Privatisation and education (re-repost)

In the light of the latest news of large-scale fraud in the for-profit vocational education sector, I thought I would repost this from CT (in turn a repost of an article in Campus Review, that’s no longer on the website).

I also found a response by Andrew Norton

To the extent that there was any coherence to the higher education policies of the Howard government, it was derived from the idea that universities should become more like ordinary commercial businesses. Managerialism and market liberalism are at one in their rejection of notions of professionalism and the idea of autonomous academic disciplines. Both managerialists and market liberals reject as special pleading the idea that there is any fundamental difference between higher education and say, the manufacturing and marketing of soft drinks. In both cases, it is claimed the optimal policy is to design organisations that respond directly to consumer demand, and to operate such institutions using the generic management techniques applicable to corporations of all kind. They should compete on the basis of price (fees) as well as quality, and tailor their offerings to market (student) demand. The laws of economics would then ensure an efficient outcome.

This theory seemed beautiful to the ideologists of market reform, but it failed to account for an ugly fact. For-profit education has been a consistent failure in all times and places. The limited exceptions relate to areas of vocational training with little or no general educational components.

The market euphoria of the 1990s produced a large number of for-profit educational ventures, most of which quickly failed. Rather than conduct a post-mortem on the departed, it is instructive to look at some of the survivors.

Edison Schools was founded in 1992 and was widely viewed as representing the future of school education. Its plans were drawn up by a committee headed by John Chubb, the co-author of the most influential single critique of public sector education in the United States (Chubb and Moe 1990).

The period since then has been one of decline. Edison has lost numerous contracts, along with its stockmarket listing and has largely abandoned new bids to operate schools, focusing instead on a variety of peripheral educational services, such as testing and the provision of course materials. Even operating in a highly favorable political and financial climate, Edison was unable to deliver on its promise of transforming the school sector, and seems unlikely to survive as a school operator in the long run.

The University of Phoenix, founded in 1976, has been widely represented in Australia as a successful challenger to traditional universities. Such claims are exaggerated to say the least. Although the University does compete with traditional providers of undergraduate university education, its record in this area is exceptionally poor, with a graduation rate of 16 per cent (“the percentage of first-time undergraduates who obtain a degree within six years”). The performance of online programs (6 per cent) is even worse.

Alarmingly in the context of discussions of FEE-Help, the University of Phoenix has been subject to persistent accusations of rorting the government-subsidised student loan system. It was fined $10 million for illegal recruitment practices in 2004. A shareholder lawsuit based on the same issue recently led to a jury award of $280 million against the University’s parent company, Apollo Group, and further litigation under the False Claims Act is continuing.

The most prominent Australian venture into for-profit higher education is U21Global, a joint venture of the Universitas21 alliance of universities, of which the most prominent driver has been the University of Melbourne. Launched in 2001, it projected enrolments of 60 000 students, and annual revenue of $500 million by 2010. As of 2008, U21Global claims 1600 students, many undertaking short courses aimed at professionals. No financial reports appear to be publicly available, but it seems unlikely that the $US50 million invested in the venture will be recovered.

The failure of for-profit education reflects fundamental characteristics of education that make models based on competition and consumer sovereignty inappropriate as a basis for policy. Because the benefits of education are hard to assess in advance, and only realised over a number of years, short-term market incentives are ineffective or perverse. Only a long-term commitment to academic standards and professionalism can maintain the quality of education, and such a commitment cannot be driven by managerial skill or direct incentives.

59 thoughts on “Privatisation and education (re-repost)

  1. That for-profit schools offer less than good value ought not to be a surprise. The market for learning is one in which asymmetric information is rife. If the potential student was capable of assessing the quality of what was on offer they would not need to purchase what was being offered.

  2. Private education isn’t a complete failure: there are quite a few private universities in the USA that are excellent, such as Stanford. I expect that being seeded with a large endowment that removes the need for short-term profit maximisation helps.

  3. I worked as a teacher in a small private college catering exclusively to international students. One anecdote tells all about the managerial attitude of the owners:
    We had to photocopy our own teaching materials, on the one photocopier for the use of all students and teaching staff. A colleague arrived half an hour before class one morning to prepare. A member of the administration was opening up, but wouldn’t let him in the building: “Administraion only before 8.30.”

  4. @djm – the crucial distinction is between for-profit and non-profit, not public v private.

  5. I think that the problem here is to do with… much profit is enough. People who go into “profitable” ventures generally expect a very significant return on their investment. No blue blooded investor is going to put up all of their capital just so that they can earn a wage and make it easy for others to earn as much without risk (break even profit scenario).

    “For profit” does work, but generally only in a philosophical sense. It is the students who are the profit takers.

  6. @djm
    I see JQ made the distinction between private and for -pro fit. The US has a very large number of not-for-profit universities providing excellent education.

