HE bill: why universities are not supermarkets

Commentator Martin Wolf examines the economic flaws and false assumptions of the Higher Education and Research Bill

February 16, 2017

By Martin Wolf

The UK government’s controversial plans for reform of higher education have at their heart two sets of economic ideas. The first concerns national wealth and, in particular, the impact of higher education on the size of the economy over time. These ideas are about the ends to be served by the system of higher education.

The second set concerns ease of entry of new providers, and of access of would-be students: it focuses on the notion of market competition. This, then, is about the means used to guide the system of higher education.
Some purists would argue that the proper concerns of higher education are beyond the purview of such vulgar economic considerations. This cannot be correct. In all modern countries, governments spend a great deal on higher education. They do so for reasons that inevitably include economic ones. Moreover, it is perfectly legitimate for the government to be concerned about questions of student choice, entry of new and innovative institutions and competition among providers. The problem, I would argue, is not that economic considerations are irrelevant but rather that they are not the only things that are relevant. The inescapable complexity arises in balancing economic considerations against other ones and, given that need, in deciding how best to do so.

The government’s animating idea about the ends of higher education is that it is an essential contributor to success in a “knowledge-driven economy”. This is so in two respects: first, higher education provides the skills necessary for people to prosper in such an economy; and, second, higher education provides the know-how upon which the success of such an economy is built. In the government’s view, these economic objectives provide a large part of the justification for its support of higher education and intervention within it.

This makes sense. It is evident that the people of the UK do, for the most part, desire a higher level of prosperity than they enjoy today. True, this goal is not universally shared. But it is, to a greater or lesser extent, put forward by every successful political party.

Yet higher education also serves other and no less important goals. As philosopher Gordon Graham put it in his 2002 book Universities: The Recovery of an Idea, “impressive though the development of technology has been, the almost equally long-standing human project of understanding both the natural and the social world to the end not of increasing welfare but of reducing ignorance, confusion and misconception, is no less impressive an outcome of intellectual analysis, reflection and inquiry”. Understanding is an essential component of a flourishing life.

Deepening and widening our understanding has also been both the greatest achievement and the defining mark of Western civilisation. Our great universities are the institutions responsible for generating and transmitting that understanding. The health of these institutions helps define whether or not this country deserves to consider itself civilised and an active contributor to civilisation.

Higher education should also mould the intellectual character of students. They should emerge not just better informed but also better able to evaluate evidence, argue and see through the specious arguments of others. Some will have an appreciation of the history and cultural achievements of humanity. Others will understand the law. Others will be steeped in the effort of philosophers to understand what we know and how we ought to behave. Yet others will have learned of humanity’s scientific and technological achievements. Educated people help make society more civilised and politics more purposeful.

Education, then, is for citizenship and for life. Similarly, institutions of higher education not only preserve knowledge but push it forward. Such knowledge is often useful in utilitarian economic terms. But, as Graham notes, it also enriches both those who possess it and the societies in which they live.

If the aim of an institution is to serve multiple purposes, it cannot be dedicated to a single aim, such as profit. It has to be an independent, self-governing entity, whose managers seek to balance these various objectives as they see fit. It cannot be for any outside entity, least of all government, to impose one set of objectives – although, as a funder, government has a right to ask universities to achieve objectives that matter to it. To preserve independence in what they do, universities also need a degree of independence in their finances. Making that work is one of the great challenges of today. There is no question that the government’s new proposals for a market-led system of tertiary education and, in particular, the proposals for a new and powerful regulator challenge that independence and indeed the very notion of the university as an institution.

Let us now turn to the way that higher education is run. The White Paper, Success as a Knowledge Economy: Teaching Excellence, Social Mobility and Student Choice, which sets out the rationale for the Higher Education and Research Bill now passing through Parliament, repeats the word “competition” 50 times. This, then, is the animating notion of the proposed reforms. But it raises profound questions. How far, in fact, is market competition a desirable or workable system for governing higher education?

The answer is that a degree of competition is desirable and even inevitable. But the idea of a competitive market in this sector is flawed: it is neither desirable nor workable. Indeed, the government itself has recognised this by proposing an overbearing new regulatory system. But that system is, alas, likely to end up promoting not competition but top-down controls highly detrimental to the purposes of the university.

A “market” for higher education is intrinsically defective, in at least five important respects.

First, education is a classic “experience good”, like health services: in other words, purchasers do not know what they are getting until long after they have consumed it. This deprives would-be “consumers” of the information on which to make a good decision or even a good evaluation of what they are receiving, as they receive it.

