Peter Klein at the always excellent Organizations & Markets Blog has a characteristically excellent post on the New York Times’ characteristically anti-market article on the University of Phoenix (and for-profit higher education).
Lest there be any doubt that the article was meant to cast UOP in an unflattering light, check out the picture of UOP’s president, William Pepicello, that accompanies the article. The picture makes him look like a cross between a clown and a devil–some sort of devil clown!
At any rate, the article is little short of a hatchet job, as Peter aptly demonstrates in his post.
I don’t know for certain whether UOP students maximize their utility by choosing UOP over Princteton (aka clown college, coincidentally), but there is, at a minimum, some theoretical merit to the form of organization.Â
Here’s what I (and Adam Smith) said on the topic once before:
Here’s Adam Smith on universities:
The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers. Their subsistence, so far as it arises from their salaries, is evidently derived from a fund altogether independent of their success and reputation in their particular professions.
In some universities the salary makes but a part, and frequently but a small part of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils. The necessity of application, though always more or less diminished, is not in this case entirely taken away . . . and he still has some dependency upon the affection, gratitude, and favourable report of those who have attended upon his instructions . . . .Â
In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it.
Faculties in today’s universities are substantially insulated from both the reputational and remunerative consequences of offering poor (or exceptional) education. As direct payment by students — and, eventually, the conferring of degrees on “independent” courses of study — becomes more commonplace, this insulation will be seriously weakened, much to the likely benefit of the students.
I have no doubt that UOP isn’t perfect. But it certainly mitigates some of the problems of traditional, nonprofit higher education.  Perhaps a comparative institutional analysis would have been in order. The implication that UOP’s shortcomings derive necessarily from its for-profit status is both unsupported and unsupportable.
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Matt:
Your point about federal subsidies is well taken, and agree entirely with the notion that they are probably entirely unnecessary — though I do not think that is where you were going with that point.
As for the rest, I wasn’t trying to be silly (except for the sweater part) so I’m sorry that it sounded that way to you. It sounds equally silly to me to place the burden of proof on those who believe that competition works to provide goods and services to consumers generally to demonstrate that these economic forces also work in education. The empirical evidence seems pretty overwhelming that for-profit institutions compete not by simply “maximizing profits by lowering costs and quality,” but by satisfying consumer demands upon all the relevant margins. As a general matter, this leads to quite a bit of diversity of offerings — check out the average grocery store aisle. Complaints about the competitive process failing as a general matter BECAUSE of the profit motive are not very compelling by my lights.
But all this silliness arises because we are talking past each other a bit. Btw, Geoff said apotheosis, not me … I had to look that up.
The point of my comment was merely that, left to fend for itself in the marketplace, if UOP fails to supply the quality of education its consumers seek, it will pay the price accordingly. To the extent that your point is federal subsidies distort this process, I agree! But this is true in the market for education more generally and consistent w. Geoff’s point.
To the extent that you believe that economic forces that operate to assure quality do not work in the market for education because consumers don’t have the incentives to “police the quality of their education because they have an incentive to get their degree with the least work possible ,” I guess you will not be shocked that I respectfully dissent. Consumers in many markets don’t want to do a whole lot of work. I want to get my cup of coffee, buy my television, or automobile, without much cost either. But we frequently see economic agents coming up with all sorts of ways to commit to performance, i.e. brand-name investments that are lost upon non-performance (e.g., Klein and Leffler). Speaking of, anybody notice that UOP just bought the naming rights to a stadium …..
Lastly, and just as a factual matter, I thought it would be nice to link to UOP’s press release disputing the factual case made against it in the NY Times article, which apparently has some errors. Here is the link:
http://www.phoenix.edu/about_us/the_facts/the_facts.aspx
To respond to Josh first: I agree that UOP does not represent the apotheosis of the for-profit educational model. But the accusations against it are ones that critics of for-profit education believe are endemic to the model. It seems kind of silly to say: “I certainly don’t know whether UOPs model is better, worse, or the same as the traditional law school model which has been around forever.” My point is: if the accusations are true, then it seems pretty clear the traditional law school model is better. And it seems nice and egalitarian to say that we should have a variety of different educational models, from the Cadillac to the Festiva. I agree. But do we really want the federal government subsidizing the purchase of Pintos? That’s the allegation of the article — the quality of the education provided is poor and is coming under scrutiny from students, employers, the DoE, and ultimately the market.
