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. 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.

  2. 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.

  3. 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.

  4. 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”.

  5. 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.

  6. 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.

  7. 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 http://www.iota.edu.au/ which does not profess to be anything more than an undergraduate organisation but whose costs are very very low.

  8. 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.

  9. 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.

  10. 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.

  11. 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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