subsidization of research by teaching helps to illustrate a number of important aspects of markets in higher education. First as noted above, it illustrates Breneman’s point about the inadequacy of information in the market for academic programs, particularly the value-added by specific academic programs to student learning. Without such information individual students in marketlike systems of higher education may pay more than is necessary for their education, and governments may invest less than they expect in the quality of teaching and learning and more than they desire in academic research and scholarship.6 Further, the analysis underscores the 5 It is important for the non-US reader to be aware that this argument focuses on what is termed in US terminology “departmental research,” which is the cost of faculty time on research that is not supported externally. That is, research time funded by the institutions’ own resources and not from external contracts and grants. Within US colleges and universities, the cost of faculty time is traditionally listed in an accounting category termed “instruction and departmental research,” which in its definition suggests the potential for cross-subsidization. Getz and Siegfried (1991) note that if half of the instruction budget is devoted to university-supported faculty research (which is consistent with the previously reported surveys on faculty time allocations), then the US’s 98 research universities alone spent $5.9 billion of their own funds on research in 1987-88. This figure represents over 10 percent of the total federal expenditures on research and development for the same period, and over 50 percent of the federal expenditures on R&D in the academic sector. 6 Faculty members might argue that the cross-subsidization of research by teaching is in the public interest, because research provides substantial positive externalities to society that individuals and governments may be unlikely to fund to the optimum amount. Alternatively, of course, the marginal positive externalities generated by improvements in the quality of teaching and learning may be greater than those generated by increases in research. Whatever the merits of these respective arguments, James (1986) raises the obvious ethical and procedural question as to whether it is appropriate for university professionals rather than democratically elected officials to determine the allocation of public resources to collective goods.
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critical importance for public policy of comprehending the interrelationship between the markets for academic programs, research, and academic labor in higher education. As the competition for federal research grants and contracts has grown more keen because of government cutbacks in R&D expenditures (Feller, 1996), and as institutions attempt to maintain their research reputation by recruiting leading faculty members with offers of higher salaries and lower teaching loads, there is an increasingly visible “research drift” in the US system of higher education with potential negative effects on the quality of teaching and learning. One means of addressing this drift, would be to encourage public policies that make the market for academic programs more competitive. The foregoing analysis has focused on developments in the US system of higher education. However, as other nations rapidly expand access to higher education, emphasize tuition fees and student-funding in their higher education financing, “off-load” operational responsibility to academic institutions, encourage market competition in their research grant systems, and introduce competitive academic labor markets, similar problems of efficiency and equity may arise. How public policy may potentially address these issues through the shaping of market behavior in higher education is therefore likely to be of increasing importance in all countries. HIGHER EDUCATION POLICY AND MARKETS There are a number of rationales for the introduction of markets and/or market-like forms to higher education systems. Foremost is a desire for economic efficiency understood as “value for money,” particularly given the growing costs of meeting social demands for universal access to higher education (Williams, 1996). Also important is a desire to use market competition as an incentive for greater innovation and adaptation in higher education, than is thought to be possible through traditional forms of coordination relying on state control or professional norms. The introduction into higher education of government reforms encouraging competitive research grants systems, greater reliance on tuition fees, and providing incentives for private fund-raising are therefore examples of the application of market instruments in academic reform. The means by which public policy might introduce or modify market behavior in higher education are numerous, but interventions tend to occur at three critical points (Dill, 1996a). The actual performance of a higher education system is affected by the conduct of consumers and suppliers of higher education in such areas as the pricing of academic programs, research, and services, and inter-institutional cooperation or collusion. Conduct in turn is affected by the structure of the relevant market, which includes the number and size of consumers and suppliers, the degree of differentiation distinguishing competitors’ academic products, the presence or absence of barriers to entry and exit for new academic competitors, and the availability of substitute products (Dill and Sporn, 1995). Finally, market structure is in turn affected by certain basic conditions such as the general framework of law within which higher education operates. Although specific higher education policy problems are usually complex and highly contextual, generic categories of public policy instruments can be identified associated with each of these points of intervention (Table 1). First, public policies influence the basic conditions of
