Markets in Higher Education

MARKETS IN HIGHER EDUCATION

HIGHER EDUCATION DYNAMICS VOLUME 6 Series Editor Peter Maassen, University of Oslo, Norway, and University of Twente, Enschede, The Netherlands Editorial Board Alberto Amaral, Universidade do Porto, Portugal Akira Arimoto, Hiroshima University, Japan Nico Cloete, CHET, Pretoria, South Africa David Dill, University of North Carolina at Chapel Hill, USA Jürgen Enders, University of Twente, Enschede, The Netherlands Patricia Gumport, Stanford University, USA Mary Henkel, Brunel University, Uxbridge, United Kingdom Glenn Jones, University of Toronto, Canada

SCOPE OF THE SERIES Higher Education Dynamics is a bookseries intending to study adaptation processes and their outcomes in higher education at all relevant levels. In addition it wants to examine the way interactions between these levels affect adaptation processes. It aims at applying general social science concepts and theories as well as testing theories in the field of higher education research. It wants to do so in a manner that is of relevance to all those professionally involved in higher education, be it as ministers, policy-makers, politicians, institutional leaders or administrators, higher education researchers, members of the academic staff of universities and colleges, or students. It will include both mature and developing systems of higher education, covering public as well as private institutions.

The titles published in this series are listed at the end of this volume.

MARKETS IN HIGHER EDUCATION Rhetoric or Reality?

Edited by

PEDRO TEIXEIRA Research Centre on Higher Education Policies – CIPES, and Universidade do Porto, Portugal

BEN JONGBLOED Centre for Higher Education Policy Studies – CHEPS, University of Twente, The Netherlands

DAVID DILL University of North Carolina at Chapel Hill, USA and

ALBERTO AMARAL Research Centre on Higher Education Policies – CIPES, and Universidade do Porto, Portugal

KLUWER ACADEMIC PUBLISHERS DORDRECHT / BOSTON / LONDON

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN 1-4020-2815-6 (HB) ISBN 1-4020-2835-0 (e-book)

Published by Kluwer Academic Publishers, P.O. Box 17, 3300 AA Dordrecht, The Netherlands. Sold and distributed in North, Central and South America by Kluwer Academic Publishers, 101 Philip Drive, Norwell, MA 02061, U.S.A. In all other countries, sold and distributed by Kluwer Academic Publishers, P.O. Box 322, 3300 AH Dordrecht, The Netherlands.

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All Rights Reserved © 2004 Kluwer Academic Publishers No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Printed in the Netherlands.

TABLE OF CONTENTS

List of Contributors

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Preface ALBERTO AMARAL AND PETER MAASSEN

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Introduction PEDRO TEIXEIRA, BEN JONGBLOED, ALBERTO AMARAL AND DAVID DILL

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Markets in Higher Education: Do They Promote Internal Efficiency? WILLIAM F. MASSY

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Cost-sharing and Equity in Higher Education: Implications of Income Contingent Loans D. BRUCE JOHNSTONE

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Transparency and Quality in Higher Education Markets DAVID D. DILL AND MAARJA SOO

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Regulation and Competition in Higher Education BEN JONGBLOED

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The Evaluation of Welfare Under Alternative Models of Higher Education Finance GERAINT JOHNES

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Higher Education Policy as Orthodoxy: Being One Tale of Doxological Drift, Political Intention and Changing Circumstances GUY NEAVE

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Market Coordination of Higher Education: The United States ROGER L. GEIGER

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‘Madly Off in all Directions’: Higher Education, Marketisation and Canadian Federalism GLEN A. JONES AND STACEY J. YOUNG

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Australian Higher Education: National and Global Markets SIMON MARGINSON

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The Higher Education Market in the United Kingdom GARETH WILLIAMS

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Rapid Expansion and Extensive Deregulation: The Development of Markets for Higher Education in the Netherlands CARLO SALERNO

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Is There a Higher Education Market in Portugal? PEDRO TEIXEIRA, MARIA JOÃO ROSA AND ALBERTO AMARAL

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Higher Education and Markets in France THIERRY CHEVAILLIER

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Conclusion DAVID DILL, PEDRO TEIXEIRA, BEN JONGBLOED AND ALBERTO AMARAL

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Glossary

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LIST OF CONTRIBUTORS

ALBERTO AMARAL is professor at the University of Porto and director of CIPES. He is chair of the Board of CHER, vice-chair of EUA’s steering committee on institutional evaluation, life member of IAUP, and a member of EAIR and IMHE. Recent publications include articles in Quality Assurance in Education, Higher Education Quarterly, Higher Education Policy, Higher Education in Europe and European Journal of Education. He is editor and co-editor of several books, including Governing Higher Education: National Perspectives on Institutional Governance (2002) and The Higher Education Managerial Revolution? (2003) in this series. THIERRY CHEVAILLIER is senior lecturer in economics at the University of Bourgogne (Dijon, France) and a member of IREDU, Institute for Research on the Economics of Education. His research interests are higher education finance and resource allocation in higher education. He has been involved in several international comparative studies on various aspects of higher education in Europe and is an expert to Eurydice. He is a member of the Consortium of Higher Education Researchers (CHER). DAVID D. DILL is professor of public policy and director of the Research Program on Public Policy for Academic Quality (PPAQ) at the University of North Carolina at Chapel Hill. His research interests include regulation in higher education, policy design and the ethics of public policy. He has published numerous books and articles on higher education and serves in an editorial capacity on the Journal of Higher Education, Higher Education Policy and Quality in Higher Education. He is a member of the Board of the Consortium of Higher Education Researchers (CHER), a life Fellow of the Society for Research in Higher Education (SRHE) and a member of the Association for the Study of Higher Education (ASHE) and the Association for Public Policy and Management (APPAM). ROGER L. GEIGER is distinguished professor of higher education at Pennsylvania State University and head of the Higher Education Program. His study, Knowledge and Money: Research Universities and the Paradox of the Marketplace, will be published by Stanford University Press in 2004. His volumes on American research universities in the 20th century, To Advance Knowledge and Research and Relevant Knowledge are being published in new editions by Transaction Publishers in 2004. In 2000 he published The American College in the Nineteenth Century (Vanderbilt UP) and since 1993 he has been editor of The History of Higher Education Annual. GERAINT JOHNES is professor of economics at Lancaster University Management School, UK. He is the author of numerous articles in journals such as the Economic Journal, Oxford Economic Papers and the Oxford Bulletin of Economics and Statistics, and also of four books, including The Economics of Education (Palgrave vii

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1993). He has also edited two books of readings: Recent Developments in the Economics of Education (Edward Elgar 1993) with Elchanan Cohn, and the International Handbook on the Economics of Education (Edward Elgar 2004) with Jill Johnes. He is consultant to the World Bank, OECD and the British Department for Education and Skills. D. BRUCE JOHNSTONE is university professor of higher and comparative education at the State University of New York at Buffalo, where he is director of the Center for Comparative and Global Studies in Education and the International Comparative Higher Education Finance and Accessibility Project. His teaching and research interests combine economics, finance and governance of colleges and universities in both domestic and international contexts. He has served as vicepresident for administration at the University of Pennsylvania, president of the State University College at Buffalo and chancellor of the State University of New York, the latter post from 1988 to 1994. GLEN A. JONES is associate professor of higher education and associate dean of the Ontario Institute for Studies in Education at the University of Toronto. His research focuses on higher education policy, systems and governance, including work supported by the Social Sciences and Humanities Research Council of Canada and numerous Canadian and international organisations. He is a former editor of the Canadian Journal of Higher Education, a past president of the Canadian Society for the Study of Higher Education, and in 2001 received the Society’s Research Award for his contributions to higher education scholarship in Canada. BEN JONGBLOED is a senior researcher at the Center for Higher Education Policy Studies (CHEPS), University of Twente, the Netherlands. Since joining CHEPS in 1993 his research has concentrated on the theme of higher education economics. He has written extensively on topics such as funding methodologies, student financial support, marketisation, financial management and per student costs. He currently serves on the Board of the Consortium of Higher Education Researchers (CHER). SIMON MARGINSON is a professor of education and director of the Monash Centre for Research in International Education at Monash University, Australia. The holder of an Australian Professorial Fellowship, his work is focused on the trajectories of the research university in the global environment. Current research projects include national and global education markets, the social and economic security of cross-border students, university networking and social capital, and technological innovation in higher education. His book, The Enterprise University (Cambridge UP 2000) with Mark Considine, won an American Educational Research Association publication award in 2001. WILLIAM F. MASSY is president of The Jackson Hole Higher Education Group, Inc., and an emeritus professor at Stanford University. He earned tenure as professor of business administration, then moved to Stanford’s central administration as vice provost for research and later vice president for business and finance. In 1987 he

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became a professor of higher education and founded the Stanford Institute for Higher Education Research where he worked on education quality, resource allocation, finance and mathematical modelling of universities. From 1996 to 2002, Dr Massy directed the National Center for Postsecondary Improvement’s project on educational quality and productivity. From 1991 to 2003 he served on Hong Kong’s University Grants Committee. His book, Planning Models for Colleges and Universities (Stanford UP 1981) with David Hopkins, received the Operations Research Society of America’s Frederick W. Lanchester Prize for 1981, and in 1995 he received the Society for College and University Planning’s annual career award for outstanding contributions to college and university planning. His modelling work continued with Virtual-U, a simulation game for teaching about universities as systems, supported by the Alfred P. Sloan Foundation and released in 2001. In 1996 he published Resource Allocation in Higher Education (University of Michigan Press) which introduced the idea of ‘value responsibility budgeting’. His most recent book, Honoring the Trust: Quality and Cost Containment in Higher Education (Anker Publishing Co. 2003), presents an action plan for boosting quality without increases in spending. GUY NEAVE is director of research at the International Association of Universities Paris, and professor of comparative higher education policy at the Center for Higher Education Policy Studies (CHEPS), University of Twente, the Netherlands. Foreign associate of the National Academy of Education of the United States and editor of Higher Education Policy, he taught history before moving over to education policy many moons ago. He lives on the far western edge of the Paris Basin at St Germain en Laye and is not a football supporter. MARIA JOÃO ROSA is assistant teacher at the University of Aveiro and a researcher at CIPES. She was awarded a PhD by the University of Aveiro (Portugal) in December 2003, with a thesis entitled Defining Strategic and Excellence Bases for the Development of Portuguese Higher Education. Her main research topics are quality management and quality assessment in higher education institutions and the internationalisation of the Portuguese higher education system. Recent publications include articles in journals such as Quality Progress, Total Quality Management and Higher Education Quarterly. CARLO SALERNO is a senior research associate at the Center for Higher Education Policy Studies (CHEPS) at the University of Twente in the Netherlands. His research focuses on the economics of higher education with special attention to issues surrounding university productivity and costs as well as the behaviour of institutions as non-profits. Since coming to CHEPS in 2001, he has authored or coauthored a number of monographs and papers in the areas of higher education privatisation, funding, per-student cost estimation and efficiency. MAARJA SOO is a doctoral student in public policy at the University of North Carolina at Chapel Hill. She graduated with a BA in political science and a masters degree in public administration from the University of Tartu in Estonia and she

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followed a graduate programme in political philosophy at the University of Oxford in the UK. Before her PhD studies in the US, she worked for several years in a public policy think tank in Estonia. Under the sponsorship of the Open Estonia Foundation she was one of the founders of PRAXIS, the first independent think tank in Estonia. At the UNC-Chapel Hill, she is involved in the Research Program on Public Policy for Academic Quality (PPAQ). Her research interests lie in higher education funding, in particular, in performance funding mechanisms in higher education. PEDRO TEIXEIRA is assistant professor at the Department of Economics (University of Porto) and researcher at CIPES (Portuguese National Research Centre on Higher Education Policy) and CEMPRE (Research Centre on Macroeconomics and Forecasting, University of Porto). He is also affiliated with IZA (the International Network of Labour Economists) and with PROPHE (Program of Research on Private Higher Education). He has collaborated with CIPES since its foundation in 1998 on various research projects and has published on various aspects of higher education policy, notably on markets and privatisation in higher education (with special attention to the Portuguese case) and on the history of economic thought namely on the history of human capital theory and the economics of education. GARETH WILLIAMS is emeritus professor of education administration at the Institute of Education, University of London where he was founding head of the Centre for Higher Education Studies. Most of his work has been concerned with the economics of education and education policy. In recent years he has concentrated particularly on the finance of higher education and has written many books and articles on the subject. He has previously worked for Lancaster University, the London School of Economics, Oxford University and the OECD. Books include: Financing Higher Education: New Patterns (OECD 1990); Changing Patterns of Finance in Higher Education (Open University Press 1992); The Enterprising University (Open University Press 2003). STACEY YOUNG earned her PhD in higher education from the Department of Theory and Policy Studies in Education, Ontario Institute for Studies in Education at the University of Toronto (OISE/UT). Her scholarly interests include the study of the emergence of markets in higher education, in Canada and internationally, the politics of higher education in Ontario and Canada, and higher education in the ancient world. She has worked in a variety of capacities in higher education and government, including special assistant to the president of the University of Toronto, and policy research analyst for the Ontario Ministry of Training, Colleges and Universities.

PREFACE

Hedda is a European consortium of nine centres and institutes devoted to research on higher education. At its foundation in January 2001 it was decided that Hedda, in collaboration with CIPES, its Portuguese associated centre, would promote the further development of the field of higher education studies through organising a series of annual high level seminars, named the Douro seminars. At each seminar prominent researchers present a research-based manuscript and debate the state-ofthe-art research on a specific higher education policy issue. The manuscripts and the results of the debates are published by Kluwer Academic Publishers in the book series called Higher Education Dynamics (HEDY). And paying tribute to the regularity of the seminars it was decided that the volumes originating from the Douro initiative will be collected in a ‘series in the series’ called the Douro Seminars of Higher Education Research (DOSHER). The first seminar was dedicated to Governance Structures in Higher Education Institutions. The seminar was held along the banks of the Douro River, Portugal, on 13–17 October 2001. The second seminar contemplated the Emergence of Managerialism in Higher Education Institutions and took place at the same location on 4–9 October 2002. The third seminar focused on Markets in Higher Education and was held on 2–6 October 2003. The 2004 seminar (2-6 October and once more at the same location) will be dedicated to a debate on Cost Sharing and Accessibility in Higher Education. The present volume contains the edited versions of the manuscripts presented at the third Douro seminar and examines the concept of market and its role in higher education. This is a very timely theme as the role of the market has become a recurrent issue in higher education debates. This is the case even in those systems traditionally monopolised by public provision and support of higher education. Nevertheless, this process is lacking some systematic treatment on the implications of promoting market mechanisms of regulation. And, in the field of higher education studies the impact of recent moves towards the use of market mechanisms in higher education did not receive the attention it ought to have, namely from an economic perspective. Therefore, this book aims to fill part of this gap by presenting a more systematic and comparative analysis of recent moves in Western higher education systems towards market regulation. This book brings together leading experts on the economics of higher education from seven countries to analyse the impact of market mechanisms on their higher education systems. Massification of higher education has led to increasing costs of the system, a burden that according to governments can no longer be carried only by the public purse. This has resulted in a decrease of the state contribution per student and a rise in public awareness of the need to improve the efficiency of higher education institutions so as to offset the effects of reduced funding on the quality of educational provision. Therefore, a number of governments are experimenting with xi

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the use of market-like mechanisms as instruments of public policy, aiming at maximising the social benefits of national higher education systems. However, important questions remain unanswered about this application of market-based policies to higher education. In this volume the initial theoretical chapters offer an analysis of the effects of market and government failures, and of the difficulties linked to the use of quasi-markets in which the ‘essential ingredients’ of markets are only partially introduced to promote market behaviour among public institutions. The book discusses the increasing role played by markets in the provision, coordination and organisation of higher education. In the first part some of the contributors analyse the implications and impact of introducing market mechanisms at a more theoretical and comparative level. The topics covered in this first part include the following dimensions through which market mechanisms can be expected to affect higher education systems and institutions: internal efficiency of higher education institutions, quality and informational issues in higher education markets, cost-sharing and access to higher education, privatisation and public provision of higher education, deregulation and competition in higher education. The authors present a dispassionate and ideologically neutral view of the advantages and disadvantages of the introduction of market-mechanisms in higher education and of its effects in terms of access, equity, quality of provision, student learning, research and scholarship, and so on. And they balance the performance of markets in higher education against the alternative of more, or a different kind of, governmental intervention. Empirical evidence on the increasing role of markets in higher education and their positive or negative consequences is documented through a series of country case studies of recent reforms in the higher education systems of mature economies. The national case studies explore the achievements and shortcomings of those policies attempting to enhance the role of markets in higher education. In order to promote a more fruitful comparative approach, the national case studies cover a set of common topics, though each contributor introduces some additional aspects relevant for each country. The national case studies are the following: the United States, Canada, Australia, the United Kingdom, the Netherlands, Portugal and France. In the conclusion to this volume, the common themes emerging from these national perspectives are presented and analysed, and an agenda for future research is discussed. We hope that this volume will become an indispensable reader for all those interested in higher education policies, especially those more directly concerned with the application of market-based policies to higher education. We are grateful to all who have made the third Douro seminar and book possible, namely Amélia Veiga at CIPES and Therese Marie Uppstrøm at Hedda, the perfect organisers of the Douro seminars. We are also grateful to Di Davies for her editorial work. We have appreciated the diligence of all our colleagues who have contributed to this volume with their papers, comments and editorial suggestions, and we certainly noticed their forbearance in replying to our tedious editorial demands.

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We want also to acknowledge the financial support from Fundação para a Ciência e Tecnologia, of the Portuguese Ministry for Science and Higher Education, making possible the organisation of this third Douro seminar. We are also grateful to the Fundação Luso-Americana that has supported the participation of William Massy and Bruce Johnstone. And last, but not least, we acknowledge once more the superb environment provided by the management of Vintage House Hotel on the banks of the Douro river. Alberto Amaral Matosinhos and Peter Maassen Oslo June 2004

PEDRO TEIXEIRA, BEN JONGBLOED, ALBERTO AMARAL AND DAVID DILL

INTRODUCTION

All across the world, higher education has become a large enterprise. The use of the word enterprise is intentional here, since not only have governments, students and private businesses invested increasing amounts of public and private resources in the sector, one can also observe a more ‘business-like’ approach in the way the higher education sector is managed (Amaral, Meek and Larsen 2003). The massification of higher education – a phenomenon describing the increasing popularity of undertaking a higher learning programme – has led to a significant share of higher education expenditures in public budgets and to problems in the steering and management of universities and colleges. In short, the political pressures for the control of public funds invested in the higher education system and the need to invent more effective and accountable models of organisation and management for the system have become prominent items on the agenda of policy makers and administrators. With the opportunity of further reductions in public spending diminishing because of the fear of deterioration of the quality of education and research, the need to reform the relationships between higher education institutions and their various clients and sponsors is apparent. What options are available to steer our still heavily subsidised universities and colleges in directions that comply with the public interest? In this context one can observe a change in the traditional role of government in many Western European countries (Neave and Van Vught 1991). The authority of government, its mode of collective decision making, its use of command and control steering approaches, the budget mechanism and the monopoly of state-run higher education institutions are increasingly being questioned. As a consequence, new and less hierarchical relationships between government and higher education providers have emerged and governments and administrators have started to experiment with more market-oriented steering and organisation models. However, these types of innovations have their own problems and the role of ‘the market’ nowadays is often debated. This is the case even in those systems that traditionally relied heavily on public provision and public support of higher education. This book aims to contribute to a more systematic analysis of the implications of introducing marketoriented mechanisms in the steering, funding and organisation of the higher education sector. The analysis is carried out primarily from an economic perspective. Moreover, the contributions presented in this book take the reader to various national systems, enabling a comparative analysis to be carried out of some 1 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 1–12 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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of the recent moves undertaken by various governments to inject market forces into their national higher education systems. 1. SOME FREQUENTLY USED TERMS AND CONCEPTS A discussion of the growing role of the market in higher education systems requires a definition of some of the key concepts related to market mechanisms. Instead of boring the reader with a large number of definitions, we have compiled a glossary (located at the back of the volume) that lists the definitions for some of the basic economic terms, such as, markets, types of efficiency, public goods, externalities, information asymmetry and types of competition. These terms feature prominently in the chapters contained in this volume. What most of us will remember, either from our introductory courses in economics, from reading the popular press or listening to debates on reform in the public sector, is the concept of the invisible hand, the metaphor popularised in economic thought by Adam Smith (1977), to describe what we nowadays call the market mechanism. Economists have elaborated on this metaphor, particularly with respect to the most important characteristic of the market mechanism, that is, efficiency. The utility-maximising behaviour of persons and the profit-maximising behaviour of firms will, as through an invisible hand, distribute goods in such a way that no one could be better off without making someone else worse off. A market is a powerful allocation system that produces – what economists call – a Paretoefficient allocation of goods. However, from welfare economics it is known that reality corresponds rarely to the assumptions of the idealised market model. Markets do not always produce the optimal outcome from a society’s point of view. Some markets can persistently produce too much, or too little, of goods and services, challenging the self-regulating capacity that economists usually associate with a market mechanism, that is, the capacity to adjust to situations of excessive or insufficient supply (or demand). This is a case of market failure. Classic examples of market failure are found in the case of public goods, the existence of externalities (spillovers), information asymmetry or monopoly powers. With the exception of the first (i.e. public goods), all of these examples are relevant for higher education (Johnes 1993). First, individuals making decisions on investing in higher education do not take into account the fact that their training will affect the functioning and wellbeing of others in a positive way. The same holds for firms investing in research (or R&D). Both examples point to an under-supply of higher education and research from society’s point of view. Secondly, one encounters information-related problems in the higher education sector when it comes to assessing the outcome (including the quality) of the efforts of academics and students. Imperfect information also shows up in the student loans market, where information asymmetries exist between students taking up loans and banks (or government agencies) that supply loans. Thirdly, while natural monopolies may not exist in the case of higher education, market power may be concentrated in a select number of providers, causing them to behave like a cartel and to erect barriers to entry for potential new providers.

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These examples of market failure provide the traditional economic rationale for government intervention (Wolf 1993). Government intervention takes the shape of public production, the provision of government subsidies and the issuing of laws and regulation. Government intervention may also work to introduce sufficient incentives to ensure that providers reveal the quality of their services and students express clearly their demands and capacities. Information is a vital ingredient for any market. Government ‘watchdogs’, for instance, are charged to oversee markets, enforcing regulation to prevent collusive practices or monopolies and to promote a market structure without unjustified barriers for potential new providers entering the market. Public production of higher education takes place when public organisations provide teaching and research on behalf of the government. When production partly takes place in private institutions, government (or government agencies) will often ‘buy’ education and research on behalf of society (i.e. the students, etc.). This is the case when the costs of higher education and research are partly met through government subsidies. The remainder of the costs are met by private contributions, such as tuition fees. The performance of a market – be it a free market, a heavily regulated (command) system or some mixed system – cannot be assessed solely on the basis of the efficiency criterion. Equity constitutes another important reason for government intervention; it addresses the question of whether the market produces an allocation that meets society’s requirements for justice (e.g. equality of opportunities). It must be acknowledged that the equity issue is the focus of much debate, namely, in terms of the concept of justice and its identification with equality of opportunities (see, e.g., the well-known work of John Rawls 1999). Clearly, this is a normative issue: the decision made depends on people’s values on issues of distributive justice, etc. The central problem lies in the unequal bargaining power and opportunities of individuals, often caused by an uneven distribution of income and wealth in society. When it comes to the higher education market, one of the major goals of government intervention is to provide equal opportunities to all qualified individuals who wish to participate in a higher education course. Equity is concerned with the distribution of educational outcomes, for example, whether poorer people end up with fewer qualifications and, as a result, with lower incomes (Barr 2001). In order to also protect the interests of future generations, it is in the interest of society that talents are not wasted and that people wishing to develop their talents are not restricted by factors such as parental income. Access policies not only consist of student subsidies, grants and loans, but also include regulation to prevent discrimination, as well as mechanisms to raise the aspiration levels for those who traditionally do not consider investing in higher education. Education – of all types and at all levels – is characterised by large government subsidies and many government regulations. Although no one questions a role for government, there is a real possibility that government interference impedes incentives for quality, efficiency, differentiation and innovation. Thus, while the market may fail, there is a possibility that government may fail as well (Wolf 1993). When studying the equity and efficiency effects of introducing markets and

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competition in higher education, one therefore will continually be confronting tradeoffs. Faced with this challenge, many governments and policy makers have ended up with – or ‘stumbled upon’ – quasi-markets (Le Grand and Bartlett 1993; Dill 1997) in their struggle to reach a compromise. In a quasi-market situation, decisions on demand and supply are coordinated using ‘market-like’ mechanisms in which only some of the ‘essential ingredients’ of markets (Jongbloed 2003) are introduced – often gradually. This is done in an attempt to simulate market behaviour among public institutions, as in the creation of internal markets. Government regulation and financing will still remain important coordination mechanisms, but elements of competition, user charges, individual responsibilities and freedom of choice are injected into the system. The quasi-market concept is used more widely in public policy and regulation studies compared to (micro-) economic theory. Nevertheless, we believe that it could be usefully applied to the higher education sector, since it points to the complex interaction between market elements and the strong regulatory power of government. We hope that this book illustrates the value of using this analytical category in economic analyses of higher education. Table 1 lists some of the ingredients, or basic conditions, of markets. Using the eight conditions, marketisation policies can be defined as policies that try to establish or enhance the eight ‘kinds of market operation freedom’ for providers and consumers in the higher education sector. The conditions stress the promotion of consumer sovereignty as well as producer sovereignty; in other words, autonomy, open markets and well-informed decentralised decision making are the key elements in marketisation policies. Table 1. Eight conditions for a market ‘Four freedoms’ for providers Freedom of entry Freedom to specify the product Freedom to use available resources Freedom to determine prices

‘Four freedoms’ for consumers Freedom to choose provider Freedom to choose product Adequate information on prices and quality Direct and cost-covering prices paid

Source: Jongbloed 2003: 114

The chapters contained in this book will show that, in today’s modern economies, governments have experimented with introducing several of the elements into the various sub-markets that exist in the higher education system, such as, the markets for undergraduate students, postgraduate students, international students, academic staff, research grants, scholarships, donations, etc. The introduction of quasi-markets in higher education is a combination of three main vectors. The first is the promotion of competition between higher education providers. The second is the privatisation of higher education – either by the emergence of a private higher education sector or by means of ‘privatisation’ of certain aspects of public institutions (cf. Teixeira and Amaral 2001). And the third is the promotion of economic autonomy of higher education institutions, enhancing

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their responsiveness and articulation to the supply and demand of factors and products. 2. FRIEDMAN AND THE MODERN DEBATE ON EDUCATION MARKETS The classic modern statement on the importance of markets in (higher) education rests with Milton Friedman (1962). Friedman, in his reassessment of the economic and social role of the state, recommended the use of market mechanisms in many activities for which this was unusual, especially in education. Although he acknowledged the important externalities associated with education, and the financial role that the state should take in this sector, he challenged the provision of these services by the state. Accordingly, Friedman states the classic criticisms of the public provision of education by the state. One of them is the poor efficiency of a system monopolised or quasi-monopolised by the state, based on a situation of uniformity in wages that prevents performance payments. This situation is considered to restrict the say students have over their education, while at the same time discouraging private contributions (by students or their parents). The system where government subsidies flow directly to the providers of education has – in Friedman’s view – led to less responsive institutions that are under-funded and less adapted to the demands of society. A system of vouchers, where government funding flows directly to students (and from them to the institutions), would create more competition between institutions and lead to more efficient use of resources. Such a system might be supplemented by students through fees and other private contributions. While the Friedman model primarily targeted basic education, it could easily be extended to higher education. This classic argument launched the debate on the feasibility of applying market mechanisms to the provision of higher education. The debate has devoted some attention to the specificities of higher education that are visible in both the demand and the supply side. On the supply side, one sees in general only a small role being played by private providers of higher education.1 If private higher education institutions do exist they mostly are of the not-for-profit kind. Furthermore, higher education institutions seem to pursue multiple objectives that are difficult to reconcile with the demands of market efficiency. The entry of providers to the market is highly regulated, with strict controls over the activity of private providers, in some cases even stricter than for public providers. In addition, it is argued that consumers of higher education do not freely choose the product, and instead are forced to choose from options pre-selected by the regulating authority. In the higher education market, prices rarely play the allocative, signalling and rationing roles that they are supposed to play in textbook examples (Jongbloed 2004). This is due to the low level of fees paid by students, or a complete absence of tuition fees. On the demand side, one of the important features that according to pro-market advocates causes inefficient allocations is the fact that often the purchaser of a degree programme differs from the consumer. The government is paying for (most

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of) the costs of education and the consumers – the students – are not confronted with the costs of their decision to go to college. This has led some to argue for a shift from indirect funding to funding through consumers. In other words, a system of demand-driven funding instead of supply-driven funding is part of the repertoire of market advocates. Furthermore, when it comes to the demand side, the choice of a degree programme is a peculiar one. It is a one-off choice, with very high costs to revert, and a choice that can transform the product by changing the preferences and tastes of other consumers of higher education (since one can reasonably regard higher education as a customer-input technology in which the calibre of one’s fellow students may affect the quality of one’s learning (see Rothschild and White 1995)). On the same note, higher education is a so-called experience good: consumers can determine the quality only through consumption. This fact points to imperfect information on the side of students and may contribute to distortions in decision making. 3. CONTINUING THE DEBATE Despite the fact that many of the essential ingredients of markets are not in place for higher education, market-type coordination mechanisms are becoming increasingly popular in higher education policy making (Dill 1997). Their emergence in particular can be observed in the area of funding. As we will see later in this book, voucher schemes and other more demand-driven funding mechanisms are the subject of debate and policy experimentation in some countries. Mechanisms of competitive funding for academic research have become widespread and in the future might become a reality for other parts of academic life, such as, the provision of particular types of programmes (masters or professional degrees). At the same time, the level of tuition fees has become a contentious issue in many systems of higher education. The system of free (or almost free) higher education based on public support has been criticised on the grounds of efficiency and equity. It is argued that students are the main beneficiaries of the degrees, hence they should bear a larger part of the costs of its provision. Moreover, from the late sixties onwards (see Hansen and Weisbrod 1969), there has been significant controversy on the possible regressive effects of low or non-existent tuition fees. Many countries have moved towards some direct form of contribution from students and their families, although the amount still varies significantly across countries. Cost-sharing is the term often used to describe different forms of direct charging for education services (Johnstone 1986). Direct charging is seen as a way of affecting student decisions (i.e. affecting allocation) as it makes clear to students that higher education leads to a private benefit. However, direct charging is also a way of raising revenue. This increasing financial participation of students and their families has also been associated with more complex, and in many cases more demanding, forms of student support (notably the trend of replacing grants with loans). The rising costs of higher education systems have also contributed to experiments in funding that increase competition between higher education institutions (Johnes 1993). One of the experiments was the application of auction-

INTRODUCTION

7

type mechanisms.2 There have been some proposals and small-scale attempts to develop experiments with voucher mechanisms in the US and the UK, but for various reasons the attempts were not extended to the higher education level. However, debates in the Netherlands and Australia lead one to expect that demanddriven funding will become an option that will receive increased attention in the coming years. Therefore, it is important to discuss the reasons for strong resistance and the specific type of problems vouchers pose in higher education. This debate on demand-driven versus supply-driven funding mechanisms for higher education often coalesces with the promotion of wider choice, the possibility of market-type accountability and the reduction of government interference in higher education. Those advocating a supply-driven system base their position on arguments about students being immature consumers, on the absence of sufficient and reliable information about services on offer, on enhanced policy effectiveness and coordination of the higher education system, and on better performance in terms of equity in the provision of higher education. They argue that pro-market policies might result in unfulfilled expectations of improved quality alongside serious detrimental effects, pointing out that these policies would increase polarisation in higher education, with growing inequality between institutions and between socioeconomic and ethnic groups. Several of these issues deserve detailed discussion and a serious assessment of their relevance for higher education systems. In many countries, governments have asked institutions to compete for students, research funds and funds tied to specific goals. Some countries have started funding institutions on the basis of contracts and business-like output targets, notably focusing on completion rates and the average length students take to complete degrees. This competitive environment has triggered important developments within higher education institutions, especially since alongside these developments there was in many countries a strengthening of institutional autonomy. The latter was supposed to provide the institutions with an enhanced capacity to face financial stringencies and new demands while strengthening organisational innovations. This is reflected, among other things, in the staffing and human resources policies of institutions, the outsourcing of several activities, and the setting up of subsidiary businesses and partnerships with private companies (Williams 1991). This was done in order to reduce inefficiencies, to generate additional revenues and to create innovative organisational models. Some of these initiatives have led to new institutional dynamics. The changes have impacted on management practices (Amaral, Meek and Larsen 2003), resource allocation within institutions and the internal evaluation of procedures and services. Since most of these changes occurred in a context of decreasing resources, it was necessarily a difficult process, punctuated with internal tensions. The assessment of these changes is complex, and sometimes highly controversial. Several have voiced concerns over these developments, maintaining that they have contributed to organisational fragmentation, increased administrative bureaucracy or even led to an identity crisis (Barnett 1990). Others have counterargued that there have been significant achievements in terms of cost reductions and increases in teaching and research output quality.

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It is worth debating these developments and discussing the extent to which the market has contributed to a higher education system that is stronger in terms of efficiency, equity, quality and responsiveness. 4. THE MANY PATHS TOWARDS THE MARKET – THE CONTENTS OF THIS BOOK This volume discusses the increasing role played by market mechanisms in the provision, steering and organisation of higher education. The first part of the book covers the implications and impact of introducing market mechanisms at a more theoretical and comparative level. In the second part, a series of national case studies complements the debate by exploring the achievements and shortcomings of those policies in national contexts. In order to promote a more fruitful comparative approach, the national case studies were written to cover the topics listed in table 1 (above), though each contributor introduces some additional aspects relevant to the country in question. In the initial chapters some of the main implications of market regulation in higher education are covered. In chapter 1, Bill Massy discusses one of the main arguments for the introduction of market mechanisms in higher education systems, that is, the promotion of efficiency. He focuses on the effect of market regulation in terms of the internal efficiency of higher education institutions. He explores the potential efficiency gains that can be brought about by market regulation, though, as he rightly points out, the non-profit nature of higher education institutions requires theoretical adjustments and introduces further complexity in the traditional microeconomics of the firm. In chapter 2, Bruce Johnstone, who analyses the issue of cost-sharing, corroborates this increasing pervasiveness of economic analysis in terms of higher education policy. The realisation of significant private benefits has led many, economists and others, on grounds of efficiency, to call for a diversification of the funding structure of higher education, namely, through stronger participation of students and their families. This has been particularly apparent in recent years for many European systems, traditionally largely subsidised by public sources. These systems transformed from elite systems into mass systems with sometimes more than 50% of the relevant age cohort participating in higher education. Johnstone analyses the case of student loans, which became one of the most popular mechanisms of cost-sharing, and its implications in terms of equity for higher education systems. His discussion highlights that cost-sharing is as complex as it is inevitable from a higher education policy point of view. One of the main conditions for an efficient and effective functioning of market mechanisms in the allocation of resources is the availability of sufficient and reliable information. The better this condition is fulfilled, the better the market will function. David Dill and Maarja Soo in chapter 3 explore this topic, which has attracted significant attention in micro-economic theory since the seventies. They suggest that the characteristics of higher education and its production can exacerbate this traditionally complex issue. The problem is not only due to imperfect information

INTRODUCTION

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for the consumer, but it is also due to the possibility that even the producers have imperfect information, due to academic autonomy and specialisation. These informational insufficiencies and other shortcomings of the market have been traditionally advanced as arguments in favour of a more visible role of government in regulating the sector, even when allowing for a strong presence of market mechanisms. The regulatory framework of higher education is analysed in chapter 4 by Ben Jongbloed, who discusses the changes in terms of regulation in many Western higher education systems, particularly in Europe, away from more centralised forms to more supervisory regulatory structures. He examines how government regulation can affect a potential higher education market, within the supervisory model of regulation. Using a framework borrowed from industrial organisation studies, he explores the role that governments can play in regulating the structure, conduct and performance of higher education institutions competing in a higher education market. He concludes his chapter by analysing the case of vouchers illustrating the difficulties of governments in regulating a higher education market. One of the ways governments traditionally regulated the higher education sector was through its degree of publicness. Privatisation can be implemented through the adoption of private-like behaviour by public institutions or by the emergence of private institutions in traditionally public dominated systems. This is the topic covered by Geraint Johnes in chapter 5 of this volume. Using an economic model, he defines the critical issues arising once societies allow for the coexistence of private and public sectors of higher education and for the coexistence of public and private funding sources. Johnes raises important questions associated with the definition of priorities of social spending and the distribution of public funds among different social groups. Moreover, he highlights the fact that in contemporary society higher education may find itself trapped on a level of low investment. In between the more economic theory-driven chapters and the set of case studies that forms the more empirical part of this book, chapter 6 by Guy Neave provides a much-needed historical perspective on the transformation of the university and its (sometimes forced) adoption of the market ideology. As a historian, he decides to leave aside the disciplinary debates and developments in economics that promoted an economic approach to education, and concentrates on a set of economic, political and social forces that contributed to the triumph of the economic rationale in the affairs of higher education policy and academic life. The chapter takes us back to the Soviet Union, the Cold War and the fall of the Berlin Wall. It links these events to the dialectics between economic ideas (e.g. human capital theory, manpower planning, supply-side economics) and political ideas (e.g. higher education creating competitive advantage as well as social inclusion). Neave’s account suggests that this process moved the university closer to the economic domain, transforming it into a very ‘ordinary’ institution that, compared to its past version, seems to have become much more successful at responding to external demands. However, he argues that there are alternatives to the market-driven university – other models could have been adopted. As in economics, it is all a matter of choice and responding to the incentives provided by different (social, political, etc.) arrangements.