So, to respond to Geoff’s point, I am *not* saying that UOP’s business model is the same as a for-profit model. UOP’s business model is cheap, flexible education for students who lack the finances, the time, and/or the credentials to go to a more traditional and prestigious school. A non-profit school with the same model should be held to the same standards if it wants its students to get federal aid. And a for-profit school that required more class hours, had individualized instruction, and hired the most talented full-time profs available would not be subject to the same scrutiny. That’s one question I have — why no “Cadillac” for-profit schools? Maybe they exist and I don’t know about them.
Now, whether UOP is being unfairly criticized or scrutinized because of its status, I can’t say. But the problems — including lawsuits and a drop in stock price — are serious enough, in my view, that they can’t be shrugged off as mere bias.
Of course…I didn’t mean to imply that I was opposed to for-profit institutions.
Seth: That may be right. The point is not that for-profit-ness in education is clearly and always better; the point is that there are plenty of reasons to think it might be (and plenty to think it might not), but surely no a priori reason to condemn it outright.
At the same time, I do not think it’s clear that universities or professors need to be protected from markets in order to operate their institutions or classrooms. If there is demand for the truth, the market will bear it. If there is not, I’m not so sure why we should be wasting resources on it. But the truth is really in the middle: Even in a market, some resources will be spent in pursuit of truth, and some will be spent elsewhere. There is no clear reason to prohibit the latter and require the former.
I agree, of course, that the University of Chicago is taking the right stance, but I disagree that this would be impossible if it were a for-profit institution. Surely there are many people who will increase their support for Chicago because of this, just as some people will reduce support.
And so there is product differentiation: Some people (the truth seekers) go to Chicago, and some people end up at Harvard.
If truth is valued there will be schools that offer the truth. But other things may be valued and valuable, too, and there is no reason why all schools should look the same. Let 1000 flowers bloom, as they say.
I think I disagree with y’all, at least a little on this one. I’m certainly no economist, but there are certainly places where a for-profit business model may not produce the optimal result, and the Academy very well may be one of them. Universities are, in theory at least, places that foment intellectual debate to puruse the truth; capitalism only pursues the truth as far as the truth is valued by the consumer. I think we can all agree that the consumers at a university, if left to their own devices, are far from interested in pursuing the truth. True, the current business -model of tenure and so on insulates professors from competition, but that may be a worthy trade-off if the alternative is a system that panders to the whims and predilicitions of the students. Look at, for example, the stand that the University of Chicago is taking against divesting from Sudan. Such a stance, the right one, I believe, can only exist if the university believes itself to be protected from the market and free to pursue the truth free from the need to please consumers.
Students may benefit from, as Geoff put it, weakening the insulation of a professor from the student, but only so far that “benefit” is measured in giving the students what they perceive to want. The whole notion of education, and espeically a liberal education is that, at least to some degree, students do not know what they want or what is good for them. As professors, we tell students what they need to know by developing core curricula, by developing syllabi to teach what believe to be relevant, and by calling on our specialized training. We teach students to challenge what they think they know and believe, we force them to question the conventional wisdom. Giving the students “what they want” can be useful in some formats, but seems problematic as concerns the purpose of a liberal educuation.
Word for word, that’s what I was going to say.
As Josh clearly (just kidding, Thom) reveals, Matt’s comment is actually a fairly harsh (but shallow) criticism of the for-profit educational model, dolled up in the rhetoric of a critique of UOP. Like Josh, I don’t know whether UOP is the apotheosis of for-profit higher education or a failed attempt. But I hardly think the move from a few disgruntled students at UOP to “for-profit folks need to show that students want and will pay for a better quality of education” is warranted.