  7. And now, it seems that Australia has its own education scam that has left trades apprentices with worthless qualifications. I did not here all of the details.

    This highlights the difference between regualr market products and education. Education is time from peoples lives. Usually irreplaceable time if the product of that expended time ultimately proves to be worthless. Lost money does represent earning time from peoples lives, but money can be reimbursed through court action. learning time cannot.

  8. “the crucial distinction is between for-profit and non-profit, not public v private.”

    It’s not clear to me that this is the correct distinction. It’s hard to see how differently many non-profit and for-profits places are operating apart from a slightly greater margin the for-profits need to make. Most Aus universities, for example, seem to be driven by one factor, and this can be seen in many domains, such as non-profitable courses being shut down, no matter how much community need there is for them (the Melborne model comes to mind here), and crappy exploitative courses being started simply to make money.

    An alternative way of thinking about this would be to consider what the difference would be if the universities here were for-profit. If the difference is “I can’t really see how many things would change in any particularly great way”, then the distinction between for-profit and not-for-profit is obviously not the correct one to make.

  9. Not for profit educational institutions are usually guided by some overriding principle — religious, secularist, one or another philosophical, spiritual or educational principle. The schooling of individual students is subsumed under that overriding aim. The educational institution maintains its esprit de corps and sense of common purpose if it can convince itself and the world that it is more or less true to its overriding purpose.

    Maximising return on capital is not a sustainable educational mission. Educational institutions that are expected to generate a dividend are in peril of either cost cutting in a race to the bottom, or to collapse into a corrosive cynicism with regard to their customers, who in turn expect to get from their schooling what they want rather than what they need.

    And as all hawkers know, the customer is always right.

  10. As I understand it private schools in Australia that accept government funding (ie the vast majority) are not allowed to operate on a for profit basis. If that rule was lifted I’m sure many private schools would continue to be not for profit. However some for profit schools would exist. Is it asserted that the later would ultimately fail or is it asserted that the existence of the later would undermine the entire system?

    In Sweden I understand that the number of private for profit schools is increasing and that they perform well compared to the alternative. The rule in Sweden is that schools that get government funding can make a profit but can’t charge anything over and above what the government gives them. This is apparently working but does I suspect leave such businesses very vulnerable to changes in government funding formulas.

    Opposite my kids public primary school there is a large number of private tuition businesses catering primarily but not exclusively to the Asian community. They seem to be doing very well and I suspect they are quite profitable. I’m not sure how you would classify these.

  11. It is sadly true that some not-for-profits can be corrupted by administrators adopting a for-profit mentality. That has even happened with public universities. Let’s hope that passes.

  12. Well, education has many characteristics that make it unlikely that private markets would deliver socially optimal outcomes – the credence good nature of education, the externalities, promotion of social norms, integration of social networks between groups and social classes… the list goes on.

    Of course, there is always going to be scope for some private for-provit provision of specialist areas of education that don’t share such features, and they shouldn’t be stifled.

    I alway wonder when discussion of private education comes up that we never discuss the compulsory nature of school (grades 1-10). How about make no schooling compulsory, and let the market work? I you don’t think that will deliver an optimal outcome, then you are already discussing the best public/private/compulsory mix of education funding and provision.

  13. The problem with non-compulsory schooling not working in a free market is due, in theory, to there being no free market in the ownership of children. Presumably if that constraint were removed the free market would solve all.

  14. I think that they have non compulsory education in some African states. It does not work very well at all.

  15. John – if I wanted to be cynical I’d say you just jumped on google and shared the first negative article about the Swedish “free schools” that you found. Should I be cynical?

    According to Wikipedia there is now 900 of these “free schools” in Sweden where there was none in 1992. That’s quite an achievement in just 20 years in a country with 9.5 million. They may have critics but they also clearly have bums on seats.

  16. “Not for profit educational institutions are usually guided by some overriding principle”.

    Katz, I think that anyone that believes this of Australian universities is delusional, unless they think the overriding principle is making money or furthering the careers of upper management (which, in Australia, means they are making and spending a lot of money, preferably on things like buildings and other easily quantifiable achievements). The “goals”, which of course change season by season according to who thinks they need to show they are doing something when they get a new position are usually so crazy they are funny. Feel free to read the ones my university uses (immortalized here: and then come back and tell me what the overriding principle is.

  17. @TerjeP
    Foolish would be the word rather than cynical. You cannot use Cato as a source and expect to come out ahead. Cato as a research institution and as an educator is in that category even worse than the for-profit, that is the for-profit not-for-profit.
    Cato a for-profit that picks the taxpayers’ pocket at the same time.

  18. @TerjeP Sweden came up last time around (this is a repost), so I knew that it wasn’t as rosy as claimed in your link. I was actually looking for a report about statements made by the (conservative) education minister there, but Google pointed me to this report instead. Is there a problem with that?