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In the second part of the book a set of chapters develops the empirical assessment of market mechanisms for several developed economies, referring as far as possible to some of the ingredients of markets developed in this introduction (see table 1). The country studies start with chapter 7 by Roger Geiger analysing the US system, consistently identified as one where the market has a more consolidated role. In his chapter, Geiger analyses the multiple markets in American higher education and the different degrees of effectiveness of market mechanisms in each of them. Whereas in some of these markets the degree of competition seems reasonably intense, in others there seems to exist a clear segmentation of the market that prevents or hinders competition between large chunks of that market. Geiger in particular pays attention to one aspect that has characterised the US higher education landscape, that is, the rising tuition, and the role that this phenomenon seems to have played in the aforementioned segmentation of several of the higher education markets. In chapter 8, Glen Jones and Stacey Young suggest that north of the US border the situation seems to be different and probably more diverse regarding the role of markets in Canadian higher education. They survey the changing role of the federal government and the way this has interplayed with provincial policies. Notably, they analyse how the financial retrenchment of the federal government has led to more diverse models of regulation at the provincial level. This has allowed room for experimentation in terms of funding arrangements and has produced increasingly dissimilar situations across states concerning hot issues in higher education policy such as tuition fees and the public mission of higher education institutions. A system that has also experienced a substantial amount of political experimentation and reform, very much in the direction of strengthening the role of market mechanisms, is Australia. This is the country analysed by Simon Marginson in chapter 9. Based on the idea of higher education as a positional good, thus leading to a peculiar type of (positional) competition, Marginson elaborates on market segmentation in higher education, an issue also highlighted in the American case. Marginson suggests that the pervading role of market competition has been a mixed blessing for Australian higher education, leading the system to achieve some governmental goals, but also weakening some fundamental purposes in higher education, notably long-term sustainability. Another country where the policy rhetoric in favour of the market has made significant inroads is the UK, which is analysed by Gareth Williams in chapter 10. He analyses the steps towards market regulation that have been taken in a country that to a large extent was more receptive to it than most of its European counterparts, due to the tradition of strong institutional autonomy that characterised British higher education. Williams describes the 1980 transformations which had a strong ideological flavour and were stimulated largely by severe funding cuts. These cuts forced higher education institutions to search for ways of doing things much more economically and to raise income from alternative sources. These trends, especially the latter, led to a major redefinition of essential features of the British higher education system, notably the size and composition of the student body and a rebalance between major functions of higher education. In this case, as in many others, it seems likely that the promotion of market mechanisms in higher education

INTRODUCTION

11

was the product of other motivations rather than being an end in itself, despite all the rhetoric associated with it. Moving to the European continent, in chapter 11, Carlo Salerno analyses the Dutch system and the somehow rapid diffusion of market elements in a country with a strong tradition of state control and planning in higher education. Salerno explains that these market advances have been particularly strong in non-traditional sectors of higher education which are more eager to adapt and take advantage of the increasing pro-market framework. In his chapter, Salerno also stresses the complexity of issues arising even when governments have successfully promoted strong market mechanisms. For instance, higher education institutions seem to have difficulty in coping with increasing financial autonomy, possibly because this was not introduced in the most convenient way for them, but rather according to the interests of government. On the other hand, the Dutch case also illustrates the ambiguities of governments in promoting market mechanisms, as in the setting of tuition fees. The ambiguities in terms of government regulation seem also to play a prominent role in the Portuguese case, analysed in chapter 12 by Pedro Teixeira, Maria João Rosa and Alberto Amaral. The overall picture of the Portuguese system is, as in many of the other cases analysed in the volume, rather puzzling. If, in certain aspects, market elements were introduced with some significance, namely the private provision of higher education and the degree of autonomy of public institutions, in other areas there was not a corresponding development. Moreover, the authors call attention to a peculiar type of (ad hoc) government intervention which attempts to force a particular result. These interventions seem to have been prompted by the government’s frustration in not achieving certain goals, due to the strengthening of institutional autonomy and of market mechanisms that limited the government’s capacity to steer the system. The interpretation by the authors suggests that government in some cases was relying on market-type behaviour as long as it delivered a certain type of result. In the final country case, chapter 13, Thierry Chevaillier analyses the French system and the role that market elements played in a system usually regarded as strongly shaped by government regulation. Chevaillier suggests that, even in a system with a long tradition of state centralisation and control, market mechanisms have been gaining visibility. Despite the political rhetoric and the strong social resistance to markets in higher education, and what these mean in terms of privatisation and competition, there are some signs of change. Although the private sector remains small in terms of generalist institutions, there are important developments in some specialised areas with strong student demand. Moreover, there is a growing level of competition between public institutions, namely, outside the core teaching activities (such as lifelong learning) and research funding. Overall, the perspective provided by this set of chapters on the reality of markets in higher education is a complex and fascinating one, both from an analytical point of view and an empirical one. In the final chapter, the editors of this volume make an attempt to identify some common and cross-cutting themes and problems. It seems that the pace, the instruments and the effectiveness with which market elements have been introduced vary across countries. Some governments appear to be confident whereas others appear softer in their introduction of market-based

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approaches. Governments are still learning, some more effectively than others, to grasp the peculiarities of market mechanisms and their application to higher education. However, despite the variability of national experiences, we hope that this diversity adds to the quality of this book and stimulates interest in the topic of markets in higher education. NOTES 1

2

However, in a number of Latin American and Southeast Asian countries private institutions play a more important role than public ones in terms of enrolments. In Portugal, the private sector represents over 25% of total enrolment. The private sector also plays an important role in many Eastern European countries. In the UK, in the beginning of the nineties, there was a failed attempt to introduce a mechanism in which the institutions would bid for students. It was assumed that this competitive mechanism would prompt institutions to reduce inefficiencies and lower their costs. However, the experiment was soon aborted because the institutions were competing on the basis of quantities instead of prices, frustrating the goals of the experiment (Johnes 1993).

REFERENCES Amaral, A., V.L. Meek and I.M. Larsen (eds). The Higher Education Managerial Revolution? Dordrecht: Kluwer, 2003. Barnett, R. The Idea of Higher Education. SRHE: Open University Press, 1990. Barr, N. The Welfare State as Piggy Bank: Information, Risk, Uncertainty, and the Role of the State. Oxford: Oxford University Press, 2001. Dill, D. “Higher Education Markets and Public Policy.” Higher Education Policy 10.3/4 (1997): 167– 185. Friedman, M. Capitalism and Freedom. Chicago: University of Chicago Press, 1962. Hansen, W.L. and B.A. Weisbrod. “The Distribution of Costs and Direct Benefits of Public Higher Education: The Case of California.” Journal of Human Resources 4.2 (1969): 176–191. Johnes, G. The Economics of Education. London: MacMillan Press, 1993. Johnstone, D.B. Sharing Costs of Higher Education: Student Financial Assistance in the United Kingdom, the Federal Republic of Germany, France, Sweden, and the United States. New York: College Entrance Examination Board, 1986. Jongbloed, B. “Marketisation in Higher Education: Clark’s Triangle and the Essential Ingredients of Markets.” Higher Education Quarterly 57.2 (2003): 110–135. Jongbloed, B. “Tuition Fees in Europe and Australia: Theory, Trends and Policies.” In Smart, J.C. (ed.). Higher Education: Handbook of Theory and Research, vol. XIX. Dordrecht: Kluwer, in press. Le Grand, J. and W. Bartlett. Quasi-Markets and Social Policy. London: Macmillan Press, 1993. Neave, G. and F. van Vught (eds). Prometheus Bound. London. Pergamon Press, 1991. Rawls, J. A Theory of Justice. Cambridge, Mass: Harvard University Press, 1999. Rothschild, M. and L.J. White. “The Analytics of Pricing in Higher Education and Other Services in Which Customers are Inputs.” Journal of Political Economy 103.3 (1995): 573–586. Smith, A. An Inquiry into the Causes of the Wealth of Nations. Glasgow Edition of the Works and Correspondence of Adam Smith. Oxford: Clarendon Press, 1977 (1776). Teixeira, P. (ed.). Higher Education Quarterly. Special Issue on Market Mechanisms in Higher Education. 57.2 (2003). Teixeira, P. and A. Amaral. “Private Higher Education and Diversity: An Exploratory Survey.” Higher Education Quarterly 55.4 (2001): 359–395. Williams, G. “The Many Faces of Privatisation.” Higher Education Management 8 (1991): 39–56. Wolf, C. Markets or Governments: Choosing Between Imperfect Alternatives. Cambridge, MA: MIT Press, 1993.

WILLIAM F. MASSY

MARKETS IN HIGHER EDUCATION: DO THEY PROMOTE INTERNAL EFFICIENCY?

1. INTRODUCTION Do market forces spur colleges and universities to operate more efficiently? Milton Friedman thought the answer was ‘yes’: that by denying market forces, “institutional funding led to less responsive institutions, under-funded, and less adapted to the needs of parents/students” (see the Introduction, this volume). Friedman has been criticised for reasoning by analogy from profit-making enterprises and not taking account of factors specific to higher education. This chapter addresses that difficulty by analysing how non-profits in general and universities in particular respond to market forces and what can be done to mitigate market and non-market failures. I will define internal efficiency as producing the right bundle of outputs given the needs and wants of stakeholders, and then minimising production cost for the given bundle. Cost minimisation means ‘production efficiency’ in the classic sense. Producing the right outputs includes, in the words of this volume’s introduction, “responsiveness and articulation to the supply and demand of factors and products”. In higher education, however, the ‘right bundle of outputs’ also includes goods that are valued by society but not captured by individuals’ demand functions. Therefore, the consideration of internal efficiency should encompass public as well as private goods. The thesis of this chapter is that markets deliver better internal efficiency than does governmental control of universities but that, in today’s environment at least, market forces by themselves do not produce satisfactory results. To understand why, we will examine the theory of non-profit enterprises and the behaviour of universities as they relate to markets and internal efficiency. First, though, it will be helpful to review the alternatives for steering a country’s higher education system. 2. ALTERNATIVE STEERING MODELS 2.1. The Market Model Van Vught (1989: 22) describes markets as ‘basically different’ from government regulation, where ‘government tries to be in charge’. Quoting Clark (1983: 30), he says, “The market form … is a type of interaction in which, in pure form, no one is in charge and matters are disaggregated”. Higher education markets decentralise decision making on both the demand and supply side of the provider-consumer 13 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 13–35 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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transaction. The question is whether the resulting ‘invisible hand’ can effectively replace the so-called ‘rationalist’ steering of government regulation. Universities operate in several markets: for example, student recruitment, sponsored research, faculty and staff recruitment; and non-academic services and facilities. This chapter concentrates mainly on students, because that is where the main issues of funding and regulation arise. I will argue that, for the most part, the effect of other markets on university behaviour is substantially the same as for business firms. In the case of students, markets can be viewed as regulatory devices or as mechanisms for transferring money from consumers or taxpayers to the universities that supply the service. This chapter considers the two to be integrally connected – that the provision of funding is bound to affect incentives and thus decision making. Each participant in the marketplace responds to signals from other participants about the price, quality and availability of goods demanded and on offer. Each sends its own signals, either through its behaviour or with targeted communications. Participants aggregate and process the signals to provide the information they need for decision making. They may do so in different ways, but most if not all aggregations are weighted by market power. For example, universities often attend differentially to student segments defined by academic aptitude and ability to pay. Supply-side market power correlates with admissions selectivity, research reputation and the quality of life on campus. But while some actors wield more influence than others, the fact remains that markets decentralise decision making. Only in rare cases can one or a few entities dictate supply or demand. All entities must pay attention to market signals or suffer the consequences. Since Adam Smith, the justification for markets has been that independent decisions by individuals, each pressing personal advantage with full knowledge of the local situation, usually produce better results than the more distant decisions of central planners. According to this logic, centralised decision making incurs heavy transaction costs due to information asymmetries and other principal-agent problems. Planners also may become passive or self-interested, or allow themselves to be captured by marketplace participants to the detriment of the general welfare. For example, they may be unable or unwilling to tolerate the ‘creative destruction’ that Schumpeter (1976) described as being essential for the dynamism of a capitalist economy. Anonymous actors making decentralised buying decisions are likely to do better and, on the supply side, if the established entities in an industry fail to innovate they will be replaced by new entrants (Utterback 1996). The idea that governments should set the boundary conditions for markets is widely accepted. For example, governments define fraud and prosecute violators. They also set rules for contracting among market participants and enable private legal actions to enforce such contracts. Whether governments should regulate the details of market operation is more controversial – for example, many believe that markets should be self-regulating in the cybernetic sense (Van Vught 1989: 29) or subject to professional self-regulation by participants. But even when government absents itself from day-to-day marketplace activities, it may intervene (or ‘interfere’, as some authors put it) episodically to correct actual or threatened market failures.

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The challenge, of course, is to fix the problem while avoiding worse failures of the non-market variety. Governments also may become market actors on their own account. Funding research through grants and contracts provides a good example. The UK’s research councils and the US’s National Science Foundation operate highly competitive markets for basic research, and mission agencies issue requests for proposals to further their areas of responsibility. Sponsored instruction agreements contribute to agency and business objectives and these, too, operate in a market environment. Such arrangements do not produce market failures as long as a multiplicity of support sources prevents government agencies from exercising monopsonistic power. ‘Quasi-markets’ arise when governments fund institutions as if procuring services for their constituents (Le Grand and Bartlett 1993). Universities are not funded for their own sake, but rather as providers of specified services for identifiable groups. Students may exercise choice in deciding which institution to attend, for example, but the main element of market power is exercised by the state on their behalf. Quasi-markets substitute a well-informed buyer (the state) for underinformed ones (the students). But as Dill and Soo point out in their chapter on transparency and quality in this volume, quasi-markets are not immune to ‘government failures’ and principal-agent problems. Following Pascarella (2001), they remain dubious that “monopsonistic or quasi-market mechanisms, in which government buys or contracts for a particular level of higher education, will prove efficient in the long run because of the potential for government misdirection of the higher education system and the substantial difficulties in validly measuring educational outcomes”. 2.2. The Principal-Agent Model and Steering from a Distance What mechanisms besides markets can be used to steer higher education? By what process can governments try to apply coherent rational decision making instead of relying on the market’s invisible hand? The so-called ‘principal-agent model’ addresses this issue. Suppose a ‘principal’ with a mission and money (government, for example) engages one or more ‘agents’ (universities) to perform certain tasks – work the principal cannot easily accomplish on its own. Agents are supposed to represent their principals faithfully, but without positive incentives to do so they may divert resources to their own agendas (Sappington 1991). The agent, however, believes that ‘He who pays the piper should call the tune’. Hoenack’s (1983) formulation of the principal-agent model identifies three ways by which agents can guard against resource diversion. 1. Regulatory. The principal may restrict the agent’s freedom of action: for example, by requiring prior approval for decisions that involve resources. Tight control prevents resource diversion, but at the cost of efficiency. Transaction costs become greater as the tasks get more complex and the

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organisational distance between principal and agent lengthens. In the terms of this chapter’s title, it is foolhardy to believe that a university’s internal efficiency can be maximised from the outside. 2. Formulaic. The principal may use direct financial incentives to overpower the agent’s intrinsic objectives. Denmark’s ‘taxi-meter’ system falls under this rubric.1 Unfortunately, such formulas become less effective as the difficulty of performance measurement increases. Devising good formulas and fine-tuning them as conditions change are daunting tasks, yet the formulas must be precisely targeted to prevent unintended consequences. Formulaic control presents difficult challenges because the two parties’ basic objectives remain out of alignment. 3. Persuasive. The principal may try to align the two parties’ objectives by persuading the agent that while resource diversion might be attractive in the short run it eventually will prove dysfunctional. This strategy minimises transaction costs, but it does not always work – especially in cases, as in government control of education, where differences may run deep and there is no credible threat that the principal will switch agents. Method 1 looks like Mitnick’s (1980) ‘Regulation by directive’ and Method 2 like his ‘Regulation by incentive’. Method 1 also can be compared to Hood’s (1983) ‘Instruments of authority’, Method 2 to his ‘Instruments of treasure’, and Method 3 to his ‘Instruments of information’. However, his ‘Instruments of action’ appear closer to quasi-market operations than an element of principal-agent theory. The Netherlands’ concept of ‘steering from a distance’ eschewed Method 1 in favour of a mixed system that combined Methods 2 and 3 with market signals. According to Teichler (1989: 171), the policy did not “necessarily imply lesser effects on the part of government to determine the major goals of higher education”. Instead, policy makers believed they could steer more effectively by: x

setting at most a framework for action;

x

pursuing government goals, possibly with the help of incentives;

x

lump-sum funding;

x

resource allocation based on output measures (graduates, dissertations etc.);

x

establishment of a system of evaluation and of dialogues related to evaluation;

x

establishment of other ways of assessment, such as performance indicators;

x

setting a limited number of policy rationales which shape incentive policies, the evaluation process and possibly state intervention, in case higher education institutions fail to take steps on their own (Teichler 1989: 171).

While reporting a ‘modest optimism’ that steering from a distance would stimulate innovation and reduce the transaction costs traditionally associated with regulation, Teichler raised a number of questions. In particular, can “the mix of increased flexibility and complex mechanisms of positive and negative sanctions … have predominantly stimulating effects, or will [it] be too threatening and thus lead

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predominantly to self-protecting activities of preservation of the status quo?” (Teichler 1989: 210). Van Vught’s ex post assessment, expressed at the Douro seminar, is that steering from a distance can work if the steering is done consistently and with a ‘light touch’. The concluding section of this chapter proposes a refinement of steering from a distance – an approach I will call ‘performance-based steering’. While retaining the ‘light touch’ character of governmental involvement, performance-based steering supplements market forces with persuasion and discretionary rewards and punishments designed to nudge universities in directions judged to be in the public interest. It presumes that universities want to further the public interest but that competing forces, including the pressures associated with growing marketplace competition, may cloud or confound their thinking. Performance-based steering can protect universities’ autonomy while helping them balance public values with private market forces. 3. MARKETS AND THE THEORY OF NON-PROFIT ENTERPRISES Massification and large-scale research funding changed higher education from a small and elite enterprise, where academic autonomy could be defended as an end in itself, to a key participant in the economic mainstream for which autonomy is a means to an end. That end, of course, is to contribute to economic development and to the lives and careers of large numbers of students. This means paying attention to markets, not just traditional academic values like advancing the discipline, preserving culture and allowing elite students to ‘sit at the feet of scholars’. Massy (2003), quoting Clark Kerr (1988), points out that the tension between markets (the Agora) and traditional academic values (the Acropolis, which represents scholarship) is anything but new. Kerr says that universities have always served the market. In fact, universities began in Europe in early modern times precisely for that purpose [to serve the market] … The cherished academic view that higher education started out on the Acropolis and was desecrated by descent into the Agora led by ungodly commercial interests and scheming public officials and venal academic leaders is just not true. If anything, higher education started in the Agora, the market, at the bottom of the hill and ascended to the Acropolis at the top of the hill … Mostly it has lived in tension, at one and the same time at the bottom of the hill, at the top of the hill, and on the many pathways in between (Kerr 1988: 1).

Winston (1997) describes the tension in more earthy terms: as pitting ‘university as church’ against ‘university as car dealer’. Universities exist to produce value rather than profit, but they also must wheel and deal in the marketplace. Non-profit theory provides a framework for understanding how they balance these requirements. Estelle James and I developed the microeconomic theory of non-profit enterprises in various publications beginning some twenty-five years ago (James and Neuberger 1981; Hopkins and Massy 1981; James 1986; Massy 1996, 2003).2 Rooted in the theory of the firm, the model describes non-profit behaviour as maximising a subjectively determined value function by adjusting outputs and output

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prices, subject to market, production and financial constraints. The value function reflects the institution’s mission. Market constraints reflect the demand functions of those who purchase its outputs and the supply functions of those who provide factors of production. The production function describes how input factors are transformed into output quantity and quality. The financial function requires that total revenue minus total cost equals zero: the all-important not-for-profit condition. In contrast, for-profit enterprises maximise profits by adjusting outputs and output prices, subject to market and production constraints. Comparing the two models, one sees that the for-profit objective function is simply the left-hand side of the non-profit’s financial constraint. All other elements of the theory remain the same. This means that the classical theory of the firm carries over to non-profits in most respects.3 On the other hand, the difference of objective functions produces profound consequences. Much of the controversy about markets as steering mechanisms in higher education stems from disagreements about the similarities and differences between the two models. 3.1. The Objective Function The key difference lies in the relationship between the entities’ managers and their owners. Businesses seek to maximise shareholder value, which is achieved by maximising a stream of profits over time. It is true that businesses may concern themselves with values beyond the realisation of profits. For example, they may further their managers’ altruistic goals or self-interest at the expense of shareholder value. This presents a principal-agent problem – a breakdown rather than a generalisable characteristic of the for-profit organisational form. Some businesses value community or employee relations over short-term profits because managers believe this will improve profits over the long term, and most reinvest part of their profits to further the enterprise’s mission and thus improve future profitability. These are business judgments, made on behalf of owners, which have no generalisable implications. The privately held Ben and Jerry’s ice cream company, where the owners are said to value the environment over profitability, highlights the essential distinction between for-profit and not-for-profit entities. The owners’ decision to accept an opportunity loss in profits is voluntary and could be reversed at any time. In effect, the not-for-profit organisational form differs from the for-profit one because it tries to guarantee such choices in perpetuity. Choices like the one at Ben and Jerry’s are easiest in privately held companies. Most publicly held companies must grow shareholder value at rates equal to their competitors’ or suffer serious consequences. Shortfalls in profitability reduce the stock price, which puts pressure on managers and may eventually attract corporate raiders. Some mutual funds advertise investments in ‘socially responsible’ companies, but even here the opportunity loss in shareholder value cannot be too great. Shareholder value also remains important in most privately held companies, especially ones that loom large in the portfolios of owners who are not independently affluent and/or who may wish to sell their shares at some future date.

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The distinction between non-profit and for-profit entities is most important where a degree of public subsidy is involved. The literature identifies three reasons for favouring non-profit as opposed to for-profit enterprises when considering such subsidies (Hansmann 1986: 61 cited in Massy 2003: 31). 1. The enterprise’s output is important to society – a ‘social good’, so to speak. People need it, and no substitutes are readily available. 2. It’s difficult to evaluate quality, so buyers have to rely on the supplier to create value for money on their behalf rather than in the interest of owners who might line their pockets by shortchanging quality. 3. The output costs so much to produce that it would not be affordable if the enterprise had to recover its full costs. Broad access requires a public subsidy in this case, and nonprofits can’t siphon off subsidy payments for the benefit of shareholders. Most if not all traditional universities receive subsidies, either directly from government or via the tax system. The fact that surpluses must be reinvested within the entity rather than inuring to external private interests makes it more likely that the subsidies will be used as intended. But this benefit comes at a price. Because external stakeholders receive no stream of profits, no financial market disciplines the entities’ efficiency – whoever heard of a corporate raider in the non-profit sector? A second major difference between for-profit and non-profit entities is that the latter’s value function is not quantitative and cannot be specified unambiguously, even in subjective terms. Like utility functions in the economic theory of consumer behaviour (Samuelson 1974), non-profits’ value functions are abstract constructs rather than operational tools. Non-profits do not specify their value functions in advance, but instead proceed iteratively and ‘reveal’ their preferences by the choices they make. One cannot even claim that a university has a single value function. Reconciling stakeholders’ differing values into a coherent framework for decision making represents a key goal of institutional governance. Hence the university’s value function should be viewed as representing the outcome of a (probably messy) governance process. James and Neuberger (1981) characterise the academic department as a nonprofit labour cooperative. This is consistent with non-profit theory as outlined here. It simply reflects a particular – and self-serving – choice of value function. But this characterisation is not consistent with government’s view of universities, nor with the substantial subsidies and tax advantages granted to them. I will argue presently that the university’s value function should reflect the public interest rather than the private interests of professors. University decision making occurs in a dynamic rather than a static environment. Non-profit theory can be extended to the dynamic case, but little is gained in the present context because the dynamic non-profit model includes most features of the for-profit one (Hopkins and Massy 1981). Financial quantities are discounted over time to produce the familiar net present values. Investment decisions depend heavily on these values, but the non-profit’s value function also enters the picture.

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Discounting future mission attainment depends on ‘impatience factors’ more akin to the subjective discount rates applied by consumers than on market-determined financial discount rates. Universities are said to be very patient entities. For example, academic decisions consider the long-term development of knowledge, and endowment spending decisions may consider ‘intergenerational equity’ – the preservation of purchasing power for future generations. Finally, because reserves and borrowing mitigate the need to balance each year’s budget, the financial constraint should be viewed as balancing cost and revenue on average over time. 3.2. Behavioural Similarities Despite the difference in objective functions, the non-profit model has many of the same implications for behaviour as the for-profit one. Following Lilien, Kotler and Moorthy (1992), I will sketch them under the rubrics of product, price, promotion and place.4 Product. Non-profit enterprises set output quantity and quality using the decision rule: ‘Marginal Value + Marginal Revenue = Marginal Cost’, or MV+MR=MC for short. ‘Marginal value’ means ‘incremental contribution to mission attainment expressed in dollar-equivalent units’. Marginal revenue depends on demand functions and output prices. Marginal cost depends on production functions and input prices. A programme will be expanded when its MV+MR>MC and conversely – that is, depending on whether its contribution to value and revenue is greater than its incremental cost. In contrast, for-profit entities use the decision rule MR=MC, where mission-based value does not enter the picture. The non-profit valuemaximising solution occurs when MV+MR=MC for all outputs and the financial constraint is satisfied. Price. Like their for-profit cousins, non-profits can be price takers or price makers. Programmes without market power must accept prices as presented in the marketplace. Those with market power enjoy pricing discretion, which is exercised through the decision rule given above. Market power produces positive contribution margins. Corporate earnings boost stock prices and eventually are distributed to shareholders. Non-profits spend their earnings on cross-subsidies that boost mission attainment. Hence both entities benefit from higher prices. For universities, the incentive to raise price is enshrined in Bowen’s Law: “Universities will raise all the money they can and spend all the money they raise” (Bowen 1980). Bowen’s Law is the non-profit manifestation of Adam Smith’s self-interest concept. Absent specific reasons to the contrary, both non-profit and for-profit enterprises will raise prices as high as the market’s ‘invisible hand’ will allow. Both entities practise price discrimination. Classic microeconomic theory describes the ‘perfectly discriminating monopolist’ as one who adjusts price according to customers’ ability and willingness to pay, thereby extracting the entire consumer surplus as profit.5 Anyone who doubts the prevalence of price discrimination should look at America’s deregulated airlines. Non-profits join forprofits in striving to discriminate on price wherever possible, since bigger margins from some customers enable larger cross-subsidies elsewhere in the system. But

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their motivation may transcend profit maximisation. For example, many universities consider student diversity and access for disadvantaged students as being intrinsically important to their missions – that is, these factors enter the value function. While sticker prices may soar, financial aid in support of diversity joins the traditional profit-maximising discounts as elements of pricing strategy. It may be hard to disentangle the motivations in particular cases, but in principle the former operate through the decision rule’s MV term while the latter operate through the MR term. Finally, both entities would rather compete on the basis of product, promotion, place, or less-than-transparent price discounts than on the basis of sticker price. Sticker price is a blunt competitive instrument and price wars produce long-lasting negative effects. It should come as no surprise, then, that sticker prices tend to be sticky downward or that British universities chose to compete on quantity rather than price in response to the Funding Council’s request that they bid for incremental student numbers (see Introduction, this volume). Promotion. Non-profits will promote their products and services in the same way and with the same intensity as for-profits. Their decision rule for balancing promotion’s costs and benefits includes mission contribution as well as marginal revenue and marginal cost, but the incentive to promote and the mechanics of the process are the same as in business. Promotion furthers the public good when it informs prospective students about the institution’s programmes and educates them on how to make good choices in light of their needs and preferences. However, hard-sell appeals appear more self-serving. Some institutions may eschew promotion as a matter of principle, but most recognise its importance in an era of growing competition. Place. Traditional universities were largely campus based, but this was a consequence of their production technology rather than the non-profit model. Such universities enjoyed a degree of local monopoly power because their human resources, libraries and laboratories were specialised, lacked mobility and could not operate at a distance. Information technology is changing that. The alacrity with which universities have opened satellite operations and distance learning programmes proves that the non-profit model does not inhibit extension of place. Institutions will expand geographically whenever the MV+MR of so doing exceeds the MC. 4. THE CASE FOR MARKETS The case that markets improve internal efficiency is difficult to prove or disprove empirically. One defines efficiency as the ratio of outputs to inputs, both adjusted for quality. I shall argue presently that we lack even rudimentary information about the quality of education, the university’s main line of activity, yet quality surely varies from institution to institution and over time. Furthermore, most universities produce at least two kinds of outputs: educated students and research and scholarship. The idea that their joint production function is Millsian – that is, that the outputs must be produced in strict proportions as in the classic example of wool and

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mutton – is strongly disputed by Massy (2003) and an increasing number of other authors. Shepardian production, in which a given set of inputs can be transformed into a wide variety of outputs, is much more consistent with the evidence (Zemsky and Massy 1995). Unfortunately, the data on faculty time allocations between education and research are as bad as the data on education quality itself. The confounding of undocumented shifts of inputs between education and research with the impossibility of measuring quality makes meaningful statistical analysis impossible. The case for markets depends on three propositions: that market forces (1) spur productivity improvement; (2) improve responsiveness to supply and demand; and (3) do not compromise higher education’s role as a public as well as a private good. Non-profit theory shows that markets can fulfil all three propositions. Unfortunately, however, the conditions required for market efficacy are more stringent than those in the for-profit sector. While the case for markets is well justified by theory, we will see in the next section that it is best characterised as ‘fragile’. 4.1. Productivity Improvement Like its for-profit counterpart, the non-profit model contains built-in incentives for productivity improvement. The incentives arise because a dollar saved is a dollar freed up for cross-subsidies, other things being equal. Suppose an entity produces two outputs. One is valued by the market and the other has low market demand but is important to the institution’s mission. Let price and quality be determined by competition. Producing the high-demand output at lower cost will improve its ‘contribution margin’. (Here ‘margin’ means the difference between revenue and direct cost.) The extra contribution margin can be spent on the output less favoured by the market – thus allowing the institution to boost mission attainment, to do more of what it would like to do. Teaching and scholarship provide the classic example of cross-subsidy in higher education. Independent institutions without big endowments or sponsored research use tuition revenue to fund faculty scholarship. The more efficiently they can teach the more scholarship they can fund. Government appropriations, endowments and sponsored research complicate the picture but the proposition remains true when all such factors are held constant. For corporations, better contribution margins boost shareholder value. For universities they boost cross-subsidies. Both results provide incentives for productivity improvement. Market forces drive institutions to evaluate what they do as well as how they do it. Universities trim cross-subsidies to their least-valued programmes in times of financial stringency. Sometimes the evaluation unearths more low-priority programmes than needed to balance the budget, in which case schools may shift cross-subsidies toward higher priority programmes. Bob Zemsky and I call this ‘growth by substitution’ – which is another kind of productivity improvement. While the substitutions could have occurred anytime, markets may well provide the impetus. A similar thing occurs when corporations mount cost-cutting drives in response to margin-squeezing competition. Less-than-necessary functions that grow

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during prosperity get excised when times are tough. Shedding unprofitable lines of business represents the same phenomenon. 4.2. Responsiveness to Supply and Demand Competition also triggers responsiveness to changes in supply and demand. Shifts in the supply curves for inputs force adjustments to production processes. On the demand side, customers get value for money or go elsewhere – which forces institutions to align their offerings to the needs of the marketplace. Markets decentralise decision making by allowing customers and suppliers to assert their individual preferences. As with for-profit enterprises, competition forces universities to consider these preferences in decisions about production processes and the quantity, quality and price of outputs. Responsiveness to supply and demand enhances dynamic efficiency. Markets decentralise decision making, as noted earlier. Anonymous and decentralised market forces override all arguments against change, no matter how powerful the proponents. While not all changes are salutary, change is a necessary condition for efficiency in a dynamic environment. Recall the school experiment where iron filings are placed on a paper that sits atop a magnet. Nothing happens until one taps the paper, at which point the ‘disruption’ overpowers friction and allows the filings to align themselves with the magnetic field. The same thing happens with markets. By overpowering organisational friction, even random shifts in supply and demand can produce worthwhile adaptations. 4.3. Furthering the Public Good Universities receive public subsidies and tax benefits because, as non-profit enterprises, they are expected to further the public good. Adoption of market solutions by governments does not change this expectation. In fact, deregulation delegates to institutions the responsibility for making public-interest decisions that previously were made by oversight bodies. Deregulation unleashes market forces, reduces transaction costs and, by removing impediments to philanthropy, relieves government of some funding responsibilities. Its justification lies in the fact that traditional universities are non-profit enterprises. One can hardly imagine making such delegations to for-profit enterprises. I described earlier how the non-profit organisational form prevents public subsidy from inuring to the private benefit of owners. To be effective, however, the delegation of public-interest decision making requires more than firewalls to prevent surpluses from inuring to the private benefit of owners. Also required are an affirmative desire to interpret and serve the public good, the will to hold institutional self-interest at bay, and the financial strength to balance intrinsic values with market forces. Most university leaders would argue that these conditions, too, are fulfilled. The next section explains why I am not so sure. First, though, let me offer a brief digression on the economist’s concept of ‘externalities’.