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Table 1: Generic public policies designed to influence higher education markets Basic Conditions Framework Rules • establishment of property rights • antitrust law • academic tenure
Market Structure Taxes and Subsidies • tuition fees • vouchers Freeing Markets • deregulation • privatization Simulating Markets • quasi-markets
Conduct Regulation • price regulation • quantity regulation • indirect information provision • direct information provision
higher education by altering the framework of laws and values within which academic institutions operate. Second, public policies influence market structure, principally through policy instruments that affect the pricing of goods and services, and by freeing and simulating markets. Third, public policies directly affect the conduct of buyers and sellers, primarily by regulation. Framework rules Public policies are essential frameworks to the basic conditions of competitive markets. For example, private property is a system of authority established by governments. By granting rights to individuals and organizations to control assets, governments create the framework of market exchange. In a number of developing nations the weak enforcement of intellectual property rights has depressed academic contributions to technical innovation (Sherwood, 1990). Therefore, laws specifying those property rights have been encouraged as a means of stimulating technology transfer between universities and industry. The affect of property rights on academic behavior is, however, both more pervasive and more subtle than this example might suggest (Massy, 1996). Consistent with the earlier discussion about teaching, an important question for academic program quality and diversity is the issue of who has ownership of the content of a particular course or component that is taught as part of an academic program. Does the property right belong to the state, to a professional association, to the institution, to the faculty of the subject or discipline, to a group of faculty members responsible for teaching the particular course, or to an individual faculty member? The definition of this property right varies among universities, among countries, and changes over time. For example, in the early part of the 19th century the curriculum of the University of North Carolina was a fixed program of studies required of all students (Powell, 1972). Not only was the curriculum for each student set by the faculty as a whole, but the specific works – Sallust, the whole, Cicero’s Orations – and subjects to be covered in each class section were also set by the collected faculty and publicly listed. In contrast, while contemporary academic policy at the University of North Carolina formally requires that the faculty of a department and school approve all courses to be regularly taught by the university, and while course titles and brief content descriptions exist for all courses, the current norms of academic specialization and academic freedom have been interpreted as meaning that the content and coverage of an individual course in many fields is the prerogative 7
of the faculty member teaching it. Partly in response to this informal allocation of academic property rights, a number of governments have developed policies re-allocating responsibility for reviewing the quality of academic programs from the institution to an independent, intermediary body. At the same time in those countries seeking to encourage innovation and adaptation in academic institutions, the traditional central government controls over curricula approval have often been delegated to the institutional level (Huisman, 1996). The impact of these reallocations of property rights on market behavior within higher education has yet to be effectively assessed. Antitrust law, which seeks to limit market failures caused by collusive efforts to restrict competition, is another means of shaping the basic conditions within which academic markets function. In the United States, monopolistic practices are controlled through the Antitrust Division of the US Justice Department, which investigates and prosecutes offenders under criminal laws. In a recent and major change in the interpretation of the law, the Justice Department has begun to apply the antitrust provisions of the Sherman Act to higher education. In the early 1990s the US academic world was startled to learn that a group of the nation’s most prestigious private universities were being formally charged with price fixing by the Justice Department (Rothschild and White, 1993). The institutions were accused of being in restraint of trade for meeting together annually in the so-called “contact group” to agree on the financial aid levels that would be offered to prospective students. The Justice Department has also begun investigating US accrediting bodies to determine to what extent they have been “captured” by professionals with a direct interest in the outcome of accreditation studies (Orlans, 1995). There is concern that accreditation processes may create monopoly conditions in the market for