Phoenix or ashes?

It’s not that long ago that people like Alan Gilbert (then Vice-Chancellor at Melbourne, and now at Manchester) were presenting the for-profit University of Phoenix as the future of education, and its critics as Luddite equivalents of the 19th century handloom weavers. It was obvious even at the time that U Phoenix was little more than a grandiosely titled trade school, occupying one of the relatively limited educational niches where for-profit firms have traditionally played a role. But even here it seems, there are pretty big problems, with a graduation rate of only 16 per cent for students without previous college experience. However hard you spin it,* this is an unimpressive result.

Admittedly, though, once you accept the defence that Phoenix is not a real university, it’s hard to make such comparisons. It’s in a different business and can’t be compared with community colleges, let alone state universities or high-end (non-profit) private institutions.

By contrast, Edison Schools represents a direct challenge to not-for-profit school education, public and private. It’s generally received a pretty favorable run from commentators on education most of whom are keen to see some kind of change, a group that has included the Rand institute. That’s way its striking to see a Rand study, commissioned by a school district that has given Edison one of its biggest contract, concluding that Edison schools performed no better than the public alternatives, despite receiving extra funding.

There can scarcely have been a more favorable climate in which to develop for-profit education than that of the last decade. The unimpressive performance of Phoenix and Edison, along with the complete failure of other for-profit initiatives and the absence of any significant success stories in the for-profit sector over many centuries and many different countries and institutional environments suggests that the for-profit model is fundamentally defective as a way of providing education.

Why is this so? The obvious reason is that educational institutions must build up reputations over decades, since the consequences of cutting corners take decades to emerge. This makes no sense in terms of profit maximization and individual incentives, so it requires a professional/academic ethos which at least in part, overrides narrow forms of individual rationality. Such an ethos cannot survive in a for-profit firm.

* The University of Phoenix says that only 7 per cent of its students fall into this category, and calculates a rate of 50-60 per cent, but this is not a figure comparable to that for other universities.

36 thoughts on “Phoenix or ashes?

  1. The real problem is that in having education dictated by market forces alone that distortions and market failure are very likely. The problem with market failure however is that it can affect lives in dramatic ways. Ways that might result in the educated being convinced to do a course for all the right reasons whilst the sales person just has to sell the course.

    The other main problem with a for profit model apart from the distortions created by the seller selling faulty goods is that it also leaves no place for learning without immediate benefits. Scholarship is not prized as it may not create monetary value. Values are skewed and lead us to the kind of educated society which knows everything about making a financial killing whilst failing to have cultural values to create a civil society.

  2. Or the converse risk with public overfunding where we have oodles of dimwits who want to make the community more aware, but lack the technical expertise to do anything about it.

  3. Phoenix only has a limited number of courses and they are mainly managerial, business etc. If you want to do mathematics or engineering Phoenix has nothing to offer. Most of the newer private Universities in the US only offer that same small group of courses – like Strayer and a few others that I looked at last year.

  4. I agree that ‘for profit’ education is likely to be a dud. There are too many possible shortcuts that provide the wrong incentives. Better to put up with a few cost inefficiencies than all the moral hazard that corner-cutting presents.

    But I am unconvinced that the public universities in Australia at least, with the constant pressure of cost-cutting and on securing full-fee students and under the guise of inept managerialism, perform much differently from ‘for profit’ institutions. Still the same incentives to replace courses on maths with units on sports management.

    The flaws in the for-profit models deserve careful study – they provide lessons to us all.

  5. The usual defence in such situations is that the presence of publicly funded organisations makes true competition difficult. Therefore the publicly funded organisations should be converted to for profit in the interests of fairness. This would work only the price would skyrocket and the throughput would dramatically drop (see African education outcomes). Another example is in medical services.

    What would work though would be a for profit annex of existing public education institutions. In this a particular lucrative need area could be targeted. This would be an area where industry would pick up the tab.