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For-profit economic theory defines ‘externalities’ as socially desirable outcomes that are not captured by market-driven demand or cost functions and, therefore, do not enter the enterprise’s profit equation. Environmental pollution and ‘the tragedy of the commons’ are quintessential examples. The theory applies as well to nonprofits. Using a strict definition, an externality would be any public good not captured by demand or cost functions and not included in the entity’s value function, whatever that function happens to be. The strict definition suggests that stakeholder objectives not embraced by the universities should be viewed as externalities. But this turns the idea of value delegation on its head. Universities are being freed from regulation as part of a grand bargain that confirms and expands their responsibility for interpreting and serving the public good. Value delegation internalises those ‘externalities’ that reflect higher education’s particular mission. Other externalities, like pollution and the commons, should be viewed in the traditional way. 5. HOW MARKETS FALL SHORT Markets provide incentives for internal efficiency but a close look at the specifics of higher education leads one to conclude that pure market solutions do not fully serve the public interest. Market solutions improve on tight regulation, but today’s markets lack the self-correcting mechanisms needed to correct current problems. These problems fall under two rubrics. Economic issues refer to the market’s ability to constrain prices and the universities’ ability to assert their values through crosssubsidies. Value issues refer to the value systems themselves – whether universities have truly internalised the public good. 5.1. Economic Issues Prices. Market solutions assume that competition will assert downward pressure on prices or at least constrain their increase. However, structural factors and the aforementioned reluctance of universities to engage in price wars limit the market’s ability to police tuition rates. I will describe the situation in the United States and then comment briefly on Europe. In America, elite private institutions provide a strong pricing umbrella for the rest of higher education. Their prestige confers great market power which they exploit by reason of Bowen’s Law. The elites’ high sticker prices, together with gift receipts and endowment returns, enable them to spend at levels not attainable by other institutions. For example, when Bob Zemsky and I analysed the forty-eight most elite US private colleges and universities we found the high spenders’ unit costs to be almost sixty per cent greater than those of institutions on the efficient frontier (Massy 2003: 72; Zemsky et al. 1999). This exercise of market power sets two standards: high sticker prices and aggressive spending targets for other institutions to shoot at. Less elite institutions, both public and private, emulate the elites’ spending levels to the extent they can. The market allows them to raise tuition as long as they stay

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under the pricing umbrella. Instead of constraining price increases, the whole market responds to the elites’ upward leadership. Moreover, the difficulty of gauging education quality tends to equate quality with spending in a classic price-quality association. This provides a further incentive for raising tuition. State funding trade-offs have further contributed to the upward pressure on prices. Public university tuitions have been limited by regulation. Zemsky (forthcoming) points out, however, that when fiscal times get tough, governors and legislators find they can constrain appropriations to higher education if they allow or even encourage institutions to boost tuition. The universities are quick to respond, and once tuition-oriented strategies become embedded they acquire a life of their own. Most schools have plenty of headroom. For example, in 2000–01 public institutions’ enrolment-weighted average tuition rate was $3510 compared to $25,000 in the private sector (Duderstadt and Womack 2003: 78). And, as part of a vicious circle, the rise of average public-sector tuition gives the elite private institutions more room to exercise their market power. The absence of a two-tiered system makes the situation different in Europe. However, governments still may encourage tuition increases to compensate for lower appropriations. As in America, universities have every motivation to boost tuition and it appears that students usually accept such increases if the change is not too dramatic. Discretionary Spending. Some believe the best way to make colleges and universities more efficient is to put them on a severe revenue diet. Financial stringency forces cost cutting, they say, and the deeper the cuts the more efficient institutions will be. The political rhetoric in some US states seems to embrace this philosophy – for example, in Missouri where the universities are expecting a twenty per cent appropriations cut this year. Many observers believe the rise of competition, including competition from for-profit entities like the University of Phoenix, will accomplish the same thing. There is truth to these assertions, but can there be too much of a good thing? Can too much competition, perhaps combined with cuts in governmental appropriations, undermine even the most efficient universities’ ability to serve the public good? To discharge their value delegations, universities must have enough financial strength to balance mission with market. While competition spurs institutions toward production efficiencies, too much drives mission out of their decision making. To see why, we need to examine the non-profit decision rule more closely. Consider a mission-critical programme, say literature, that a school would like to expand but cannot because of weak demand.6 Incremental value (MV) is positive by hypothesis but expansion would require more resources (MC) than would be recouped in revenue (MR). Transposing the non-profit decision rule shows that value is maximised when MV=MC–MR. It implies that literature’s contribution margin is negative, which means the university is subsidising it through discretionary spending.7 Discretionary spending can be funded from two sources: fixed revenue, as from endowments or government appropriations, and other programmes’ positive contribution margins.8 Give a school enough fixed revenue and every programme can be subsidised – in which case all its MVs can be positive. Resources will feel

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constrained because positive MVs cry out for programme expansion, but no programme need cross-subsidise any other. Erase the school’s fixed revenue, however, and discretionary spending can only be accomplished through crosssubsidies. This requires at least some programmes to operate with positive contribution margins. Such programmes must have negative MVs, which means they are larger or priced more aggressively than would be desired if the institution had lots of money.9 The ability to earn these positive margins depends on market power. There can be no cross-subsidies in a perfectly competitive market.10 Internal subsidisation is what distinguishes non-profit from for-profit enterprises. Non-profits recycle surpluses to boost mission attainment, whereas for-profits eventually distribute the money to shareholders. Most universities rely on positive margins from popular programmes to boost discretionary spending capacity, which in turn allows them to express their values through internal subsidies. What happens if a non-profit has no capacity for discretionary spending? Again we turn to the model – this time to its MV term. I defined MV earlier as ‘marginal value expressed in dollar-equivalent units’. One gets dollar equivalence by dividing ‘subjective marginal value’ by the institution’s ‘marginal value of money’ (MVM).11 MVM is the extra value attainable from an extra dollar of spending. It usually shrinks as spending grows and universities run out of high-value activities in which to invest. Conversely, MVM may approach infinity as an institution fights for survival. MV goes to zero as MVM goes to infinity, in which case the decision rule changes from MV+MR=MC to MR=MC. Institutional values vanish from the left side of the equation, so market forces rule. Non-profits in serious financial difficulty tend to behave like for-profits! The proposition can be understood without resort to mathematics. Universities buck the market by injecting their own values into decision making. This means support of things the market does not care about, which requires discretionary spending. Institutions without spending discretion cannot assert their values. They must respond to supply and demand and only supply and demand. For example, the aforementioned literature programme might well be downsized if the university suffered a major financial setback. For-profit universities do not emphasise literature programmes because of the subject’s weak demand, just as they do not support much faculty scholarship. Literature provides an example of the so-called ‘endangered species’ argument against over-zealous reliance on markets. But one can identify other ways in which universities balance values with market forces to promote the public good. Needbased financial aid provides a particularly good example. This is being covered by others in this volume, but I should note that competition has forced many US institutions to reduce or eliminate need-based aid – just as predicted by non-profit theory. Competition from for-profit universities cherry-picks high-margin programmes – precisely the ones traditional universities rely on to generate the resources needed for discretionary spending. The president of a mid-level private university once told me what happened when the University of Phoenix moved in down the street: enrolments in her MBA programme dropped by fifty per cent in two years. I do not mean to criticise the University of Phoenix or similar for-profits. They produce real

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value for money. But we should recognise the consequences of such competition, and also competition from traditional universities that seek to expand their territory or cope with financial stringency by competing away the margins of others. 5.2. Value Issues Universities will discharge their delegated responsibilities when and only when their value functions truly reflect the public good. A university’s mission statement reflects its values. It should call out these values with sufficient specificity to provide practical guidance. Then university leaders should rally their institutions to defend and fulfil the mission in the face of internal self-interest and external market forces. To quote my colleague Bob Zemsky, “Universities should be mission centered as well as market smart”. University leaders try to fulfil this responsibility but they confront daunting obstacles. Derek Bok’s recent book on the commercialisation of higher education (Bok 2003) describes how, despite good intentions, institutional values can be undermined: for example, in distance education, applied research and – that hardy American perennial – big-time athletics. Bok asks whether today’s universities are in fact discharging their delegated value responsibilities. I will add four additional problem areas: the tendency to value inputs as well as outputs, perceived property rights within institutions, mission drift, and lack of attention to information about education quality. Valuation of Inputs. Bob Zemsky tells a story that vividly illustrates how value gets ascribed to inputs. He was Penn’s chief planning officer when, during a conversation about efficiency, the dean of the Wharton Business School asked why arts and science departments were not cutting costs by substituting staff and technology for high-cost faculty wherever possible. “If they aren’t maximising the margins available for cross-subsidies”, he asked in effect, “What are they maximising?” “Monks”, Bob replied without hesitation. “That is, faculty numbers. Like the monasteries wanted as many monks as possible – as colleagues and for the good of the order.” This does not violate non-profit theory. It just says that professors, the university’s most important factor of production, are being valued for their own sake as well as for what they produce. Perhaps there was a time when professors could legitimately be valued like monks – for example, when the university sector was small and heir to scholarship that had been kept alive by the monasteries. But massification and large-scale sponsored research have changed all that. Professors hardly represent an endangered species. In today’s world, efforts to promote academic jobs look more like labour actions than genuine interpretations of the public good. To the extent such efforts are self-serving they have negative consequences for internal efficiency.12 The consequences were less apparent before information technology began offering opportunities for changing the educational production function. Barriers to the substitution of lower-cost for higher-cost inputs are moot as long as the technical means for substitution remain limited. But that is changing. For example, the new generation of ‘learning modules’ now coming over the horizon embeds content,

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interactivity and student assessment in the same software. The design of such modules will be capital intensive and require professorial content experts – but not in large numbers. Local faculty will deploy the modules and help students interpret the material, but their efforts can be leveraged by staff and by the software itself. Professors will not become obsolete, but their role will change. Whether professors are valued intrinsically will determine the degree to which universities substitute technology and staff for faculty – and thus their internal efficiency as compared to for-profit educational providers. Property Rights. In addition to being intrinsically valued, successful academics accrue what educational economist Henry Levin calls ‘property rights’.13 They feel vested in their programmes and fiercely resist efforts to downsize them. Another story will illustrate what I mean. Suppose the dean delivers the following message to a senior professor: “I’ve got good news and bad news. The good news is that your programme’s quality has been reviewed and passed with flying colours. The bad news is that I’m eliminating it in order to fund a promising new initiative”. Imagine the strenuous appeals to colleagues, the provost, the president and friendly board members. Such behaviour reflects more than ego. Because academics are so highly specialised, losing one’s programme can blight a career. Such cuts get appealed in the corporate world, but the appeals usually challenge facts or analyses. In universities, they often focus on equity – on violations of ‘property rights’ built up by a period of successful service. Property rights represent a serious barrier to growth by substitution. Market forces can make it harder for universities to fund initiatives with new money, but they do not necessarily solve the property rights problem. To solve that problem, institutional leaders must provide due process and deal compassionately with faculty whose programmes are downsized or eliminated. Most important, they must convince their constituents to put mission first. Failure to do so prevents the university from adapting to new conditions. This diminishes its internal efficiency and ability to serve the public good. Mission Drift. Today’s market forces reinforce the natural tendency of academics to steer their institutions toward research. Most professors come from PhD programmes that stress research much more than teaching – if, indeed, teaching enters the programme at all. It is natural for professors to want to succeed at research, for this generates personal satisfaction and rich rewards in the marketplace. Salaries of research stars tend to be higher than those of great teachers, and so are mobility and the chances for promotion. Good research leads to sponsored projects, which further boost salary through summer stipends and provide funds for graduate students, equipment and travel. For institutions, research-centred prestige boosts fundraising and student demand, and sponsored projects may confer direct financial benefits. No wonder that missions are drifting toward research at surprisingly many universities, even those whose external stakeholders focus mainly on undergraduate education.14 The so-called ‘academic ratchet’ produces a “steady, irreversible shift of faculty allegiance away from the goals of a given institution, toward those of an academic specialty” (Zemsky and Massy 1990: 22). The result may at first improve educational quality. But because there are only so many hours in a day, increases in

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research per faculty member eventually come at the expense of time devoted to educational tasks. The ratchet also generates pressure for smaller classes, lower teaching loads and more courses in the professor’s specialty – which reduce the student-faculty ratio. Such shifts appear optimal to universities whose mission is drifting toward research, but they reduce internal efficiency as seen by stakeholders who do not value research to a similar degree. Missions are drifting in other ways as well: for example, Bob Zemsky and I have cited the shift from traditional academic programmes like the humanities and soft social sciences toward market-oriented programmes like executive education and technology transfer (Zemsky and Massy 1995). Such shifts stem from institutional values as well as opportunistic responses to market demand. They follow from the ‘New Golden Rule’: ‘Those with the gold set the rules’. Successful academic entrepreneurs wield disproportionate influence in the councils of their universities, and this eventually rubs off on the definition of mission. Such shifts may or may not be consistent with the value delegations of external stakeholders. Market Information. Given the grand bargain between governments and universities, one would expect institutions to provide comprehensive, accurate and timely information to prospective students. Such information is essential for the efficient operation of markets and for higher education as a public good. One would think universities would be quick to give students the tools they need to choose effectively among schools and programmes. One can imagine a world where universities shoulder this responsibility as an essential part of their mission. In such a world, institutions would learn as much as possible about how their offerings cater to or fail to meet the needs of various student groups, and then use all available promotion vehicles to get the information out. Scholarly standards of evidence would apply to such communications, and robust public debate would be welcomed as a means of spurring improvement. The interests of prospective students would be more important than competitive advantage. Puffery and ‘hard-sell’ appeals would be avoided. Such behaviour characterised some elite colleges and universities in the kinder and gentler days before the floodgates of competition opened. But generally not today, at least in the United States. To assert that the market lacks essential information may seem strange given the proliferation of college choice publications and league tables, but consider the content of these vehicles. Data on institutional size, academic and extracurricular programmes offered, faculty reputation and student selectivity abound. Graduation rates are beginning to be reported, and some US publications have added student satisfaction and impressions about the institution. For example, the Princeton Review’s “Best 351 Colleges” lists the top academic and top party schools as seen by students. What is missing, though, is systematic data on what actually happens to students between matriculation and graduation. What kinds of knowledge and skills have they acquired and how ready are they to apply their learning? How have their attitudes been moulded by the institution and their fellow students? What do students do after graduation and why? Such data would seem essential for reasoned pre-college choice. Doing without it is like buying a ticket on an airline that promises to transport you in style with people you would love to meet, but is vague

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about the destination. Psychologists may say the journey is its own reward, but one should expect more from a once-in-a-lifetime investment in higher education. Defenders of the status quo point to two widely used surrogates for education quality: research performance and admissions selectivity. The surrogates boil down to institutional prestige. Unfortunately, they are too crude to serve prospective students or to guide faculty in their efforts to improve education quality. Ask a professor how research boosts quality, and you will probably get vague assertions like ‘research allows us to get better faculty’ coupled with anecdotal examples of how a few undergraduates got involved in research and went on to gradate school in the discipline.15 Selectivity is a self-fulfilling prophecy: good students go to selective schools, interact with other good students, and lever the resulting propinquity and their college’s prestige to get ahead in life. In this case the students get what they pay for, but they would get much more if better information improved their ability to choose among the many selective schools and spurred the schools themselves to improve learning.16 Hoxby (1997) argues that peer effects justify selectivity’s self-fulfilling prophecy. To quote Geiger in this volume, “Due to their role in educating one another (peer effects), high-ability students have an incentive to cluster together. Better students contribute to higher quality, which in turn attracts better students”. The argument makes sense from the students’ point of view, but one should not use it to justify institutional indifference to the quality of educational provision. Such a position depends on the highly dubious proposition that peer effects are all that matter, that faculty performance cannot differentiate among institutions. Institutions could do more to assess their students’ learning, but most seem happy with the status quo. The elite institutions have committed themselves to research and selectivity as market appeals, and they are pleased that their prestige keeps them on top of the heap. It is telling that no elite private institutions and only a handful of the elite publics have adopted the National Survey of Student Engagement or the Collegiate Results Survey (Zemsky forthcoming).17 The market provides little incentive for them to assess and report on the quality of their students’ learning and this objective is absent from their mission statements. Indeed, the incentive may be negative because it is the dearth of good market information that perpetuates the myth that research invariably begets education quality. Many lesselite institutions seek to follow the elite ones, so improving market information is not important for them either. A few institutions are beginning to develop and publicise data on student learning, but the phenomenon has yet to reach critical mass. Worse, no ‘invisible hand’ drives markets toward better informational efficiency. 6. PERFORMANCE-BASED STEERING My conclusion in this chapter is that markets provide important incentives for internal efficiency, but that market failures prevent the full measure of efficiency rightly desired by government stakeholders. Non-profit theory shows that markets generate the same basic efficiency incentives for universities as in the for-profit

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sector. The alternative to markets is government control which, to paraphrase Friedman, produces less responsive institutions that are less adapted to the needs of parents and students. Yet the markets for higher education as currently constituted fail in certain crucial respects. Universities tend to value faculty for their own sake, which inhibits technology-based productivity improvement. They honour the perceived ‘property rights’ of faculty, which inhibits growth by substitution. They do not resist mission drift, which encourages faculty to substitute research for educational tasks to the detriment of students. They under-invest in the provision of information about education quality, which forces the market to rely on surrogates that serve the interests of providers far more than those of consumers. Markets cannot discipline price without meaningful information about quality. In the US, elite institutions exploit peer effects and price-quality associations to boost their own spending and provide a pricing umbrella for other universities and, indeed, for state governments that wish to shift funding priorities away from higher education. Worst of all, information shortfalls prevent the market’s invisible hand from driving incentives for quality improvement. We are caught in a vicious circle that produces an arms race in spending without regard to educational value added. This encourages mission drift, which actually inhibits education quality improvement. Yet non-profit theory confirms the universities’ contention that punitive funding cuts or price controls are dangerously blunt instruments for breaking the circle. What is to be done? How can governments correct the shortfalls of today’s markets without exposing universities to the non-market failures associated with regulation or overpowering them with oversimplified formulaic objectives? Hoenack’s (1983) formulation of the principal-agent problem, discussed earlier, identified only three approaches. The first two – regulation and strictly formulaic funding – are problematic in higher education. That leaves the third approach, persuasion. But persuasion cannot work without something on the line. If one likens persuasion to ‘jawboning’, to use a term familiar in the US, the jawbone must have teeth. I believe ‘performance-based steering’ is the answer. The idea is very simple: allocate a small amount of funding based on the subjective evaluation of key elements of performance – and make the evaluations public. Experience shows that a few percentage points of annual appropriation can refocus universities on important public goals (see Massy 2003), without undermining their responsiveness to markets. The goals might include demonstrated technology-based productivity improvement, growth by substitution and adherence to mission. Most importantly, they might include investment in the provision of information about education quality. Constructive dialogue on these issues would help align the university’s objectives with the public good, and the ensuing financial allocations and attendant publicity would underscore the seriousness of the exercise. Performance-based steering nudges universities in directions judged to be in the public interest, but it does not overpower them. It strengthens Hoenack’s ‘persuasive’ alternative while retaining the ‘light touch’ character of Van Vught’s conception of ‘steering from a distance’. I have discussed the approach elsewhere under the rubric of performance-based funding (Massy 2003), but the approach

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should not be confused with the many formulaic approaches that have been proposed or implemented in higher education. The keys to performance-based funding are as follows. x

x

x

x

The amount of money at stake should be large enough to get institutional leaders’ attention, yet small enough to allow them to engage in constructive dialogue without fighting the scheme at every opportunity. The objectives should be few in number, understandable and compelling in terms of the public interest. (The examples given above meet these criteria.) Institutional leaders should be allowed to present qualitative as well as quantitative evidence but the standards of evidence should be high. Unsupported rhetoric and assertion should be penalised so that institutions have an incentive to get the facts – which is a prerequisite for effective action. The exercise should be even-handed and transparent. At the same time, the evaluators should not be required to prove that their judgments are correct – it is enough to show that they flow reasonably from the facts.

Performance-based steering presumes that, as non-profit enterprises that enjoy substantial government subsidies and tax advantages, universities want to further the public interest. It also recognises that competing forces, including the pressures associated with growing marketplace competition, may cloud or confound their thinking. Resource dependency theory (Pfeffer and Salancik 1978) confirms that money is an important motivator for all kinds of organisations – including nonprofits. Performance-based steering leverages small increments of funding to nudge universities in the right direction without disempowering them. It provides for a more effective delegation of responsibility from government to universities than is possible with regulation, formulaic incentives or persuasion alone. NOTES 1 2 3

4 5

6

Described on the Web at http://eng.uvm.dk/publications/factsheets/taximeter.htm. A comprehensive mathematical treatment, including all the results discussed in this chapter, can be found in chapter 3 of Hopkins and Massy (1981). The most accessible non-technical discussion can be found in chapters 2 and 3 of Massy (2003). One can argue that for-profit enterprises include social responsibility in their objective functions or consider it as a constraint on profit maximisation. The fact remains, though, that the profit motive is dominant for most companies, especially public ones that are subject to corporate raiding. My discussion of the differences between non-profit and for-profit enterprises is based on this formulation. Most university programmes are better classified as ‘services’ than ‘products’. However, the distinction need not concern us here. Consumer surplus is the area under the demand curve. The perfectly discriminating monopolist possesses market power and is able to compartmentalise demand so that customers charged lower prices cannot resell to those charged higher prices. Price discrimination produces higher profits than a one-price-for-all strategy. The argument also applies to faculty scholarship as in the two-product entity considered earlier. However, the marketplace for faculty as a factor of production tends to bundle teaching and

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7

8 9

10

11

12 13 14

15 16 17

33

scholarship so that it is hard to hire and retain PhDs who will do the former without the latter. This does not change the example’s principles, but it does make it more complicated. This requires that the demand and cost functions meet certain regularity conditions. For linear functions, marginal revenue equals average variable revenue (i.e. price) and similarly for marginal cost. Hence MR–MC equals contribution margin. The regularity conditions do not require linearity, however. ‘Fixed revenue’ is analogous to ‘fixed cost’ in that it does not vary with changes in output. (Both quantities may vary over time, however.) Endowments always produce fixed revenue by this definition. I will address the relation of government appropriations to fixed revenue later. A negative MV does not imply that the programme is not valued overall. For example, a university might consider business education to be an important part of its mission (positive overall value) but expand enrolment beyond ideal size (negative marginal value) in order to bulk up the programme’s contribution margin. A more precise statement is, “There can be no permanent cross-subsidies in a purely competitive market where costs are homogeneous”. As in industry, temporary cross-subsidises can arise as competitors enter the marketplace or fend off others’ inroads, and permanent cost advantages can lead to permanent cross-subsidies. ‘Subjective marginal value’ is the partial derivative of the value function. MMV is the Lagrangian multiplier for the financial constraint, which is determined as part of the value maximisation. Dividing the former by the latter produces the ‘incremental contribution to mission attainment expressed in dollar-equivalent units’ referred to in section 3.2. Universities are substituting non-tenure-line for tenure-line faculty, which shows that the intrinsic valuation of faculty can take a back seat to economic necessity. Such substitution has not been easy, however. Henry R. Levin, Columbia Teachers College and formerly Stanford University, pers. comm., early 1990s. National Center for Postsecondary Improvement (NCPI) interviewers observed the drift toward research in all types of institutions studied – including comprehensive universities and even liberal arts colleges. Indeed, certain faculty at one prestigious liberal arts college (not in the study) refer to their institution as a ‘research college’. My team at the NCPI (Stanford University) did ask this question of a sample of almost 400 faculty at 19 institutions of varying types. We got the kinds of answers suggested in the text (see Massy 2003, chapter 4). This brief treatment of a very complex subject is intended to be indicative rather than fully convincing (see Massy 2003 for a more extensive treatment). As described by Zemsky (forthcoming): The NSSE or National Survey of Student Engagement has been administered over the last four years to a sample of seniors at 730 baccalaureate institutions. The instrument focuses on the extent to which the respondents’ college experiences reflected agreed upon best practices leading to a quality undergraduate education. The CRS or Collegiate Results Survey, now a licensed product of Petersons, the publishers of some of the nation’s best college guides, was initially adopted by 80 institutions in the spring of 1999. In all more than 40,000 college graduates six years beyond their receipt of a baccalaureate degree, reported on their current activities, the skills they required in the workplace, their principal activities outside of work, by responding to 10 specially crafted scenarios their degree of confidence in performing a host of tasks their college educations might have prepared them for. Neither the CRS nor the NSSE was able to convince a private medallion university to participate; none of the Ivies joined; not Duke nor Stanford nor the University of Chicago, nor any other universities belonging to the Consortium for Financing Higher Education (COFHE). A handful of public medallions – the University of Michigan, the University of Illinois, and the University of North Carolina Chapel Hill – used either the CRS or NSSE, but in general public medallions also declined to participate. Among the eight campuses of the University of California offering undergraduate programmes, for example, only UC Santa Cruz has participated in the NSSE and none participated in the CRS.

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REFERENCES Bok, Derek. Universities in the Marketplace: The Commercialization of Higher Education. Princeton, NJ: Princeton University Press, 2003. Bowen, Howard. The Cost of Higher Education: How Much do Universities and Colleges Spend per Student and How Much Should They Spend? San Francisco: Jossey-Bass, 1980. Clark, Burton R. The Higher Education System: Academic Organization in Cross-National Perspective. Berkeley: University of California Press, 1983. Duderstadt, James J. and Farris W. Womack. Beyond the Crossroads: The Future of the Public University in America. Baltimore: The Johns Hopkins University Press, 2003. Hansmann, Henry. “The Role of Nonprofit Enterprise.” In Rose-Ackerman, Susan (ed.). The Economics of Nonprofit Institutions. New York: Oxford University Press, 1986, 57–84. Hoenack, Stephen A. Economic Behavior Within Organizations. New York: Cambridge University Press, 1983. Hood, Christopher C. The Tools of Government. London: MacMillan, 1983. Hopkins, David S.P. and William F. Massy. Planning Models for Colleges and Universities. Stanford, CA: Stanford University Press, 1981. Hoxby, Carolyn M. “How the Changing Market Structure of US Higher Education Explains College Tuition”, National Bureau of Economic Research, Working Paper 6323, December, 1997. James, Estelle. “How Nonprofits Grow: A Model.” In Rose-Ackerman, Susan (ed.). The Economics of Nonprofit Institutions. New York: Oxford University Press, 1986, 185–195. James, Estelle and Egon Neuberger. “The University Department as a Nonprofit Labor Cooperative.” Public Choice 36 (1981): 585–612. Kerr, Clark. “A General Perspective on Higher Education and Service to the Labor Market.” Unpublished paper excerpted in Policy Perspectives (September), “Distillations.” 1988. Le Grand, J. and W. Bartlett. Quasi-Markets and Social Policy. London: Macmillan Press, 1993. Lilien, Gary L., Philip Kotler and K. Sridhar Moorthy. Marketing Models. Englewood Cliffs, NJ: Prentice Hall, 1992. Massy, William F. (ed.). Resource Allocation in Higher Education. Ann Arbor: University of Michigan Press, 1996. Massy, William F. Honoring the Trust: Quality and Cost Containment in Higher Education. Bolton, MA: Anker Publishing Company, Inc, 2003. Mitnick, Barry M. The Political Economy of Regulation; Creating, Designing and Removing Regulatory Reforms. New York: Columbia University Press, 1980. Pascarella, E.T. “Identifying Excellence in Undergraduate Education: Are We Even Close?” Change 33.3 (2001): 19–23. Pfeffer, Jeffrey and Gerald R. Salancik. The External Control of Organizations: A Resource Dependence Perspective. San Francisco: Harper and Row, 1978. Samuelson, Paul. Foundations of Economic Analysis. New York: Atheneum, 1974. Sappington, D.E.M. “Incentives in Principal-Agent Relationship.” Journal of Economic Perspectives 5.2 (1991): 45–66. Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. London: Taylor & Francis Books Ltd, 1976 (1942). Teichler, Ulrich. “Government and Curriculum Innovation in the Netherlands.” In Van Vught, Frans (ed.). Governmental Strategies and Innovation in Higher Education. London: Jessica Kingsley Publishers, 1989, 168–211. Utterback, James M. Mastering the Dynamics of Innovation. Boston: The Harvard Business School Press, 1996. Van Vught, Frans. “Strategies and Instruments of Government.” In Van Vught, Frans (ed.). Governmental Strategies and Innovation in Higher Education. London: Jessica Kingsley Publishers, 1989, 21–46. Winston, G.C. “Why Can’t a College be More Like a Firm?” Discussion Paper 42, Williams Project on the Economics of Higher Education, May, 1997, http://www.williams.edu/wpehe/DPs/DP-42.pdf. Zemsky, Robert. “The Dog That Doesn’t Bark: Why Markets Neither Limit Prices nor Promote Educational Quality.” In Burke, Joseph C. (ed.). The Many Faces of Accountability: Holding Higher Education Responsible for Performance (working title), Jossey-Bass, forthcoming.

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Zemsky, Robert and William F. Massy. “Cost Containment: Committing to a New Economic Reality.” Change 22.6 (1990): 16–22. Zemsky, Robert and William F. Massy. “Expanding Perimeters, Melting Cores, and Sticky Functions: Toward an Understanding of Our Current Predicaments.” Change 27.6 (1995): 40–49. Zemsky Robert, William F. Massy, Daniel Shapiro, Susan Shaman, Gregors Dubrow and Jennifer Giancola. “Market, Price, and Margin: Determining the Cost of an Undergraduate Education.” Philadelphia: The Institute for Research on Higher Education, University of Pennsylvania, unpublished manuscript, 1999.

D. BRUCE JOHNSTONE

COST-SHARING AND EQUITY IN HIGHER EDUCATION: IMPLICATIONS OF INCOME CONTINGENT LOANS

1. INTRODUCTION This chapter explores the fitful saga of cost-sharing in European higher education, and some implications of the current (2003) interest in income contingent loans for recovering a portion of the costs either of student living or tuition fees or both. Europe is the last bastion (some might say the last refuge) in the world of fully (or almost fully) tax-supported higher education, extending in many countries beyond free higher education to at least some governmental, or taxpayer, responsibility for expanding higher educational participation and equity with need-based grants covering some of the costs of student living. However, there is a long tradition in Scandinavia of the student bearing all or most of the financial responsibility for food, lodging and other costs of student living – generally through partially subsidised student loans (in Sweden, loans of the income contingent variety). This long tradition of student contributions in Scandinavia, plus the increasing expenses of student living costs everywhere in Europe, coupled with low and frequently diminishing (in the UK virtually disappearing) cost-of-living grants from the government, have kept the question of student contributions – and thus of student loans – at least on the table in many European countries. The advent of tuition fees – implying a greater share of the actual costs of instruction borne by parents as well as by students, and which can be seen on a modest scale in the Netherlands, Portugal and most recently Austria, and on a more substantial scale in the UK – extends cost-sharing to a far more economically significant as well as a more ideologically controversial arena (at least in Europe). The spread of cost-sharing in Europe, then, implying parental and/or student shares of both the costs of instruction and the costs of student living, although still lagging behind most other countries of the world, has profound implications for the spread of market forces to higher education generally as well as for the realisation of the virtually universal objective of preserving and expanding equity. And in this saga, student loans – which make possible a student share of this cost burden – will almost certainly grow in importance to European higher education policies. This chapter will look first at the implications of cost-sharing, or the shift of higher educational costs from exclusive or near-exclusive financial reliance on government, or the taxpayer, to being shared with parents and/or students.1 We will consider especially the implications of cost-sharing to several different notions of 37 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 37–59 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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higher educational equity. We will then consider the implications of income contingent loans as a means of implementing a measure of cost-sharing. We will look especially at the implications of such loans to the two principal (and at least partially conflicting) purposes of any student loan programme: (1) to effect a real cost recovery as evidenced by a shift of some of the higher educational cost burden from taxpayers to students; and (2) to expand participation (thus advancing equity) to some who would likely have been excluded in the absence of this cost-sharing – and of the particular income contingent form of student loans. This chapter addresses the overall Douro Conference theme of higher education and market forces in the policy context of the important and virtually universal goal of higher educational equity, and in the programmatic context of the increasing popularity of income contingent loans (sometimes mistakenly termed ‘graduate taxes’) as currently employed in Sweden, UK, South Africa, Australia, New Zealand and, to a much more limited extent, the US.2 We will look especially at the current (2003) fascination with the Australian Higher Education Contribution Scheme (HECS) which embeds the incorporation of a tuition fee3 within a system that allows the fee to be either paid ‘up front’, as a direct tuition fee (presumably mainly by parents), or deferred and assumed by the student via an income contingent loan. This is the system that was adopted in 2001–02 in Scotland as an alternative to the (then) UK ‘up-front’ tuition fee and that is currently (2003) ‘on the table’ for adoption in the rest of the UK according to the government’s 2003 White Paper. 2. COST-SHARING IN HIGHER EDUCATION The concept of cost-sharing as developed by Johnstone (1986, 2002, 2003a) begins with a presumption that the underlying costs of higher education are borne by some combination of four parties: government or taxpayer (via direct or indirect taxation or even by inflation);4 parents (via savings, borrowing or current income); students (via savings, current earnings or borrowing); or philanthropists (via endowments or current contributions). Cost-sharing as a governmental policy generally refers to a shift of at least some of these costs from a substantial reliance on governments or taxpayers to a greater reliance on parents and students. Cost-sharing is especially thought of as the introduction of, or especially sharp increase in, tuition fees to cover part of the costs of instruction. In Europe, the UK is an example of a country which has recently introduced tuition fees, in 1997. Austria in 2001 became the first German-speaking country to introduce tuition fees for all students (although the fees remain nominal). The US is an example of a country that has already shifted a significant portion of higher education costs to parents and students via tuition fees – ranging in the public higher education sector in the early 2000s from ‘lows’ in the neighbourhood of $1500 to ‘highs’ in the range of $4000 to $6000 (and much higher for out-of-state students and for advanced professional students) and in the private sector from ‘lows’ in the neighbourhood of $10,000 to ‘highs’ in excess of $25,000. The US public higher education sector in particular has continued the shift via especially sharp increases in public sector tuition fees that have far outpaced not only the cost of living, but also the rise in the underlying costs of higher education,

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thus compensating (but only partly) for the very considerable cuts in state funding (Johnstone 1999 and 2004). Cost-sharing can also take the form of user charges to cover more of the costs of lodging, food and other expenses of student living that may have hitherto been borne substantially by governments (taxpayers) or institutions. In fact, much of Europe has traditionally assumed living expenses to be the responsibility of other-than-thetaxpayer, although there are differences in whether these expenses are assumed to be the responsibility of parents – as in Germany, France and most of Southern Europe – or of the students themselves, via universally available loans, as in Scandinavia. Less noticeable shifts in the prevailing patterns of cost-sharing – almost always in the direction of shifting the burden from the taxpayer to the parent and/or student – include the introduction of small, non-instructional fees (with the advantage of not having to be called tuition fees), the freezing or diminution of student support grants (especially in an inflationary economy), the channelling (sometimes with some governmental resources) of more students into a tuition-dependent private sector, or, in the few countries that have introduced significant loan programmes, an improvement in recovery rates (i.e. a lessening of needed public subsidies) via an increase in the rate of interest or an improvement in collections. A form of tuition fee that is especially popular in former Communist or Marxist countries – where there is likely to be especially intense ideological opposition to the very concept of cost-sharing, but where there is also likely to be a desperate need for the revenue that can rather easily be generated by tuition fees – is the so-called dual-track tuition fee, in which students who are not academically accepted into the small and selective pool of fully state-supported positions may still be admitted for a fee. Such a system maintains a kind of fiction of free higher education even in Russia, for example, where the revenues from tuition are approaching 50 per cent of all university revenue in spite of an official policy of free higher education (Bain 2001).5 The rationale for cost-sharing has been the subject of a large and well-accepted (even if politically and ideologically contested) body of economic and public finance theory. Much of this rationale focuses on the presumed greater efficiency brought about when there is a charge, or a price, that reflects (even with a substantial taxpayer subsidy) at least some of the real costs and the trade-offs involved. Thus, higher education that is free to the student/family ‘consumer’ can, by virtue of this degree of subsidisation, either be over-consumed (i.e. too much partaken of, or too much partaken of by students with insufficient capacity to benefit, and/or at too great a cost) or consumed with insufficient academic effort, presumably because there is no cost incurred by either the student or their family and therefore nothing foregone by the participation. Some tuition fee is thus assumed to induce both a harder working student and one who is more perceptive and demanding of the institution. And the institutions, at least in theory, have an incentive to hold down their tuition fees in order to attract and retain the student (or the parent), thus presumably becoming more efficient (or at least less wasteful), and also to provide what the student is likely to want – which is also likely to be what the potential employers want.