higher education programs. Others have raised the broader question as to the effect that academic collusion among universities to divide territory, constrain faculty salaries, or restrict scholarships to meritorious students might have upon intellectual competition and the incentive to create new fields (Stigler, 1994). Perhaps the best known example of a government policy designed to stimulate market competition by altering the basic conditions within which academic institutions compete is the Thatcher government’s policy eliminating academic tenure in UK universities (Williams, 1996). This act not only introduced greater competition into the UK academic labor market, but also altered one of the underlying values of the academic system itself. Thus government policies affecting the definition of private property as it applies in research or academic work, the application of antitrust policy to higher education to thwart the traditional problem of monopoly power, and alterations in academic tenure all illustrate the means by which government policy may influence the basic conditions which shape market behavior. In this manner, public policy can theoretically ensure the discipline of a competitive academic market that rewards entrepreneurial risk-taking, relevant quality improvement, and productivity enhancement. Taxes and subsidies In contrast to framework rules, which attempt to influence the basic conditions within which markets operate, taxes and subsidies can affect the actual structure of markets. Particularly in the United States, federal tax policy has played a significant, if largely invisible role in subsidizing higher education by providing incentives for families to invest in their childrens’ education, and for individuals and corporations to make gifts to both private and 8
public institutions (Gladieux and King, in press).7 Two particular forms of tax and subsidy, however, directly affect the competitive structure of markets by altering the relative price of academic programs: tuition fees and vouchers. Tuition fees for public sector institutions, or charges levied upon students that cover some portion of the underlying costs of higher education, may be understood as a form of tax designed to limit the over consumption of publicly subsidized academic programs. Tuition fees are frequently justified by the private benefits that a higher education conveys upon students in the form of higher lifetime earnings, increased career opportunities, and enhanced life chances (Johnstone, 1992). An important emerging argument for tuition is one based upon equity, rather than efficiency. Because students in higher education in most countries -- particularly in the more selective and expensive programs -- come disproportionately from middle and upper class elites, low or no tuition higher education may be disproportionately subsidizing the enrolled elites with the taxes of the non-enrolled working class. From the perspective of competitive markets, tuition also provides an explicit price for higher education. This price can theoretically create greater cost consciousness on the part both of students and institutions, and also make institutions more sensitive to the needs of students. Finally, tuition in the public sector provides greater opportunities for the emergence of private sector higher education and thereby can contribute to the potential responsiveness and diversity of the system overall. The early evidence from international experiments with tuition fees is that they do not appear to depress overall participation rates, but they do increase administrative costs (e.g., for marketing), and increase institutional incentives to attract full-cost paying students (Williams, 1996). However, a major policy problem from the standpoint of efficient markets is the difficulty governments have in effectively setting the level of tuition: the suitable amount of tuition in relationship to program cost; the appropriate tuition differentials among programs and types of students; and the correct increases in tuition over time. The converse of taxes on the supply side are subsidies on the demand side, such as voucher systems which permit students to purchase academic programs at reduced prices. The voucher may be in the form of a government grant and/or a government subsidized conventional loan, income contingent loan, or graduate tax (see Johnstone, 1992). To work effectively voucher systems must be coupled with a policy devolving responsibility to institutions for tuition pricing, resource allocation, and enrollments. Voucher, or student-funding systems, are argued to have advantages over institutional-funding systems directed by central governments (see the discussion of “quasi-markets,” to follow). Vouchers permit consumers to express their preferences on the value of academic programs directly to institutions, rather than to have their preferences filtered by government agencies. Further, voucher systems encourage students and their families to be more thoughtful consumers of academic programs, to consider both the quality and the cost of their purchases. Freeing and simulating markets Much of the current government effort to alter the structure of markets in higher education is motivated by a desire, not to correct perceived market failure, but to correct
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The monetary benefits to institutions and individuals of these subsidies (formally termed “tax expenditures”) in the US were estimated prior to the Tax Reform Act of 1986 to total over $4 billion a year.