  6. Instead of distributing funds for tertiary education by setting quotas and funding according to the quotas why not distribute the funds to students and let the students decide where they wanted to go. Universities could truly compete against each other because they would be free of the quota constraints. Students would also compete for the funds based on their scores in standardised tests. That is, students with higher scores would get more funds. This would bring more competition into the whole system. It would remove much of the current administrative costs in the distribution and accounting of funds and bring innovation and a dynamism to the education sector.

    That is we give the funds for education to the students and not to the institutions. It would be interesting to see what would happen.

  7. Though Australia has long had a for-profit vocational education sector and has a small for profit higher education sector as well (though no universities, but Phoenix would not be allowed to call itself a university in Australia as it does not even pretend to do research).

    Despite Phoenix’s current problems (though they respond to the NYT article here) the listed US for-profit education sector has done reasonably well by focusing on people relatively poorly served by the US public system (which is generally much better than Australia’s, so tough competition overall).

    But as I would always say, let the market decide.

  8. Kevin.

    The trouble with the funds to students concept is that is just one small step away from Milton Friedman’s education coupons. This brings up the spectre of tradeable education rights. That might be ok under some circumstances, but it is wide open to abuse by manipulative people trading away education rights of people under their control. It is also open to political manipulation, even more so than the existing system is. Add that to the idea of individual contracts and you have massive scope for abuse. Education should be freely available for the first pass.


  9. Why do you have to make them tradeable? No one is mentioning making them tradeable. How is it open to political manipulation – give me an example – don’t just say it? Why do you need individual contracts – you give people the money and they can only spend it at approved institutions. You give people a currency that has a specific purpose and cannot be used for anything else.

    It depends on how many you give out but I would see nothing wrong with giving out funds to everyone who wants them. I would just give the brightest a few more funds and so bring a bit of competition into the equation.

    When I went to University – which was a long time ago – I received a Commonwealth Scholarship and I could use it whereever I wished. I would not have been able to go without the Scholarship and it seemed to work well. Why did we go away from this idea.

  10. Kevin asked why we got away from scholarship model. The reason is that Bob Gregory and Bruce Chapman persuaded the Wran Committee in 1988 or so that although as was well known graduates earn much more over their lifetimes than non-graduates, they did not then recompense the Commonwealth for the degrees that enabled those higher earnings, and should therefore pay tuition fees even if deferred as under HECS. Presumably both were adept at never paying income tax themselves as otherwise they might have noticed that graduates’ higher earnings yielded incrementally more revenue to the Commonwealth than non-graduates’ lower earnings (and much more than it spent on higher education). My work on graduate v non-graduate taxation in Britain showed a very acceptable real rate of return to the government on its stingy funding of higher education as well as an evergrowing contribution to general revenue that far exceeds public spending on HE (in general graduates’ tend to return double their proportionate share of taxpayers). Jeff Borland and others have shown the same is true here. But HECS came in anyway.

  11. I think this is an unfair representation of “for profit” universities. Its a diverse sector and the University of Phoenix and the like represent one end of the spectrum. There are heaps of for-profit univesities in the US that function just fine — its just that the they sit in the more traditional eduational sphere and presumably can’t expand or make as much money as easily. Its also worthwhile trying to consider exactly what “non-profit” means. Its hard to imagnie how many of the “non-profit” entities with large endowments are functioning any differently to for-profit one, excluding the payment which is going to the owners versus the well paid executive boards.

  12. Harry,

    It seems to me that it makes sense to expect that a university ought to apply a very low discount rate in its decisions, similar to the social discount rate one applies to social investments.

    One way to ensure low discount rates is by conceiving of a university as a partnership of tenured faculty, the equity owners.

    A situation in which administrators in a university think of themselves as management/middle management and perceive academics as simply labor inputs, is bound to end catastrophically. In the end such managers have an incentive to look for short term benefits, ignoring the long term.

    One reason many private universities are superbly successful, is that tenured academics are viewed as the residual claimants and the overlapping-generations institution of tenure ensures that investment decisions in the university take into account long term costs and benefits.