    Regardless of location method, a negative finding about privatisation by a Swedish business group seems to me to carry a lot of weight. A positive by Cato is a bit, well, MRD.

  19. @conrad The universities are guided by mud the same goals as ever, and do a reasonably good job of pursuing them, but they are not guided by VCs or mission statements. Senior managements, strategic plans and so on come and go, with very little effect – these days I think even the senior managers recognise that.

  20. “The universities are guided by much the same goals as ever..”

    Perhaps that’s true but (a) most never had any well specified goals (which once may have been a good thing) compared to the US universities, many of which really do know what they are doing and why; (b) I’ve never worked anywhere where the bottom line has been less important than Australian universities (try asking you overseas colleagues that now work in Aus — perhaps universities in Aus differ on this an UQ is better than most); (c) things certainly have changed in terms of courses-for-money. This is why, as you’ve noted before, every university tries to offer the same money making courses, no doubt some of which are of dubious quality; and (d) things like the Melbourne model pretty much prove that even the good and rich universities are willing to sacrifice quality for money — the Liberal Arts courses and people at Melbourne were really excellent, but that didn’t stop them destroying that due to money concerns.

  21. Academics teaching in Australian universities are in an invidious situation. The funding model imposed on them demands that many academics are compelled to teach students who are incapable of satisfying minimal expectations.

    Course provision far exceeds effective demand. But the survival of programs requires a constant flow of bums on seats. Teachers are therefore required by their administrators to certify students against their professional judgment. These teachers are torn between security of employment and professional integrity. The survivors betray their integrity replacing it with cynicism.

    In this environment there exists very little scope for pursuing sound educational objectives. Thus, ironically, the current higher education funding model has replicated the outcomes of the for profit sector without actually generating a profit or a surplus.

  22. As we consider “for profit” education we should think about how this would likely play out in the Australian context. Tertiary education is expensive. Even AusGov Corp which runs the current programme has difficulty balancing the budget. So you have to wonder who the investors capable of bringing to site the huge amount of funding to pull this off might be.

    There are some obvious front runners which would have a mixture of output appeal. Any politician with a Coles U Commerce degree, for instance, who rises to be treasurer is guaranteed to pull the Libertarian vote, because they know that he would work tirelessly to keep taxes Down,…Down, Down. And legislation drafted by bureaucrats and pollies with Woolies U Law degrees are likely to be well received for their economy use of only short low cost budget words, although such legislation might have to be replaced more frequently.

    A Murdoch Institute Journalism qualification is less likely for the risk that recordings of campus conversations could emerge years late to embarrass or restrict divergent careers. More popular would be the McArts degree servicing the advertising industry, although a “sameness” could set in quite quickly. Telstra Tech is a safe bet despite that nagging sensation of paying ever more to get less each semester. Apart from the llifetime course fee repayment experience with regular calls from sub Asian call centres the GE IT is a likely feature of a “for Profit” future.

    A commercial purpose tertiary education system would certainly be more “colourful”, but would it serve the community, or would it be a passing phase of some zombic ideology? I suspect the latter.

  23. Many businesses run on a not-for-profit, worker ownership or consumers’ co-operative because they are the forms of organisation that survive in market competition.

    Life insurance (AMP?) was often run on mutually owned, not-for-profit basis especially in earlier times when it was easier for managers to disappear into the night with the funds. Dividends to private owners would be a device to deplete capital before life insurance payouts are due.

    Worker owned firms are in many of the professions. Much of their capital is human capital and mutual monitoring was required to prevent shirking. Alchian and Demsetz pointed this out in 1972 as did Ed Lazear.

    When it is difficult to specify quality in a contract, such as with education, innovative forms of organisation are required to overcome shirking and dilution of quality.

    Andrei Shleifer’s argued in “State versus Private Ownership” that we want state ownership in the following cases:
    1. opportunities for cost reductions that lead to non-contractible deterioration of quality are significant;
    2. innovation is relatively unimportant;
    3. competition is weak and consumer choice is ineffective; and,
    4. reputational mechanisms are also weak.

    He applied his criteria to prisons and schools.
    • Although in some respects prison contracts are very detailed, they are still seriously incomplete. There are significant opportunities for cost reduction that do not violate the contracts, but that can substantially reduce quality.

    • For schools, the damage to quality from cost cutting may be large, but innovation is probably important, and the incentives of publicly employed teachers are weak.

    • under vouchers, school choice would force private schools to compete by providing higher quality, since schools cannot compete in price if students pay with vouchers.

    See also

    The application to universities is less clear because universities do compete on both price and quality. About 20 percent of American college students attend private colleges. Some of the most prestigious universities in the U.S. are private, non-for-profit universities.

    Developers can gain from setting up a high quality, not-for-profit private university and service the surrounding community. These developers have a long-term interest in the not-for-profit private university staying high quality as the anchor of their business.

    How do private language schools operate?

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