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apparent government failure (Wolf, 1993).8 Thus there is an active attempt to inject competition into the delivery of public services and to leverage change in government through the use of market mechanisms. The primary means for reforming higher education through market-related policies is by freeing regulated markets, and by simulating markets through various “quasimarket” mechanisms. Freeing, or deregulating, higher education markets is generally of two types. The first is the relaxation of existing regulations in the public sector governing higher education finances, personnel, and curriculum, essentially devolving control over these decisions to the institutions, themselves (Huisman, 1996; Volkwein, 1987). This type of deregulation usually permits institutions to set and recover their own fees, to develop their own personnel classification systems (effectively eliminating civil service regulations), to negotiate their own contracts, and to approve their own academic programs. Ironically, this form of deregulation is often actively sought by administrators of public sector institutions who, as competitive forces rise and as public sector financial support per student falls, seek greater management flexibility in the operation of their institutions.9 Recent studies on management flexibility among public sector universities suggest that there is substantial variation in the degree of government control across states and nations (Volkwein, 1987; McDaniel, 1996). As international market competition increases in higher education, those public institutions operating in more regulated environments are likely to be at a competitive disadvantage. Therefore pressure for regulatory relief by administrators of public sector academic institutions will probably increase. The early lessons on deregulation in higher education reflect the experience in commercial markets such as the aviation industry. That is, government deregulation along one dimension may require a need to regulate more stringently along another dimension. For example, devolution of authority over finances and program approval to the institutional level has been accompanied by new regulations for accountability on institutional finances and academic quality in countries such as the US and UK. The second type of deregulation is privatization, which itself takes three forms: 1) demonopolization, in which a government relaxes or eliminates laws and regulations restricting private colleges and universities from competing with public institutions; 2) de-nationalization, or permitting previously state-controlled academic institutions to become independent; and 3) “contracting out,” in which services previously provided by the state sector such as food services, grounds keeping, or information technology support are placed out on tender to private enterprises. The simple existence of “private” institutions of higher education does not in itself create a competitive market in higher education (Geiger, 1988). In certain countries such as Belgium and the Netherlands, private, sectarian institutions have existed for many years, but are funded similarly to public sector institutions, and have few incentives to be innovative. In other countries private higher education exists with little direct governmental financial support, but is frequently subject to more restrictive regulations than the public sector. De-monopolization 8 The term “government failure” has emerged to describe those conditions in which governments, like markets, will sometimes fail to promote the social good, principally because of the defects of representative government and inefficiencies in using public agencies to produce and distribute goods. Advocates of the government failures approach therefore support using the market mechanism itself as a principal instrument of public policy. 9 Volkwein (1987) provides a valuable framework for the analysis of management flexibility in higher education, and classifies the US states according to the degree of flexibility they accord their public sector institutions. McDaniel (1996) has updated Volkwein’s analysis of the US and classifies OECD countries on the same dimensions.
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policies would thereby mean leveling the playing field of regulation between public and private higher education, and permitting private institutions to compete for government research grants and for government-supported students. Denationalization is less common, although there have been legislative debates in the American states of Florida, Maryland, Washington and Virginia about privatizing their public university systems, and in the state of Oregon, the medical university was restructured as a public corporation (Mingle and Epper, 1997). In an experiment in Sweden the government has recently permitted Chalmers Institute of Technology to restructure itself as a trust-fund, operating under private law. Contracting out, by contrast, is being experimented with in many countries (Williams, 1996). The evaluation of these reforms in the United States where the policy is being actively pursued by national, state, and local governments, reveals several consistent costs and benefits (MGT of America, 1996). First, contracting out appears to be most common in higher education support areas such as repairs and maintenance, food services, security, and printing, although it is also used with specialized professional services such as information technology and public relations. Second, contracting out often results in significant cost savings, often with improvements in service. Cost savings generally derive from the contractors’ ability to achieve economies of scale, greater management flexibility, reduced staffing levels, and undeniably from lower salaries and benefits characteristic of the private sector in the US. Third, academic institutions also encounter consistent problems with contracting out, especially when they lack an institutional capacity for supervising and monitoring contractors effectively, when it is difficult to effectively define and measure the service desired or to clearly identify current institutional costs for the service, and when the competitive private market for the service does not include a sufficient number of suppliers. Finally, contracting out often also has a negative effect on the morale of current employees in public institutions. When competition within a market cannot be guaranteed, it may be possible for government to simulate a market through the implementation of “quasi-markets” (Le Grand and Bartlett, 1993).10 Under the Conservative Government, the UK has widely applied the concept of quasi-markets to the welfare state, including higher education. With this approach the Government ceases being a direct provider of higher education, but instead becomes a purchaser of services from independent providers, who compete with each other in an internal or quasimarket. Quasi-markets differ from real markets in several respects, the most noteworthy being that while student consumers may express their preferences by their choice of educational programs, their choices are not purchases. Instead, purchasing is centralized in a monopsonistic government agency acting on the behalf of the consumers. Quasi-markets are in fact well established in higher education. Research councils offering competitive grant systems are essentially operating as quasi-markets, and increasing numbers of countries are directing more of their research support for universities through these competitive processes (Williams, 1991). In the UK a quasi-market system has been extended to almost all research funding through the coupling of institutional “block” funds for research to the results of a research assessment exercise (Williams, 1995).11 In the early 1990s the higher education funding councils also experimented with an institutional bidding process for contracts to teach undergraduates. The 10
For a comparative analysis of quasi-markets, see Niklasson, 1996. With regard research funding the UK quasi-market system differs in important respects from the US system. In the US the majority of federal research funding is allocated project by project based upon peer review. In the UK quasi-market system, government block funding for research is allocated to institutions based upon past research performance. 11
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early experience with quasi-markets in UK higher education has suggested several issues about their effectiveness. First is the traditional question of whether monopsonistic government purchasers will act in the interests of consumers in their administration of the pricing system for educational programs and research, or whether they will pursue their own priorities, essentially replicating the well-known ills of centralized educational planning. A second critical issue is the substantial increase in transaction costs created in a quasi-market system, particularly for consumer information on the quality of academic programs. The effects of public policy instruments employing market mechanisms will be subject to increasing evaluation. While the superiority of these instruments to traditional forms of government regulation are yet to be clearly demonstrated, the adoption of these new types of market policies will likely have significant impact upon academic systems. Regulation Regulations seek to alter the conduct of market behavior, primarily of sellers. The process by which regulation is carried out has traditionally been one of command and control, in which orders are given, compliance is monitored, and non-compliance is punished. Efforts at regulation relevant to influencing market behavior in higher education generally focus on regulating the prices institutions charge for academic programs, research or services, regulating enrollments or the production of certain programs, and encouraging the provision of information about the quality of programs and services, so that individual consumers can make more informed decisions. Price ceilings are often employed by government as a mechanism for preventing government subsidized organizations from overcharging. The previously noted shift to market systems of higher education financing featuring student-funding and institutionally set tuition fees runs the risk of providing an incentive for institutions to inflate costs and “prices.” In this context, whenever an institution increases its charges it may increase the eligibility of its students for government assistance. One means to combat this problem is to limit student assistance at institutions where tuition and fee increases exceed some government mandated standard (e.g., inflation plus one percent). Alternatively governments may try to develop cost standards for different institutional sectors and to limit student eligibility for financial aid to those institutions which fall within the recommended range (this is similar to cost reimbursement policies in the US health system). Still a third possibility is to set a maximum as to the amount of student assistance that a student could receive in a given year. In this way, future increases in the cost of attendance above the aid maximum would play no role in determining student eligibility for financial aid. The major weakness with this type of price regulation is that regulators have great difficulty in accurately determining average costs in higher education. Governments have commonly regulated the number of enrollments in certain especially expensive fields such as medicine through the mechanism of numerus clausus. Rapid massification has so strained the budgets of some countries that they have been motivated to reintroduce more dirigiste methods of allocating student places (Johnes, 1996). The funding councils in the UK have established target enrollment bands for each institution; enrollments in excess of the stipulated figures incur a financial penalty (these limits do not apply to overseas enrollments). A form of regulation which clearly relies on the logic of competitive markets is information provision, both indirect and direct. The importance of information on academic 12