Second, employers of the graduates’ services do not know in advance what their employees have learned and can do. They rely mainly on the reputation of the provider. They are right to do so. An institution that possesses a first-class reputation will attract first-class students. Since the quality of the students is the most important determinant of the quality of the graduates, this bias of employers is entirely sensible and so self-reinforcing. By virtue of producing more employable and so more prosperous graduates, institutions with established reputations will also attract more private funds and a higher quality of staff. Since entry into a prestigious institution signals quality, students will also be willing to pay more. These additional resources will, in a competitive market, further reinforce differences in quality and reputation. For such reasons, genuine competition among providers is virtually impossible. It is also why the universities of Oxford and Cambridge remain England’s top universities nearly two centuries after new entrants entered the field.

Third, in a market in which the quality of provision is almost impossible to assess, the price charged is itself a powerful signal of quality. For this reason, weak institutions will be unwilling to charge less than their competitors, because it will signal their poor quality and so attract worse students and, quite possibly, fewer students, too. This tendency will reinforce the upward spiral of prices in a competitive market: top institutions charge more because they can; weak institutions charge more because they cannot risk not doing so.

Fourth, since the existence of a provider is itself a signal of success, its failure would severely damage the value of its qualification. The failure of a provider would be particularly devastating for students actually earning degrees. Indeed, it would be so damaging, particularly now that students are expected to borrow substantial amounts of money, that such failure would be almost politically inconceivable. For this reason, the exit of providers is also extremely difficult to manage.

Finally, given the well-known failures of markets in the creation of human capital, the government quite rightly funds student loans, currently without limits on the number and even the qualifications of students. So the taxpayer bears the risk if students fail to earn enough to repay what they have borrowed. This makes it rational for providers to maximise the number of students and for students to borrow up to the limit. Students are in essence buying a lottery ticket: if they do well in life, they will afford to repay the loan; if they do badly, they will not have to repay. This makes excessive borrowing a rational strategy for students. That, in turn, will create huge opportunities for irresponsible or corrupt providers. If one can eat lobster at other people’s expense, one tends to eat too much.

In brief, reliance on market competition in this sector is likely to lead to highly perverse results: further divergence in quality among institutions; mass default on student loans; and huge scandals involving new providers, particularly profit-driven providers. Not-for-profit entities are more likely to work precisely because they are somewhat less likely to exploit such opportunities. Where markets are defective, forms of governance that do not depend on the profit motive are essential. Some things simply cannot be bought and sold successfully. It is why professional codes in medicine or the law are so important.

Moreover, even if the market model could be made to work on its own terms, it would not ensure the delivery of the wider social, political and cultural purposes of a system of higher education. Some mechanism also needs to be found to ensure high-quality research. The market mechanism would not, of itself, achieve such aims and profit-seeking providers would have no incentive to do so.

It is important to note, moreover, that these are aims of the system as a whole. If they are to be delivered, they need to be internalised in most, if not all, institutions. This is impossible in profit-seeking institutions. That, in turn, is why they are not in fact universities, whatever they might be labelled. What makes a university a university is that it does not serve purely market objectives. Profit-seeking institutions can be training colleges. But that is quite a different thing.

Given the extreme difficulty of creating a genuinely free market in higher education, the government has to create a substitute. It does so here, as in other cases, by empowering a regulator. This regulator – the Office for Students – will have an extremely wide range of regulatory powers: to control entry into the sector; to promote choice and competition; to provide data, analysis and information to the secretary of state; to develop, publish and operate a “risk-based regulatory framework”; to help widen access for disadvantaged students; to assess quality; to monitor financial sustainability, efficiency and governance of higher education; to be responsible for the “Prevent” programme against extremism; to be the principal regulator for providers that are charities. As the White Paper states, “the OfS will have oversight of the sustainability, efficiency and health of the higher education sector, and as part of its role will monitor the sustainability of individual institutions”. In essence, this new regulator will manage the UK’s higher education system.

If this new regulator is to be effective, it needs power. That it certainly will have. The almost incredible fact is that the new legislation grants the power to the OfS – a body appointed by, and subservient to, the government – to revoke the charters that have historically granted the right to award degrees. Thus, this body would be granted the ability to abolish the right of the universities of Oxford and Cambridge – two of the greatest universities in world history – to grant degrees. You will argue that it would never dare to do so and you might be right. But the power is quite enough to force such institutions, and certainly those with smaller reputations and clout, into line. Make no mistake; this is a fully fledged government takeover of the UK’s university sector. Anybody who thinks this will end with more diverse, more innovative, more courageous and more independent institutions is simply a fool.