  13. “One reason many private universities are superbly successful, is that tenured academics are viewed as the residual claimants and the overlapping-generations institution of tenure ensures that investment decisions in the university take into account long term costs and benefits”

    This model only works if tenure is extremely hard to get, and is viewed as a huge prize that yields life time benefits and great power, and a sense that that power must be used responsibly. While this is true of the leading US private universities, is it true of Australian universities?

    The US private universities do keep their management clearly in their rightful place. This is seen in the very clear distinction they make between “faculty” and “staff”. The staff are the labour inputs.

  14. I am not opposed to private universities Rabee – given the eminence of many in the US that would be foolish. I am opposed to private ‘for profit’ universities.

    Many managers in Australian universities are academics. A few are really good but many use managerialism as a silly short-term career move and as an alternative to using their brains. No working, university academic in Australia today feels like a residual claimant – too much ass-kissing for that!

    Oh, I agree with your point about discount rates – it motivates things like giving scholarships and investing in fundamental academic disciplines.

  15. I think I’ve mentioned before, the problem came in long ago with losing the plot as to what a university is “for”. It only provides education incidentally, the way a cow only incidentally provides meat or milk.

    The purpose of a university, in so far as it has one, is learning – and the rest
    is incidental. But once you have bought into the idea that education is
    its purpose, rather than the purposes of those who would put it to work –
    the purpose of a farmer for the cow – then you can wander into these
    strange byways. But there is the risk of forgetting the actual purpose
    and so compromising it that it can be destroyed. If the managerialist
    does that, he also loses what he hoped to gain.

  16. Kevin.
    On tradeability. You suggest giving the ‘funds’ to the students. By ‘funds’ I believe you mean money. Money is tradeable.

  17. The University of Phoenix recently sent me an unsolicited (I have never had anything to do with it, or anyone of its ilk, and would definitely remember if I did) marketing email.

    Universities (to use the term loosely) as list-buying (or randomised email) spammers? How low can you go?

  18. Pr Q: “The obvious reason is that educational institutions must build up reputations over decades, since the consequences of cutting corners take decades to emerge. This makes no sense in terms of profit maximization and individual incentives…”

    So I guess you would say that the profit motive is wrong in all other areas where long-term reputations are required, eg airline safety, most long-life assets (eg bridges), drug companies.

    There are conspicuous failures in each of these markets, but that doesn’t mean that the government has to ban for-profit provision.

    If for-profit provision of bridges or drugs is OK, why isn’t it OK for education?

  19. MP: try reading John Stuart Mill, Principles of Poltical Economy 1848. There are social benefits of HE that are over and above the private benefits, and since not all parents can afford fees it makes sense (to all except the social democrats of this world like Gregory, Chapman, and Leigh)for HE to be provided free, knowing that in the long run the beneficiaries more than pay society back through the higher taxes levied on their higher incomes

  20. BilB what we are proposing is that the funds (money) are converted into a new currency. This new currency (like all currencies) can only be used in defined circumstances and has rules associated with it. It is “electronic money” and we can give it any sort of properties we like. For tertiary education it is simple. It has to be spent by a particular individual (and only that individual) and they can only spend it for education in designated institutions – but the individual gets to choose the institution hence you have a market. We would also define that this sort of money is not allowed to earn interest and hence it is a good idea for the recipient to spend it on their education – but they might take a break year or decide to use it after 10 years of work experience.

    We create a new currency for a specific purpose and we give it properties that fit the purpose. What it means is that you can direct funds to be used (and only used) in specific markets and keep the power of the market to direct funds efficiently.

    It turns out that it is relatively simple to build rules into the currency and it turns out that it is relatively easy to enforce those rules. It also turns out that it is easy to keep track of who possesses amounts of the currencies.

    Instead of thinking about “vouchers” as a commodity that represents education spending think about this new education currency that can only be used for specific purposes. An institution which is authorised as place for spending means that they have the right to convert it back to a regular currency.

    I am looking forward to hearing why people think this system will not work. I think it will work and so I am even more looking forward to people thinking of new currencies for specific purposes to handle intractable problems where there are other externalities that can be addressed by currency rules.