programs, particularly on quality, for the effective functioning of higher education markets has been emphasized at several points. Because academic quality was historically deemed to be difficult to measure, governments have traditionally relied upon indirect information provision on academic quality through government licensing or accreditation, which provides an exclusive right to offer an academic program. While the logic of indirect information provision does not necessarily require professional self-regulation, this has become a common form of licensing in the US via the concept of voluntary institutional and/or specialized accreditation. As noted earlier, however, professional self-regulation can suffer from the same problems as price regulation; professional cartels are often in a position to create market inefficiencies for their own benefit by raising prices, restricting competition, or altering the quality of their service. As a result, there has been increased government interest in policies featuring direct provision of information to higher education consumers, particularly on the quality of teaching and learning. Direct information provision may be implemented through a government agency or intermediary body, as in the subject-level quality assessments conducted and made publicly available by the Higher Education Funding Council of England (HEFCE), or by mandating public provision of quality information by academic institutions themselves. In the United States the federal government has made federal aid contingent upon academic institutions publicly providing information on student graduation rates, and a number of states are requiring public sector institutions to make available performance indicators related to the quality of their teaching and learning (Dill, 1997). Over the last decade as national systems of higher education have moved from elite to mass status, government policies calling for the direct provision of academic quality information, usually featuring some form of peer review, have become a world-wide phenomena. While such polices appear to resolve the problem of “insufficient information” on academic quality, they generally are based upon subjective judgments of academic practice. Rarely do such assessments focus on or provide information about the outcomes of academic programs, the type of consumer information which is most vital if higher education markets are to perform efficiently. *
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Throughout this section the generic policy instruments that governments can employ to influence the basic conditions, structure, and conduct of higher education markets have been reviewed. Examples have been cited, where available, of applications of these instruments, and some suggestions provided of the possible effects of the respective policies. The information on potential policy impacts in higher education, however, is necessarily sketchy and often inferred from the experience with these instruments in other sectors. Since the effects of market policies will vary depending upon the social, political, and economic institutions of the relevant country in which they are inserted, much more information is needed on the implementations of these various instruments underway throughout the world. Enough is known, however, about the assumptions of perfect markets and of the behavior of academic systems to raise some concluding questions about the applicability of markets to higher education.
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PROBLEMS IN APPLYING MARKET FRAMEWORKS TO HIGHER EDUCATION: THE ASSUMPTION OF INSUFFICIENT INFORMATION The foregoing analysis of market-related policies suggested that a case can be made for encouraging competitive markets for academic labor, for research, and for other services such as academic consulting (which are often effectively a part of competitive markets in any event). The reviewed evidence for the superiority of competitive markets in the allocation of academic programs is less clear, however.12 In this regard, there is a need for more careful research and testing in higher education of the behavioral assumptions underlying the market model. The applications of the market logic to academic programs rests directly or indirectly upon the “market failures” assumption of insufficient information (Dill, 1995). That is, it is presumed that even if a “price” is created for academic programs through the adoption of tuition fees, students lack sufficient information about the quality of academic institutions or programs to make discriminating choices. It is further assumed that if such information were to be provided publicly by academic institutions under government mandate, by independent quality assurance agencies carrying out government policy, or by secondary information markets, that subsequent student choices would provide incentives for institutions to improve their academic quality. This simple logic lies behind the development and publication of academic quality assurance information in many countries. However, this logic rests upon a long and complex causal chain, which assumes first that reliable and valid measures of academic quality can be created, second that if provided students will use such information in their decisions on enrolling in higher education, and third that institutions as a consequence will respond to declining student numbers and will act to improve the quality of their academic programs. While it is theoretically conceivable that such a market could work efficiently, there are a number of practical problem in its implementation. For example, to achieve the supposed efficiencies of a competitive market the relevant information necessary for effective student choices is not peer evaluations of teaching processes, nor subjective judgments of the quality of a curriculum, but objective measures of the value added by a particular academic program.13 Academic faculties and institutions have few if any incentives to invest resources in the development of such outcome measures. As a result consumers must often rely upon proxies of academic quality such as research reputation. In the US studies controlling for student ability at entrance have found little correlation between student learning and the traditional institutional rankings based upon research reputation (Astin, 1985). Similar problems of valid measurement may occur even with government-mandated external assessments of the quality of teaching and learning. Despite many references to student learning in the design of the subject level assessments in the UK, the early rounds of assessment conducted by teams of peer reviewers organized by the HEFCE, focused not on educational outputs, but on educational process, particularly the quality of individual lectures in first degree programs (Dill, 1996b). In addition to being a measure of questionable validity, such assessments may also have the effect of reinforcing conventional methods of teaching, thereby 12
As discussed earlier, because universities are multi-product firms, combining the activities of research and teaching, there is also the separate problem of the distorting effects that increasingly competitive research markets may have on academic behavior, particularly in a context of less perfectly competitive academic program markets. For a similar argument, see Johnes (1996). 13 A comparable emphasis on the relationship between outcomes information and competition in the health care market is presented in Teisberg, Porter, and Brown, 1994.
