Monday, October 01, 2012

Higher Education Business at the time of Cost Disease

The biggest challenge for serious entrepreneurs in Higher Education business is to confront the cost disease. As the American student debt exceeds credit card debt and the cost of American college tuition increased by 440% compared to a 110% rise in average prices and 150% rise in average wages since 1970 (The Economist, Sep 29th, 2012), this may be the biggest challenge the Higher Education sector faces as a whole. For-Profit Higher Education has expanded significantly in the United States during this period, and indeed, hasn't done much to depress the upward spiral of costs as evidenced in these figures. 

Yet, other countries such as the UK has now embarked on following the American model: The British government, through a series of pointed policy initiatives, has made it clear that they intend to encourage the business of Higher Education. The reason for doing this, if we discount the conspiracy theories, is to keep costs under control, and yet meet the aspirations of social mobility of the populace. However, the roots of the cost disease lie outside the public-private divide. 

William Baumol, the man who brought the term 'cost disease' in the realm of public discussion, treats Education as a specialist labour intensive industry, where the costs keep going up but productivity doesn't. The theory states that the better paid professors, and they must be paid more and more if the brightest people have to be attracted into the profession, can only teach a certain number of students, and therefore, the costs will invariably go up. Baumol sees the Higher Education enterprise as an extension of his celebrated String Quartet phenomenon, where skilled musicians can perform live only to a certain number in the audience, and as they are paid more and more, the costs go up. 

The issue indeed is that in its current form, where Higher Education is seen as a key to social mobility and therefore, there is a political consensus regarding the democratisation of higher education opportunities, Higher Ed is very dissimilar to live performance of classical symphonies. Despite Baumol's explicit warnings against knee-jerk reactions such as privatisation to the phenomenon of cost disease, the governments across the world have tried to do exactly the same - open the doors to all sorts of private enterprises to tackle the problem - and in turn created a plethora of divergent offerings but failed to control the cost problem. 

One would wonder why the cost problem persists, because the learning technology has improved in leaps and bounds during this period and private competition has proliferated, factors which should have changed the structure of the industry from being like skilled music performance live to something akin to the telecommunications, where these two factors drove down costs to near-zero. I shall argue that this is due to how we view Higher Education, where reputation, and not outcome, is coveted. Increasingly, additional costs are incurred in playing the reputation game, and indeed higher prices help reputation and lower prices diminish it, and all the private players have done so far is to sign up in this reputation game rather than trying to genuinely change the structure of the industry.

The interesting point, of course, is that Higher Education, despite its apparent cost spiral, may have a completely different reason than being a 'skilled labour intensive' enterprise for its own cost disease. Despite touting Higher Education as a democratising force, governments across the world have maintained and promoted a reputation-based view of Higher Education and a whole industry of rankings and commentaries have sprouted up around the phenomenon of reputation in Higher Education [commentators such as Anya Kamenetz elaborate this clearly - see DIY U]. There is indeed nothing wrong with high quality higher education except the fact that this reputation game is a self-serving enterprise - best students go to best universities - and this is unlikely to have any positive effects on social progress or intellectual excellence, except the preservation of existing social order and a pseudo-meritocratic affirmation of social privileges. In summary, Higher Education is being turned into a luxury good, where prices must go up and it must remain scarce commodity, because of the whole reputation game.

I believe the entrepreneurs in Higher Education should seek to disrupt this model. One inescapable consequence of the reputation rat-race is the 'feature creep', where the schools are forced to spend more and more on things not directly relevant to the quality of education, such as heated swimming pools and plush lawns, but which push the costs ever upwards. Besides, the schools, to keep their success rates and rankings intact, have only become increasingly selective. The progressive disappearance of student aid and pressures on government subsidy mean that the Higher Education is increasingly unaffordable to a large number of potential students: A vast pool of 'non-users', which is something like a precondition of an industry disruption. 

In the end, therefore, this is time for industry-disrupting higher education enterprises to emerge. We are already seeing some of the new and novel, the emergence of MOOCs, which is about democratizing knowledge and expanding access. More than current For-Profits, which mimicked the public education model and fell into the reputation trap, these enterprises and those who follow them with the sole objective of tackling the cost disease, will lead the global higher education industry in a few years time.

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