    I have tried to explain the idea in a different context at

  21. Kevin
    The key thing that is wrong with that concept is the uncertainty that it creates. Consider that in one year every student that would go to one school takes a sebatical. The school would not be able to operate because it had no income. The other aspect of it is that if you issue spending rights (which is what you are saying in principal) then that has to be backed up by the issuing authority with cash on hand to cover the presentation of the “supply demand” when ever it occurs. Government funds are aquired on a day by day basis (this is one of the features of the gst) and the expenditure is made on a day by day basis. In your model the government cash has to be on hand at the time of allocation of the education currency.

  22. BilB good points but they are the same with the current system. Students now enrol in Universities and defer. I was listening the Chubb of ANU lamenting this fact the other day. Government funds are now committed to fund Universities before classes start so I see no difference in the problems of allocation. The new system actually makes the process easier for the University because they can continue to sell their courses until they are filled up without having to worry about quotas.

    The “real money” is not needed until it is cashed in by the educational institution. In many ways it will be better for the government because with the new system the money is created in when it is spent whereas I believe governments now give educational institutions money “up front” and the educational institutions collect the interest on the money while they are waiting for it to be spent. With the new currency no interest is paid on educational money.

  23. “The real problem is that in having education dictated by market forces alone that distortions and market failure are very likely.”

    Really – such as? Are they worse than bureaucratic failure and no price mechanism of wages to direct applicants to courses? Or the captured market control of licensing boards like the AMA?

    Did Mill et al., ever model their work at least graphically or algebraically or in a simulation? How does reinvestment rates, demand for skilled trades and deadweight losses factor into this?

  24. A problem might be that without action on other fronts, merely giving a set amount of tokens to a student would not actually make up for the fact that one student is richer and can therefore afford to go to a better, higher charging institution. If you can make the institutions all fairly equal in educational ability, or else have them graded sensibly in tiers, like here in the UK you can do diplomas and stuff, or at a higher level, honours degrees, or PhD’s and so on.

    The problem that would still be left however would be the uncertainties formed by making the institutions compete for students every year. Not that they don’t already, but if it was really heading towards a free market, the institutions would have to put up with not knowing if next years cash flow was going to be different to this years, and so on. Of course, this happens with the current set up as well, but I really dont think that a market based setup would be better, and it would likely be a lot worse.
    Plus, they would have to recruit all sorts of marketers, salesmen and bureacrats to administer it all.
    Like with the NHS in the UK. The internal market resulted in a massive increase in managers, for little or no appreciable gain.

  25. You overcome the problem of some students being richer by giving some students enough money to attend the expensive schools and courses. You get students to compete for the money through their results and achievements. That is, you bring competition into the student side and you make the rewards significant. You can add money if you wish for students from deprived backgrounds.

    The difficulty with tacking on pseudo markets onto “command and control systems” by pretending to have a market if people pay part of the cost or because the institutions are for profit, is that you get the worst of both worlds. A market is a place where you have a lot of buyers with money to spend who have genuine choices over how they spend their money.

    Markets work and they mean that money is spent more efficiently. The trick is to create genuine markets and that means giving the students the money so they can choose. “Massive increases in managers” will occur where you have pretend markets but in real market situations managers have to justify their existence and you find the organisation will stop them proliferating if the organisation is going to survive.

    Of course it will be uncomfortable for many to have genuine competition for students but it will improve the overall system. Many institutions will die or be absorbed by others but that is good as it is part of the evolutionary development of the total system where the fit survive and the unfit die.

    Introduce a system of educational money for students and genuine competition for students by institutions and the system will flourish, become efficient, and produce better outcomes for both staff and students.

  26. I find the low graduation rate of UP encouraging.

    The short-term commercial temptation would be for such a university to err on the side of becoming a degree mill.

    It is clear that the University is standing as a gatekeeper between its “customers” and the employment market.

    At present there is a mismatch between the aspirations of the customers and minimum certification standards of the University.