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retarding the development of teaching and learning innovations that may be both more effective and efficient. Research on how American students actually choose a college or university does suggest that perception of program quality is an important predictor variable, but primarily for the more able students (Garvin, 1980; Litten and Hall, 1989). For all types of students, geographical location was a powerful predictor of college choice (Rothschild and White, 1993). Similar issues about the maturity of student decision making have been raised by experiences with the provision of quality assessment information in the UK. There has been limited evidence of public demand for the reports on program quality published by the HEFCE, and despite efforts by subject fields that received “excellent” ratings in the assessments to publicize their results, there is little evidence to date of related increases in student applications. Finally, an obvious criticism of the causal assumptions of the market logic in higher education is that it is unlikely that governments will let public sector institutions fail (Johnes, 1996). Therefore, the expected benefits that truly competitive markets are supposed to yield -institutional innovation, productivity enhancement, and quality improvement in academic programs -- may not materialize. The problem of immature consumers is one rationale for the implementation of quasimarkets, rather than consumer-oriented markets, for the distribution of academic programs. A central government agency can act as a principal representing the interests of the consumers, and making contracts with institutions on their behalf. The principal has the motivation and the power to carefully monitor academic quality, which the students and their families may lack. As already noted , however, government regulatory bodies may suffer from government failure. That is, rather than increasing efficiency, the principal or regulatory body may in fact contribute to inefficiency, because measuring the quality of academic output is ambiguous, monitoring is costly, and the quality assurance agency itself may not be subject to competition. A quasimarket approach also may divert universities from the creative tasks of educational program improvement into the wasteful activities of bureaucratic reporting, of efforts to mislead or impress regulators through rehearsed quality presentations, or of lobbying and public relations efforts designed to co-opt quality assurance agencies. Finally, the processes whereby external regulators can effectively influence poor performance, in a sector where there are strong and difficult to alter traditions of autonomy and professional control, have yet to be demonstrated.14 A case could be made that competitive markets might be made to work efficiently for academic programs in selected market segments of higher education. As a first example, the MBA market in the United States (and increasingly in Europe) is becoming highly competitive. In the US great attention is awarded to published quality rankings of these programs. The rankings include ratings by employers, proportion of MBA graduates employed, and average salaries of graduates, which collectively provide outcome information that potential students find of great relevance. Furthermore, there is some evidence that the keen market for students and quality reputation has led MBA programs to place a high premium on curriculum design, the evaluation of teaching, and on innovative techniques for teaching and learning, and in this sense 14 Despite expressed interest, as of this writing the HEFCE still has not connected institutional budgetary allocations to the outcomes of subject level assessments. Nor is there evidence within UK universities of internal reallocations reflecting these assessments. In Scotland the Scottish Higher Education Funding Council has provided a premium of 5% in funded student places to those universities whose disciplines receive an assessment rating of “excellent.” In the US there is also growing interest at the state level in tying institutional funding to performance measures related to teaching and learning (Dill, 1997).