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In fact, the most compelling case for cost-sharing in the transitional countries of the former Soviet Union and Eastern and Central Europe, the developing world, and even in the advanced industrial countries of Europe and the rest of the OECD countries, may rely less on the economist’s presumptions of theoretically superior efficiency and equity (as valid as these presumptions may be) and more on the much simpler to grasp – and much less controversial – sheer need for alternative (i.e. nongovernmental) revenue. This need, in turn, emerges from the long and compelling queue of competing public needs (even in Europe) as well as the political pressure for tax relief. The increasing pressure on public revenues in Europe and the other highly industrialised nations is exacerbated by the effects of globalisation, which increase the predilection, as well as the ability, of taxable individuals and enterprises to escape to lower tax venues. And by most calculations, a substantial portion of this non-governmental revenue is going to have to come from parents and students in the form of tuition fees. Cost-sharing thus takes on many different forms. But in whatever form or forms, cost-sharing is generally increasing throughout the world, including the advanced industrialised world, at the start of the 21st century. For example: x

x

The US, where the costs of higher education – high and rapidly rising over time to begin with – have been rising even faster in that share borne by parents and students. Tuition fees at public universities rose by some 84 per cent in the 1990s as the share borne by governments or taxpayers diminished (NCES 2002, table 312). Public sector tuitions and fees vary widely – mainly by state and type of institution rather than by degree programme – but range for undergraduates from a low of around $2000 to a high of $5000 and more, and at least double that amount for students from another state. Total expenses to students range from a low of about $5000 for students at community colleges living with their parents, to a high of $35,000 to $40,000 a year living in residence or independently at a prestigious private college or university (Johnstone 1999, 2001b). The US, however, has extensive programmes at both the state and federal levels of government and from the colleges and universities themselves, of ‘need-based’ or ‘means-tested’ grants and minimally subsidised loans, such that all students – at least of traditional college-age, and albeit with loans and part-time employment – can afford at least the public college or university. Coincidently, the most able students, regardless of the income of their family and albeit with extensive loans, can be assured of sufficient financial assistance to attend the most expensive institution. The UK, which in 1997 became the first European country to impose more than a nominal tuition fee – although it is still low by US public college and university standards. The tuition fee in England and Wales is £1500 (2003) and can be covered by need-based grants and loans, to be repaid as a portion of student earnings, or ‘income contingently’. The government, in the form of a White Paper that is ‘on the table’, in 2003 (Department for Education and Skills 2003), is proposing to replace this ‘up-front’ tuition fee with a tuition fee that would be deferred for all

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x

x

x

x x

x

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students and repaid after graduation at a rate of interest equivalent to the increase in the general cost of living (i.e. a zero real rate of interest). This would make England and Wales much closer to the cost-sharing arrangement in Scotland, which was allowed in 2001 to replace its ‘upfront’ tuition fee (paid for by parents, albeit means tested) with a mandatory income contingent loan (paid for by students), called a ‘contribution’ to the Scottish University Endowment Fund (Department for Education and Skills 2003; Richards 2002). Australia, where the HECS was inaugurated in 1989 as a way of combining a tuition fee with a scheme that allowed most students to defer this tuition and repay as an income contingent loan at a rate of interest that would mirror the prevailing Australian rate of inflation. The tuition in 2001 was about $2600 (US) for undergraduate arts and sciences and could, in lieu of the income contingent loan, be paid ‘up front’ at a discount (Chapman 2002; Chapman and Ryan 2002). Sweden, where there is no tuition fee but students receive study assistance to cover living expenses and repay via income contingent loans. Germany, where there is also no tuition fee but where a means-tested student assistance grant is partly repayable as a conventional, very highly subsidised, loan. Austria, which ‘broke ranks’ with the rest of German-speaking Europe and began charging a tuition fee in 2001. Russia, where the universities are legally free, but where the dual tuition programme allows up to one-half of all Russian university revenue to come via tuition fees. China, which abandoned its dual tuition scheme in 1997 to charge all students a tuition fee that is high by the per capita income of the country, but that has provided a great deal of revenue for China’s rapidly expanding system of higher education.6

3. OPPOSITION TO COST-SHARING AND THE ISSUE OF HIGHER EDUCATIONAL EQUITY Cost-sharing – particularly the imposition of, or sharp increase in, tuition fees – is contested on many grounds. Much of the opposition to tuition fees, aside from that which is simply self-serving (i.e. the understandable opposition to paying for something that was at one time paid for by someone else), is based on the allegation that tuition fees are inequitable as they inhibit or discourage children of the poor (and the rural and those of ethnic or linguistic minority status or girls) from attending higher education. The relationship between cost-sharing (or tuition fees) and equity is a complex and contested one, to which we now turn. Equity in higher education has very different meanings and connotations. A core meaning is that higher education should be equitably accessible, that is, accessible to all with the interest and the academic ability to benefit. By this narrow construction

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of higher educational equity, interest and academic ability, or academic preparedness, are acceptable correlates to higher educational participation, whereas attributes such as socio-economic class, occupation, race, religion, language, one’s gender, or ethnicity of one’s parents are generally thought to be unacceptable correlates to participation. By this construction, cost-sharing can be made more or less equitable to the degree that need-based grants and/or generally available student loans are provided to those students from low income families to make up for the revenues not forthcoming from the parents. The problem with this construction of educational equity is that there is in all industrialised countries a substantial and persisting correlation between these socalled acceptable and unacceptable correlates: that is, children born into poverty or into an ethnic or linguistic minority group are statistically less likely to exhibit the interest and academic preparation for higher education and thus will be statistically less likely to participate – in spite of those children from the remote countryside or from very poor parents who surmount these odds and succeed in their academic high schools (see Farrell 1999). Most of this insufficient preparation or ambivalent interest has little to do with the presence or absence of tuition or other elements of cost-sharing, or of the availability of financial aid in the form of need-based grants and generally available student loans. However, to the degree that young people of low income, or ethnic or linguistic minority, or rural or otherwise isolated backgrounds may be more ambivalent about the opportunity costs of higher education (i.e. about foregoing the income from directly entering the workforce) or about the sacrifices and/or risks entailed by incurring indebtedness, even need-based grants and generally available student loans might not be enough to maintain equitable participation under a policy of shifting cost burdens onto students. The assurance of genuine equity in a country moving in policy directions of greater recognition of market forces and/or more cost-sharing, then, almost certainly requires a special sensitivity to, and possibly additional financial compensation for, the fundamentally greater ambivalence, the greater perceived opportunity costs and the arguably greater debt aversion of those from low income, rural, or ethnic/ linguistic minority backgrounds or, in some cultures, of females. Some critics of cost-sharing are fundamentally opposed to cost-sharing on the mainly ideological ground that higher education, like elementary education and other basic needs, simply ought to be free – that is, paid for by all citizens/ taxpayers. Some attempt to buttress this argument by asserting that the overwhelming preponderance of benefits are social – an assertion, however, that is not well supported by econometric evidence. Other critics take a more pragmatic and political view, asserting that cost-sharing accompanied by need-based grants and generally available loans might be theoretically compatible with equity, particularly if the grants are generous enough to compensate for the likely debt aversion and greater felt opportunity costs of the poor or of girls or of rural or ethnic minorities. To these critics, however, the problem is that sufficient need-based grants are simply never a high enough political priority, and that when revenue shortfalls occur or other pressing public priorities emerge, politicians are too apt to accept the high-tuition but fail to deliver the promised high-aid.7

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An altogether different construction of higher educational equity is fairness, based on the notion that those who benefit should bear at least some of the costs. Under this construction, free tuition is inequitable because the children of the wealthy in all countries disproportionately benefit, while all taxpayers/citizens (whether contributing via direct taxes, indirect taxes or the confiscation of purchasing power through deficit spending-induced inflation) bear the costs. This is the classic liberal economic critique of free tuition. From this construction of equity as fairness, free higher education is most inequitable – and therefore cost-sharing is most likely to actually further the cause of greater higher educational equity – to the degree that: (1) higher educational participation is minimal, including only the most interested and best prepared; (2) the children of the wealthy and powerful disproportionately benefit from this rationing of free higher education via their greater access to good schools, academic role models and other forms of cultural capital; and (3) the taxes used to support ‘free’ higher education are proportional or even regressive. Also by this construction, then, ‘free’ higher education that is supported by relatively progressive taxes and is more or less universally partaken of, with little if any correlation between higher educational participation and the unacceptable correlates of socio-economic class, gender and ethnicity, would be essentially equitable – or at least not inequitable. One of the major policy issues in higher education is whether the powerful trends toward greater cost-sharing and other forms of higher educational privatisation and market orientation that we are observing around the turn of the 21st century are compatible with our deeply held values of equity and social justice. The answer that most academic leaders, interested politicians and policy analysts would give is that these trends can be compatible – but only with policies and resources that provide, among other things: x

x

x

x

need-based, or means-tested, financial assistance in generous enough amounts not only to compensate for the missing parental contributions of the children of low income parents, but also to at least partially compensate for the greater ambivalence and felt opportunity costs of those children and young adults who are likely to be missing some of the culturally based academic ambition and vision of their more socioeconomically fortunate age peers; similarly, student loans to cover some of the costs both of instruction (i.e. tuition fees) and of student living – in sufficient amounts and with sufficiently manageable repayment schemes to encourage children and young adults to invest in their own further education; public information (public relations, as it were) aimed at the children of the poor and the rural and at ethnic and/or linguistic minorities and girls – in short, at all who may have been historically under-represented in higher education – to urge not only the importance but also the feasibility (especially the financial feasibility) of tertiary education; admission policies that screen appropriately for academic talent and interest, with sensitivity to the virtually universal cultural biases of most measures of academic preparedness and commitment;

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continued attention to the most problematic origins of socio-economic educational screening, which are in the middle and secondary school years and which require the greatest political attention and public resources.

With such policy attention and public resources devoted to the furtherance of higher educational equity, the superior efficiency, responsiveness and fairness associated with cost-sharing and privatisation (and with the additional public revenues made at least theoretically available by this greater efficiency) the seemingly inevitable trend toward a greater orientation to markets in higher education can be not only compatible with, but may actually enhance, our social and political attention to equity and to other public values in the academy. Expressed another way, if the trends are as ineluctable as they appear to be, and if there will almost certainly be fewer public revenues to continue free higher education plus generous need-based grants for the costs of lodging and food, then some further movement in the direction of greater cost-sharing in the mature industrialised countries seems virtually inevitable. And if this is so, then the combination of costsharing with the optimal amount and form of financial assistance – including opportunities for student borrowing – has the ability to increase the total revenues to higher education and to better focus the available public revenues in support of higher educational equity. 4. STUDENT LOANS Student loans, or any other sort of what are sometimes called deferred payment plans – including all forms of income contingent and so-called graduate tax schemes as well as more conventional, or mortgage-type, forms of lending – are integral to any policy that features a share of higher educational costs to be borne by students. Student loans purport to achieve two distinct and basically contradictory aims. In the first place, such schemes are usually part of a policy of cost-sharing, as described above. Second, loan schemes are ways of enhancing participation or accessibility, and thus equity, by increasing the total revenue stream and thus expanding higher education’s capacity (and thus its accessibility), and by making it possible for would-be students without parental or other sources of support nonetheless to invest in their own higher education. Student loans may take one of two basic forms, with many variations of each and with ‘hybrid’ versions of the two also possible.8 Conventional Loans. A conventional, or mortgage-type, loan carries three contractual elements: (1) a rate of interest expressed as an annual percentage of the amount borrowed or still to be repaid (which may be fixed or may vary according to some index such as the government’s borrowing rate or the calculated annual rate of inflation); (2) a repayment period or the amount of time the borrower has to repay the loan; and (3) a repayment mode such as whether the payments are to be in equal monthly instalments, or instalments that begin small and increase over time, or some

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other arrangement that yields a stream of payments sufficient to amortise the loan at the contractual rate of interest. Income Contingent Loans. An income contingent (or ‘contingent repayment’) loan carries a contractual obligation to repay some percentage of future earnings (sometimes per $1000 borrowed) generally until the loan is repaid at the contractual rate of interest (whether subsidised, unsubsidised, or premium – that is, designed to generate a surplus) or until the borrower has repaid for a maximum number of years. The borrower who has repaid the maximum number of years without paying off their loan at the contractual rate of interest is released from further obligations and thus granted a subsidy, or an effective grant. This subsidy is given not on the basis of the current low income of the borrower’s family at the time of the original loan, but on the basis of the borrower’s own low income over an effective earning lifetime – that is, on the basis of their higher education never really ‘paying off’ monetarily. Elements that are stipulated in the income contingent loan contract are (1) the annual repayment burden, or the percentage of income or earnings that must go to loan repayment (which may be fixed for all income levels, or progressive, increasing at higher incomes); (2) the stipulation of precisely what is to be counted as income and over what span of time (e.g. last year’s actual taxable, or the current year’s estimated gross); and (3) the provision for release from further repayments (which would be either repayment in full at a contractual rate of interest or, in the event of low income and the consequent inability to repay in full within a reasonable period of time, repayment for a maximum repayment period or until a maximum age). The elements of an income contingent loan that vary according to income or earnings, then, are (1) the actual monthly or yearly repayments; (2) the repayment period; and (3) the ultimate (i.e. after the final payment is made) cost of the loan expressed as an overall effective interest rate on the original amount borrowed. (This is in contrast to a conventional loan, which stipulates the rate of interest, repayment period and repayment mode – and thus the required monthly or annual payments – but in which the burden of repayments varies according to income or earnings.) Graduate Taxes. A variant on the income contingent loan is the graduate tax, whereby the student (sometimes only the graduated student), in return for government subsidisation of higher education in the form of low or no tuition (and possibly of an additional student maintenance grant), becomes obligated to an income surtax, generally for the rest of their earning lifetime. A true graduate tax is just that: an income surtax on university graduates, without the keeping of individual borrower accounts or ‘balances owed’. However, because the purpose of a graduate tax – like any governmentally sponsored student loan plan – is to shift a portion of the costs of higher education from the government or taxpayers to students, but to be paid only after the student has finished (presumably graduated) and is earning an income (supposedly higher because of the higher educational experience), the financial success of the graduate tax, like the success of any other student loan, must be measured by the discounted present value of this stream of future income surtax payments. Thus, the mathematics and the practical effect on participating students of the graduate tax and the income contingent loan – assuming similar terms – are practically indistinguishable. (It should be noted that there has never been, through 2003, a true operational graduate tax according to the definition just given; most

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references to graduate taxes are to income contingent loans that do, in fact, maintain ‘balances owed’.) Student Loans, Cost-Sharing and Equity. The degree to which a student loan programme, whether conventional, income contingent or a hybrid version between these two models, serves the goal of cost-sharing – that is, supplementing taxpayer revenue with student and/or parental revenue – depends on the net cost recovery of the programme. This may be viewed as the discounted present value of the reasonably anticipated repayment stream, net of defaults and servicing/collection costs. This value, in turn, depends on three elements: (1) the degree of ‘built in’, or ‘best case’, subsidisation, which is a function of the cost of money, the interest rate charged to borrowers who repay in full, the repayment periods and the number of low-earning borrowers who, in the income contingent plans, will eventually be released from further repayment obligations with balances outstanding; (2) anticipated defaults (mainly, although not exclusively, within the conventional repayment plans); and (3) the costs of servicing and collections. On the other hand, the degree to which a student loan programme serves the goal of higher educational equity – that is, reducing the link between higher educational participation and the aforementioned unacceptable correlates of socio-economic class, gender, ethnicity and the like – depends on the degree to which the loan programme makes possible participation that would be unlikely in the absence of this student borrowing. And insofar as virtually all generally available student loan programmes require some public subsidisation – and thus must be viewed as tradeoffs for other equivalently costly ways to expand participation and equity – the taxpayer costs of the student loan programme, including all publicly funded subsidies, administrative costs and guarantees against default, must be compared alongside alternative public expenditures to the same end, such as free or highly subsidised tuition fees for all, or additional need-based grants. In this comparison – because only a loan programme makes possible a substantial contribution from the students themselves – a student loan programme that is minimally subsidised, efficiently administered, and experiences modest defaults (all of which are possible in advanced countries) has the theoretical ability to release some public revenues from the support of all instructional expenses to be used in various targeted ways to advance participation and equity. 5. INCOME CONTINGENT VERSUS CONVENTIONAL REPAYMENT OBLIGATIONS: MISUNDERSTANDING, MISREPRESENTATION AND UNINTENDED CONSEQUENCES As an optional mode of repaying a student loan, the income contingent repayment form has some theoretical as well as practical advantages and has attracted (for quite different reasons) the attention of economists, politicians and students alike. In fact, knowledgeable proponents of income contingent loans, such as Australia’s Bruce Chapman (Chapman 2002; Chapman and Ryan 2002) and the UK’s Nicholas Barr (2001), proclaim income contingent loans to be ipso facto superior to all other forms of student lending. However, income contingent loans are also thoroughly

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confounded with misunderstandings, misrepresentations and unintended consequences. As an example of a misunderstanding, much of the popular attractiveness of income contingent loans is not the property of income contingency, per se, but of the extent and type of the built-in governmental subsidisation of a particular loan plan or of the use of the government’s machinery of income tax withholding and pension contributions – either of which could be extended just as well to conventional, or mortgage-type loans. In addition, there are certain disadvantages in the income contingent loan form that seem insufficiently recognised by their proponents. (These genuine disadvantages, incidentally, are generally not the alleged disadvantages cited by student groups and others simply opposed to any form of tuition fees and/or student loans.) There is also, whether intended or not – particularly in the political advocacy of income contingent loans – what would appear to be misrepresentation, as in the employment of income contingency to effectively obfuscate the true nature of tuition fees, the implications of student indebtedness and how particular plans shift the higher educational cost burdens among taxpayers, parents and students. This misrepresentation (if it is indeed that) may be politically expedient. But it may also simply postpone more difficult but necessary actions on the part of government and/or encourage students to borrow more than they would otherwise intend. Finally, as in so many public policies forged in ideological conflict and political compromise, there may be unintended consequences – or at least consequences that were almost certainly unintended by some of those responsible for the policy and its details. In the case of the Australian HECS, its ‘look alike’ adoptions in Scotland and Wales, and its serious entertainment by the UK government for the rest of the UK, a consequence that appears to be unintended (at least to some) is a shift in the higher educational cost burden not from parents and students to governments and taxpayers, but from parents (who can and do pay) to students in the form of additional indebtedness. In short, while the income contingent repayment form does have attractive features, it is well to keep in mind several qualifications, or caveats, to the common presumption of the superiority of the income contingent loan form (for elaboration on these points, see Johnstone 2000, 2001a). In the first place, an income contingent loan is still a loan and is not per se any ‘cheaper’ for most students than a conventional loan merely because the repayment obligation is expressed as a percentage of income or earnings. The cheapness or expensiveness of a loan – not to be confused with the manageability of its repayments – is measured by its ‘true’ simple annual interest rate (or the discounted present value of the repayment stream). In any income contingent loan, most borrowers will still repay their loans ‘in full’ at whatever interest rate is built into the provisions of the loan, depending on how generous the government (or any other lender) aims to be. Both the Australian and UK plans aim to collect from most borrowers a zero real interest rate – that is, a rate of interest that mirrors the prevailing rate of inflation. South Africa aims to collect a 2 per cent real rate of interest, that is, 2 percentage points above the prevailing rate of inflation. The US income contingent loan, on the other hand, aims to collect through those loans to be repaid income contingently the same rate that is charged on other repayment modes which in 2002 was 8.25 per cent. If there is a

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special advantage to the borrower in the degree of subsidisation, it is not from the income contingent nature of the repayment obligation. Some proportion of low earners, of course, fare better in an income contingent plan. But the degree of low earnings subsidisation is a function of the percent of income or earnings to be repaid and the number of years that a low earning borrower will be ‘held in repayment’ attempting to repay ‘in full’. Thus, the degree of low earner subsidisation is separate from the degree of subsidisation accorded to all borrowers – and each is a function of the particular features built into the particular plan. An income contingent loan scheme can provide especially generous subsidisation to the lifetime low earner by means of a low percent-of-income repayment rate and a short maximum repayment period. Or, an income contingent scheme can require almost all borrowers to repay their loans at the same interest rate, requiring low earners to repay for extremely long repayment periods and reserving real repayment forgiveness only for the truly destitute.9 Second, some of the attractiveness attributed to income contingency – specifically, the presumed convenience to the borrower and the presumed greater certainty of repayment (and thus of lower defaults) to the lender, or the government – comes primarily from the government’s willingness to enlist the policies and procedures of income tax and pension or insurance withholding to the cause of collecting student indebtedness. But this machinery, including the power to mandate employers to collect such sums at the point of wage and salary payments, as well as the government’s power to verify compliance and punish transgressors, could in theory be applied as well to the collection of conventional loans, or, for that matter, to the collection of any payment owed by citizens, the effective collection of which is deemed to be of overriding public importance (e.g. local taxes, child support, alimony, traffic fines, philanthropic contributions or tort judgments).10 Third, an income contingent loan presents major complications not found with conventional mortgage-type loans. Most of these arise from the need to stipulate precisely, and to be able then to verify, the income that is effectively to be ‘taxed’ in order to arrive at the proper repayment amount. Multiple sources of income, highly variable income, income that tends to not get reported at all, and income that can be easily shifted between a borrower and a non-borrower member of the family all constitute great problems for the viability of an income contingent loan scheme. OECD countries, with extensive reporting and monitoring of virtually all income and with a culture of voluntary income tax compliance, may be able to overcome these problems, as Sweden and Australia seem to have done. For other countries, where sources of income or earnings are frequently multiple, highly variable and generally unreported, the problem of establishing the repayment obligation will be an enormous one and will invite misrepresentation of income and almost certain repayment shortfalls. (This is quite clearly the case in virtually all developing and transitional countries; but may also be the case in many European countries where income tax evasion has been carried out to a high art.) (See Johnstone 2001a, 2003b.) Finally, following upon the observations above, it is not as clear as it is often proclaimed that an income contingent loan will be superior on the criterion of effective cost recovery. Student loan plans, whether conventional or income

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contingent, will recover insufficient repayments to the degree that the plan: (1) carries too great an interest subsidy (i.e. is initially designed to recover far below the true opportunity cost of money); (2) incurs excessive defaults or consistent underpayments; or (3) is excessively costly to service. It follows, then, that successful plans – at least on the criterion of effective cost recovery – will be minimally subsidised and will experience minimal defaults, underpayments and administrative costs. The appropriate question for our analysis, then, is whether an income contingent or a conventional form is apt to be better on the criterion of actual cost recovery assuming that either plan would carry the same degree of builtin taxpayer subsidy and that either would have the same access to whatever governmental machinery existed for the collection of tax withholding and pension contributions at the point of wage and salary payment. The question posed in this way can only be answered in theory, as the purportedly successful income contingent loan programmes such as those in Australia, New Zealand, Sweden and South Africa have never been compared ‘side by side’ to a conventional loan programme operating in the same culture and with the same access to governmental subsidies and to the government’s tax and pension withholding machinery. In theory, however, the two repayment forms are likely to experience different kinds of losses. A conventional repayment plan incurs losses from defaults or from losses in cash flow due to late payments – either of which may be attributable to wilful non-payment or to errors in servicing and collection. Both default and arrearage can be expected to increase with financial hardship – as in periods of unemployment – although sensitive provisions for deferment or refinancing can lessen such losses in conventional loan schemes. Losses from income contingent loans, on the other hand, will mirror the losses from income tax collections generally in the particular country: that is, from non- or under-reporting of income, either earned or unearned, and from overstatement of the expenses purportedly incurred to bring in this income (or of any other kinds of otherwise allowable deductions from an individual’s gross earnings). The problem with income contingent repayment obligations is their essential non-detectability. There is no signal, or trigger, similar to the missing of a scheduled payment on a conventional loan for the underpayment on an income contingent loan due to an under-reporting of income. In short, a conventional loan programme employing a combination of monthly repayments as well as employer deductions where appropriate, with vigorous enforcement, and with clear repayment expectations at the time of initial borrowing as well as at the time of departure from the university, may stand to recover as much or even more than an income contingent plan. 6. INCOME CONTINGENT LOANS AND THE NEED FOR PRIVATE LOAN CAPITAL Insofar as the impetus behind student loans is the need to shift a portion of the costs of higher education from governments to students, the loans need ultimately to tap private savings rather than rely simply on governmental tax revenue. Large-scale savings in industrialised countries are found mainly in banks or investment funds, in

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corporate and insurance company reserves, funded pension plans and the like as well as in personal savings accounts. These private savings are tapped either by having banks make and hold the loans, or by having the university or the government make the loans, but then to sell the loan notes in ‘bundles’ to the banks or other primary holders of savings. The student loan notes themselves are too risky for private savers without some assurance of ultimate repayment – for example, collateral from the parents or a guarantee from the government – but with this assurance, the student loan notes can find buyers in the private savings market. Herein lies another problem with loans of the income contingent variety. Unlike most conventional loans that may be defaulted upon but can then be collected from a guarantor or co-signatory (or collateral seized and sold), an income contingent loan, although fairly well insulated from defaults per se, can be recovering little or no repayments due to the low but misreported current income of the borrower and still not be detectable as a default, per se. The holders of the income contingent loan notes, then, would be unable to collect from any guarantor or co-signatory; indeed, guarantors and co-signatories are generally not associated with income contingent loan schemes. Depending on the nature of the prevailing employment, the health of the economy, the technical ability of government to monitor all incomes and the culture of compliance with income tax reporting and payment, the risk of underpayment on an income contingent loan may be as common – but considerably more difficult to ‘catch’ or ‘stem’ – as defaults and arrears on conventional loan repayments. Thus, loans of the income contingent variety are less likely than conventional guaranteed loans to find any private buyers and therefore to continue their dependence on government/taxpayer for loan capital.11 7. AN UNINTENDED CONSEQUENCE: INCOME CONTINGENCY AND THE SHIFT OF PARENTAL TO STUDENT COST BURDEN One of the consequences of the form of income contingency that has been adopted in Scotland and is advanced in the 2003 UK White Paper (Department for Education and Skills 2003) is the transfer of cost burden from parents to students. This is because income contingency in these cases has been advanced not as a way simply for the students to repay an indebtedness already deemed by policy to belong appropriately to the student, but as a means of shifting that cost burden currently borne by many parents, in the form of the relatively small, means-tested tuition fee, to an additional burden borne by students (i.e. in addition to what students are already bearing, frequently through student debt, via their assumption of living expenses). For this reason, it is important at this point in our analysis to explore the distinction between the parent share and the student share of costs of higher education, and their respective roles in any considered policy shift from the government, or taxpayer, to either or both the parent and student. Cost-sharing is frequently advanced as though the student share and the parent (or family) share were theoretically and practically indistinguishable. This can be true in some instances. Policy assumptions can be made that parents with certain profiles of income, assets, purported special hardships and other dependent children

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still in school can afford to contribute so much to the costs of their children’s higher education and that students ought to be able to earn so much during their years at the university and then be able to bear so much higher educational indebtedness to be repaid after graduation. In practice, however, some students may wish to be financially independent even though their parents could and would contribute; or some parents may decide not to contribute up to the expected amount. In either case, the children will need to earn more and/or assume more indebtedness in order to replace the now-missing expected parental contribution. Or, students may assume higher educational indebtedness according to plan, but it may be the parents who in fact make the repayments, further complicating whether the non-governmental share is being assumed by the student or the parent. However, the theoretical rationales underlying the expectation of a parental (or perhaps an extended family) share and a student share are quite different. A parental contribution is based on the principle that the student is still, at least through their first degree (assuming no significant time lapse between the completion of secondary and the beginning of tertiary education), a financially dependent child and that parents have an obligation to contribute financially to the expenses associated with their children’s higher education, at least to the limit of their financial ability. (Additionally, it is assumed that the parents derive considerable satisfaction from the higher education of their children, and receive more satisfaction – and even some derived status – from being able to place their children in the ‘best’ university they can afford and that their children are able to get into.) In countries that have tuition fees, this parental obligation, or expected parental contribution, generally extends both to the underlying costs of instruction (i.e. tuition fees) as well as to food, lodging and other expenses of student living. Where there is an extensive, tuition-dependent private sector and where the public sector also charges more-than-nominal tuition fees, the expected parental contributions can be very high indeed.12 To the extent that the parents are financially able, these contributions are expected to be borne at least through the baccalauréat, and the family may be expected even to draw on savings or other assets and in some instances to borrow from future income. In order to uphold the principle of higher educational opportunity, or widespread accessibility – a principle officially embraced by virtually all countries – the notion of an officially expected parental contribution requires some measure of parental means or need so that financial assistance or some kind of offset to tuition fees can be granted. This requires some way to assess and be able to verify the parents’ professed means, or need. In most of the OECD countries, especially those that rely heavily on income taxes and have thus constructed elaborate systems of determining and verifying income from all sources (both earned from wages, salaries, commissions and the like, and unearned from dividends, interest and rents), parental means can be reasonably inferred from whatever income has been determined to be appropriately taxable.13 The expectation of a parental contribution towards the expenses of higher education raises a number of other complications and questions: for example, the degree of sacrifice to be expected, whether to consider assets such as the family home in the calculation of ability to contribute, whether to expect the parents to

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have made any effort to have saved for their children’s higher education, or whether reasonably to expect some additional parental indebtedness. Officially expected parental contributions become complicated in instances of parental separation or divorce or disputed custodianship of the children. Also, there is a question about where to draw the line between financial responsibilities for the first degree, and for subsequent advanced degrees. But the most complicating factor of all may be the very appropriateness of the expected parental contribution itself: that is, the assumption underlying an officially expected parental contribution that the student is still, at least while enrolled full time through a first degree, a financially dependent child. The validity or applicability of this assumption, that is, whether the university student is properly viewed as a financially dependent child or an independent adult, is largely cultural, but is also a function of the extent of higher educational participation in the particular country as well as the ability and willingness of that government to tax, both extensively and progressively. US parents, for example, expect to pay at least through the baccalauréat (to the extent they are financially able) and are even expected to draw on savings or assets, and in some instances to borrow from future income. South and East Asian parents seem to expect to contribute and to sacrifice financially to support their children. German parents are obligated by law, up to their officially calculated means, to contribute to their children’s costs of food and lodging (there are still no tuition fees), and they can be taken to court for the failure to do so. British parents, according to Barr (from studies in the early 1980s and reportedly corroborated in the early 1990s), frequently do not meet the full officially expected parental contribution, leaving students both “… in poverty” and “… in a dependent position” and leading Barr to conclude that a proper UK system should eliminate ‘up-front’ fees and the notion of an expected parental contribution altogether (Barr 2001: 205). In contrast, Scandinavian culture views the student as an independent adult, and there is no official parental contribution either toward the costs of instruction (there are no tuition fees) or toward the costs of student living, which are deemed to be the responsibility of the students themselves (although many observers believe that many Scandinavian parents in fact do contribute). But the Scandinavian countries are also blessed with high per capita incomes and very successful and progressive tax systems. Scandinavian parents understandably believe themselves to have already paid for their children’s university education – and the families that are most likely to send children on to higher education have almost certainly paid substantially more taxes than those who are not. In addition, Scandinavian countries have effective and ubiquitous student loan schemes that impose considerable costsharing on students in the form of student financial responsibility for virtually all of the costs of student living. Thus, a combination of wealth, relatively flat demographics (providing for high but relatively stable participation rates), a very progressive and technically successful tax system, and extensive and generally available student loans allow the Scandinavian countries to forego an officially expected parental contribution towards either the costs of instruction or the costs of student living.

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The theory behind the appropriateness of a student contribution, on the other hand, is based almost entirely on the assumption of substantial personal and private benefits from higher education. These presumed benefits may be manifested in higher lifetime earnings, greater status and influence, more ‘life options’ or simply the personal satisfaction that comes (to most people) from being better educated. This theoretical appropriateness of a student contribution is buttressed by the fact that higher education in almost all countries (including developing and transitional countries) tends to be partaken of disproportionately by an intellectual and social elite further supporting the principle that students should contribute something toward the costs of their higher education. It is this principle – quite apart from the principles that supported the parental contribution – that calls for student loan programmes so that students can defer this contribution until they are financially able to do so. However, the increasing interest in the UK and elsewhere in adopting an Australian-type scheme in lieu of a tuition fee will have the effect of shifting what has been a financially successful (if controversial) parental contribution to an additional student contribution toward the costs of higher education. 8. INCOME CONTINGENT LOANS AND EQUITY The other major aim of student loan programmes – to some degree working against the goal of shifting the expense burden from the taxpayer to the student – is to maintain and even enhance equity or access to higher educational opportunities. Taken by itself – that is, without any additional cost-sharing, or further shift of cost burden to parents and/or students – the ability to borrow, at a reasonable rate and possibly with little or no collateral, provides a way for some students, particularly those from poor families or those who by any system or tradition have outgrown their financial dependence on their parents and who thus may have no other resources, to be able still to invest in their own higher education. In addition, student loans (as a component of cost-sharing, designed to provide additional revenues to higher education) provide a way to expand revenues, therefore to expand capacity and the participation of those for whom the access barrier is as likely to be insufficient higher educational capacity as it is to be insufficient personal or parental resources. It is true that students would prefer no tuition fees to even some tuition fees and would prefer grants to loans. It may also be the case that there are some populations (perhaps rural, or ethnic or linguistic minorities) who are more debt-averse and reluctant to borrow, and who would, in the short run, abandon altogether higher educational aspirations for themselves or for their children if borrowing is the price of getting a higher education. On the other hand, the claim of widespread debt aversion may also be a self-serving assertion by students who will not lose their presumed entitlements without a struggle. In the end, since the consequences of insufficient higher educational revenue and therefore of insufficient higher educational capacity tend inevitably to fall disproportionately on the poor, who have no private or ‘out-of-country’ alternatives, it is more likely in fact to be the poor

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who most need the loans, both for higher educational capacity to be increased and for a way to make an investment in their own future. The question that is relevant to this enquiry, then, is whether a particular form of student lending – specifically a conventional loan with a known cost (i.e. a simple annual interest rate) and a fixed repayment schedule or an income contingent loan with a fixed percent of income owed, but an indeterminate cost and repayment period – provides more access. Posed another way, this question asks whether one or another form of student indebtedness makes students more (or less) willing to go into debt in order to attend a college or university that they would have been unable to attend in the absence of that opportunity to borrow. Some subtly different forms of nearly the same question include: Which form of student loan repayment obligation would the student prefer at the onset of the need to borrow (when, as in the US, an income contingent repayment mode might be available as an option)? Which form would the student prefer when actually making the repayments? Under which form of repayment obligation would the student be better off after full repayment? These loan preference questions are exceedingly difficult to answer even in theory, and quite impossible to answer experimentally or through actual observation, as there have been so few occasions where there have been two different but fiscally comparable plans in operation long enough to see which one seems to make a difference in accessibility. In fact, the US Direct Loan Program provides the only generally available student loan programme in the world where borrowers have a choice between an income contingent, a conventional mortgage-type, and a fixedbut-graduated repayment mode – each with precisely the same present value of anticipated repayments. In this contest, the income contingent option has not been the favoured choice (General Accounting Office 2001). In fairness to the proponents of income contingency, the US income contingent option is also extremely complicated, notoriously ungenerous to low-earning borrowers, and lacks the convenience of being ‘piggybacked’ onto the US income tax and social security withholding systems at the point of wage and salary payment, and so fails on all counts to provide the kind of loan that the proponents of income contingency have always advocated. The US income contingent option has been purposely constructed to maximise the recovery of repayments, minimise the need for governmental subsidisation (at least beyond that called for by the conventional student loan plans) and not provide any further burden to employers or jeopardise the very high US voluntary income tax compliance. On the other hand, another reason for the relative lack of interest in the US income contingent repayment option may be that the US conventional student loan schemes currently (as of 2003) provide such easy and almost automatic deferment in the event of a return to school as well as relief and refinancing in the event of unemployment or other occasions of genuine financial hardship that the flexibility and manageability once thought to be the special property of income contingency seem now to have been built into US conventional loan programmes (US Department of Education 2003).

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9. INCOME CONTINGENT LOANS AND POLITICAL EXPEDIENCY At the same time, even if income contingent loans are neither ipso facto less costly or burdensome, nor even necessarily more manageable, they may still be more politically saleable than loans of a conventional variety – and, thus, more likely to allow the introduction of cost-sharing into a country where there is extraordinary resistance to the very concept of either students or parents bearing a significant portion of the costs of higher education. This is a purely political – almost a public relations – case for income contingency. The Australian HECS, for example, has been undeniably successful in expanding the revenue to higher education. It can also be said that it has done so in a way that obscures the fact that it is the introduction of tuition fees – far more than the introduction of any particular means of handling the resulting student loan obligation – that accounts for the increased flow of revenue to Australian public higher education. The increased revenue still comes in the first instance entirely from the government. But the government is presumably more generous to the Australian universities because of the two forms of enhanced revenue offsets within HECS: (1) the increased non-governmental revenue from the parents who pay tuition up front to lessen their children’s HECS obligations; and (2) the increased governmental borrowing capacity that is at least in theory covered by the government’s new assets in the form of the signed HECS future ‘surtax’ obligations. In the case of Scotland, most students and most of the political left were apparently made happy by the conversion of what was a relatively modest, meanstested and largely parent-borne tuition fee to an entirely student-borne income contingent loan – for some reason preferring the additional burden on students (cleverly termed a ‘contribution to the Scottish University Endowment Fund’) to Britain’s politically unpopular tuition fee. And the 2003 UK White Paper, The Future of Higher Education, is promising the same thing for England, that is, the conversion of what has been an avowed and continuingly controversial (however modest and means-tested) tuition fee to a mandatory student-borne income contingent loan – on top of loans that the students are already bearing for their living costs. Some academics and policy analysts may be made uncomfortable by what might be viewed as misrepresentation – represented, for example, by calling a mandatory contribution from students and/or parents to cover a portion of instructional costs anything but what it is: a tuition fee. Furthermore, students who are made to believe that their income contingent obligations are fundamentally unlike real debts may borrow more than they need to, or even mean to. Similarly, politicians may erroneously believe (or be encouraged to pretend that they believe) that they have solved a serious higher education revenue problem when of course they have not – to the fiscal jeopardy of the public universities and possibly as well to the students. On the other hand, if the ideological and political opposition to tuition fees and other elements of cost-sharing is so extreme – and the need for other-thangovernmental revenues is so great – then perhaps the introduction of tuition fees and student loans under the cover of an income contingent contribution is worth the price of just a little misrepresentation.

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In summary, income contingent loans modelled on the Australian HECS would seem to work well when: x

x

x

x

a government, by downplaying (or not mentioning at all) the politically treacherous concept of tuition fees, is able to get an element of costsharing that it would likely be politically unable to get were it to advocate openly even a modest tuition fee; a government, in stressing mainly the income contingent loan obligation of the student in lieu of a tuition fee, is willing to forego the potential of more up-front tuition and to minimise the role of parents (even affluent ones) as an important partner in sharing the costs of higher education; a government does not really need even the students’ deferred revenue now, but is able to tax and/or borrow sufficiently to keep the public universities academically strong and accessible, and is willing and able as well to be the true lender for the student loan scheme; the majority of student borrowers (or students who become obligated to future income contingent payments) will have during most years of their working lives a single employer at a time, who will pay them a periodic and relatively regular salary, and who will also be sufficiently large, sophisticated and legally compliant that they can be counted upon to take out of the borrower’s paycheck the correct amount owed for student loan repayment, year in and year out.