    The crisis will come if and when that mismatch disappears but no new clientele step forward to accept the challenge of meeting the University’s certification standards.

    That is when narrowly commercial motives will become difficult to avoid.

    However, recurrent scandals in Australian universities demonstrate that publicly-funded universities are by no means immune from turning themselves into degree mills.

  27. Well, theres part of the problem right there Kevin- I think you’ll find many of us on here don’t actually have much faith in markets at all. As an economist friend of mine says, “Theres no such thing as a free market”.

  28. Kevin, my impression from reading the article is that UP engages in exactly the kind of quality shading you describe, and that the main group of customers (adults with full-time jobs) are happy enough to go along with it. The low completion rate for new undergraduates appears to result from high dropout rates due to lack of meaningful interaction, rather than from the imposition of rigorous standards.

  29. Guthrie we do have a problem then:) What do you have faith in?

    I like the idea of markets because I think they are an approximation to the “survival of the fittest” model of evolution. Survival of the fittest works because we have a way of getting rid of inefficient ways of doing things – not that we have the best way. That is the success of a system can be measured by the fact that some parts of it fail. In the University sector a successful system will be one where we get Universities being created but also “disappearing”. If we do not have our bad Universities failing then the system is failing.

    The fact that we “have no such thing as a free market” doesn’t mean that markets are a bad thing but that we have not set up the mechanism to work as it should. The attraction of creating a lot of buyers who have a lot of choice and being able to measure the choices and to be able to measure the outcomes means that we can have systems that are more transparent and we can work out how to adjust the parameters to achieve our desired outcomes.

    In the particular case I am talking about we can adjust the rules of our currency for education purposes to achieve the outcomes we desire for the system. If we have a system which can be adjusted then we can concentrate on the important issue of defining the outcomes we desire rather than what we do at the moment which is to concentrate on the details of how the system works. I am suggesting that creating a currency for a purpose, setting up a market to spend the currency and let the market work out the details of how it is spent and then adjusting the rules of the currency to meet our objective is more likely to succeed than trying to set up rules associated with the things on which we spend the money.

    The problem with using a single currency is that different objectives outside the problem at hand get confused.

  30. JQ my apologies for going off on a tangent. I am surprised that their completion rate is as high as 16%. I don’t think UP tells us much about the efficiency of not for profit Universities but a lot more about the efficacy of “distance” education models. A better model of a for profit education institution that seems to be achieving good results is the very new Queensland’s own Institute of Technology which does not profess to be anything more than an undergraduate organisation but whose costs are very very low.

  31. Tim Curtin – you completely miss my point. You can have education that is free and provided by for-profit businesses. We already have free job search services, provided for free by for-profit businesses, subsidised by the government.

    Similarly, you can have free education that is provided by for-profit businesses and fully subsidised by government.

    The question of whether whether education should be subsidised can be completley separated from the question of whether the education providers should allowed to be for-profit.

  32. Its nice to hear an Australian perspective on this. In europe, most people dont even know the difference between private non-profit and for-profit HE. In my country, Greece, private HE education is outlawed by constitution presumably because noone thought of the possibility of anyone wanting to create non-profits. In the field of secondary education, the curriculum of the private schools is prescribed by the Ministry of Education down to the textbook to use, ostensibly to prevent the profiteers from cutting the corners. The results are not surprising.

    So it is nice to hear that in Australia the question is not of whether for-profit education should be allowed, but whether it is socially optimal.

    About vouchers. The idea of vouchers stems from a misdirected notion that education is a public good, and that sometimes it is better to have for-profit providers bid for the provision of public good (paid for by the state). However, the definition of a public good
    is this
    1) once provided, its marginal cost is zero or very small
    2) no private party would ever contemplate providing it (except as charity), because cost far exceeds the benefit to the private party

    The definition applies neatly to the classical public goods like roads, libraries, military, but there is nothing in common with education. Both parts of the definition depend crucially on the non-scalability of the cost. Education, on the other hand is highly scalable. It costs approximately linearly with the size of the sudent body, and the minimum size of a viable HE institution is very small: some US porivate colleges number a couple hundred students. Furthermore i fail to see in principle why the taxpayer should pay for the improvement of the employment prospects of private individuals. This point is borne out by experience of countries like Russia, India and China which provide very good education for free only to see them leave for the better jobs abroad.

