I’m working on my long running book project Economics in Two Lessons, and I dug out this old post, originally written in 2008, which remains strikingly relevant today.
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.
John Quiggin 
The historical record in Australia is not good but a role for private education supopliers does arise in my view. In vocational areas such as finance and accounting, for example, there is a role for this sector. Many of the entrepreneurs here do set the goal of being financially viable but that, as privater suppliers is essential. The entry costs of gaining public support are now high and the screening process for government assistance is tough. Be careful too not to compare this sector with a hypothetical ideal. The re;levant comparison is with the non-major universities – I worked in these for 30 years – fair go John many of their pracrices are atrocious – overly bureaucratic, totally financially-oriented and with a lousy record of treating fee-paying students. The public sector could benefit from some competition with private suppliers.
Sorry about the spelling errors. It seems I cannot correct.
The public sector could benefit from some competition with private suppliers.
Not realistically possible over the long term: “high-quality education” is a stable equilibrium for a not-for-profit, but unstable for a for-profit. An institution that starts cutting corners on service delivery will see reputation and thus enrollments and income suffer: because of the profit motive, a for-profit is under much higher pressure to keep cutting costs once they’ve started.
[this can happen to a not-for-profit, but because of the incentive dynamics a not-for-profit has a much easier path to the “shrink and rebuild over some years” alternatives.]
Privatisation has damaged much more than education in this country. It has also damaged the provision of power, water, transport and communications. Other areas of damage we could add in are provision of superannuation and employment In each of these sectors problems are increasing. The infrastructure is failing to keep up with population growth. Costs to consumers are rising faster than general inflation. Services are declining.
Our internet has slipped from 30th to 60th on speed metrics in the last three years. Power prices have increased by an average 120% in ten years. On international measurements our education outcomes are declining. The World Economic Forum International Ranking of Infrastructure, 2014, lists Australia 20th, behind countries like Portugal, Taiwan and Spain to name a few. One would hazard a guess we have slipped since then given that our internet has slipped from 30th to 60th.
In Brisbane I can now note poor provision of internet, declining bus services, severely declining commuter train services, a transport, power and communications infrastructure which cannot withstand common summer storms and common rain events, let alone the increasingly severe events being induced by climate change.
Under neoliberalism Australia is being fundamentally damaged and set back. We see this not only in existing infrastructure declining but in the failure to build new infrastructure and the failure to meet developments needs for ameliorating climate change and meeting the demands of an ever harsher climate. We are going backwards. Neoliberalism and privatisation are the main causes of our national decline.
Education, like management consultancy, has another feature which makes application of a profit-based model problematic: the inherent difficulty of assessing the true quality of the service provided. It may be that Harvard University provides a high-quality education, or it may instead be that Harvard simply attracts very able students who would succeed in later life whatever quality of education they received at university. It may also be that everyone else believes that a Harvard education is high quality and this strong reputation results in Harvard graduates walking easily into jobs and having successful later careers, despite their own lack of ability or the true poor quality of a Harvard education.
Successful graduates of Harvard send their children to Harvard and give generously to Harvard. Successful graduates of Brooklyn College send their children to Harvard and give generously to Harvard. Reputation is all in this marketplace, and it may be entirely self-fulfilling.
Hi John. Your recent ‘repost’ from 2009 regarding Privatisation & education threw-up the following intriguing (for me anyway!) quote;
“The limited exceptions relate to areas of vocational training with little or no general educational components.” (Do the quotation marks come after the full stop or vice versa – I am never sure?)
Would you kindly expand on this statement – do I interpret that vocational education and training (‘VET’) lacks, or indeed, does not req
I didn’t get to finish …. do I interpret that vocational education and training (‘VET’) lacks, or indeed, does not require reference to “general education components” as part of its ‘business model imprimatur’? … and further more, what are these seemingly elusive “general education components” in the context of privatisation and education? (same issue with questions marks and punctuation!)
Disclosure alert!!! I am a teacher in the VET sector.
Thank you.
regards,
Keith H.
Telecommunications, energy, transportation, banking, education and training at all levels, health care, aged care, child care, environmental services, artistic and cultural services – all social goods, all essential to the quality and cohesiveness of our society, all necessary for the wellbeing of people. And none of them should be dominated by profit-seeking incentives. For the provision of social goods we need a robust and accountable public sector and not-for-profit sector that are motivated by commitments to 1. quality; 2. universality of coverage; 3. adapting flexibly, patiently, and creatively to the diverse needs of citizens / consumers; 4. a civic and ethical mission.
Having only spent five years at one university (the University of NSW) i cannot comment on privatisation impacts on tertiary education. My only observation is about the malignant role of time servers. This certainly brings down the quality of service provision at public schools. My time at the NSW Department of Education, where I taught at four different schools, certainly made me doubt the usefulness of teachers, who stay in the profession merely to secure superannuation windfalls. When I was teaching at Moree High School, we would get Deputy-Principals for only three (3) months. This would place sixty-four year old men on a higher superannuation payout. My first school was Mosman High School, a much sort after permanent posting. Unfortunately, when I was there, ten teachers approaching sixty years of age (all male) had no interest in their students. they were counting off the five years they had left to retirement. This lowers the quality of teaching and blocks the most progressive teaching ideas at the staff meetings. Don’t know if any of this is relevant but there it is: time servers certainly infect the public school system. Professionalism can be defined as working only for monetary reward. Monetary reward includes superannuation.
Offhand, I can’t think of anywhere in the world, at any time, that for-profit education has worked. Private schools tend to flourish only when they are non-profit, and run by an entity with enough economic acumen to provide stability in the teacher force until quality teachers actively seek to gain employment there, and are then freed to teach.
In short, none of the privatization proposals now sitting before U.S. legislators has a successful track record. Throwing tax money at privatization is unjustified and wasteful.
But, free market false myths are appealing and strong, and overcome common sense.
Perhaps more troubling is the long term effect. Over the past ~500 years western culture and science benefited greatly from advances in arts, humanities and sciences that were seeded and cultivated at our great state and non-profit universities. New state and non-profit universities have been able to goose these processes sometimes. But few and far-between are the contributions from for-profit colleges.
Has anyone studied this effect? Are my observations contradicted by any serious measurement anywhere?
Any future Nobelists on the faculty or in the studentbody of any for-profit school?