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to be distinguishable from traditional academic programs within their own institutions (Rothschild and White, 1993; Shulman, 1993). This example, however, also illustrates some of the possible limitations of competitive markets, since MBA programs are often priced close to cost, and MBA students, in contrast to first degree students, are more mature, post-graduate students with a high motivation for careful program selection. Furthermore the measures of outcomes employed in evaluating MBA programs may be less relevant for first degree programs. A second example is the affect that international trade agreements such as NAFTA are having on markets for academic professional programs. While designed to increase the world-wide flows of goods and services, these agreements have also empowered organizations of professionals such as architects and engineers to coordinate the content of academic professional programs across nation-states (Peace-Lenn, 1997). These linkages are leading to international agreements among the professional bodies that may effectively provide international standards for academic programs with professional content. Academic institutions that wish to offer viable professional academic programs will therefore likely need to create curricula that fulfill global standards defined by the international professional bodies. Both the MBA and world professional standards examples suggest the importance of considering relevant market segments in the design of market-oriented policies for higher education (Garvin, 1980). Stimulating competitive graduate and professional program markets may be more feasible than efforts at the first degree level. Another factor affecting the emergence of more competitive markets for academic programs is the development of distance learning” mega-universities” (Daniel, 1996). In comparison to traditional universities, these new institutions have every incentive to create valid, outcome measures of student learning in order to demonstrate the competitive viability of their academic programs. Furthermore, their large economies of scale substantially lower the costs of such an effort. The potential market affects of mega-universities are illustrated by the proposed new Western Governors University (WGU) in the United States (Mingle and Epper, in press). The WGU will offer no instruction itself, but will facilitate student access to technology-based course modules and degree programs that are currently available through other colleges and universities. However, all participating degree offerings must be competency-based, thus the WGU provides a clear incentive for all participating (and all competing institutions, including traditional colleges and universities) to develop more publicly available measures of the outcomes of their academic programs. The policy alternatives for addressing the academic quality problem, of course, are not limited to the alternatives, whether government or market, suggested by the logic of insufficient information. Another approach would be to create incentives for academic institutions themselves to monitor and control the quality of their academic programs (Dill, Massy, Williams and Cook, 1996). Still another approach might be to create additional incentives for academic professional associations or societies, which frequently playa quality assurance role in academic research, to assume a more activist role in assuring the quality of academic programs. Either of these approaches might also generate positive benefits such as strengthening communication and accountability within institutions and the academic professions, benefits which more market and government-oriented approaches may not produce. In summary, each of the suggested solutions to the problem of insufficient information on academic programs -- mandated provision of quality information to consumers by institutions or intermediary organizations, institutional accountability for quality assurance, renewed professional reasonability for academic quality, or simply encouragement of market competition 16
as means of assuring quality -- will likely prove imperfect. It will be important, therefore, to continually examine the full costs and benefits of non-market as well as market alternatives in higher education to determine in what circumstances market instruments prove superior. CONCLUSION In the increasingly aggressive political debate around the globe about the relative role of governments and markets, higher education is but one point, if a prominent point, of contention. At the most general level, there is a clear agreement that the total privatization of higher education would not maximize public welfare (Rivlin, 1992; Thurow, 1996). The positive social benefits produced by enrollments in higher education and by academic research and scholarship justify continued government subsidy. Thurow (1996) has usefully illustrated that as traditional markets become more global and more competitive, corporations are even more likely to disinvest in long-term research and development and lower class families are even more likely to conclude that higher education is an unwise investment for their children. In this new environment government support for higher education and academic research becomes of greater, not lesser, importance. Government support, of course, does not necessarily require government provision, and consequently experiments are underway in many countries applying markets to academic programs, research, and service as well as to academic labor. The concept of a market suggests unrestricted competition between academic institutions limited only by their own creativity and society’s scarce resources. But there is substantial variation among existing higher education markets, caused primarily by public policy interventions. Government policy on the basic conditions, structure, and conduct of academic markets can have a significant influence over the strategic options of an academic institution as well as on the institution’s performance. Much of the literature on markets in higher education challenges the legitimacy of this form of organizing academic systems. As this review has tried to suggest, competitive markets may have a place in higher education, but there are a number of important questions regarding the assumptions, design, and impacts of market-related policies that are deserving of careful research in the years to come. REFERENCES Astin, A. (1985) Achieving Educational Excellence. Jossey-Bass, San Francisco. Breneman, D. W. (1981) Strategies for the 1980s. In J. R. Mingle (ed.) Challenges of Retrenchment. Jossey-Bass, San Francisco. Clark, B. R. (1983) The Higher Education System, Academic Organization in Cross-National Perspective. University of California Press, Berkeley. Clotfelter, C. T. (1996) Buying the Best: Cost Escalation in Elite Higher Education. Princeton University Press, Princeton. Daniel, J. S. (1996) Mega-Universities and Knowledge Media: Technology Strategies for Higher Education. Kogan Page, London. Dill, D. D. (1995) Through Deming's eyes: A cross-national analysis of quality assurance policies in higher education. Quality in Higher Education 1, 95-110. Dill, D. D. (1996a) Markets and public policy. In M. Warner (ed.), International Encyclopedia of Business and Management, pp. 3354-3363. Routledge, London. 17
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