    So, the answer to the necessity to give opportunity to people of limited means is not coupons, but bank loans. Already in the US, the most expensive education of all, that in MBA and medical school is financed largely by loans.

    There is another logical flaw in the argument for provision of most public goods by the government, which is that 2) should instead be taken to mean that once provided it benefits everybody whether they can be made to pay for it or not. This more narrow definition excludes such things as roads, airports or libraries which can and is undertaken by private companies with sufficiently large capital, who then charge per use. This then suggests adding healthcare research and definitely keeping the millitary in the list of genuinely public goods.

    So there is no generally valid reasons why institution like Phoenix U should fail, the specific reason most likely is that it is a distance learning school. I am curious to see whether with the advent of real-time video-conferencing this problem cannot be cured.

  33. i consider myself a free-market person, and provided reasons above for why educational coupons are not necessary because education is fundamentally not a public good. but there is another reason: any coupon system encourages fraud. If you give a coupon to someone, they tend to try to cash it in at a discount to face value. The other side simply pretends to provide the service and gets the full face value from the government. So the incentives really are perverse with a coupon system, because it is not a free-market solution but a travesty.

    Now consider a vision of a truly free-market system of financing education. Banks lend to people based on their evaluation of the persons merit and ability to make full use of the opportunity of going to a good school. The bank would offer lower interest rates to people with better academic standings and promise. First this would provide an enormous incentive to do well in high school, secondly it would do away with admissions offices. Banks would be much better able to judge who has better promise, simply because money is at stake.

    This is of course a mockup, you may object that under such system noone would go into professions that dont pay so well but have great social importance, but that is increasingly the case under current systems of public for-fee education as well.

  34. I discovered this article and responses just now, one year after most were made. I have no idea if this is still open for discussion but will just leap in….

    Born, raised and educated in New Zealand with a career as a teacher, credentialed by legitimate, non-for-profit educational institutions, I also was a teacher advocate and active officer in the NZ Post Primary Teachers Association. In the 1980’s and 1990’s I actively protested against ‘performance pay’ for educators and any references to For Profit education rendered me nauseaus. I also marched in protest at New Zealand legislation in the early 90’s to introduce the Employment Contracts Act. This background is provided so you can see that I am no calculating sales representative. I am, however, a Business graduate.

    Fast forward ten years, I no longer teach and no longer live in New Zealand or Australia. I live in the USA and I am an Education Consultant for a For Profit Consultancy which represents For Profit (Regionally Accredited) Schools in the USA.
    I would not work for University of Phoenix, although I live in Phoenix. UoP has grown far beyond any descriptions within this article. It is huge. It is also experiencing legal issues. Within this For Profit Education sector, companies cannot remunerate employees by way of commission or performance based pay. Education Consultants must earn a salary which is ultimately based on performance. Tenure is very much performance based. Phoenix, in the State of Arizona is a ‘Right to work State’ where employees may be terminated at any time for any reason. Working conditions vary markedly with the worst being at the University of Phoenix itself.

    My comment addresses the other side of the coin, from a sales point of view. I am proud to ‘counsel’ my students into one of the For Profit schools we represent because they deliver outstanding education, online, in time and do change lives for the better.

    I see merit in the provision of vocational and academic education by for profit providers. Students will still get into debt, no matter what school they attend. Yes, I am a salesperson in much the same way as an Insurance Agent or Registered Securities Representative but earn a salary. That does not undermine the fact that I believe in what I am doing, although I found the transition difficult at first, I have integrity and believe that I am always honest with my students. My role is to empower them to move foward to accomplish their dreams.

    Actually, its a little bit like being a teacher…in a large, dynamic High School…

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