A crucial question in judging the ability of this new body to promote effective competition is whether its teaching excellence framework could actually measure that highly elusive concept effectively. The White Paper states “the TEF will provide clear, understandable information to students about where teaching quality is outstanding. It will send powerful signals to prospective students and their future employers, and inform the competitive market.” It will do so by assessing universities and colleges on the metrics of graduate employment, student retention and student satisfaction.

Approximately a second’s thought would demonstrate that none of these metrics would tell one whether a university actually teaches well. Graduate employment will be overwhelmingly determined by the reputation of the institution, as will student retention. Measures of student satisfaction are unlikely to be well correlated with whether they are well taught. Low student satisfaction might merely mean that they are being challenged and tested in ways that they find uncomfortable. The truth is that good teaching is always challenging and often uncomfortable. There is no reason to suppose that the majority of students recognise it when they receive it. Many are more likely to prefer unchallenging teaching leading to unjustifiably high grades. Yet that would merely generate a competitive race towards lower standards and so the destruction of one of the main purposes of higher education, which is to sustain and even improve the standards of students over time.

The White Paper states: “Many institutions want to gain their own degree awarding powers, and the right to describe themselves as universities. These high quality institutions will help to enhance the world-class reputation of the sector. However, the current process for obtaining either degree-awarding powers or university title is long, convoluted, and unnecessarily burdensome for high quality providers.” The question is whether such institutions should be granted what they want. The statement that these putative universities are of a high quality assumes precisely what has to be proved. The greater likelihood is that they are not of high quality. In that case, the results will be disastrous, not only for their students and the taxpayer but for the reputation of UK universities as a whole. It is a series of scandals waiting to happen. Just think of Trump University.

In important respects, the problem with the government’s proposals on higher education is not that they are too radical but that they are not radical enough. The use of the market-cum-regulatory model as a means of expanding the university sector, while ignoring the rest of tertiary education, is inappropriate not just because it damages universities but because it fails to provide an effective system of tertiary education. It makes no sense to encourage such a high proportion of young people to take university degrees, to concentrate government support on students at just one stage of their lives and to starve resources available to the rest of tertiary education.

As Alison Wolf, Sir Roy Griffiths professor of public sector management at King’s College London, and my wife, has argued in her co-authored book Remaking Tertiary Education: Can We Create a System That is Fair and Fit For Purpose?, we need to think about tertiary education as a whole. In that context, we can see universities for the very special institutions that they are, with particular characteristics. But we need to fund other institutions with important training functions, alongside universities. For many people, shorter and more targeted courses will be a better option.

The way forward might then consist of the following.

First, we should make loans available, up to a predetermined limit per person for legitimate educational purposes, for all post-18-year-olds, with a much higher upper age limit than now.

Second, we should encourage the creation of new institutions specifically designed to provide different sorts of courses, including two-year qualifications. Such institutions do not need to be universities or provide standard degrees. They may just help people to obtain well-known higher-level vocational qualifications. Assume, in brief, that tertiary education of some kind is going to become universal. Then design such a universal system, accepting that universities as we understand them will be just a part of that system and not necessarily the largest part.

Third, we should continue to encourage diversity among universities, via research funding. Only a few elite institutions can be at the global forefront, and the prominence of UK institutions at the top of global rankings provides great benefit to the country now and in the future, and not merely in economic terms. The achievements of UK universities are also an important and widely respected indicator of the UK’s contribution to global civilisation. But we should only allow universities to charge higher fees than today if they can demonstrate needs-blind admission among qualified UK students.

Fourth, we should encourage transparency on the quality of teaching, but we should not pretend that this can be easily measured. We must accept that an essential feature of any worthwhile system of higher education is trust in the ethics of self-governing institutions. Outside regulation and market incentives will never effectively replace this internal motivation.

Overall, higher education in the UK is a success, particularly at the top end. A good conservative principle is to do no harm. Instead, the aim should be to focus attention where things are not going so well, which is in other parts of tertiary education.

The great American journalist H. L. Mencken once said that “For every complex problem, there is an answer that is clear, simple, and wrong.” The problems of higher education are certainly complex. The government’s answers – market competition and a competition-promoting regulator – are simple, but wrong. The great idea of the independent and self-governing not-for-profit university must be protected. The government needs to think again.

Martin Wolf is the chief economics commentator of the Financial Times. This is an edited version of a lecture he gave at the Council for the Defence of British Universities in January.