I would also take issue with this:
Students have a hard time policing the quality of education everywhere–some would say that’s precisely why most education is nonprofit. But I and many others have pointed out that the very nonprofitness of education may serve to accentuate this, by attenuating the relationship between the quality of education and its price. At least that’s what Adam Smith said.
The notion, implicit in both the Times article and Matt’s comment, that for-profit education must be held to a higher standard because of its “business model” (read: its for-profit-ness) is, as I said, not supported. It even seems to me quite possible that the bigger burden is on the nonprofit institutions.
I will grant this, however: The presence of a massive federal subsidy is a big distortion and, at the same time, almost certainly unnecessary (college students have relatively high human capital, and subsidized loan markets would seem to be unnecessary). See, as always, Armen Alchian (The Economic and Social Impact of Free Tuition in Armen Alchian, Economic Forces at Work (1977) at 203).
Matt writes:
“Because UOP is being accused of doing exactly what critics would say a for-profit university would do — maximizing profits by providing the least expensive and lowest quality education possible. For-profit folks need to show that students want and will pay for a better quality of education.”
Why would a for-profit person want to do that? The success or failure of UOPs business model has little to do with whether its for-profit status is good or bad for education more generally. I certainly dont know whether UOPs model is better, worse, or the same as the traditional law school model which has been around forever. Nor do I pretend to know.
As a for-profit person, I respond to Matt’s challenge to show students want and will pay for a better quality of education two ways.
The first is by pointing out that competition between for profit enterprises generates a number of offerings to consumers in all sorts of markets.
Isn’t the right answer here to let diverse business models arise and compete? The market provides a better way to answer the question of what business model best serves consumers than does the DOE. Of that, I am fairly certain … and I took this to be the thrust of Geoff’s post.
Second, the implicit assumption in Matt’s challenge is that consumers who demand a lower quality / lower priced education somehow count less than those who want the educational Cadillac. I’m not sure why for-profit folks need to show that consumers want and will pay for better levels of education any more than we would need to demonstrate that it is a good thing that automobile manufacturers sell both a Lexus and the Ford Festiva (This is analytically identical to Friedman’s point the point that requiring practitioners to have licenses is much like requiring consumers to have Cadillacs or no car at all).
I do, however, agree about the sweater.
First, I’ll agree that the lighting in the picture is bad. But he was the one who decided to wear that sweater, no?
Second, I think you’re barking up the wrong tree here when it comes to your complaint against the Times. Yes, the article is pitched negatively. But it is not anti-market. In fact, it points out that the market has lost confidence in UOP, too. And that’s because there are questions about the quality of education being provided. The Times isn’t making this up — there are lawsuits and DoE reports, and Intel won’t give tuition remission anymore. Sure, disgruntled students can be found anywhere, but that doesn’t mean that some schools aren’t worse than others.
But more to your point, I do think UOP might need more scrutiny that other universities — not because it is for-profit, but because of its business model. Its model requires a lot of students being admitted, completing courses with fewer class hours taught by adjuncts, graduating at extremely low rates, and getting $1.8 billion in federal aid each year for doing so. The students won’t necessarily police the quality of the education, because they have an incentive to get their degree with the least work possible. It is the reputation of the degree, not the quality of the education, that matters to future employers. Obviously, there is some relationship between those two, but it is not a perfect one. So it is the feds — who provide nearly $2 billion a year in aid for folks to get a UOP education — who must inquire into the quality of that education.
If I were a proponent of for-profit educational models, I’d be attacking UOP, not defending it. Because UOP is being accused of doing exactly what critics would say a for-profit university would do — maximizing profits by providing the least expensive and lowest quality education possible. For-profit folks need to show that students want and will pay for a better quality of education. You could say that the Times is manufacturing a case against UOP based on stereotypes. But the fact that these quality concerns are being brought though a False Claims Act lawsuit, supported by a DoE report, obviously has the market itself concerned.