Conversely, HECS-type income contingent loans are less applicable when: x

x

x

x

the need is for non-governmental revenue now, making the parental contribution to tuition (even with a great deal of discounting) the primary source of needed revenue supplementation; the scarcity of governmental revenue precludes government from being the sole lender (which places a premium on student loans that have some – albeit discounted – value on the private capital market); many of the graduates (borrowers) are likely to hold multiple short-term jobs and to be employed in the informal economic sector where records are most unreliable – or to emigrate; there is no tradition of voluntary, reliable self-reporting of incomes, and the state systems for monitoring and verifying incomes for the purpose of income tax withholding and/or pension or social security contributions are non-existent or unreliable. 10. SUMMARY

Cost-sharing, or the shift of increasing portions of the costs of higher education from governments and taxpayers to parents and students, early in the 21st century, is pervasive and expanding even as it remains controversial. Within this policy shift, student loans, also controversial, seem destined to play an increasingly important

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role. And among the very many forms of student loans, the form employed by Australia in its HECS, together with other variations of so-called income contingent loans, are receiving increasing attention from politicians and policy makers. The Australian scheme appears to have been successful, and there are many reasons to favour elements of student loan programmes that incorporate features associated with income contingency generally. At the same time, income contingent loans, especially as identified with the Australian HECS, seem also immersed in misunderstanding, misrepresentation and unintended consequences. Student loans are important, both to the financial viability of higher educational institutions, to the accessibility of these institutions to students without regard to the income or other background characteristics of their families. But student loans are also more complicated than often portrayed. Countries contemplating the adoption of loans, or of larger financial schemes that incorporate the deferment of a student contribution, should study carefully both the theoretical underpinnings of cost-sharing and the actual operations of alternative programmes of tuition fees and student loans. NOTES 1

2 3

4

5

6 7

8 9

This chapter is considering cost-sharing and the phenomena of privatisation and marketisation within the public, or at least the publicly financed, higher education sector, which in all of Europe remains the overwhelmingly dominant sector in spite of the rapidly emerging privately owned, tuitiondependent institutions in post-Communist Eastern and Central Europe, Russia and the other European countries of the former Soviet Union. Income contingent loans are also being urged by their proponents in some of the formerly Communist countries in Eastern and Central Europe as well as in many developing countries. In the UK and elsewhere (except US), the word tuition means instruction: thus the price one must pay for instruction needs to be called a tuition fee. In the US, the word tuition has come to mean only the fee, and so the term tuition fee would seem redundant. However, this chapter will follow the UK usage and generally refer to the tuition fee. It is important to bear in mind that the ‘taxpayer’ can also be the average citizen consumer or even worker whose real take-home pay is diminished by the government in indirect forms of taxation, such as payroll taxes or even business taxes, which leave less revenue to be distributed to workers, or even (the most regressive form of taxes) to deficit finance-induced inflation that only indirectly, but still assuredly, removes the purchasing power from the ordinary citizen or worker. Dual-track tuition is also seen in several countries of East Africa (also with Marxist legacies) where, for example, Makerere University in Uganda, arguably one of the most successful in Sub-Saharan Africa, admits as many as 80 per cent of its students on a tuition fee-paying basis in spite of the official governmental policy of free higher education (see Johnstone 2003b). For cost-sharing information of some 35 countries, see the International Comparative Higher Education Finance and Accessibility Project web site at http://www.gse.buffalo.edu/org/IntHigherEdFinance/ (November 2003). This critique is especially compelling in low income countries where student loans have simply not worked, for all kinds of reasons (see Colclough 1991 for an effective presentation of such a view). See Johnstone (2000, 2002) for a rebuttal, pointing out that most of the student loan programme failures in Sub-Saharan Africa, for example, are essentially faults in programme design and should have been anticipated, and that the right combinations of programme design and efficient execution, with the exception of South Africa, have simply not occurred. The section on conventional loans draws extensively on Johnstone (2000) while the section on income contingent loans draws on Johnstone (1972). This is quite clearly the case in the US optional income contingent repayment mode, which has not been popular with students in part because of its extreme complexity, but in part also because only

58

10

11

12

13

D. BRUCE JOHNSTONE the very destitute stand to gain any ultimate forgiveness, with all others paying until their loans are fully repaid at the same rate of interest as on other conventional student loans. An obvious corollary to this presumed advantage, of course, is that a government that lacks the power and/or established means of collecting taxes and pension contributions from all or nearly all of its citizens can hardly be expected to be able to collect much of any payments on income contingent loan or graduate tax obligations. Even in Australia, which touts its HECS as a success and a model for much of the world, the loans depend entirely on government revenue, and the income contingent loan notes in the hands of the government (i.e. the promises to pay what can be viewed as income tax surcharges) have virtually no market value (even though these HECS promises could in theory sustain a higher level of governmental indebtedness). This theoretical position, however, has not been supported by the International Monetary Fund. US parents, for example, can expect to pay $10,000 or more for their child to attend a public college or university and $25,000 or more for an expensive private college, in both cases including tuition fees as well as student living expenses – and also in both cases in addition to the $5000 to $10,000 share that may be expected to be borne by the student through loans and part-time employment. In countries with neither highly developed systems nor a culture of tax compliance – and this includes most if not all developing and transitional countries – the determination of parental or family means and thus of the financial assistance required for a student to access higher education is extremely difficult and subject to both error and misrepresentation. In such cases, approximations to, or proxies for, means such as parental occupation, or the educational level of one or both parents, or verifiable ownership of an automobile or of a home with plumbing, may have to be employed (see McMahon 1988; Tekleselassie and Johnstone forthcoming; and Wolanin 2002).

REFERENCES Bain, O. “Cost of Higher Education to Students and Parents in Russia: Tuition Policy Issues.” Peabody Journal of Education 76.3/4 (2001): 57–80. Barr, N. The Welfare State as Piggy Bank: Information, Risk, Uncertainty, and the Role of the State. Oxford: Oxford University Press, 2001. Chapman, B. A Submission on Financing Issues to the Department of Education, Science, and Training Inquiry into Higher Education Reform. Submission 317, Higher Education Review. Canberra: DEST, July, 2002. Chapman, B. and C. Ryan. “Income Contingent Financing of Student Charges for Higher Education: Assessing the Australian Innovation.” In Woodhall, M. (ed.). Paying for Learning: The Debate on Student Fees, Grants and Loans in International Perspective. Special International Issue of The Welsh Journal of Education 11.1 (2002): 64–81. Colclough, C. “Who Should Learn to Pay: An Assessment of Neo-Liberal Approaches to Education Policy.” In Colclough, C. and J. Manor (eds). States or Markets? Neo-Liberalism and the Development Policy Debate. Oxford: Clarendon Press, 1991, 197–213. Department for Education and Skills. The Future of Higher Education (White Paper). London: Her Majesty’s Stationery Office (HMSO), Cm 5735, 2003. Farrell, J. “Changing Conceptions of Equality in Education.” In Arnove, R. and C. Torres (eds). Comparative Education: The Dialectic of the Global and the Local. Lanham: Rowman and Littlefield, 1999, 149–177. General Accounting Office. “Details on Income Contingent Repayment in FDLP.” Alternative Market Mechanisms for the Student Loan Programs. Appendix IV. Washington, DC: US General Accounting Office, 2001, 82–92. Johnstone, B. New Patterns of Student Lending: Income Contingent Loans. New York: Teacher’s College Press, 1972. Johnstone, B. Sharing the Costs of Higher Education: Student Financial Assistance in the United Kingdom, the Federal Republic of Germany, France, Sweden, and the United States. New York: College Entrance Examination Board, 1986. Johnstone, B. “Financing Higher Education: Who Should Pay?” In Altbach, P., R. Berdahl and P. Gumport (eds). American Higher Education in the Twentieth Century: Social, Political, and Economic Challenges. Baltimore: Johns Hopkins University Press, 1999, 347–369.

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Johnstone, B. “Student Loans in International Comparative Perspective: Promises and Failures, Myths and Partial Truths.” International Comparative Higher Education Finance and Accessibility Project. Buffalo: University at Buffalo Center for Comparative and Global Studies in Education, 2000, http://www.gse.buffalo.edu/org/IntHigherEdFinance/. Johnstone, B. “The Economics and Politics of Income Contingent Repayment Plans.” International Comparative Higher Education Finance and Accessibility Project. Buffalo: University at Buffalo Center for Comparative and Global Studies in Education, 2001a, http://www.gse.buffalo.edu/org/IntHigherEdFinance/. Johnstone, B. “Higher Education and Those ‘Out-of-Control Costs’.” In Altbach, P., P. Gumport and B. Johnstone (eds). In Defense of American Higher Education. Baltimore: The Johns Hopkins University Press, 2001b, 144–180. Johnstone, B. “Challenges of Financial Austerity: Imperatives and Limitations of Revenue Diversification in Higher Education.” In Woodhall, M. (ed.). Paying for Learning: The Debate on Student Fees, Grants and Loans in International Perspective. Special International Issue of The Welsh Journal of Education 11.1 (2002): 18–36. Johnstone, B. “Cost-Sharing in Higher Education: Tuition, Financial Assistance, and Accessibility.” Czech Sociological Review 39.3 (2003a): 351–374. Johnstone, B. “Income Contingent Loans and Graduate Taxes: Can They Work in Developing and Transitional Countries?” International Comparative Higher Education Finance and Accessibility Project. Buffalo: University at Buffalo Center for Comparative and Global Studies in Education, 2003b, http://www.gse.buffalo.edu/org/IntHigherEdFinance/. Johnstone, B. “The Economics and Politics of Cost Sharing in Higher Education.” Economics of Education Review 20.4 (2004): 403–410. McMahon, W. “Potential Resource Recovery in Higher Education in the Developing Countries and the Parents’ Expected Contribution.” Economics of Education Review 7.1 (1988): 135–152. NCES (National Center for Education Statistics). Digest of Education Statistics 2002. Washington, DC: US Department of Education, 2002. Richards, K. “Reforming Higher Education Student Finance in the UK: The Impact of Recent Changes and Proposals for the Future.” In Woodhall, M. (ed.). Paying for Learning: The Debate on Student Fees, Grants and Loans in International Perspective. Special International Issue of The Welsh Journal of Education 11.1 (2002): 48–63. Tekleselassie, Abebayehu A. and D. Bruce Johnstone. “Means Testing: The Dilemma of Subsidy Targeting in African Higher Education.” Journal of Higher Education in Africa forthcoming. US Department of Education. Repayment Book: William D. Ford Federal Direct Loan Program. Washington, DC: Department of Education, 2003, http://www.ed.gov/DirectLoan/pubs/repabook/index.html. Wolanin, Thomas. “Means Testing in Developing Countries.” International Higher Education 28.4 (2002): 9–11.

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TRANSPARENCY AND QUALITY IN HIGHER EDUCATION MARKETS

Since applicants are generally hard-put to know just how much they are really learning, let alone how much they can expect to learn at a school they have never seen, they do not make enlightened choices. They rarely possess either the time or the information to explore all the promising options available to them and usually have only a limited basis for comparing the options they do consider. Under these conditions, competition does not necessarily cause good instruction to drive out bad. Instead, students often flock to courses with superficial appeal or to institutions with established reputations even though the education they receive is only mediocre … Competition does not inspire universities or their faculties to do as much as they might to improve their instruction in the way that it forces computer companies to work at improving their products (Bok 2003: 161–162).

1. INTRODUCTION Perfect competition and efficient markets presuppose that market transactions are ‘transparent’, that is, that producers and consumers possess ‘perfect information’ about products or services.1 This perfect information includes information on price as well as information about relevant characteristics of the product or service such as quality.2 In the case of pure commodities and/or ‘search goods’ that are frequently purchased, information about price alone may provide sufficient knowledge to the consumer to assure that markets are Pareto efficient. However, in the case of less frequently purchased and/or ‘experience goods’, whose relevant characteristics can only be effectively assessed by consumption, it is possible that reliance on price information alone may lead to market failure. This economic logic is therefore used to justify various regulatory policies designed to protect consumers such as licencing and the provision of information on the quality of goods and services (Smith 2000). Higher education is not only perceived to be an experience good (McPherson and Winston 1993) and a rare purchase, but also a major influence on student ‘life chances’.3 Therefore a strong argument can be made for adequate consumer information in higher education (Cave 1994). Better information is important not only for consumer protection purposes, but also for producer effectiveness. Information on the quality of a product provides an incentive for producers to invest in quality improvements and thereby better compete in the market. Within the field of economics, information problems that contribute to market failure are often described as ‘information asymmetries’. This implies that producers of a good or service may have knowledge about their product that is unknown or unavailable to consumers and this asymmetry of knowledge creates an uncertainty in 61 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 61–85 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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transactions that may not produce a Pareto optimum (Akerlof 1970). In the instance of higher education, this uncertainty can be understood in several ways.4 In the first instance, information asymmetry in higher education can be understood as an example of the ‘principal-agent’ problem. Higher education in all countries is provided by or heavily subsidised by the state due to its presumed social benefits. Because students can be considered ‘immature consumers’, the state may stand in for the consumer and act on the students’ behalf to ‘purchase’ higher education. In developing its implicit contracts with universities, the state may confront difficulties in determining the relative quality of academic work and therefore may be enticed to pay more for research and/or academic programmes than is Pareto efficient. In the second instance, information asymmetry in higher education can be understood as a ‘consumer protection’ problem. Universities may produce or publish information about their academic programmes that is misleading or not in the interests of prospective students and/or the public. Lacking valid knowledge about the relative quality of educational programmes, students may be forced to spend additional time and money searching for relevant academic quality information. Or they may be enticed to purchase an expensive campus-based university education, ignoring a less expensive, but similarly effective, distance learning educational programme (of course, the opposite could also occur). Thus in both of these examples there may be an information asymmetry that leads to inefficiency in the market for higher education. As a result, the social costs of a higher education system may not produce the optimal social benefits. But, in the particular case of higher education, there may be a third type of information problem that is not caused by an asymmetry of information so much as by imperfect information (Stiglitz 2000). Both principals and student consumers may have imperfect information about the true quality of academic programmes – that is, the value added they provide to the student and ultimately to society – but, because of the distinctive properties of universities, the producers may have imperfect quality information as well. Because of traditions of academic autonomy and specialisation, professors may also lack sufficient information to judge the quality of academic programmes and may as a consequence fail to improve them. From the standpoint of the overall efficiency of the market in higher education, it may not matter whether there is a problem of asymmetrical or imperfect information. But, from the standpoint of designing effective policy interventions, whether inefficiency is caused by academic opportunism or by a dilemma of collective action could be quite important. This chapter reviews relevant research on the transparency of higher education markets. The relationship between academic quality information and perfect competition in higher education markets will be explored first then the known problems of misinformed principals and under-informed consumers, as well as the less familiar problem of ignorant professors, will be discussed. The discussion will focus on the university sector, because the combined production of teaching and research poses particular issues of transparency and quality in higher education markets. In addition, the observed ‘research drift’ in many systems of higher education, in which former teaching-oriented institutions seek to compete with

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traditional universities for academic reputation and research funds, suggests that the informational problems associated with universities may become more common in other sectors as well. 2. PERFECT COMPETITION AND INFORMATION ON ACADEMIC QUALITY Efficient market competition presumes that consumers have perfect information about price and essential characteristics of a service such as its quality. As noted, for perfect competition to occur in the case of ‘experience goods’, such as academic programmes, readily available consumer information about quality is even more crucial. For example, there is some evidence that imperfect information on academic quality in the US market for higher education is encouraging an ‘academic arms race’ in which institutions seek to build their academic reputations through expensive investments in research and high ability students rather than through improvements in teaching and student learning (Ehrenberg 2002). To better comprehend this potential market failure, the social benefits of academic quality need to be clarified and their potential influence on the efficiency of higher education markets needs to be understood. We assume that the performance of universities in educating students is to be judged by their contribution to human capital (Becker 1964). During their university education, students develop knowledge, skills and abilities that over their lifetime provide private benefits to themselves as well as social benefits or social capital to the larger society. This human capital perspective provides the logic for public subsidies for higher education and is also explicitly reflected in current national policies on academic quality which seek to improve the academic standards of higher education institutions (Brennan and Shah 2000). Consistent with human capital theory, these policies increasingly focus on information about student learning outcomes – the educational ‘value-added’ of an academic programme or degree (Dill 2000).5 However, there is an alternative perspective on the performance of higher education institutions, the signalling or screening perspective (Spence 1973). This perspective suggests that academic programmes do not actually add to human capital, but simply ‘screen’ students on pre-existing abilities and offer confirmatory signals of these capabilities to the labour market.6 ‘Signalling’ also provides economic value to the society by saving employers the costs of identifying and recruiting new employees, but it is unlikely that these social benefits alone could justify the current substantial public subsidies for higher education throughout the world. Therefore, in order for market competition in higher education to be Pareto efficient, we assume that the increasing social costs of academic programmes are purchasing equivalent social benefits as reflected in gains in student knowledge, skills and abilities.7 For market competition to produce this outcome, consumers of higher education will need information on both the ‘price’ of an academic programme and its educational value-added. In the absence of such quality information, market competition may encourage inefficient behaviour. Two

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prominent examples of how imperfect information may lead to market failure are the problems of ‘cross-subsidisation’ and ‘cream skimming’. An important source of normative regulation in academic institutions is the department or faculty, whose structure provides a primary means of social control (Braxton 1990). But university departments or faculties operate as non-profit labour cooperatives engaged in the production of multiple products (James 1986). In other words, faculty members essentially control the means of production. As Clotfelter (1996: 179) has observed: The university’s central and most distinctive activities – teaching, research, and public service – are carried out largely by its most distinctive sector of employees: the faculty. As a consequence, the decisions about how to allocate faculty effort are basic to the functioning of colleges and universities, and to their cost. ... most day-to-day decisions concerning these activities are entirely in the hands of departments and faculty members themselves.

Faculty members in universities tend to value research over teaching, because of its intrinsic interest, because of its clear contribution to unit reputation (which is a major proxy for academic quality) and because in competitive research and labour markets time spent on research can lead to increased grant revenue and future earnings for the individual faculty member (James 1986). Given these incentives and the absence of valid measures of the value added by academic programmes, faculty members will choose to ‘satisfice’ teaching quality (Massy 2003). That is, they will limit their time investment in teaching first degree students in order to maximise their time investment in research and graduate teaching. In effect, faculty members act individually (and are supported in these actions by academic policies that they collectively determine at the departmental level) to shift to research, activity time paid for by the government and tuition paying students principally for teaching.8 This represents a market failure in the sense that tax payers and consumers pay a higher ‘price’ for a university education of a given quality than they would if perfect competition caused faculty members and their institutions to continually improve the educational value added of academic programmes.9 Research on faculty activity in the US (Clotfelter 1996; Fairweather 1996; Getz and Siegfried 1991; James 1986) over the last several decades has revealed that the proportion of time faculty members reported spending on teaching had fallen and the proportion of time they reported spending on research had risen in all types of fouryear institutions. As Clotfelter (1996: 204) discovered in a detailed analysis of changes over time at representative departments at Chicago, Duke and Harvard Universities: If the [three] institutions examined here are any indication, the period between 1977 and 1992 was one of gradual, but quite perceptive, change. Virtually without exception, average classroom teaching loads, measured in courses taught per year, decreased in the sample departments. Although these calculated loads by no means cover all aspects of teaching, they are suggestive of a significant movement away from teaching and toward research.

An important objection to this cross-subsidisation thesis in US higher education is that it fails the ‘stand-alone cost test’ (Rothschild and White 1993). In this test, one assumes that first degree education as a product could be supplied by an

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undergraduate-oriented college in competition with traditional universities. One then asks whether, as a separate firm, on a stand-alone basis, the undergraduate college would not have a competitive price advantage over the traditional university. If it does not, then research cannot be cross-subsidising teaching in the university sector. Rothschild and White (1993) apply this test in the US by noting that undergraduate education programmes produced as a joint product with graduate teaching and research by research universities such as Harvard and the University of California, Berkeley compete easily and well for top students with ‘single-product’ selective liberal arts colleges such as Swarthmore and Pomona. Thus the evidence of the higher education market in the US suggests that the cross-subsidisation of research by teaching in the university sector does not take place. Rothschild and White’s (1993) argument, however, makes a critical assumption and appears to be inconsistent with recent empirical evidence. Applying the stand-alone test to a good such as higher education implies that US consumers currently have sufficient information to discriminate between selective liberal arts colleges and research universities on academic quality, since price alone is unlikely to be a sufficient indicator for such a complex service. As already noted, in the absence of valid measures of the educational value added by academic programmes, ‘academic reputation’ has become an influential proxy for academic quality among student consumers. Academic reputation itself is strongly related to measures of admissions selectivity and faculty research. Therefore, in order to compete with research universities for the best students, selective liberal arts colleges have been forced to invest more of their discretionary tuition revenues in faculty time for research. Fairweather’s (1996) national survey data revealed that the proportion of time spent teaching had fallen and the proportion of time spent on research had risen over the last ten years not only in research universities but also in selective liberal arts colleges. He also discovered that the promotion and tenure policies of liberal arts colleges were increasingly emulating those of research universities, placing less emphasis on teaching and more on faculty publication. More recent studies of the underlying cost structures of colleges and universities have provided further empirical support for the cross-subsidisation hypothesis in both elite undergraduate colleges as well as research universities (Clotfelter 1996; Ehrenberg 2002; Massy 2003). A second contributor to inefficiency in the academic market may be the increasing emphasis on the test scores of entering students as a measure of academic quality. For example, average entering student test scores are given significant weight in current league tables of academic quality published throughout the world (Dill and Soo 2003). This focus on the quality of entering students has received some legitimacy from the recent work of educational economists. In a seminal economic modelling exercise, Rothschild and White (1995) argue that talented student peers may act as educational inputs in the production of human capital. That is, the concentration of the most able students in certain colleges and universities is socially beneficial because of the positive peer effects they have on each others’ learning. As evidence in support of this thesis, Rothschild and White (1995) note the lifetime earnings advantage that accrues to graduates of the most selective US universities.10 Subsequently ‘peer effects’ have become an accepted component of

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higher education production functions among many educational economists (Bratti 2002; Hoxby 2002). For example, in an analysis of the US higher education market Hoxby (2002) argues that, despite evidence of continual tuition increases in both the public and private sector that exceed growth in average family income and inflation, market competition in the US has created an efficient system of first degree education. She bases this conclusion on evidence that US colleges and universities overall have increased their educational quality as measured by their expenditures on educational inputs, which include their expenditures to recruit more talented student peers. She thereby treats the marginal costs of recruiting high ability students as ‘implicit wages’ in payment for their input to improved academic quality. Hoxby concludes that the US baccalaureate market is now in equilibrium and that the net benefit to society of the new competitive market in US higher education is positive. She therefore argues that letting the market work is the most effective public policy. There are serous questions however about the assumed relationship between peer effects, as measured by entering student average test scores, and human capital formation. Empirical research in support of this relationship is based largely on econometric studies of the relationship between average entering student test scores and graduate lifetime earnings as well as a small number of studies of the effects of peer quality (again as measured by entering test scores of freshman roommates) on grade point averages in US colleges.11 However, the extensive research on student learning indicates an inconsistent and trivial relationship between admissions selectivity based upon average entering student test scores and measures of the knowledge, skills and abilities learned by students during their education (Pascarella and Terenzini 1991). In fact, the most recent review of the peer effects research also casts significant doubt on the supposed relationship between peer effects, as measured by average test scores of entering students, and students’ earnings capabilities.12 First, the research confirms that the impact of institutional selectivity on earnings is nonlinear. Only the most selective institutions may have an impact on earnings. Second, the relationship depends on the students’ major field of study, which is often not controlled in relevant studies. That is, less selective, public institutions in the US often offer academic majors with less potential earnings capacity than selective schools. Finally, and most importantly, when studies control for the types of students who apply to more selective institutions – utilising measures of individual ambition – the earnings advantage of more selective schools disappears. As Dale and Kreuger (1998: 30) conclude in their carefully controlled study of the relationship between college selectivity and earnings: After we adjust for selection, our findings cast some doubt on the view that peer group quality, as measured by the average SAT score of the students who attend a college, is an important determinant of student subsequent life outcomes. The average SAT score of students who attend college – though commonly used as a proxy for peer groups and school quality in previous studies – may be too coarse a measure to accurately reflect a student’s actual peer group or college quality once school selection is taken into account … It is also possible that peer group effects are trivial for college students.

Let us be clear about our argument here. We are not denying that university students can be affected by the behaviour of their peers, but we seriously question

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whether manipulating average entering student test scores alone will influence the educational value added by universities. Logically, the effect of peers on the quality of education is moderated by the organisation of education and the nature of instruction. For example, many selective US colleges and universities attempt to create a rich ‘on-campus’ opportunity for student interaction through special living and eating arrangements, small seminars, honours colleges and other special educational opportunities. Similarly, student learning in the UK may benefit from the peer effects promoted by Oxbridge-type colleges. The benefits of peer contacts may be minimal or non-existent however in the large and/or non-residential universities that educate the majority of US college students as well as the majority of students in many other countries.13 As in the case of cross-subsidisation, there is reason to fear that a misplaced focus by universities on improving average entering student test scores, or ‘student selectivity’, could contribute to inefficiency in higher education markets. In a recent national study of US higher education Brewer, Gates and Goldman (2002) discovered that many institutions are making extensive investments designed to increase the selectivity of their admissions process by linking tuition discounts with academic merit and student ability, attempting to lower student acceptance/yield rates, and investing in expensive student consumption benefits such as dormitories, eating facilities or fibre optic computer networks that will help attract high ability students.14 The researchers suggest that this attempt to build prestige by ‘cream skimming’ the student market is pursued as a substitute for investments in improving the quality of educational delivery and may therefore lessen the overall educational benefits of higher education for students and ultimately for society. The problems of cross-subsidisation and cream skimming are likely to be exacerbated by the dynamic nature of global reform in higher education. The worldwide adoption of market-based policies for higher education such as common degree frameworks, competitive allocation of research funding, competitive salary schedules, merit-based promotion and tenure policies, and the international competition for research faculty and high ability students could foster an international ‘arms race’ among universities in which global academic reputation will play an increasingly central role. Historically, incentives for faculty members to conduct research in many national systems were constrained by state salary schedules, the inclusion of research support in university base budgets, promotion and tenure policies with limited links to research performance, nationally oriented research cultures and differentiated higher education sectors. These policies are now rapidly disappearing. Many countries that have expanded access to higher education over the last decade in order to provide greater economic opportunity for their citizens are now expressing concern about an observed ‘research drift’ in their higher education systems (Dill 1998). The recent UK White Paper on higher education explicitly noted the danger of cross-subsidisation and called for new efforts to assure the quality of teaching and student learning in the more competitive research environment (DfES 2003). Finally, universities in a number of countries, which have historically had an open admissions policy, are now experimenting with selective admissions in order to recruit the most able students from their own country and abroad (Jongbloed 2003).

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In sum, an analysis of existing behaviour in higher education suggests that the nature of information on academic quality will be highly influential on the efficiency of future academic markets. We will now turn to a review of the research on the role played by existing quality information among buyers and consumers of higher education. 3. MISINFORMED PRINCIPALS The last decade has produced a ‘paradigm shift’ in governmental thinking about higher education from the state meeting the institutions’ needs to the college or university meeting the state’s needs. Many states are now experimenting with performance-based funding and various forms of contracting in an attempt to improve the efficiency of their higher education systems (Jongbloed and Vossensteyn 2001). These contractual relations represent a form of quasi-market in which the state ceases being a direct provider of higher education, but instead becomes a purchaser of services from independent providers who compete with each other in an internal market (Le Grand and Bartlett 1993). Quasi-markets differ from real markets in several respects, the most noteworthy being that while student consumers may express their preferences by their choice of educational programmes, their choices are not purchases. Instead, purchasing is centralised in a monopsonistic government agency acting on the behalf of the consumers. Government purchasers therefore confront the classical principal-agent concern: “how the principal [government] can best motivate the agent [university] to perform as the principal would prefer, taking into account the difficulties in monitoring the agent’s activities” (Sappington 1991:45).15 In order to address this problem, states have attempted to define relevant performance indicators for higher education including measures of academic quality. Governmental steering by performance indicators rests on two main premises: (a) agencies have, or should have, a specified goal or a set of goals; and (b) the goals can be quantified so that success or failure relative to the goals can be measured (Heckman, Heinrich and Smith 1997). Both of the premises are problematic in higher education. Universities not only pursue multiple goals, competing objectives and contentious trade-offs, but the primary goal of higher education – developing student knowledge, skills and abilities – is extremely difficult to measure with validity. As a consequence, a variety of proxy measures for academic quality has been adopted. The most common performance indicators of academic quality include cost per student, student non-completion rates, time to degree, graduate employment and student satisfaction (Cave et al. 1997; Jongbloed and Vossensteyn 2001). Even if there is a belief that these indicators are effective proxies for desired educational processes and outcomes, there is still the question of how well they measure a university’s performance. Johnes and Taylor (1989) discovered that inter-university variation in students’ non-completion rate in the UK is highly influenced by the qualifications of entering students and the subject mix. Yorke (2001) shows that the most important variables affecting student dropout are maturity of entry and social

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class, which together explain more than 80% of the variation. Graduate employment is similarly heavily influenced by subject mix as well as the labour market situation in the relevant region (Cave et al. 1997). Average cost per student, per graduate or per credit has also been used as an indicator of academic quality. A high cost per student, however, may indicate either the availability of resources for educational processes or an inefficient use of resources (Cave et al. 1997). Moreover, a significant part of a university’s costs is often beyond its control. The implementation of performance funding in Finland revealed that universities in different geographical areas face different prices and are not therefore economically comparable (Höltta and Rekilä 2003). Over two-thirds of the variation of university unit costs in the UK was explained by different disciplinary mixes between institutions (Johnes 1990). Inter-institutional comparisons of costs may thus be helpful in assessing quality only if institutions experience the same ‘production technologies’ and prices (Cave et al. 1997). Student satisfaction is an increasingly important indicator of the quality of teaching performance and can also be considered as an outcome measure of the education process (Ramsden 1991). Astin states that “it is difficult to argue that any other outcome category – cognitive or affective – should be given greater priority than student satisfaction” (Astin 1991: 62). There nonetheless are important issues about the validity of student satisfaction measures as they may vary for reasons other than academic quality and are subject to manipulation. For example, student satisfaction differs between required and non-required classes (Haladyna and Hess 1994) and is related to professors’ grading practices (Nimmer and Stone 1991). Ehrenberg (2002) reports examples of US business schools inflating independently administered alumni satisfaction measures by informing the graduates prior to the survey that higher scores would enhance the economic value of their degrees. Finally, use of student satisfaction as a performance measure may deter professors from experimenting with new teaching methods (Emery, Kramer and Tian 2003). The main challenge of performance indicators is how to measure the contribution that universities make for students’ intellectual and personal development. Burke and Serban (1998) point out that among the number of US states that use some form of performance funding, only two included an indicator related to student learning. Because of the weak measures of learning outcomes, government’s ability to provide valid incentives for performance is limited and may have dysfunctional effects. Poorly designed performance measurement may lead to risk-avoiding behaviour among institutional administrators and academic personnel and cause them to under-invest in academic quality improvement over time (Jongbloed and Vossensteyn 2001). For example, using graduation rate as an indicator of a university’s performance may encourage institutions to lower academic standards or make them more reluctant to accept higher-risk students, which conflicts with the public goal of increased access (Cave et al. 1997). Recent US research has revealed some of the dysfunctional impacts of poorly designed performance indicators. The state of Ohio attempted to improve academic quality by monitoring the time faculty members spent teaching (Colbeck 2002). Universities responded by changing the way they reported faculty time use to the state. In one university, administrators simply lengthened the time assigned to each

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class by 10%. The frequently cited Tennessee Performance Funding Initiative (Fairweather and Beach 2002), which offered supplements of up to 5.45% over university operating budgets for institutions that demonstrated improvements in student learning and increased programme quality, has not increased faculty efforts to improve academic quality. The performance measures used focused on indicators such as graduate job placements, pass rates or scores on professional licensure tests, rather than changes in teaching and student learning at the department level. Improvement funds were also awarded to the central university rather than to academic departments demonstrating quality enhancements and these supplemental funds were often expended on activities not directly related to undergraduate instruction. University administrators also attempted to shield faculty members from the burdens of complying with the programme; as a result most of the faculty members supposedly affected by the performance indicators were unaware of their very existence. Finally, in addition to the mentioned measurement problems associated with government performance indicators of academic quality there is the additional problem of the structure of quasi-markets. Because these markets are monopsonistic, rather than truly competitive with many suppliers and consumers, there is the possible danger of ‘government failure’ (Wolf 1993). When government is the single ‘buyer’, those responsible for defining and monitoring appropriate measures of academic quality may choose to pursue private organisational goals or particular personal biases rather than the public interest. Or the government agency may be ‘captured’ in the sense that those being monitored gain control or significant influence over the monitoring agency and alter the performance indicators to favour their own interests over those of the broader public (Baldwin and Cave 1999). As a consequence, the expected innovation and efficiency benefits from market competition may not materialise. For these reasons it is important to explore in greater depth the informational problems associated with truly competitive higher education markets, particularly student choice of academic programmes and insufficient incentives for faculty cooperation to improve academic quality. 4. UNDER-INFORMED CONSUMERS In contrast to the principal-agent problem of government as a monopsonistic purchaser is the asymmetric information problem in a higher education market of many suppliers and consumers. Here we encounter the question of whether potential students and their families have sufficient information about academic quality to make an economically rational decision about which university to attend. Economists have been generally chary about surveying students to learn how they form expectations about college choice.16 However, as a guide to the possible information imperfections in the consumer market of higher education, it is possible to ask a more limited question of students. That is, what types of information on academic quality do students use to choose the programme or university in which they enrol and do existing measures permit students to successfully differentiate between institutions on the quality of learning? This question has been pursued in a

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number of studies in both the US and UK. Because of the different structures of the higher education systems of these two countries, we separately review this research, although there is much overlap in the relevant studies. From an economic perspective, the potential university student may be conceived as a rational investor in human capital who is evaluating the costs and benefits of attending a particular university.17 In assessing these relative costs and benefits, students utilise a variety of information. In the case of the UK, a national survey (Connor et al. 1999) indicates that the most important factors influencing the choices of applicants to full-time university education are the course or subject and academic quality – particularly teaching reputation, entry requirements, employment prospects for graduates, location, available academic and support facilities, social life and costs of study. Information on the academic course or subject has consistently proven the most influential on student choice in the UK (Carrico et al. 1997; Connor et al. 1999; Moogan, Baron and Harris 1999). This obviously reflects the structure of higher education outside North America, where first degree students apply to and enrol in a particular subject or field. In assessing academic quality, university reputation was a factor often mentioned (Connor et al. 1999; Moogan, Baron and Harris 1999), but applicants generally placed little importance on research quality and instead sought information on teaching reputation.18 This clear distinction between teaching and research quality may be more common to UK consumers because of differential government-required programme assessments of research and teaching quality. In terms of the value-added by university education, the most relevant information sought by applicants was graduate employment prospects. The applicants also reported that the most used and most useful sources of information in declining order of importance were university prospectuses, visits to universities, and a handbook on university programmes published by the University and College Admissions Service. Following these documents, applicants listed various ‘advisors’ as most useful: personal contact with a schools’ career advisor, current university students, university staff and various staff members at their school. About half of the applicants had read the commercially published league tables of universities and about 40% also used the ratings of teaching quality and research upon which these rankings are based. Students reported some vagueness on what these published quality assessments actually revealed and relied more upon parents, other students and employers to gauge academic reputation. Higher ability and higher social class applicants as well as ethnic minorities used league tables and quality assessments more than other applicants, but overall quality rankings were viewed as of below average influence and were not listed among the most useful sources of information by the survey respondents. At the time of the survey, ITbased sources of information were used by less than 30% of the applicants. While the surveyed applicants reported that they were not overwhelmed by the large amount of information available, they did desire information about particular academic programmes and universities that was more focused and less one-sided. Although there is a great deal of government defined and published data about UK universities, applicants still had concerns about the quality and accuracy of information provided by some institutions.

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Based upon the survey, the researchers (Connor et al. 1999) also made recommendations for improving consumer information for university choice. With relevance to academic quality, they called for regular, independently validated information about courses and institutions so as to discourage reliance on less reliable and anecdotal sources. More information was desired on the work and other experiences of those graduating from different types of programmes. Although ITbased information had been little used by the applicants in this sample, the researchers also called for the use of more interactive formats of information that would permit consumers to personalise their search for information. The extensive research on college choice in the US suggests that the institutional factors important for US students and parents in choosing among colleges are primarily the academic programme (major area of study), tuition costs, financial aid availability, general academic reputation/general quality of institution, location (distance from home), college size and social atmosphere (Hossler, Braxton and Coopersmith 1989; Manski and Wise 1983; Paulsen 1990; Zemsky and Oedel 1983).19 In an annual survey of entering students, ‘a good academic reputation’ is the reason given most frequently by freshmen in selective colleges for having chosen the institution in which they enrolled (Litten 1991). However, perceptions of the academic reputation of an institution have been found to be most highly related to institutional admissions selectivity, as measured by average student test scores (Grunig 1997; Paulsen 1990), and to indicators of research activity as well as doctoral programme rankings (Astin 1985; Grunig 1997). Therefore, it is debatable as already noted whether information on ‘academic reputation’ in the US will promote student choice that is efficient for society. In contrast, Litten and Hall (1989) examined how a sample of high ability students and their parents defined quality in colleges. They identified the following among the leading indicators: high admissions rates of graduates who apply to top graduate and professional schools, students who were high achievers before college (i.e. institutional selectivity), surveys showing graduates were satisfied with the college, high starting salaries for graduates in the fields that interest them, and faculty who spend as much time teaching as doing research. In a subsequent set of focus-group interviews with high school students in Indiana and Massachusetts, Hossler and Litten (1993) discovered that over 25% identified the following as extremely or very important characteristics for choosing a college: advantages in getting a job, advantages gained in admission to advanced degree programmes, learning/intellectual development students achieve, students’ psychological development (value formation), students’ social development and income of graduates. These latter characteristics and indicators include a number of process and outcome measures that come closer to addressing the ‘value-added’ concept of academic quality. Research on the sources of information considered by US applicants suggests some of the limitations of published information. The most frequently used sources were in fact college catalogues, campus visits, school guidance counsellors, students already enrolled in college and college admissions officers (Paulsen 1990). Commercial college rankings or league tables are used primarily by students of high achievement and social class (McDonough, Antonio and Perez 1998). There is

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evidence that the information provided in different college guidebooks about the same institution is often inconsistent and even contradictory (Hossler and Litten 1993). Most of the available guidebooks also failed to provide information of particular interest to college applicants, such as student outcomes and student educational experiences. In addition, the visibility of US college rankings based upon prestige or reputation also appears to be encouraging institutions to ‘game’ the market in order to better position themselves on the proxy measures of academic quality currently employed (Ehrenberg 2002). Universities have attempted to manipulate information on average entering student test scores by dropping out the lowest scores, not reporting the scores of international students or by making the tests optional for admission. In the latter case, only students with high test scores are likely to report them and applicants with lower test scores will now more likely apply. Thus the relevant colleges should be able both to increase their average test scores and increase their admissions selectivity. A number of colleges and universities have also adopted early admissions plans for students who will make a commitment to a particular institution. Because almost all early applicants eventually enrol, such programmes lower the fraction of total freshman applicants that need to be admitted and also increases the institution’s ‘yield’ rate, both of which improve the college’s selectivity. Hossler and Litten (1993) reviewed the overall provision of information on academic institutions in the US. They noted that virtually all of the published data on colleges and universities, whether collected by government or by the publishers of guidebooks and commercial rankings, are supplied by the institutions themselves and that no independent source of verification exists: When colleges compete for students via the information they provide and the public must rely primarily upon this information, we find it intolerable that some form of audited and certified information, as precise and objective as our financial audits, is not available (p. 78).

They suggest the development of standardised data gathering instruments, including questionnaires completed by current college students and alumni that would permit an objective comparison of institutions. Most needed was information on student educational experiences and outcomes. Among the types of information recommended were student satisfaction, as measured by senior and alumni surveys, the percentage of graduates who enrol in advanced degree programmes and information on the occupations and incomes of programme graduates.20 They recommend that the data be subjected to third party verification. For example, information on university applications, admissions and enrolment could be reviewed as part of financial audits and the information in college prospectuses on programme offerings could be verified as part of accreditation reviews. The collected research on college choice in the UK and US offers some support for the view that consumers associate academic quality with the knowledge, skills and values to be gained through a university education. In both countries, however, despite the growing number of guidebooks, league tables and other publications designed for the higher education market, there still appears to be inadequate comparative information on the academic quality indicators of interest to students.

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Quality information tends to focus on the uni-dimensional concept of academic reputation or prestige, which is highly influenced by factors other than the quality of undergraduate instruction. Insufficient information is available on student outcomes and the quality of students’ educational experiences in different programmes and institutions. There is also evidence, particularly in the US, that imperfect information on academic quality together with competitive higher education markets create incentives for institutions to misrepresent the information students need to make rational college choices. Improved consumer information on academic quality offers some potential for increasing the efficiency of higher education markets, but there is some question as to whether this information will be provided without government intervention. 5. IGNORANT PROFESSORS In the preceding sections, the empirical evidence on efforts to improve academic quality by providing relevant information to the buyers and consumers of higher education has been reviewed. In this section, a more speculative cause of market failure in higher education – ignorant professors – will be discussed. It will be suggested that the current institutional framework of academic work provides insufficient incentives for academic quality improvement within universities. Consequently, information provision to consumers and buyers may need to be supplemented by incentives for the development of institutional-based information and quality assurance mechanisms that, with regard to their basic educational processes, help to make universities more effective learning organisations (Dill 1999a). Those advocating information provision as a remedy to uncompetitive markets assume that over time the demands of better informed consumers will increase the incentives for producers to decrease the costs of higher education and generate greater innovation and quality. But given the nature of student consumers, the difficulties of effectively measuring student learning outcomes, the constantly changing nature of academic knowledge and the deeply ingrained traditions of academic freedom and specialisation in higher education, there is reason to question whether demands from better informed consumers alone will be sufficient to motivate quality improvement. In a classic analysis of universities, Cohen and March (1986) argued that they were prototypal ‘organised anarchies’. That is, they did not know what they were doing! An important contributor to organised anarchy in Cohen and March’s (1986) formulation was poorly understood technology. Professors possessed a weak understanding of the core production process whereby incoming students are transformed into educated graduates and therefore improvements in teaching, student learning and academic productivity were fitful and uncertain. More recent research by Massy (2003) suggests the continuing confusion about and lack of interest in academic productivity among the US professoriate. This ignorance is reflected in the continually increasing costs of US higher education, which regularly exceed the rate of inflation and growth in medium family income.

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The nature of the core processes of academic production differs between teaching and research. While more difficult, it is still possible in many fields for a single investigator to make a substantial discovery or contribution to research or scholarship. However, in the case of student learning, the quality of a student’s academic experience is best conceptualised in an interdependent manner that is greater than the sum of the activities of individual teachers in separate classrooms (Ewell 1988). The research on teaching and learning in higher education reveals that while what students learn is related to the quality of the individual teaching they receive, it is also closely associated with what may be termed the academic coherence of the curriculum (Dill 1999b). That is, student content learning and cognitive development are affected by the nature and sequence of their curricular experiences as well as by the extent to which the faculty are collectively involved with the substance of teaching and the student’s education experience (Pascarella and Terenzini 1991). Therefore, more systematic efforts to improve the quality of learning outcomes will likely require cooperative action by faculty members to ‘restructure’ the curriculum, to redesign course sequences and requirements, and to better coordinate their individual efforts at instruction in order to achieve greater academic coherence. The primary unit for improvement in teaching and student learning in US universities is the academic department. Departmental meetings, committee work focusing on teaching and curriculum, and other face-to-face informal interactions among colleagues facilitate both the detection of ineffective education as well as the communication of norms and behaviours supportive of quality teaching and student learning (Braxton and Bayer 1999). Field research at the departmental level in US universities (Massy, Wilger and Colbeck 1994), however, has uncovered a pattern of ‘hollowed collegiality’ in which departments nominally appear to act collectively, but avoid those specific collaborative activities that might lead to real quality improvements in academic programmes. For example, faculty members readily reported informal meetings to share research findings, collective procedures for determining faculty promotion and tenure, and consensus decision making on what particular courses should be offered each term and who should teach them. But: Despite these trappings of collegiality, respondents told us they seldom led to the more substantial discussions necessary to improve undergraduate education, or to the sense of collective responsibility needed to make departmental efforts more effective. These vestiges of collegiality serve faculty convenience but dodge fundamental questions of task. This is especially the case, and is regrettable, with respect to student learning: collegiality remains thwarted with regard to faculty engagement with issues of curricular structure, pedagogical alternatives, and student assessment (Massy, Wilger and Colbeck 1994: 19).

The researchers suggested that academic beliefs about individual autonomy and academic specialisation that have led to atomisation and isolation among faculty members were a major contributor to this observed pattern of fragmented communication. Faculty members not only do much of their teaching alone, but, because disciplinary sub-fields are defined quite narrowly, many faculty members find it almost impossible to discuss their teaching with one another.

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The prevailing norm of academic individualism may therefore impede the systematic monitoring or measuring of student achievement that is crucial to the improvement of academic quality. Without public information about the valueadded by an academic programme there are insufficient incentives for individual faculty members to enter into the coordinated activity necessary to produce academic programmes with the academic coherence and structure research suggests are associated with student learning. The improvement of academic quality thereby represents a classic dilemma of collective action.21 Why does cooperative activity among faculty members to improve the quality of academic programmes not now spontaneously occur? Game theory would suggest that individual faculty members already work within a context that should encourage cooperative activity in the design and improvement of academic curricula. These conditions are: 1) that individuals have repeated dealings with one another; 2) that individuals possess information on the other players; and 3) that individuals deal with a small number of other people (North 1990). Under these conditions cooperative behaviour for joint gain should theoretically occur. But game theorists have also identified an additional condition necessary to sustain cooperative behaviour, that is, the ability to calculate collective costs and benefits. Thus, if a measure of the value-added to students by an academic programme is not available, then individual faculty members will base their decision, with respect to the amount of time to commit to cooperative activity in teaching and curricula improvement, on the individual costs and benefits to themselves. The benefit of cooperating with other faculty members in the design and implementation of higher quality academic programmes will therefore receive little or no value. By the same logic, faculty members also have few incentives to invest time and effort in developing or maintaining measures of the value-added by academic programmes; as a consequence, the decline or rise of academic standards in subject fields remains largely invisible to academic eyes.22 Academic administrators often contribute to this problem by adopting what Massy (2003) has termed an ‘invisible hand’ approach toward academic quality improvement. That is, they actively encourage the recruitment of the best students and faculty members and feel that they have thereby met their responsibility for improving academic standards. Countries such as the UK, Hong Kong and Sweden that have systematically reviewed the mechanisms for maintaining academic standards in different academic subject fields, however, have discovered substantial variance in the means employed for assuring academic quality across units within the same university (Dill 2000). When these variations were revealed to deans or university administrators with authority over the relevant programmes, the administrators often indicated that they were ignorant of these differences. This lack of knowledge and, in many instances, lack of concern with observed variations in academic quality assurance processes within universities suggest that traditional beliefs about academic freedom and autonomy have encouraged administrators to abdicate their responsibility for assuring academic standards. As Rosovksy and Ameer (1998: 150) argue, “academic freedom does not absolve colleagues or administrators from assuming responsibility for what are essentially matters of procedure, management, good order – and above all else – legitimate student needs”.

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In sum, there is some evidence that inattention to academic quality improvement within universities is caused not only by under-informed consumers, but also by ignorant professors. Policies designed to provide better information to consumers and buyers may increase market competition for effective teaching and student learning. But it is likely that actual improvements in academic standards may also require policies that provide stronger incentives for cooperative faculty behaviour on the development of effective quality assurance processes within universities. 6. CONCLUSIONS As higher education markets develop within countries and expand around the globe, the extent to which market competition will prove efficient for society will depend upon whether the new framework provides sufficient academic quality or value for money. It is possible that increased competition alone will create greater incentives for institutions of higher education to constantly improve student learning. Some evidence from the US (Brewer, Gates and Goldman 2002), for example, suggests that while traditional institutions of higher education may compromise student learning in an effort to gain academic prestige, profit-making institutions have a greater incentive to compete on educational value added, since they cannot make money by contesting on reputational indicators such as student selectivity and academic research. On balance, however, based upon our review of the evidence on the information on academic quality currently available to buyers and consumers, we believe there a is a genuine potential for market competition in higher education to promote an inefficient ‘academic arms race’ that will contribute to a market failure. This suggests the need for some type of government intervention. We remain dubious as noted above that monopsonistic or quasi-market mechanisms, in which government buys or contracts for a particular level of higher education, will prove efficient in the long run because of the potential for government misdirection of the higher education system and the substantial difficulties in validly measuring educational outcomes (Pascarella 2001). It is possible that introducing institutionally determined differential fee structures may promote sufficient consumer pressure for quality improvement that government contracting along with appropriate consumer information could then be effective in addressing potential failures in the academic market. However, our own view is that a more effective policy would combine better consumer information with enforced professional self-regulation as a means of quality improvement. As governments increasingly use market forces to coordinate and steer their university systems, they will need to define the essential quality information to be maintained and reported by universities and make public subsidies conditional on the accuracy of the data.23 Public policy can thereby improve the reliability of information for student consumers, whether provided by the commercial sector or the not-for-profit sector. In terms of the type of data to be provided, information on subject fields and academic programmes is of particular value to student consumers, even in North America where the structure of academic programmes includes a strong emphasis on general education prior to the choice of a major field of study.24

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The types of programme information publicly required of all institutions should include, at a minimum, entry standards for programmes, programme completion rates, the proportion of programme graduates entering employment/professional training/higher degrees, the average starting salaries of graduates and the satisfaction of graduates with their academic programmes. While such information on academic programmes is still not available in much of the world, it is obtainable for universities in Australia. The Australian government has required all publicly subsidised universities to conduct Course Experience and Graduate Surveys that make this type of information publicly available. In addition, the new National Survey of Student Engagement (NSSE) (Kuh 2003) in the US can provide information on how effectively colleges are contributing to educational value added though a number of process indicators that have been shown to be valid predictors of student learning. The public provision of NSSE data is now required for statesupported colleges and universities in a number of the US states. Academics strongly object to the concept of regulation, especially as it relates to academic quality. But academic standards cannot be maintained or improved without some type of external control, a fact made clear when we routinely describe professional processes such as external examining and voluntary accreditation as self-regulation. The issue is not whether regulation is needed, but who is responsible for developing and implementing it. We believe that improved consumer information as outlined above along with ‘enforced self-regulation’ (Baldwin and Cave 1999) offers the greatest potential for addressing the causes of potential market failure in higher education we have outlined. Examples of such enforced selfregulation could include existing academic processes such as external examining, or newly developed processes such as subject assessments or academic audits as they have evolved in the UK, Europe and Asia. These processes, required by government but designed and implemented by the academic community, can provide public evidence that academics are meeting their obligation to assure academic standards (Cave, Dodsworth and Thompson 1995). Unlike the regulatory initiatives on student assessment in the US, there is some evidence that these external reviews of quality assurance processes and academic standards have helped address the collective action dilemma of academic quality within universities. They have helped promote greater communication among faculty members on the improvement of teaching and student learning, by challenging academics to provide the evidence of student learning upon which they are basing academic and resource allocation decisions and by strengthening the internal collegial processes by which academic standards are assured (Dill 2000; Henkel 2000). Given the complexity and dynamism of academic knowledge, we believe professional self-regulation is still likely the most effective safeguard for assuring academic standards in competitive academic markets. But, given the rapidly increasing social costs of higher education and its growing influence on the life chances of our citizens, we seriously question whether reliance primarily on ‘trust’ in the academic profession (Trow 1996) is a feasible option for assuring the efficiency of the system. In our view there needs to be more valid and reliable consumer information on academic quality available as well as public evidence that universities take self-regulation of academic standards seriously and that existing

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professional processes designed to assure academic quality in fact promote student learning. NOTES 1 2

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The basic theoretical concepts of information economics to follow are derived primarily from Carlton and Perloff (2000) and Friedman (2002). The major concern with imperfect information in higher education relates to academic quality, but recent US research suggests that there may also be some potentially important issues related to the transparency of ‘price’. Kane (1999) surveys the longstanding issues associated with cost and access in US higher education and suggests that informational issues may be a primary cause of poor college-going rates among low income groups (for more recent empirical support, see Avery and Hoxby 2003; Kane 2002). Kane (1999) argues that college access policies featuring backwardlooking, means-tested financial aid benefits make the price of higher education less transparent. Students and their families cannot effectively determine the cost of higher education until after they have applied for university and learned about their eligibility for financial aid. He points out that, in contrast, the Australian means-tested Higher Education Contribution Scheme (HECS) is forwardlooking, based upon the student’s future income. Arguably, this approach increases the transparency of the costs and benefits of higher education in two ways. First, it makes clearer prior to applying to university the student’s eligibility for financial assistance (i.e. there is no eligibility criterion for HECS) as well as the associated costs. Secondly, it focuses students’ attention on their future earnings stream, which should be an important component of their decision to attend university. Because the adoption of tuition fees and the expansion of means-tested financial aid have accompanied policies designed to enhance access to higher education around the world (Jongbloed in press), increasing the transparency of university ‘price’ may help secure the expected benefits of higher education markets. It could be argued that the products of higher education are ‘post-experience’ goods like psychotherapy (Weimer and Vining 1999), whose quality can be accurately assessed only after consumption is completed, if then. Post-experience goods may therefore warrant even more rigorous efforts at consumer protection. We are not convinced that higher education meets this stricter standard. In the analyses to follow, the focus is on the informational issues associated with the market for educational programmes. Similar issues can be raised with the market for research. For example, informational problems have emerged as part of the evaluation of research quality in the UK (i.e. the Research Assessment Exercise – RAE) with critics arguing essentially that funding based upon imperfect information on research quality is inefficient for the larger society. Astin (1985) most clearly articulates this perspective on academic quality in his ‘talent development model’. Astin argues that the major purpose of a university is to develop the talents of its students to their maximum potential. This development is achieved by facilitating changes in students’ intellectual capacities and skills, values, attitudes, interests, habits and mental health. Institutions that provide the largest amount of developmental benefits to students therefore possess the highest academic quality. A recent study (Bratti 2002) of the degree performance of life sciences students in the UK suggests the type and score of A-level exams taken by university entrants have a high and significant effect on the class of degree awarded. Consequently, Bratti argues, if the quality of student intake is not controlled, the supposed ‘value-added’ by academic programmes with a high academic reputation is significantly mis-specified. Astin (1985) conducted similar research in the US indicating that when entering students’ abilities are controlled, ‘academic reputation’ is often a poor predictor of educational value added in higher education. Hanushek and Kimko (2000) provide intriguing evidence for the relationship between academic quality as defined here and economic development. They compare the extent to which changes in educational quality (as measured by standardised scores for mathematical and scientific literacy) and in the quantity of schooling (as measured by the number of years of schooling) have contributed to economic growth differences averaged over thirty years across 139 countries. They find that increases in workforce quality have a profound influence on economic growth, much more than increases in the quantity of schooling.

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DAVID D. DILL AND MAARJA SOO Within US colleges and universities, expenditures for instruction are traditionally listed in an accounting category termed ‘instruction and departmental research’ which means that expenditures for instruction also include the time professors spend on research that is not externally funded. If faculty members choose to invest more of their time on research and less on instruction, this could lower the quality and/or drive up the cost of instruction. An obvious response to the cross-subsidisation thesis, as well as to our argument below that academic prestige and quality rankings are highly influenced by research reputation, is that teaching and research, particularly in the university sector, are joint products. That is, faculty time spent on research can improve the quality of academic content taught to students at the first degree level (Clark 1997). For evidence on the other side see Astin (1996). The available empirical evidence on the relationship between faculty research productivity and quality of instruction at the first degree level indicates the association is at best modestly positive, but so small as to suggest the two are unrelated (Terenzini and Pascarella 1994). For a related review in the UK, see Coate, Barnett and Williams (2001). Whatever else may be said about this relationship, it appears too tenuous to provide support for the observable research drift now occurring in higher education systems throughout the world and the growing investment of scarce resources and faculty time in research activity. If these increasing social costs are to be justified, they must be by the social benefits of the research itself, not by its supposed contribution to first-level degree instruction. Rothschild and White (1995) do note that, because of limitations in their modelling exercise, the differences in the incomes of graduates of more and less selective colleges and universities may in fact be attributable to other factors than peer effects. For a comprehensive review of this economic research see Winston and Zimmerman (2003). This discussion is based on the analysis in a draft chapter on ‘Career and Economic Impacts of College’ kindly provided to me by Ernest Pascarella from the manuscript of a planned revised edition of Pascarella and Terenzini (1991). That talented peers are not a sufficient condition for effective student learning is also suggested by the current controversy in US higher education over grade inflation in the most selective universities (Rosovksy and Hartley 2002). Grade inflation, or more precisely grade compression in which all students receive high grades, may lower student motivation for significant academic effort, thus negating or undermining the supposed learning benefits to be gained from contact with able peers. Note that students may be willing to pay higher tuition and fees to attend universities that provide greater immediate satisfaction in terms of student living conditions and social life. But unless these satisfactions experienced during the process of education contribute to the students’ future productivity, their capacity for learning or other benefits to the society, they are essentially consumption benefits that add to the cost of higher education and do nothing to enhance human capital (Cohn and Geske 1990). See also the discussion of principal-agent relationships by Massy in this volume. For a particularly insightful exchange on this issue, see the paper by Manski (1993) which includes a comment by E.A. Hanushek. As Hoxby (in press) emphasises, massification of higher education has altered the nature of the discussion. From a human capital standpoint the critical choice is no longer whether to attend university, but which university (and/or programme) to attend. Interestingly, minority university applicants in the UK gave much greater weight to teaching and research reputation as well as graduate employment prospects than did applicants as a whole. Reflecting the unique US collegiate culture there is also the belief that intercollegiate athletic success has a positive effect on the volume of institutional applications. Toma and Cross (1998) discovered that winning a national championship in football or basketball subsequently translated into increased applications for major universities, but they did not control for applicant quality. Zimbalist (1999) also finds evidence for a modest relationship between athletic success and applications, but finds no evidence that athletic success increases a university’s average student test scores or its yield on admissions. Note that the only country where this type of information is currently readily available to student consumers is Australia where government policy requires universities to conduct surveys of current students and graduates, that is, the Course Experience Questionnaire and the Gradate Survey. The lack of university-based information on the value-added by higher education has been identified by US state policy makers as an important problem. By 1990, over two-thirds of the states had passed regulations encouraging public institutions of higher education to implement various forms of

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‘student assessment’ programmes designed to place greater institutional attention on the improvement of student learning (Ewell 1997). Ultimately, all five regional accrediting bodies also adopted an assessment criterion as one of their criteria for reviewing institutions of higher education. However, this effort appears to have had a limited impact on faculty behaviour. A national survey provides little evidence of a sustained commitment by institutions or academic programmes to using student assessment information to improve student learning (National Center for Postsecondary Education 1999). Less than a quarter of the surveyed institutions reported that faculty members involved in institutional governance even supported student assessment activities and few institutions actively linked information on student assessment with improvement of the faculty’s instructional approaches. 22 The UK and a number of other countries have a tradition of subject exams and external examiners that potentially provide the needed information and incentives for quality improvement at the subject level. However, the most comprehensive study of the UK examination system (Warren Piper 1994) suggests that faculty cooperation in quality improvement and the maintenance of academic standards is being adversely affected by the increasing specialisation of academic work as reflected in the development of modular forms of instruction and multidisciplinary programmes. 23 See, for example, the work of the Performance Indicators Steering Group in the UK, which defined information to be provided on the nature and performance of the higher education sector (Bowden 2000). 24 Programme or subject level quality information is of increasing importance to students. Entry qualifications can vary across subject fields in the same university, even in the US where entry to the subject field often occurs after enrolment in the college or university. Furthermore, the quality of the student learning experience, graduation rates, student satisfaction, employment prospects, and even lifetime earnings are apt to vary significantly by subject field within the same university. Therefore, quality rankings based upon average data for the university as a whole not only misrepresent the experience for particular subject fields, but fail to provide the academic quality information most desired by student consumers. Finally, the public provision of quality information by programme will reveal differences among them that may create incentives for institutional administrators and faculties to make improvements.

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BEN JONGBLOED

REGULATION AND COMPETITION IN HIGHER EDUCATION

1. INTRODUCTION This chapter discusses the relationship between regulation and the functioning of markets. In particular it will look at government regulation and the degree of competition in the higher education market. The structure of this chapter is as follows. The next section introduces briefly some ideas about markets, competition, government coordination and efficiency. It also briefly touches upon the changing role of governments in regulating the market. Section 3 introduces some additional concepts, like regulation, self-regulation and market failure. Here, the discussion briefly summarises the well-known origins of market failure and the arguments for government intervention. Section 4 presents an extensive discussion of the relationship between regulation and performance, based on the theory of industrial organisations. The different types of regulation in general as well as examples of government regulation in higher education are presented. Attention is paid to regulation dilemmas that emerge as a result of the fact that universities are becoming more and more like hybrid institutions, combining a public mission and a commercial line of activity. Moving from regulation to deregulation, section 5 discusses the idea of vouchers as a means of injecting market forces into the highly regulated higher education systems. It is argued that the competition induced by vouchers will most certainly lead to re-regulation by the government to redress undesirable effects. Finally, section 6 presents a number of concluding remarks on the roles to be played by government in the higher education system. The all too familiar issue of finding a balance between regulation and market forces is revisited. 2. COMPETITION WHERE POSSIBLE, REGULATION WHERE NECESSARY… The market mechanism, that is, the ‘invisible hand’ of Adam Smith, ensures that, in the case of shortages of a specific good or service, the relative price of that good will rise, while an excess will lead to a lower price. In other words, the discipline of the market will lead to an efficient allocation of goods and resources. In a free market with perfect competition, prices carry all the information on the basis of which decisions with respect to demand and supply are made. In short, then, the 87 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 87–111 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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competitive market is a powerful regulator. Ever since the work of Adam Smith, the key notion in economics has been that a decentrally organised market with prices sending out signals is a better system for collecting and interpreting information than the government as the institution that centrally coordinates decisions. A central planner will not have the information on the specific individual preferences of citizens for the many products and services. It is totally impossible to accurately form estimates of the total demand for thousands of products, to motivate the millions of producers to satisfy this demand, and to be aware of the available technologies or the quality of the workforce. Moreover, it is equally impossible to monitor and control the activities of the managers and employees of millions of firms. It is no wonder then that supply and demand do not balance in a centrally led economy. And, given the fraud, nepotism and rent seeking that exist in the nomenclature, firms and labour unions, it is no wonder that, even in economies that are less heavily steered by a central coordinating institution, many calls are heard to reduce the extent of government intervention and regulation. The growing complexity of our society only seems to strengthen the case for relying on markets to make the decisions. The power of the market lies in the actual and potential competition for scarce resources that can be used in a variety of ways to meet the preferences of consumers. Competition between suppliers ensures that prices will adjust to reflect market scarcity. Economists call this a situation of allocative efficiency, or Pareto efficiency. Pareto efficiency is a situation in which no individual (or group of individuals) can improve their utility without negatively affecting that of others. In the case of less than perfect competition, prices will be less flexible; price adjustment will not lead to a situation of Pareto efficiency. Goods and services will not be allocated in full accordance with demand and supply. Strictly speaking, the model of perfectly competitive markets is not very realistic. Its assumptions are far from being satisfied. In reality, one has to allow for transaction costs, scale effects, less than perfectly informed individuals, less than perfectly mobile production factors and non-homogeneous goods. Apart from that, competition takes place not only through prices, but also by means of quality, aftersales services and the range of products offered by providers. Markets may also function imperfectly because of the abuse of monopoly powers. In monopolistic markets the suppliers set the price and prices are set above marginal costs. This leads to profits for the monopolists; it causes allocative inefficiencies and a less just income distribution between suppliers and consumers. Moreover, according to Leibenstein (1966), monopolies have a tendency to operate in a cost inefficient (or internally cost inefficient) way. This claim is supported by empirical evidence. Compared to monopolistic market structures, competitive markets are more likely to be responsive to the wishes and needs of clients, and competitive markets generate more incentives to use resources in an economic way (see Scherer and Ross 1990; Massy in this volume). In other words, competition leads to cost efficiency, meaning that entrepreneurs/managers use their production factors in such a way that costs are minimised. While internal (or static) efficiency is part of the model of perfect competition, dynamic efficiency is not. Dynamic efficiency prevails when innovations in products and processes are initiated and adjustments to changing technologies and needs are

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carried out smoothly. The relationship between competition and dynamic efficiency however is problematic. There are arguments that suggest that, on the one hand, cooperation between providers in markets is necessary to bring about high-risk technology innovations, but, on the other, entry into the market needs to be relatively easy for new providers in order for them to introduce and develop creative ideas. The latter idea is close to the notion that innovation sometimes may need to be stimulated by the use of non-market instruments. Collusion and other noncompetitive measures to create such externalities (or spillovers) are examples where the invisible hand of market competition is assisted by the visible hand of government regulation. This will be explored further below. This sketch provides a background for the discussion on markets, competition and (de-) regulation. It illustrates that, because of unmet conditions, free markets are not a realistic option for most sectors of economic activity. Centrally steered systems also are not an option, because of the problems governments would have in fine-tuning the system. In terms of the industrial organisation literature (Scherer and Ross 1990: 37) this means that only a ‘third best’ option is available which comes down to stimulating competition as a function of regulation. The leading principle then is: “Competition where possible, regulation where necessary” (Kay and Vickers 1988: 287). This approach takes into account that market failures may occur and that national interests (e.g. equality of opportunity, income redistribution, innovation) may be at risk, calling for government regulation. In any case, this principle comes down to a repositioning of government. The question is: What instrument of intervention may be used by the government to create more competition and markettype behaviour in the sector, given specific manifestations of market failure and given specific government goals? It comes down to the issue of striking the right balance between competition and regulation; finding out when and how to intervene and where the marginal benefits of regulation no longer outweigh the marginal costs. This approach may be interpreted as a step in the direction of a ‘state supervising’ system (Van Vught 1989). Instead of a heavily regulated control system, a system is established with more room for market-type coordination, thus emphasising individual (i.e. decentralised) decision making by providers and clients. This development may be characterised by means of figure 1 below (see Van Asseldonk, Berger and Den Hartigh 1999; Jongbloed 2003a). The left part of the figure shows a traffic junction with traffic lights on all four corners regulating the flow of traffic. Creating acceptable queuing times requires substantial effort in terms of programming the traffic lights. One would have to first study the intensity of the traffic at that exact location, incorporate ‘real time’ information on traffic flows in response to the duration of red and green signals, install traffic lights for pedestrian crossings and prevent the lights from turning green all at the same time. This is our analogy of the state control model. The right side of the figure pictures our analogy of the state supervision model: a roundabout. There are no traffic lights and only one simple rule regulating the traffic flows. That rule is: the traffic on the roundabout has priority. This system of coordinating traffic flows does not require an extensive information system. The flow of traffic is much smoother compared to the intersection/traffic lights system.

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Figure 1. Coordination systems: The crossing versus the roundabout

Elsewhere (Jongbloed 2002), it has been argued that in today’s networked society where heterogeneous and unpredictable behaviour is key, self-steering instead of regulation may be a more appropriate model to coordinate the decisions in a higher education system. Coordination (steering and control) cannot take place anymore through increasing interventions and regulations by the government. Instead, the government (the national as well as the supranational) will have to rely on designing clever frameworks or ‘rules of the game’ for the interaction between individual clients and individual providers. These rules of the game are what Douglass North (1990) has termed institutions and consist of both informal constraints and formal rules. Looking at the roundabout picture, one might be tempted to believe that in today’s higher education system the role for the national government is diminishing. However, that would be taking the analogy too far. Instead, the role of the government will have to be redefined. The centrality of human capital in today’s knowledge-driven economy requires that governments carefully arrange the frameworks, boundaries and playing fields for the providers of higher education. Government policies will have to support the building up of high-level skills and knowledge-intensive goods and services. The range of policies available covers competition, science and innovation, policies aimed at assisting firms by means of incentives and subsidies, and policies aimed at facilitating firms’ access to and handling of technology. Government policies increasingly will have to strengthen the networks between firms, knowledge producers (e.g. universities) and government, using a wide range of facilitation mechanisms that seeks to intensify formal interactions as well as informal interaction between the agents in these networks. The question is not how much government, but rather what can government do and how can it do that best? This amounts to a new paradigm for government (Dunning 1997: 60) where:

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… government should eschew such negative or emotive sounding words such as ‘command’, ‘intervention’, ‘regulation’ and replace them by words such as ‘empower’, ‘steer’, ‘co-operative’, ‘co-ordination’ and ‘systemic’.

3. CONCEPTS: GOVERNMENT INTERVENTION, SELF-REGULATION AND MARKET FAILURES Before proceeding further, it is necessary to be more specific about concepts and theories regarding regulation, government intervention and market structure. Regulation may be defined as government-imposed restrictions affecting individuals’ or organisations’ freedom to decide – their rights and liberties. The freedom to decide or choose relates to the eight areas that have been defined in the introduction to this volume as conditions for a market. Regulation is often supported by the threat of sanctions. Regulation can take the form of laws, controls and rules imposed by government (or, rather, parliament), but it can also take the form of private laws, norms and self-regulation. The difference between state-imposed regulation (the ‘visible hand’) and self-regulation will now be explored a little further. Government regulation of decision making in markets is based on a number of reasons. First of all, markets can produce too much or too little of goods and services from society’s point of view. This type of market failure arises for various reasons, most of them already discussed in the introduction to this volume: x x x x

monopoly powers and the existence of barriers to entry externalities (spillover effects) information asymmetries (hidden action, hidden information) free-rider problems.1

Secondly, there may be a reason for governments to intervene through regulation because of wider social goals, such as: x x x x

correcting unequal bargaining power (due to uneven distribution of income and wealth) protecting the interests of future generations preventing socially (morally, politically) undesirable behaviour (e.g. discrimination) protecting ‘endangered species’ (goods that are undervalued but nevertheless important from a societal or cultural point of view).

The first argument leads to the correction of differences in opportunity among otherwise equally talented individuals who seek an education. The instrument that can be mentioned here is student financial support. An example that belongs to the second category of reasons listed above is the need to stimulate innovation and find solutions to (future) problems of a social, economic or environmental nature. Affirmative action policies and regulation are examples of the third set of intervention arguments. The need to protect training programmes and research in

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areas that are important from a cultural point of view but would otherwise attract insufficient resources is an example of the fourth argument for government intervention or regulation. All four examples are based on value judgments; in the end, politicians (parliaments) need to decide on the emphasis to be put on social policy goals and issues of distributive justice. The efficiency arguments and the social policy goals call for government intervention. Government intervention in the higher education market consists of four different types: x x x x

regulation (e.g. with respect to quality and quantity) finance (e.g. through subsidies, taxes, fees, loans, vouchers, income transfers) public provision (e.g. public universities) information/communication (to improve decision making).

In particular, strong government intervention is called for in the case of pure public goods, because the market will underprovide such goods (market failures). Government intervention is also relatively strong in the case of quasi-public goods that are characterised by the significant externalities inherent to their production. Externalities will be discussed more extensively below. For the moment we only point to the fact that public production (public goods) or public subsidies (public or quasi-public goods) determine the production of goods that, due to externalities, are underproduced by the free market. Public financing and production will not be discussed here; that discussion will be left to other chapters in this volume. Instead, this chapter will look more closely at regulation as an instrument to enhance efficiency2 and equity in the higher education market. There are different types of regulation, differing according to the room left to markets. According to the regulation definition given above, regulation seeks to change the behaviour of individuals and groups – to affect the market process (market structure and market conduct). One may distinguish the following forms of regulation: x x x

state-imposed regulation self-regulation enforced self-regulation.

An example of state-imposed regulation is the regulation of quality on the goods and services market. In the case of higher education, one can point to accreditation and standards with respect to curricula content. Government agencies (e.g. inspectorates), buffer organisations and other public regulatory agencies are charged with the monitoring of behaviour. They will have to outline acceptable and unacceptable behaviour – often in consultation with the sector itself – agreeing on standards to be imposed on processes or outcomes. They will have to have means for identifying non-compliance and often will use penalties and/or rewards to achieve compliance. When the emphasis is on financial incentives and rewards, the

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use of the regulatory instrument comes close to the use of (public) funding as an instrument. Self-regulation emerges in the private sector through binding, private law-based norms that have been agreed upon by a representative set of providers or ‘stakeholders’. One can think of certification, norms and mutually agreed quality standards and criteria for the recognition of providers, products and programmes. Next to prices and contracts, these forms of self-regulation work towards achieving some kind of order in the market (or higher education system). Self-regulation is preferable to government regulation when specific knowledge or information is primarily held by the sector itself. Apart from that, self-regulation can constitute a more flexible and more tailor-made alternative to laws and government regulation. Codes of conduct are an interesting example of providers agreeing to meet sectorwide principles. For higher education institutions that are active in income generating activities by means of contract research it can mean that they agree to fair pricing and not to use public funds to cross-subsidise activities carried out in competition with the private sector. It means that the sector itself monitors its members to see whether the code of conduct is respected. Self-regulation may also take place through independent private institutes that award a recognised trademark or certificate as a sign of suppliers meeting specific quality standards. Accreditation certificates given by independent agencies or boards are a natural example when it comes to higher education. We can point to professional organisations in fields like engineering or business as examples. When the sector (or ‘industry’) develops its own arrangements and the government provides legislative backing, such as in the case of peer review in teaching or research, one can speak of enforced self-regulation or conditioned selfregulation. The government promotes self-regulation and at the same time connects it to specific conditions or policies. It usually means that the government is one of the agents influencing the shaping of self-regulating practices. An example from the Netherlands is the quality assurance system for teaching, where the higher education providers themselves are responsible for monitoring the quality of degree programmes, and the Ministry of Education can withdraw public funding should the assessment indicate poor quality (see Salerno’s Dutch case study in this volume). In higher education, the norms of academic professionalism act as systems of self-regulation. The ethical norms of the professoriate assure that academics spend their time and attention on a mix of activities that is in the public’s interests as well as the interest of higher education institutions and the professoriate’s collective selfinterests. In fact, the professionalism of the professoriate may make explicit stateimposed regulation redundant. One might even argue that relying on the ‘ethicality constraint of the university’3 could prevent unintended consequences of the accretion of governmental regulations and act as a counterbalance to the potentially harmful (to the public’s and the student’s interests) pulls of competition and prestige seeking by universities and colleges. Other examples of self-regulation are covenants or contracts. Contracts are negotiated between government and institutions in such a way that the rigidity of law is avoided. Government and private (or semi-public) organisations enter into voluntary agreements, for instance, to promote a specific outcome that is in the

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interest of society as a whole, or to reduce the negative externalities of unrestricted market behaviour. This signing up of contracts may have a positive effect on the acceptance of policies and may reduce the (transaction) cost of monitoring and control. Like state-imposed regulation, self-regulation may negatively affect the functioning of markets, for instance when monopolies or oligopolies collude to reduce rivalry or drive suppliers out of business. In the case of abuse of market power, governments may apply antitrust policies or regulation. The set of publicly funded higher education providers is sometimes regarded as a cartel that has enjoyed protection from outside influences. An open market structure, in the sense of low barriers to entry (and exit), the freedom to set prices and determine quantity (i.e. enrolments) and quality, is believed to provide incentives for providers to operate in an efficient way. However, there may be reasons for the government to continue the protection of the public providers – examples are the government’s wish to prevent a ‘thinning out’ of public resources and protecting particular providers for cultural and regional reasons. After discussing three types of regulation it is worthwhile mentioning that the most fundamental type of government regulation, which is often taken for granted, is the creation of the basic (or bare) essentials that any society (say market) needs in order to function properly. These ‘bare essentials’ are underlying the various types of transactions (exchange of goods, services, information and resources) that take place in society. One of the basic functions of government is to ensure that citizens are not confronted with exorbitant ‘transaction costs’ (Williamson 1989). Transaction costs are connected to the gathering of information, negotiation and specification of contracts, and the monitoring and enforcement of contracts. A free market economy cannot function properly without a minimum degree of public regulation. This regulation shapes and guarantees the ‘basic order’ and, in particular, the property rights in the system. Government regulation ensures that economic agents (citizens) do not only agree on (transaction) prices but also agree on product quality, contract conditions (length, intertemporal aspects, sanctions) and other aspects connected to the exchange of goods and services. If this basic legal infrastructure is absent, transaction costs will be high and economic activity is likely to be less than optimal. Given this legal (or institutional) framework, markets sometimes fail to reach an efficient, socially optimal, allocation of goods and services. The invisible hand of the market then needs to be assisted by the visible hand of government regulation. Government regulation can take several forms. Earlier in this section, three types of market failures were distinguished: (1) monopolies; (2) externalities; and (3) information asymmetries. The remainder of this section will discuss these three types of market failures in more detail and connect them to government regulation. The first type of market failure, market power, can manifest itself in concentration and collusion of providers through monopolies and oligopolies. In itself, concentration is not a ‘bad’ phenomenon, as it may be the outcome of successful entrepreneurship (through product differentiation and innovation) or positive economies of scale.4 Market power may be the logical outcome of competition in a market. However, market power can also be the consequence of

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developments such as mergers, alliances and acquisitions. When power is concentrated in a restricted set of providers, this may have negative consequences for the wellbeing of consumers and providers who, in the production ‘chain’, are dependent on, or linked to, the colluding providers. While market power can be the outcome of a ‘natural selection’ process it may also be the result of ‘unnatural practices’. For instance, specific exclusion practices by incumbent providers towards new providers (e.g. cartelisation) or specific types of self-regulation by incumbents may stand in the way of a proper functioning of the market. Such restricting practices can take various forms, like mergers, price agreements,5 etc. In short, excluding practices leads to barriers to entry for new providers. Government regulation in the form of antitrust policies may be called for when there is sufficient evidence of collusion or otherwise protectionist behaviour by provider concentrations. Regulatory agencies (‘watchdog supervisors’, see Laffont and Tirole 1993) have been created by national (or supernational, in the case of the European Union) governments to monitor producer behaviour in the market for private goods. With higher education becoming to be regarded as a (private) good, subject to the conditions of the GATS agreements, such agencies may also be overseeing the higher education market in the near future. Baumol, Panzar and Willig (1982) in their ‘theory of contestable markets’ have argued that, where economies of scale and scope lead to a concentration of economic power, the decisions with respect to prices and volumes can still turn out to be allocatively efficient, even without government intervention. They suggest that, if the markets are sufficiently contestable (i.e. open to new providers) oligopolies/monopolies will be disciplined in their behaviour. The ‘threat’ of new providers entering the market then will force incumbent providers to refrain from protectionist policies. Barriers to entry are not necessarily all due to regulation and collusion, but may also be caused by the existence of high ‘sunk costs’.6 However, contestability is a necessary, not a sufficient, condition for an allocatively efficient monopoly without government intervention. Another condition that would have to be met is ‘sustainability of prices’. Sustainability means that the monopolist can stay in business given existing prices, and potential new providers do not have a way of entering the market due to the fact that the costs of entry are higher than the expected revenues. If prices are unsustainable, and incumbent providers are operating in a multi-product market, they may face the threat of ‘cream skimming’, meaning that the new entrants focus on profitable segments of the market and existing providers are left with the rest of the activities. External effects is another manifestation of market failure. These so-called spillovers occur when the utility of one individual (A) is directly influenced by the activities of another (B) without B taking this into account when making decisions with respect to those activities. External effects may be either negative or positive. Negative means that, from an allocation perspective, too much activity is taking place (e.g. emission of pollution), while positive externalities are an indication of too little activity (e.g. education and fundamental research).

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According to Ronald Coase (1960), negotiations between the parties involved can lead to an acceptable solution, even without government intervention in the distribution of property rights. This negotiation results in a voluntary contract between A and B where the external effects are ‘internalised’ and an optimal allocation on the basis of decentrally taken market decisions is reached. The conditions that have to be met here are: (1) there is only symmetrical information (see below); and (2) the transaction costs of negotiation are smaller than the transaction cost of government regulation. Often, these conditions will not be met in practice: asymmetrical information exists. Moreover, individuals are not behaving rationally. All of this stands in the way of a socially optimal solution – especially if the effects of a transaction lie in the future. When talking about externalities, it is useful to make a distinction between private goods and public goods. In the case of a private good, most of the benefits and costs accrue to the individual consumer. For a public good, most of the benefits accrue to society in general – it is a commodity whose benefits are indivisibly spread among the entire community, whether or not particular individuals desire to consume the public good. Pure public goods are characterised by non-excludability (nobody can be excluded from their consumption) and non-rivalness (consumption by individual A does not affect individual B’s consumption of the same good). The classic example of a public good is national defence. In the case of public goods, the market will not experience incentives to produce optimal quantities of the good. If goods are characterised by strong positive external effects but exclusion is technically possible, one speaks of quasi-public goods. Examples are knowledge and information goods, such as education and fundamental (or basic) technological research. The market will not provide optimal quantities of such goods because other providers and consumers can make use of the good once it is produced: the ‘free rider’ effect. Therefore, to stimulate the production and consumption of such goods, government policies are called for. On the one hand, the policies subsidise education and research in order to let as many individuals as possible reap the benefits. On the other hand, to stimulate the generation of research by the market it may be necessary that governments create exclusiveness, either by charging a price to the users or by protecting intellectual property by means of patents. In this way a market for intellectual property is created. While these policies diminish externalities, they do stimulate innovation in the long run because of efficiency incentives. This points to a dilemma. High subsidies create external effects, but this comes at the expense of a supply that, from a market-oriented perspective, is less efficient. In higher education, we see more and more governments introducing user charges (through introducing or raising tuition fees), making higher education more exclusive. However, many governments do not stimulate competition between providers or enhance user choice. The supply side is largely protected from market behaviour. The unequal distribution of information is an important source of market failure (see also Dill and Soo in this volume). Because individuals are not fully informed, they will either not engage in transactions or agree on sub-optimal transactions. Recalling Coase (1960), insufficient information is an important source of

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transaction costs which stand in the way of agents engaging in contracts. Even before contracts are agreed upon, a danger of adverse selection (hidden information) exists. Once contracts have been drawn up, the danger of moral hazard (hidden action) exists. Here, we can point to game theory and principal agent theory: information asymmetries stand in the way of an efficient allocation. Information asymmetries between consumers and producers occur in many markets – in particular, in markets where the degree of uncertainty in product or service quality is relatively large. For some goods and services, quality is only revealed after the use of the product. One speaks of ‘experience goods’; there is an ‘ex ante uncertainty’ that causes market failure (see Dill and Soo in this volume). Information problems also show up in the case of goods where even after purchase or consumption the consumer is unaware of the ‘real’ quality of the good. This is a case of ‘ex post uncertainty’. One often speaks of ‘trust goods’ (Kay and Vickers 1988). The consumer only ‘purchases’ goods from providers they can trust, that is, either providers are known to possess the ‘right’ (professional) qualifications or they have no incentive to cheat consumers. If the provider is a non-profit organisation, consumers often will have more trust in the quality of the good. If uncertainties and risks play an important role in the market, corrective action may be called for to prevent providers from taking advantage of consumers or consumers taking advantage of producers. Regulation – by government or the providers themselves – aims to protect consumers and/or providers. This leads to rules on product quality, conditions imposed on providers and the supply of product information. Accreditation, quality assessment, student guides and protection of recognised providers are some of the obvious examples from the higher education field creating barriers to entry and determining public funding for selected providers. Again, it is not necessarily government that is called upon. Monitoring, screening, signalling and selection can also take place through independent quality inspection agencies acting independently of the government or created by the providers themselves. Sometimes information problems are tackled through certificates, standards (e.g. ISO), guarantees, insurance and rules relating to consumer protection. Part of this is the result of government action, part is the result of more bottom-up initiatives. While earlier, in the case of externalities, the problem of finding the ‘right’ balance between social benefits and private benefits was discussed, here the presence of information asymmetries posing a similar problem is considered. On the one hand, the prevention of hidden action and hidden information may call for protectionist measures (aimed at providers and/or consumers). On the other, however, the need for creating a broad range of choices for consumers and a sufficient degree of competition between suppliers calls for restraint in terms of regulatory actions. Again, the question is: Where does government step in and where can it leave corrective measures to the market, or to self-regulation? The trade-off is between the benefits of a reduction of market failures and the institutional or transaction costs that result from policy intervention and the bypassing of markets.

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4. GOVERNMENT REGULATION AND GOVERNMENT FAILURE Regulation may fail because the desired effect is not achieved or the cost (either in an institutional or economic sense) may be much higher than the benefits of regulation. The first is connected to the effectiveness of the policy instruments. The second relates to the cost efficiency of regulation. Different types of regulatory failure will now be considered. The discussion will include legal and institutional costs of regulation as well as the effect of regulation on economic performance. In particular, the negative consequences that regulation may have for competition will be analysed. 4.1. Regulation and Effectiveness There is a large policy analysis literature that addresses the discrepancy between policy goals and the results of applying regulation and other policy instruments. Geelhoed (1983) relates the discrepancy to three main causes. In the first place, not all potential instruments can be used as a regulatory device. For instance, some types of regulation (e.g. discrimination) may be socially unacceptable, while others are only of limited use. For higher education, an example is the introduction of selection and access restrictions in universities. Social pressures may prevent such legislation from being introduced. Secondly, when looking at policy effectiveness and policy or transaction costs, the reactions of the objects of regulation (the organisations, individuals, citizens) are important. The effects of regulation fall into two categories: direct effects and indirect effects. When it comes to the direct effects of regulation, the question is to what extent the actual impact matches the intended outcome of regulation. Do the goals need adjusting, or do the regulatory instruments need adjusting? The indirect effects of regulation include the unexpected and unintended effects, often observed in areas that originally were not the areas that the regulation was addressing and frequently the areas that were neglected at the time the policy was designed. Policy costs are the costs of applying the policy and are a part of the effects of regulation. To begin with, there is the cost of preparing, designing and implementing regulation and decrees issued by the government. Monitoring costs are part of this; these are the costs incurred due to the information asymmetries that exist between principal and agent. Other policy costs are less obvious – they relate to the costs incurred by other agents – outside the government. Regulation may impose a burden on organisations and individuals – it sometimes unintentionally restricts the freedom to manoeuvre and leads to compliance costs. As an example, research assessments in higher education are believed to have high compliance costs. Thirdly, regulation may have all kinds of combined effects. When governments increase regulation, the rules will often have to be more detailed and complicated. Regulation often calls for additional regulation; interest groups will request regulation for their territory if they feel that other areas are protected by regulation. Moreover, due to rapid developments in society and in technology, regulation may turn out to be out-of-date or difficult to adjust, once it is introduced. Regulation in one area also has the potential to interfere with regulation in another. All in all,

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regulation tends to lead to high transaction costs – especially if it is of a traditional ‘command and control’ type that dictates standards and conditions to be met by providers. Breyer (1982) therefore prefers government intervention by means of taxation, charging, tradable rights and the definition of service liability. This is more like steering through incentives instead of steering through decrees. 4.2. Regulation and Efficiency Regulation can have important consequences for the efficiency of the system. Currently, the belief is held that most regulation represents a burden on economic activity and deregulation leads to increased efficiency. The chapter will now look more closely at this relationship, in particular, at the different kinds of efficiency. The supposed increase in economic efficiency due to deregulation can be categorised into three types: 1. 2. 3.

an increase in internal efficiency of organisations (production requires fewer resources); an increase in allocative efficiency (supply is matching/meeting consumer demands more closely); an increase in dynamic efficiency (more incentives for innovation in processes and products).

The first type of efficiency stresses the idea that deregulation and, therefore, more freedom to decide on the choice of activities and resources will encourage providers to search for better ways of providing their services. As a result, the service will be produced against lower costs. In other words, regulation is believed to harm market-oriented behaviour because decentralised coordination by means of price mechanisms is bypassed. The increase in allocative efficiency is caused by the fact that competition either leads to a lower price (making the service more attractive to more consumers) or leads to a product with higher quality. In some cases, competition may lead to higher prices, but even then the price/quality ratio is more favourable for consumers. Dynamic efficiency increases due to the fact that competition encourages providers to look for new products that are differentiated from existing ones (thereby decreasing the intensity of competition). Differentiation can be either horizontal (other products) or vertical (better quality). Connecting our discussion to the ‘economics of regulation’ (Stigler 1971) and the stylised version of the structure-conduct-performance model from the theory of industrial organisations (Scherer and Ross 1990), regulation can be tied to the market structure or the conduct of the market. Structural regulation addresses the issue of who gets access to the market; which providers are allowed to engage in particular activities. The structure of the market is characterised by the number and size distribution of providers and their clients, the degree of physical or subjective differentiation distinguishing competing providers’ services, the presence or absence of barriers to the entry of new providers, the shapes of cost curves, the degree to

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which providers are vertically integrated (e.g. from pre-higher/tertiary education to postgraduate training) and the extent to which individual providers produce a diverse set of services (see Scherer and Ross 1990: 4–5). (The issue of barriers to entry was discussed earlier in the chapter.) When they are powerful enough, providers sometimes lobby for entrance barriers, making it difficult for new, competing providers to enter the market.7 For higher education, the regulation of market structure includes financial and legal requirements (e.g. with respect to the financial health of new entrants), infrastructure requirements (the size, location and condition of buildings, health and safety conditions) and requirements relating to staff (type of training/degrees held by staff) and programmes (accreditation, in particular, the contents, length and structure of degrees). An important piece of regulation for higher education concerns the right to start a new degree programme or a new institution. This issue is perhaps best seen as a process where governments decide: a) what entities to, and not to, recognise as legitimate providers of higher education; b) which of the recognised and nonrecognised providers will receive public funding; and c) how that funding will be distributed within the sector (Jongbloed and Salerno 2002: 22). The decisions on each of these topics affect the structure of the higher education market and the extent to which new, often private, providers can set foot in the market. Figure 2. The structure-conduct-performance model

structure

conduct

Regulation of structure

Regulation of conduct

• regulation of entry/exit • regulation of competition • protection of intellectual property rights • funding and recognition of providers

• • • • •

regulation of price regulation of quantity regulation of capacity regulation of quality regulation of inputs

performance

Administrative regulation • tax/fiscal rules • accountability requirements

Market structure in turn is affected by a variety of basic conditions. One is the general legal framework within which providers operate. Another set of conditions that is more of an institutional nature (see North 1990) consists of the dominant socio-economic values of the community of providers and consumers. For instance,

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does society witness a move to a more individualised society, characterised by more heterogeneity and unpredictability and individuals engaging in increasingly volatile forms of interaction (Jongbloed 2002)? This institutional framework is shaped, to a large extent, by public policies, including the use of regulatory and financing instruments. An example from higher education would be the degree of workforce unionisation: are workers organised in collectives to bargain for salary rises and other employment conditions? And, if so, do employers have to conform to collective agreements on pay rises? The second type of regulation is conduct regulation, where regulation places restrictions on decisions with respect to price (tuition fees) and volume (for instance, the number of publicly funded student places in a university or in the higher education sector as a whole). Conduct also extends to such matters as cooperative arrangements between providers (either overt or tacit; mergers and alliances), investment in facilities (through taking out loans), providers’ behaviour on input markets (recruitment of staff, students, purchasing equipment) and output markets (differentiation and diversification strategies), innovation strategies (research and development), marketing and legal tactics. Conduct regulation affects the market behaviour of providers and the degree to which they can compete. Conduct regulation may also extend to the quality of the services provided, making it difficult to be distinguished from structural regulation. Generally, one might argue that structural regulation affects the incentives of providers to behave in a particular way, while conduct regulation affects organisational behaviour itself. Structural regulation is sometimes argued to be more effective and cost efficient than conduct regulation. The reason is that conduct regulation leads to transaction costs, because the presence of principal-agent problems (information asymmetry) requires the regulator to collect information and monitor performance. In any case, both types of regulation affect the extent of competition in the market. For higher education, the various types of conduct regulation may be categorised into three sub-sets. Following Volkwein (1987), we can distinguish regulation on: x x x

academic matters (i.e. institutional mission, programmes, student selection) personnel and governance matters (i.e. terms of employment, institutional management) financial matters (i.e. budgetary control, audit, access to revenue/capital markets).

The first area of conduct regulation is closely connected to the topic of academic freedom. With governments and other large funders increasingly demanding value for money, the degree of academic autonomy may come under threat, implying that restrictions on the mix and contents of the services offered by higher education institutions limit their ‘opportunity set’, including the possibility for institutions to deny entry to students who apply for a study place at the institution. Accreditation, recognition of degree programmes and quality assessments in teaching and research are examples of regulation (part of it self-regulation, and partly state-imposed) on

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academic matters. Also, in the interest of students, there is some degree of interference in academic matters. ‘Consumer protection’ regulation not only includes checks on the quality of academic programmes and procedures to handle student complaints, but also extends to the publication by providers of information on programme requirements and graduate achievements (see Dill and Soo in this volume; also Cave 1994). Governments may ask institutions to report on the academic achievements of their students in order that students are better informed of the quality of degree programmes. This is a kind of administrative regulation affecting the performance of education providers. Regulation of the academic services provided also includes controls over what services are provided to whom, and where the emphasis of the institution’s teaching and research activities lies. Regulatory authorities may also require institutions (public as well as private) to seek approval for new programme proposals before they qualify for public funding or before enrolled students qualify for student support. While quality control is one concern, another is the regional distribution of programmes across the country. Regulatory authorities sometimes are sceptical about new programmes that might compete with (i.e. ‘duplicate’) existing programmes at other public or private institutions (Thompson and Zumeta 1981). Regulation of personnel matters includes restrictions on the number of academic and non-academic positions, the approval of appointments, staff classification systems and salaries. As concerns the latter, the so-called collective agreements on salaries are an important element of conduct regulation in the area of personnel matters. It is a fact that employees of the public higher education institutions are often considered civil servants. Salary policies affecting civil servants in other parts of the public sector therefore will often affect the higher education sector as well. The civil service status implies that merit pay will normally be absent in public institutions. This makes it difficult for public higher education institutions to compete with the private sector in attracting and retaining the most talented individuals. This is particularly true in fields with severe shortages, for example, natural sciences, computer sciences, etc. (Ferris 1991: 105). ‘Appointive autonomy’ also includes tenure issues, appraisal systems, working hours and other workplace regulations. Some of these issues will be determined by national regulation (e.g. in collective agreements), others by self-regulation or even on an institution by institution basis. National laws and regulations also affect the higher education institutions’ mechanisms for governance and management. For institutions’ stakeholders to have a say in some of the key decisions, specific bodies and committees will have to be in place. Examples are academic boards and programme committees. Governance and management regulations also define the roles and responsibilities of the heads of institutions and the roles of their senior managers. The third area of conduct regulation relates to financial autonomy. This stretches into areas such as budgetary controls, restrictions on charging tuition fees, control over how financial resources are used and generated, and the way institutions have to meet accountability requirements.8 Financial autonomy is often connected to the issue of whether the higher education institution receives a lump sum budget from the public funding authorities or an itemised budget. In the first case, the institution

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is free to spend its revenues in the way it considers most appropriate to achieve its objectives. In the second, spending is prescribed and the public budget is only to be used for particular items (equipment, salaries) or functions (teaching, research). In most countries, the public core funding for higher education institutions is currently primarily provided as a lump sum (Kaiser, Vossensteyn and Koelman 2001). Itemised (or earmarked) budgets are used for the development and implementation of specific innovations, and usually a small part of the teaching budget is reserved for this. State regulation over financial matters also includes the control over non-state (non-public) revenues, that is, tuition revenues and revenues from sponsored research and auxiliary activities (such as net income from bookstores, room rent, etc.). As far as control over prices charged to consumers (i.e. students, contract partners) is concerned, one can observe regulatory agencies (ministries, executive budget agencies, legislators) exercising control over tuition fees and crosssubsidisation patterns. In most countries around the world, state authorities set the fees (Jongbloed in press) in order to control the price of admission and to make higher education affordable for all qualified students, irrespective of means.9 We take the opportunity here to discuss more extensively the problems associated with the regulation of institutions that are increasingly active in managing a diverse portfolio of, on the one hand, traditional tasks, such as teaching and research, and, on the other, entrepreneurial (income-generating) activities. According to many observers and researchers (e.g. Koelman and De Vries 1999; In ‘t Veld 1995), marketisation in higher education results in higher education institutions becoming hybrid organisations, that is, “bodies which operate in both the public and the private domains, fulfilling public duties as well as developing commercial market activities” (Van Twist and In ‘t Veld 1999: 3). They are increasingly becoming a mixture of a governmental institution and a commercial enterprise. This trend is believed to lead to a more customer-oriented, efficient and innovative higher education system (see e.g. In ‘t Veld 1995) with providers being encouraged to perform better because they have to compete with others. Hybrid organisations are believed to be more interested in new developments and innovations because of their need to distinguish themselves from competitors. This makes them adopt a more enterprising attitude, searching for ways to improve efficiency, to innovate their products and to increase product quality. While one of the advantages of hybrids is that they can generate revenues through their commercial activities, this is also regarded as one of their potential disadvantages. Hybrid organisations are sometimes accused of unfair competition, in particular if they use their public revenues to subsidise commercial activities. Crosssubsidisation of commercial activities enables them to charge prices that are lower than those of private competitors. This sometimes makes politicians argue for a splitting up of hybrids into a public part and a private part. This would also take away the danger of academics jeopardising the core mission – the public duties of their institution. Market activities may bring in large benefits for staff who are directly involved, leading them to disregard their public duties. Conflicts of interest also manifest themselves in research publication practices. Autonomy and

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professional integrity may also be harmed when academic staff offer themselves as consultants to the highest bidder. The practical issue for the government is how to deal with the challenges and risks of hybrid higher education institutions. Realising that the option to simply prohibit the existence of hybrid organisations is out of the question, the only option available for the government seems to be to find ways of regulating hybrid organisations. The regulation then would have to foster the strong elements of hybrids while bringing the risks arising from hybrids under control. Van Twist and In ‘t Veld (1999: 15–16) argue: It is necessary to come to acceptable details of composite forms that are oriented on government as well as on market. Acceptable are those composite forms that can reduce the contradictions in the impulses connected to hybridity to allowable proportions. Thereto specific arrangements have to be designed.

The regulatory arrangements suggested by Van Twist and In ‘t Veld (1999) include conditions that relate to the public tasks of higher education institutions as well as conditions arising from their activities in the private domain. With regard to the first, the regulations would have to ensure that the public duty (teaching and research) of the higher education institution may not be endangered and students should not become victims of entrepreneurial activities. The goal of the hybrid is to strive for some interconnection between commercial activities and the core business of the institution. The conditions with respect to the private (for-profit and not-for-profit) activities would have to ensure that there is no unfair competition between higher education institutions and private enterprises. This means that there should be distinct agreements on the nature and proportion of the commercial activities. The responsible leaders of the higher education institutions (deans, directors, presidents and other managers) would need to monitor and guard these issues, perhaps with some overseeing/supervisory body (e.g. Board of Trustees). Clearly, accountability is the central issue. Higher education institutions will need to be accountable for their public duties as well as their commercial activities. Transparency, monitoring and reporting will become crucial issues – in particular, with respect to institution and department costs and revenues from commercial activities. Explicit rules and standards will need to be agreed upon and need to be codified in higher education institutions’ internal policy documents. To a large extent, this regulatory framework may be constructed through initiatives of the higher education institutions themselves. Codes of conduct, pricing strategies, reporting and accounting practices may be formulated through self-regulation initiatives or covenants. With universities and colleges increasingly becoming hybrid organisations, they should be accountable regarding their public tasks (through monitoring) as well as their commercial activities (through warranty of quality). Marketisation, therefore, will go hand in hand with internal as well as external regulatory arrangements.

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5. VOUCHERS: A WAY OF INCREASING COMPETITION? The developments towards mass-individualisation, the knowledge society and lifelong learning place new demands on higher education – on the organisation of the sector as a whole as well as on individual higher education institutions (Jongbloed 2002). This will have consequences for the way in which the sector is managed, funded and regulated by public authorities. However, due to the heterogeneity and unpredictability in markets, public authorities cannot centrally plan and manage the higher education sector. As argued in section 2, self-regulation by students and higher education institutions themselves may have to be the leading principle. This implies that choices made by students and other demands placed upon higher education institutions are driving the system. For the funding of the higher education sector this would imply a large degree of demand-side financing. In the research literature (e.g. Levin 1983) vouchers are often propagated as a powerful means of introducing demand-side financing. Students (or prospective students) would receive a bundle of vouchers (or entitlements) to buy educational services from higher education institutions. The voucher represents a certain amount of money (an ‘entitlement’) to be spent on approved higher education programmes (Blaug 1967). A voucher scheme represents a specific way of funding (higher) education. Instead of the government allocating subsidies directly to the providers of education, the government is channelling the subsidies through students (i.e. the consumers). To secure their funding, higher education institutions therefore will have to compete for students and consequently are believed to shift their focus from satisfying government bureaucrats towards the needs of their customers. Thus, a voucher scheme contains incentives to strengthen student choice and competition. In a voucher scheme, the providers of higher education are forced to be responsive to the needs and preferences of their customers (i.e. students, business). Providers are forced to compete and students are encouraged to seek the provider that best satisfies their demands. In doing so they can choose from a range of providers. Vouchers, therefore, constitute a marketoriented type of funding of higher education. An essential element of a voucher scheme is that individual students are receiving government subsidies – either in terms of real money, or in terms of entitlements to a given amount of education – to be spent at the educational institution of their choice. Vouchers thus are a form of demand-side funding. Student choice drives the funding. This is in contrast to a system of supply-side funding where educational institutions are funded directly on the basis of the number of students they enrol or the number of diplomas they confer. The crucial aspect of the voucher idea is freedom to choose and this, according to Barr (1998), would require that education is not only provided by public institutions but also – or at least in part – by private institutions. So, students would be allowed to cash their vouchers also at accredited private institutions that – just like the public ones – comply with specific quality standards. The voucher scheme can also be extended to include on-the-job training programmes. Most of the voucher schemes proposed in the academic literature address compulsory education. Regarding higher education and other forms of post-

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compulsory education, voucher schemes are rare (Jongbloed and Koelman 2000) and hardly ever leave the drawing board stage (e.g. the voucher model proposed in Levin 1983). However, there is an often-overlooked example to be found in the US, namely the Pell grant. The Pell grant has characteristics of a voucher model. The US federal government, in 1972, in confronting a major decision point in how it should come to the assistance of institutions of higher education, both public and private, came to a very clear rejection of federal block grants, and an equally clear embrace of vouchers (then referred to as basic grants, now Pell grants), albeit need-based, and never a true entitlement (i.e. always depending on the adequacy of a particular year’s appropriation). The Pell grant is quite clearly a voucher in that it is given directly to students without regard to academic merit (or even ‘academic promise’), programme of study, or institution at which the voucher may be used (including both private not-for-profit and private for-profit institutions). However, the Pell grant is not very generous and is never the single source from which institutions derive their public funding for education. According to Barr (1998), two questions are central for a discussion about vouchers in higher education. The first question is: Are students capable of making informed choices? Barr comes to the conclusion that in higher education consumer tastes are diverse, degrees are becoming more diverse, and change is increasingly rapid. The most important reason for these developments is the increasing complexity of our post-industrial society. In Barr’s opinion, students are more capable than central planners of making choices on what they want to study and where they want to study. In his view, the goal of consumer sovereignty can be regarded as more relevant for higher education than for compulsory education. The second question is: How useful is competition? Barr concludes that it is a huge mistake to think that a simple-minded voucher model (higher education institutions competing for students; the ones attracting large numbers flourish, others keep on struggling) is the only approach to competition. He argues that “vouchers should be thought of as a continuum, from zero per cent constrained (‘law of the jungle’) to 100 per cent constrained (‘pure central planning’) or anywhere in between” (Barr 1998: 352). Policy makers should consider a variety of constraints in choosing their position on this continuum: 1. Protecting subjects. Some courses (e.g. classics) need special protection, others need less protection. This can be arranged by tying some vouchers to specific subjects. 2. Protecting institutions. For reasons of regional balance it could be necessary to tie vouchers to universities in particular parts of the country. 3. Protecting individuals. There are good reasons to offer larger vouchers to students from low income families. 4. Protecting quality. One of the bests arguments in favour of competition is that competition creates a strong incentive for higher education institutions to offer quality to their students. Nevertheless, at the same time it is important to protect standards, for example, by monitoring quality and publishing the results.

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All in all, Barr (1998) concludes that vouchers call for a regulatory role for the government in order to foster both educational and distributional objectives. The degree of competition is a political matter with different possible policy answers. We would like to add to Barr’s conclusion that vouchers are not the only approach to competition. While vouchers are theoretically attractive and often suggested as a useful funding mechanism in today’s lifelong learning context that stresses flexible learning routes and custom-built curricula, the goals to be achieved most not be lost sight of. If the aim is to have institutions compete for students, one has to bear in mind that vouchers are not the only approach to competition and – because different voucher models exist – would also go hand in hand with some degree of government regulation. If policy makers feel that a more market-oriented education system should emerge, with competition between providers and student choice driving the system, they may also want to consider some alternatives to vouchers. There is in fact very little fundamental difference between a voucher system and a system in which the government allocates a formula-based grant on the basis of the institution’s enrolment – even in the case of students studying during irregular periods during their lifetime. So, why introduce vouchers? There can only be one argument: to make students realise that the choices they make imply that the government is investing on behalf of them and – in return for that – the educational institution is supposed to deliver a service. However, making students realise this by giving them a voucher is somewhat artificial, since the voucher does not represent ‘real money’ in the sense of being part of the student’s free disposable income. Therefore, well-informed student behaviour may be more effectively enhanced if they make a contribution to the cost of their education themselves.10 Since the benefits of higher education and other forms of postsecondary education to a large extent will accrue to the individual who receives the education, there is a strong case for charging a fee to the student. However, in order to have tuition fees play a role in informing students about the range of choices they can make in postsecondary education, the fees will have to have some relation to the quality – and therefore the costs – of the services delivered to the student. This implies that a market-oriented way of funding postsecondary education requires a deregulation of tuition fees (Jongbloed 2003b). The providers of education and training would have to be free to set the level of the fees they charge to their students. Fees would not have to cover the full cost but should be higher for more expensive programmes. Institutions then would charge differential prices to reflect their differential costs.11 The only exception to this general rule would be that programmes that produce relatively large external effects would receive a larger government subsidy, thus enabling a smaller fee to be charged. Such a deregulation of fees could easily take place without an introduction of vouchers. Public funds still could be allocated to the providers of education on the basis of the number of students enrolled and the programmes they take. Funds, then, follow the student in two ways: through market-driven fees as well as through enrolment-based grants.12 Both of these mechanisms imply a substantial degree of competition in the higher education sector.

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6. CONCLUSIONS In this chapter, it has been argued that there are many reasons why governments intervene in the higher education market through regulation and other instruments of intervention. Governments will try to ensure that society’s demands are satisfied at minimum cost, that higher education providers deliver high quality services and that the higher education system is accessible to all talented individuals. However, with growing levels of fiscal stress, many governments are introducing market forces into the highly regulated higher education systems in order to make providers of higher education and research more responsive to the demands of society and raise the levels of efficiency in the system. The introduction of market forces takes place through deregulation and policies aimed at increasing competition between providers – either within the set of often heavily subsidised and monopolistic public providers or between public providers and private providers with the latter allowed entry into the higher education market. Deregulation is not a goal in itself; it is intended to give more room to the market, that is, to decentralised decision making by students and providers of higher education. It would be a misconception to equate deregulation with marketisation. On the contrary, to let the market function properly a powerful system of rules is necessary. In the first place, there is a need to create an institutional framework that builds trust among the agents in the market, assuring them that contracts are fulfilled, that service quality is acceptable and that the market is transparent. Secondly, a set of rules and regulations will be needed to oversee market entry and exit – preventing providers abusing their market power. However, reasons to limit competition will always be brought forward – in particular, if next to efficiency, equity considerations are considered. Regulation of market structure and conduct of providers (and their clients), though, is always an imperfect substitute for competition due to transaction costs and other economic costs of non-market (government) failure. Apart from regulating the degree of competition among public and private higher education institutions, there remain other important roles for government to play. Government retains a major influence and exerts substantial power over the working of the higher education system. While it is no longer controlling the system as a central planner, it does have several roles to play. The first role for government lies in financing, thus promoting the external effects of investment in higher education. Furthermore, government will have to act as a facilitator in allowing higher education institutions to attract private funds (e.g. through tuition fees and entrepreneurial activities). A second role lies in the provision of student support and ensuring students have access to loans (private, public) and, where necessary, grants. This task is aimed at promoting access and equity. This goal cannot only be accomplished by using incentives and financial instruments. Non-financial instruments, regulation and supplying information are also called for. The third role of government lies in quality assurance. Again, this is not a financial instrument, although the outcome of quality assurance exercises may have consequences for the financial resources that flow from the public purse to institutions and students. Regulation needs to be in place to ensure that higher

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education institutions deliver education and degrees that meet national and international quality standards. Governments may require higher education institutions to publish timely and accurate performance information in their yearly reports, or facilitate agencies that inform students, their parents, employers and the general public about the performance, costs and quality of the teaching and research that take place in universities and colleges. We have argued that marketisation policies will lead to a system where individual demands and decisions drive the system and we have used the ‘roundabout’ metaphor to illustrate this. Market-type mechanisms seek to strengthen the link between private – that is, individual – preferences and private contributions and create incentives to improve efficiency. Government regulation and funding then will have to emphasise demand instead of supply. A system of demand-side funding through vouchers was discussed, but it was argued that some of the intended goals of voucher systems might also be realised by means of pricing policies and quantity regulation (or rather the absence of quantity regulation). Differential tuition fees by field or institutional type would affect the composition of higher education demand, act as price signals and raise additional revenues for the sector. Another example of more market-oriented policies is the introduction of competitive funding for research – competition, not only for public funding, but also for private research contracts. Institutions, thus, respond to various markets and generate revenues from many sources. The dilemma that immediately arises, in particular, in systems where higher education is primarily a public affair, is whether entrepreneurialism negatively affects the public tasks of the institution: Does it endanger the teaching function? Is fundamental research neglected in favour of applied (and more immediately profitable) research? Are research results kept secret or even compromised by industry demands? All of this illustrates that regulatory frameworks and self-regulatory initiatives will be needed. It also shows that the answers to market failures and non-market failures are to a large extent dependent on the society’s view of higher education, on traditions, cultures and ideologies. This chapter has shown that regulation affects the static as well as the dynamic efficiency of the system and that the particular type of government regulation will depend on the particular market failure to be addressed. The issue whether regulation produces better results than more market-oriented (say competitive or pricing) approaches, however, remains problematic. The country case studies contained in this volume will hopefully shed some light on this. NOTES 1

2 3

The non-exclusiveness and non-rivalness of the services (education, research) produced by higher education imply that innovators are unable to appropriate all the benefits from their efforts and therefore may be inclined to under-invest in education or research. This may call for protection of property rights (e.g. patent systems). Efficiency under the respective guises of: productive efficiency (least cost provision), allocative efficiency (in the Pareto sense) and dynamic efficiency (making best use of resources over time). See also Massy in this volume. This term derives from Bruce Johnstone.

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4

Positive economies of scale are present when an increase in inputs with a given factor leads to a more than proportional increase in output. 5 For instance, ‘predatory pricing’, where cartel members engage in aggressive price setting strategies (prices set below marginal costs) to deter new providers from entering the market. One can point to prestigious private universities in the US that use their immense endowments to offer large scholarships to bright students, thereby luring them away from competing (public or private) universities. See Breyer (1982). 6 Sunk costs are costs that have already been incurred, and which cannot be recovered to any significant degree. 7 Quoting Stigler (1971: 6): “The butter producers wish to suppress margarine and to encourage the production of bread”. Strong regulation of competing sectors (providers) is profitable, and so is the deregulation of a sector that provides a complementary service. 8 Although the latter may also be included under the heading of administrative regulation (see figure 2). 9 It is not just the regulation of tuition fees that affects the price of admission – student support (grants, loans, scholarships), selection mechanisms and capacity limits (i.e. restrictions on available, publicly funded, student places) all have an effect on the student enrolment decision. 10 Another way of strengthening well-informed behaviour is to monitor quality and publish the results. Monitoring can be done by inspectorates, accreditation bodies, newspapers, etc. 11 A model like this is currently in use in New Zealand. 12 Instead of basing grants on enrolments alone, they may be based on a combination of enrolments and student performance (e.g. the number of credits accumulated by students), or student performance alone (see, e.g., the Danish model of funding higher education).

REFERENCES Barr, N. The Economics of the Welfare State. 3rd edn. Oxford: Oxford University Press, 1998. Baumol, W.J., J. Panzar and R.D. Willig. Contestable Markets and the Theory of Industry Structure. New York: Harcourt, 1982. Blaug, M. “Economic Aspects of Vouchers for Education.” In Beales, A., M. Blaug, E. West and D. Veale (eds). Education: A Framework for Choice. 2nd edn. London: Institute of Economic Affairs (IEA), 1970, 23–47. Breyer, S. Regulation and its Reform. Cambridge: Harvard University Press, 1982. Cave, M. “Why Students Need (Consumer) Protection.” Royal Economic Society Newsletter 87 October (1994): 18–20. Coase, R. “The Problem of Social Cost.” Journal of Law and Economics 3.1 (1960): 1–44. Dunning, J.H. “Technology and the Changing Boundaries of Firms and Governments.” In OECD. Industrial Competitiveness in the Knowledge-based Economy. The New Role of Governments. Paris: OECD, 1997, 53–67. Ferris, J.M. “Competition and Regulation in Higher Education: A Comparison of the Netherlands and the United States.” Higher Education 22 (1991): 93–108. Geelhoed, A. De interveniërende staat, aanzet tot een instrumentenleer. The Hague: SDU/Ministerie van Binnenlandse Zaken, 1983. In ‘t Veld, R.J. Spelen met vuur. Over hybride organisaties. Den Haag: Vuga, 1995. Jongbloed, B. “Lifelong Learning: Implications for Institutions.” Higher Education 44.3/4 (2002): 413– 431. Jongbloed, B. “Flexible Fees: Great Expectations and Critical Conditions.” Paper presented at the 16th CHER Annual Conference, Porto, Portugal, September, 2003a. Jongbloed, B. “Marketisation in Higher Education, Clark’s Triangle and the Essential Ingredients of Markets.” Higher Education Quarterly 57.2 (2003b): 110–135. Jongbloed, B. “Tuition Fees in Europe and Australasia: Theory, Trends and Policies.” In Smart, J.C. (ed.). Higher Education: Handbook of Theory and Research, vol. XIX. Dordrecht: Kluwer, in press. Jongbloed, B. and J. Koelman. Vouchers for Higher Education? A Survey of the Literature. Enschede: CHEPS, 2000. Jongbloed, B. and C. Salerno. Funding and Recognition: A Comparative Study of Funded Versus Nonfunded Higher Education in Eight Countries. Vol. 92 in series ‘Beleidsgerichte Studies Hoger

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Onderwijs en Wetenschappelijk Onderzoek’. The Hague: Ministry of Education, Culture and Science/SDU, 2002. Kaiser, F., H. Vossensteyn and J. Koelman. Public Funding of Higher Education. A Comparative Study of Funding Mechanisms in Ten Countries. Vol. 84 in series ‘Beleidsgerichte Studies Hoger Onderwijs en Wetenschappelijk Onderzoek’. The Hague: Ministry of Education, Culture and Science/SDU, 2001. Kay, J. and J. Vickers. “Regulatory Reform in Britain.” Economic Policy 9 (1988): 285–351. Koelman, J. and P. de Vries. “Marketisation, Hybrid Organisations and Accounting in Higher Education.” In Jongbloed, B., P. Maassen and G. Neave (eds). From the Eye of the Storm. Higher Education’s Changing Institution. Dordrecht: Kluwer Academic Publishers, 1999, 165–187. Laffont, J.J. and J. Tirole. A Theory of Incentives in Procurement and Regulation. Cambridge, MA: MIT Press, 1993. Leibenstein, H. “Allocative Efficiency Versus X-efficiency.” American Economic Review 56 (1966): 392–415. Levin, H.M. “Individual Entitlements.” In Levin, H.M. and H.G. Schütze (eds). Financing Recurrent Education. Sage: Beverly Hills, 1983, 39–66. North, D.C. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press, 1990. Scherer, F.M. and D. Ross. Industrial Market Structure and Economic Performance. 3rd edn. Boston: Houghton Miffin Company, 1990. Stigler, G.J. “The Theory of Economic Regulation.” Bell Journal of Economics and Managerial Science 2.1 (1971): 3–21. Thompson, F. and W. Zumeta. “A Regulatory Model of Governmental Coordinating Activities in the Higher Education Sector.” Economics of Education Review 1.1 (1981): 27–52. Van Asseldonk, A.G.M., L.J.W. Berger and E. den Hartigh. Naar een economie van heterogeniteit en onvoorspelbaarheid: kennisvragen voor de Nederlandse managementwetenschappen. Den Haag: Adviesraad voor het Wetenschaps- en Technologiebeleid, 1999. Van Asseldonk, T. Massa-individualisering: Geld verdienen aan de grillige consument. Alphen aan den Rijn: Samsom, 2000. Van Twist, M.J.W. and R.J. In ‘t Veld. “Public Organisations in the Market Place. Risks, Profit Opportunities and Conditions for Existence.” NIG Working Papers, no. 99–95, 1999, Enschede. Van Vught, F.A. Governmental Strategies and Innovation in Higher Education. London: Jessica Kingsley, 1989. Volkwein, J.F. “State Regulation and Campus Autonomy.” In Smart, J.C. (ed.). Higher Education: Handbook of Theory and Research, vol. III. New York: Agathon Press, 1987, 120–154. Williamson, O.E. “Transaction Cost Economics.” In Schmalensee, R. and R.D. Willig (eds). Handbook of Industrial Organization I. New York: North Holland, 1989, 135–182.

GERAINT JOHNES

THE EVALUATION OF WELFARE UNDER ALTERNATIVE MODELS OF HIGHER EDUCATION FINANCE

1. INTRODUCTION There are three reasons why government should fund expenditures on services. Firstly, market failure might occur; hence public goods are often paid for through the tax system, and government is also active in areas where externalities are to the fore. Secondly, the provision of services might provide an effective means of redistribution. Thirdly, services may be provided through the government if they are regarded as a merit good. At a basic level, education qualifies under all three criteria. Improvement in the general level of literacy, numeracy and other basic skills helps those who become more literate or numerate, to be sure, but it also helps others to communicate with them – and so education confers externalities. At primary and lower secondary levels, where education is universal (or near universal), resources are diverted from wealthy taxpayers towards poorer households. Equally, education is regarded by many as a ‘good thing’, and some people might under-invest in it if left to their own devices.1 It is not at all clear, however, whether any of these three arguments should apply to higher education. The main beneficiaries of higher education, it is agreed, are the students themselves. Whatever contribution education makes to their productivity is reflected (in a free labour market) in their subsequent remuneration. The beneficiary pays principle thus suggests that the burden of paying for education should be borne by the student – though, depending on the nature of capital markets, this might require special arrangements to be made to ensure both the availability of loans and a suitable repayment mechanism. Yet, in almost all countries, governments make very substantial subsidies to education at this level. In this chapter, two approaches will be used to investigate the nature of the balance between public and private provision in higher education. The first is to develop a simple model which shows how the externality argument may reasonably be used to qualify the beneficiary pays principle. The second is to examine how the higher education system has responded to structural change in a number of European countries over the last 15 years; differences in the experiences of different countries will allow conclusions to be drawn about the conditions under which private higher education is likely to flourish. Throughout, the focus of interest is on the funding of higher education, not the ownership of higher education institutions. 113 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 113–125 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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The chapter proceeds as follows. In the next section, a simple theoretical model is developed which allows back-of-the-envelope calculations to be made to evaluate the degree of public intervention that optimises social welfare. In the third section, the recent history of higher education in some European countries is discussed; these histories are then interpreted in the context of the theoretical model presented earlier. Finally, conclusions are drawn. 2. A SIMPLE MODEL There has been a considerable amount of recent literature on the appropriate means for funding higher education. Recent examples include the Greenaway and Haynes (2003) report, Chapman (1997) and Barr and Crawford (1998). These have generally been supportive of reforms that shift the burden of paying for higher education away from the general taxpayer towards the student. The argument is, essentially, that the main beneficiary should bear the main burden of the cost of tuition. This follows from the user pays principle and – to mainstream economists, at least – has not been regarded as particularly contentious. Consequently, economists have not hitherto challenged themselves with the question of how to come up with estimates of the benefits of the user pays principle in this context. This section represents a first attempt to tackle this question.2 In order to do so, I shall develop a model which is quite general, and which is capable of accommodating conditions under which private funding of higher education is more efficient, equally efficient, or less efficient than the publicly funded alternative. The model will allow us to appreciate why the funding of higher education has become a politically contentious issue in many countries, in spite of the near consensus amongst economists in favour of the user pays principle.3 It is important to note two things about economic models of the kind developed here. Firstly, the model attempts to provide a distillation of factors that are deemed to be the most important in analysing education finance; the aim is to provide a representation that captures the main issues yet (and this is the important point) is simple enough to facilitate understanding why governments may or may not be involved in funding higher education. The model is not supposed to be real; it is supposed to be a distillation of reality. Secondly, decision makers in the model are assumed to act rationally; this assumption is necessitated by the difficulty involved in modelling irrational behaviour. The model is formalised as follows. Individual i receives disposable income of Yi where Yi = (Y0 + siTi)(1-W)

(1)

where Y0 is a constant, si is a binary variable4 that indicates whether or not i has attended tertiary schooling, W is the (proportional) rate of income tax, and Ti is a stochastic variable which is assumed to follow a uniform distribution and which varies between some strictly negative number and some strictly positive number.

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This last variable is intended to measure the innate ability to benefit from schooling. Tax in this model is paid solely for the purposes of financing education. It would be possible for the tax rate to equal zero if all education were paid for privately. Alternatively, if the tax rate exceeds zero there is some element of subsidy for education. We shall suppose that there is a single period, and that incomes and expenditures are incurred at the end of this period. Note that, for simplicity, we suppose that future income gains represent the only gain to education. Education is assumed to take place instantaneously. This means that educated and uneducated individuals alike have the opportunity to earn an income.5 Direct costs of education are covered by the cost term, c0. This cost may be paid entirely by individuals, for example, by securing a loan – in which case the tax rate is zero and the loan must be repaid at the end of the period. Or the cost may be borne entirely through the tax system. In this case the government pays for each educated worker’s education, and the rate of proportional tax is set so as to offset this cost exactly. For each worker, i, net income is defined as Yi-ci where ci is the private cost of education to i in the tth period. Where education is paid for privately, this will either be c0, if the individual is educated, or zero, if not. In this case W=0. Where education is paid for entirely through the tax system, however, ci will equal zero for all individuals – but in this case W>0. Suppose individual i undertakes schooling iff (Y0 + siTi)(1-W) - ci t Y0(1-W)

(2)

that is, iff the discounted value of post-schooling income (net of costs) is at least as great as the discounted value of income if no schooling is undertaken. In solving the central problem of this chapter, it will be necessary to work from a definition of social welfare. To provide a general definition, let social welfare, W, be defined as a weighted sum of the net incomes of all workers. Unit weight is attached to the incomes of uneducated workers, while a weight of V is attached to the incomes of educated workers. This specification of the welfare function is quite general: setting V=1 implies a utilitarian welfare function, while setting lower values of V implies the attachment of a higher weight to the net income of the less welleducated workers. As we shall see later, the most interesting values of V lie in the range 0
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income which is distributed between Y0+c0 and Y0+Tmax. Hence total social welfare is given by W = n{Y0 (c0-Tmin) + V[Y0+(Tmax+c0)/2 -c0](Tmax-c0)}/(Tmax-Tmin)

(3)

Turn now to consider the case in which all education is funded through the tax system. This is a little more complicated, because it entails solving the model for the optimal rate of taxation. Suppose, as before, that those undertaking education are at the top end of the T distribution, and suppose also that the proportion who undertake education is given by O. Total tax revenue is given by Wn{Y0 + O[Tmax - O(Tmax-Tmin)/2]}

(4)

since the term in curly brackets is the pre-tax income of the typical individual. The total cost of education is c0On. Setting tax revenue equal to government expenditure allows us to solve for O, which must of course lie within the unit interval. Hence O = {WTmax-c0 r —[(WTmax-c0)2 + 2W2Y0(Tmax-Tmin)]}/W(Tmax-Tmin)

(5)

Social welfare is given by the weighted sum of all disposable incomes, and hence W = n(1-W){(1-O)Y0 + VO Y0 + VO[Tmax-O(Tmax-Tmin)/2]}

(6)

Substituting O out of this expression, we can investigate the effect that varying W would have on welfare. Substituting the welfare maximising value of W back into the social welfare function then allows the calculation of social welfare. Some interesting observations are worth making at this stage. First, under a utilitarian regime (where V=1), the choice of funding system has no impact on welfare. Since social welfare is an unweighted sum of net incomes, it does not matter who pays for the education – so long as the socially optimal number of workers get educated (and here that is assured by choice of the tax rate), the level of economic welfare will be the same regardless of funding mechanism. Who pays differs according to regime, but who pays is not interesting given the nature of the social welfare function. This means that, if we adopt a utilitarian social welfare function, the question of whether education is paid for through the tax system or privately is a red herring.7 Interestingly, a Rawlsian social welfare function8 also has the property that it does not matter whether education is publicly or privately financed. If it is privately financed, those who can benefit from it will invest in it, leaving the net income of the remainder unaffected. Meanwhile, if it were publicly financed, those who do not undertake education would be made worse off by tax payments; so, in the Rawlsian

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model with public finance, nobody would receive education, and the utility of the poorest member of society would be the same as under private funding of education.9 The same is not true, however, for more general cases in which V is less than one. This is most easily appreciated by the consideration of some empirical examples, and these form the basis of the remainder of this section. Consider the following values for the key parameters of the model. Let Tmax=200000, Tmin=-700000, Y0=300000, c0=25000 and n=30 million. The value of Y0 may be interpreted as the discounted value of lifetime earnings for the group of uneducated workers. If money values are measured in pounds, then the figures here may be thought of as a rough approximation to the United Kingdom context. Other assumed values of these parameters could clearly be used in order to reflect the position in other countries. If V=1 (the utilitarian case), W=9.5104x1012 in both the public finance and private finance scenarios. When financed through taxes, the optimal value of W in this case is 0.015, yielding O=0.19. Consider now some cases in which V<1. To begin, consider what would happen if V=0.975. Under private finance, W=9.4539x1012, while under public finance, W=9.4518x1012 with W=0.014 and O=0.1800. Clearly in this case private finance offers a higher level of welfare than does public finance. Notice that, under public finance, the level of education has fallen below the level that obtains under private finance. Now consider the case where V=0.75. This yields a value for W of 8.9453x1012 in the private finance scenario, but a value of 9.0571x1012 under public finance. The optimal value of W under public finance is 0.006, giving a value of O of 0.0750. The level of education under public finance has fallen further. So while public finance offers greater welfare in this example than does private finance, it also provides a solution that yields a lower average level of education in the workforce and lower average earnings. Why does this reversal take place from a situation where private finance is best for welfare to one in which public finance is better? Under private finance, those who can benefit from education do so. Under public finance, education is offered only to the extent that it raises social welfare. If the weight attached by society to the welfare of the richer (more highly educated) group is sufficiently low, then so will be society’s investment in education. More people will then belong to the less highly educated group, and the greater weight that these extra people have in the social welfare function more than offsets the loss of income to the highly educated group. A further case is worthy of examination, namely that of V>1. This is interesting because it allows us to identify what might happen when the educated form a group that has a particularly powerful voice in the political process.10 In order to provide a concrete example, suppose that V=1.5. Under private finance, this yields welfare of 1.064x1013. Under public finance, however, welfare is maximised when W=0.02, yielding welfare of 1.091x1013, and O=0.26. Hence welfare is enhanced by public

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finance of higher education not only for V (well) below unity but also for V (well) above unity. The reason for this is straightforward: with V sufficiently in excess of one, the tax costs borne by those who do not receive education receive relatively little weight. To clarify further the above discussion, consider the impact on social welfare of public and private finance respectively, where education levels are kept constant across the two funding regimes. This means that O is constrained to be 0.19 and W is constrained to be 0.015 under public finance. In this case, with V=0.975, welfare under public finance is 9.4515x1012. This compares with the 9.4539x1012 reported earlier for the private finance case. Likewise, where V=0.75, welfare under public finance is now 8.9211x1012, compared with 8.9453x1012 under private finance. These figures make it clear that, given society’s investment in education, private finance is more efficient than public finance. Public finance becomes more efficient at lower levels of V only because it allows a welfare enhancing (albeit not libertarian) cap to be put on the extent of educational investment. Where prospective students are able to migrate to buy education privately in other countries, the imposition of such a cap may not in any event be feasible. Using the figures provided for the example above, and once more allowing tax to settle to its welfare maximising level, it is possible to establish the critical value of V at which welfare is the same under both public and private finance. This value is 0.94. From the above discussion, it is clearly important to have some idea of the true value of V. Fortunately, we have recently been given a clue. Work by Alesina et al. (2001) involves the construction of an empirical happiness function in which macroeconomic variables play a part. In particular, these authors study the impact of the mean income level and the distribution of income upon happiness. Using their results as a guide (see appendix) we shall assume in the sequel a value of V=0.3114. It is worth noting in passing that this low value is in accord with other work conducted using happiness measures by Easterlin (1995). The evidence provided by numerous studies is that the time trend of happiness has not mirrored the upward trend in incomes. This is not to say that income does not matter – at any one point in time, higher income individuals tend to be happier than lower income individuals. But in the aggregate, the level of income does not seem to be a particularly strong determinant of happiness, though the distribution of income is. Since 0.3114 is below the critical value (of V=0.94), the above results can be interpreted as a case (in welfare terms, not in terms of income maximisation) for public funding of higher education in the United Kingdom. If, however, O and W are chosen by government to replicate the free market levels of education, rather than to maximise social welfare, public finance entails a welfare loss. With V=0.3114, welfare would then be 7.9538x1012 under private finance and 7.8872x1012 under public finance. The welfare loss would therefore amount to a little under one per cent.11 A peculiarity of the model as it stands is that it can be used only to analyse extreme funding methodologies – funding must either be wholly from private or

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wholly from public sources. This rather unappealing feature of the model can be relaxed quite simply by introducing information asymmetries. To be more specific, we could define several groups of potential students which have different perceptions of the earnings premium that is attached to education. To adopt an extreme assumption, there might be two such groups, one of which correctly perceives the benefits of education, while the other fails to perceive any such benefit. Suppose further that these groups are randomly scattered through the distribution of T in identical fashion to each other. In such a situation, it is easy to see intuitively (and straightforwardly, but tedious to demonstrate formally) that welfare can, even for V close to one, be maximised by providing publicly funded education to the second group, while allowing the first group to purchase their education privately. A mixed model of this sort might be of particular interest where groups can be identified by social class, ethnic group or other distinguishing characteristic. The heterogeneity of student types also helps us understand why blended models of public and private finance are the norm in the world. Numerous caveats ought to be attached to the above analysis. Firstly, T may more realistically have a non-uniform distribution. Secondly, the model as it stands comprises a single period; a multiperiod model in which education takes time and where loans are repaid with interest would clearly match more closely what we observe in the world. It would allow foregone earnings to be included in the model. It would also allow consideration of situations in which O is not stable over time. Thirdly, the estimate of V given above is likely to be imprecise; it is obtained from the results of Alesina et al. (2001) for the United States which themselves are not estimated with precision. Further work should be aimed at providing better estimates of the empirical social welfare function particularly with respect to the role played by the level and distribution of income. Fourthly, the model as it stands does not allow for externalities due to education. Fifthly, the model as it stands does not accommodate the incentive effects of taxation, and in particular does not allow taxation to influence work effort. Finally, the types of funding mechanisms considered here are extremes – full private finance and full public finance only. Despite these caveats, the model does demonstrate that there are conditions under which public finance of the higher education system is efficient, just as there are conditions under which private finance is efficient. The extent to which privatisation of higher education should take place is therefore an empirical issue, and different countries may very well adopt very different approaches yet still serve the goal of social welfare optimisation. In the next section, some evidence drawn from a number of European countries which have very different recent histories concerning the privatisation of higher education will be considered. While the reasons for their different histories are complex, we shall see that the simple model outlined above helps explain much of what we observe.

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3. RECENT EUROPEAN EXPERIENCE12 Four European countries will be considered. Two of these are from Western Europe (Sweden and the UK) and the other two are from Central and Eastern Europe (Slovakia and Romania). The recent political histories of these countries differ considerably, and this has a clear effect on the nature of their higher education policies. It is important to emphasise that the terms ‘private’ or ‘independent’ can mean very different things in different countries. In Sweden, there are around 50 institutions of higher education catering for over 310,000 students. The state sector comprises 11 universities, plus the Karolinska Institute, the Royal Institute of Technology, 7 independent art colleges and 16 university colleges. The private sector comprises three universities: Chalmers University of Technology, Jönköping University College and the Stockholm School of Economics (all of which offer education to postgraduate level), plus 10 undergraduate institutions. The private universities are not small – Chalmers, for instance, had almost 7500 students in 2000, and Jönköping over 4500. These two institutions were transferred from state to private ownership in 1994, and continue to receive unit funding from government at similar levels to state universities. These universities are distinct in that they enjoy greater autonomy than state institutions. Their creation follows the 1993 Higher Education Act which explicitly encouraged the development of independent universities and university colleges, along with greater diversity and competition throughout the higher education system. In the United Kingdom, there are about 100 universities, serving 1.1 million undergraduate and over 350,000 postgraduate students. A further 300,000 undergraduate and 50,000 postgraduate students attend colleges of higher education (many of which can award their own degrees) and colleges of further education (which award degrees validated by universities). There exists a handful of fully private institutions in the UK – notably the University of Buckingham and Henley Management College (both have a Royal Charter and offer their own degrees); Ashridge Management Centre is another important player in private management education, and it awards degrees validated by City University. In addition, several American institutions have campuses in Britain that offer full degree programmes. These include Schiller International University, the American Intercontinental University, the American International University (which is often referred to as Richmond University) and Huron University. Each of these caters for several hundred students, but the majority of students are from overseas. The relative dearth of private institutions in the UK is due to two factors. Firstly, and most importantly, the state system, which has been heavily subsidised, provides good coverage. The changes proposed in the recent White Paper may well alter this position inasmuch as it will make attendance at traditional universities more expensive for students. Secondly, university status can be conferred only by the Privy Council (in effect, the government) and has been jealously guarded. Rather than through fully private institutions, most of the expansion of private higher education in the UK has so far come through the autonomous institutions that

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are often thought of as being in the state sector. These may determine their own tuition fees for many categories of students: all postgraduates and all students from outside the EU. For programmes that are in high demand (most notably in the business area), the more prestigious providers charge premium tuition fees, and these are typically met by students themselves. For EU undergraduate students, tuition fees are currently £1125 per year. The White Paper, The Future of Higher Education, published in 2003, announced the introduction of differential top-up fees of up to £3000 per annum for domestic and EU undergraduate students. This represents a major further step in shifting the burden of paying for higher education towards the student. In Slovakia, the substantial political reforms begun in the late 1980s were accompanied by reforms to the higher education system. These reforms have been relatively modest, however. While they have ensured the restoration of academic freedom, the state has retained a virtual monopoly on the provision of universitytype education. In light of the many other reforms that have taken place, this may be regarded as somewhat surprising. Institutions are granted university status on the advice of the Accreditation Commission; once this status is granted, the institutions become autonomous legal entities, and have considerable discretion over matters such as curricula. As has been the case in the UK until the most recent reforms, this autonomy is tempered by the fact that the state provides the bulk of the income of public institutions. Currently some 20 institutions meet the needs of about 100,000 full-time (and about 35,000 part-time) students. There are, however, two private institutions of higher education in Slovakia that have been formally accredited and awarded university status from the Ministry of Education. These are the Catholic University in Ruzomberok (which was transferred to private ownership from the state), and the Higher School of Management in Trenein (which is a branch campus of an American University). These institutions have enrolments of 600–700 students. The failure of private institutions to emerge spontaneously in the wake of massive social and political reforms in Slovakia is attributed to the absence, in the 1990 Law on Higher Education (and the 1997 amendments to this law), of a framework within which such institutions can be encouraged to develop. State institutions charge no tuition fees (other than nominal registration and examination fees), and so private institutions are – again, as in the UK – placed at a competitive disadvantage. In 2002, a new law on higher education liberalised entry into the sector, but maintained the principle of free tuition. While this remains in place it is unlikely that the private sector will flourish in Slovakian higher education, and so the transition to a free market in higher education remains slow. Indeed, the nature of the electoral process may guarantee the slowness of this transition, particularly if the median voter is one who benefits (or whose children might in future benefit) from subsidised higher education.13 The final country to be examined in this section is Romania. Experience here has been very different from that in many other countries.14 After the fall of Ceausescu, higher education has expanded very rapidly, largely as a result of excess demand that was suppressed in the former regime. Hence, while in 1989–90 there were 44 higher education institutions and about 165,000 students, by 2000–01 there were

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57 institutions and over 320,000 students in the public sector. The private sector, which did not exist until the mid-1990s, comprised some 84 institutions by the end of that decade, serving almost 140,000 students. Private institutions may be accredited (by the National Commission for Academic Evaluation and Accreditation) – in which case they can award their own degrees – or, prior to being accredited themselves, they may award degrees that are validated by public sector institutions. Most of the new private sector institutions in Romania have developed afresh, only a few being spin-offs of pre-existing institutions. The bias in provision in older universities toward engineering and sciences gave the opportunity for flexible new institutions to provide subjects such as business studies which were in high demand (and where costs of provision are relatively low). In the private sector, students pay tuition fees. In the public sector, also, since 1998–99, fees have been charged to students who are recruited over and above numbers paid for by the state. Hence both the fee-paying status of students attending public universities and the considerable pent up demand for places provide explanations for the rapid ascendancy of the private sector of higher education in Romania. How do the above stories of experience in a variety of countries fit in with the theoretical model examined earlier? The countries fall into three distinct groups: the egalitarian (Sweden); the country that is moving rapidly from a highly regulated to a highly liberalised market (Romania); and countries that are moving more slowly towards liberalisation of the higher education market (Slovakia and the United Kingdom). In the case of a highly egalitarian country such as Sweden, V is unusually low, and state funding of higher education is therefore the norm.15 In the case of Romania, the social welfare function could be argued to have changed from one that approximates a Rawlsian function, but with an ethos that the state should provide and where in consequence there is limited provision, to one that approximates the utilitarian and where private funding is not discouraged. In the cases of Slovakia and the United Kingdom, the heavy subsidisation of universities in the traditional sector has discouraged competition from new private institutions. Since the model outlined above does not allow analysis of coexisting subsidised and unsubsidised institutions, it cannot fully capture what is going on in these countries. It is unlikely, however, that the situation in either country represents a steady state; in both countries there are moves to encourage greater private investment in higher education. 4. CONCLUSION Typical models of higher education funding throw no light whatsoever on a key fact that we observe in many countries – namely that the government finances much higher education activity. There are a number of reasons why the government should get involved in higher education finance, and other writers have studied some of these at length (see e.g. Johnson 1984). The present chapter has focused on one such reason, namely the impact that higher education has on the distribution of income, and the observation that the income distribution may be an argument in the social welfare function.

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Different countries have different preferences concerning the income distribution, and it is not surprising that they should employ different policies for funding higher education. What is, perhaps, surprising, is the enthusiasm with which some transition economies have embraced the beneficiary pays principle, and the consequent high level of activity in the private sector. It may be the case that, once such economies achieve a wider income distribution, a renewed clamour for state activity will occur. In the meantime, the variety of experience that can be observed, particularly in the transition economies, provides useful exemplars of how to progress towards a system in which private universities provide a substantial proportion of all higher education. NOTES 1 2 3

4 5 6 7

8 9 10 11

12 13 14

The merit good argument is viewed by many observers as patronising; since individuals know their own utility functions (and this information is not known to governments), individuals may be best placed to choose whether or not to spend their resources on education. Another model which, like mine, attaches disadvantages as well as advantages to the private financing of education appeared after early versions of the present chapter were prepared. That model (De Fraja 2002) does not, however, permit straightforward empirical implementation. An alternative to the user pays principle is the beneficiary pays principle. The two principles diverge where externalities are present. In the present chapter, we consider one such externality arising from the impact that income distribution has on welfare. In this respect, the chapter takes the position of the beneficiary pays principle. I am grateful to Jung-Wun Park for pointing this out to me. Since si is chosen by the individual, the above equation does not imply that negative values of Yi can be observed. It also means that foregone earnings are not treated as a cost of education. This is a simplifying assumption; it would be possible to relax the assumption but this would involve much tedious mathematics and would provide little new insight. I assume that V is given. This is necessary in order to perform the back-of-the-envelope calculations in the sequel. Intriguing possibilities would be offered, however, by a theoretical model with multiple time periods in which V is endogenously determined. Since, in the utilitarian regime, it does not matter who pays a given amount for the educational service that is provided to those most able to benefit, this result does not depend on the nature of the tax system. In particular, relaxing the assumption of a proportional income tax in favour of a progressive income tax would leave the result unchanged. In such a function, social welfare is determined exclusively by the welfare of the poorest member of society. The Rawlsian case is particularly interesting since, for many economies where the educated group forms a minority, it is indicative of the outcome of a median voter model. In cases where most people receive higher education, it also serves to indicate what conclusions a median voter model might draw. Although the value of V used in this last calculation reflects what is known about the impact of income distribution on happiness, it is far from clear that electorates would vote for political parties that emphasised egalitarianism to this extent. This interesting paradox provides an important topic for future research. This section draws on work done in collaboration with Daniela Andrén, Thomas Andrén, Anetta Caplánová, Luminita Nicolescu, Dana Sapatoru and Laura Paun as part of PHARE-ACE P98-1020-R (an European Community programme). The political problems witnessed in the UK in 2003 as the government attempted to make the transition to higher and differential tuition fees reinforce the perception that median voter models provide much insight. Poland, Estonia and Moldova are other examples of countries that have developed significant private sectors of higher education over the last decade.

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15 Note that in Sweden about 60% of young people enter higher education, and so this country is pursuing a goal in which equity is consistent with increased, subsidised access to higher education.

REFERENCES Alesina, Alberto, Rafael di Tella and Robert J. MacCulloch. “Inequality and Happiness; Are Europeans and Americans Different?” NBER Discussion Paper 8198, Cambridge, MA: National Bureau of Economic Research, 2001, http://papers.nber.org/papers/w8198. Argyle, Michael. The Psychology of Happiness. London: Routledge, 1989. Arrow, Kenneth J. Social Choice and Individual Values. New Haven: Yale University Press, 1951. Barr, Nicholas and Iain Crawford. “Funding Higher Education in an Age of Expansion.” Education Economics 6.1 (1998): 45–70. Chapman, Bruce. “Conceptual Issues and the Australian Experience with Income Contingent Charges for Higher Education.” Economic Journal 107.442 (1997): 738–751. De Fraja, Gianni. “The Design of Optimal Education Policies.” Review of Economic Studies 69.2 (2002): 437–466. DfES (Department for Education and Skills). The Future of Higher Education (White Paper). London: HMSO, Cm 5735, 2003. Di Tella, Rafael, Robert J. MacCulloch and Andrew J. Oswald. “Preferences Over Inflation and Unemployment: Evidence From Surveys of Happiness.” American Economic Review 91.1 (2001): 335–341. Easterlin, Richard A. “Will Raising the Incomes of All Increase the Happiness of All?” Journal of Economic Behavior and Organization 27.1 (1995): 35–47. Greenaway, David and Michelle Haynes. “Funding Higher Education in the UK: The Role of Fees and Loans.” Economic Journal 113.485 (2003): F150–F166. Johnson, George E. “Subsidies for Higher Education.” Journal of Labor Economics 2.3 (1984): 303–318. Oswald, Andrew J. “Happiness and Economic Performance.” Economic Journal 107.445 (1997): 1815– 1831. Sen, Amartya K. “The Impossibility of a Paretian Liberal.” Journal of Political Economy 78.1 (1970): 152–157.

APPENDIX Suppose that the income distribution may be characterised, extremely simply, by a group of educated workers who earn on average Y1, and a group of uneducated workers who earn Y2. The former group comprise [ of the whole. Note that, in a model of this type, the Gini coefficient is given by 1/2 - [[2Y1 + (1+[)(1-[)Y2] / 2[[Y1+(1-[)Y2] Linearising around [=0.1, Y1=25000 and Y2=15000 yields 1/2 - (0.4951 - 0.2324[ - 2.637x10-6Y1 + 4.395x10-6Y2) Alesina et al. (2001, table 3.4, column 1) show that, on average, the marginal effect on happiness (H) of a one standard deviation change in mean income is 0.003, while the corresponding figure for a change in the Gini coefficient is -0.001. (This is based on a model for the United States. Alesina et al. (2001) do not report marginal

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effects for the corresponding model using European data, although much of the work in their paper is based on data from the Eurobarometer data set.) These figures imply that the marginal effect of a unit change in mean income is 1.446 x10-6, while that of a unit change in the inequality measure is -0.0357. Hence the happiness function may be expressed as H = 1.446x10-6[[Y1 + (1-[)Y2] - 0.0357[1/2 - (0.4951 - 0.2324[ - 2.637x10-6Y1 + 4.395x10-6Y2)]+constant Imposing [=0.1, this may be rewritten as: H = b1[Y1 + b2(1-[)Y2+constant where b1=5.0459x10-7 and b2=1.6203x10-6 This confirms that, in the social welfare function, more weight is attached to the income earned by the lower income group than to that of the higher income group. Using these values and grossing up, it can be inferred that V equals b1/b2, that is, 0.3114. It should be noted at this stage that there remains some controversy about whether it is legitimate to represent the happiness function as a social welfare function. As Arrow (1951) demonstrated, the aggregation of individual preferences into a social welfare function may not be possible under reasonable conditions. But if, as here, it is supposed that interpersonal comparisons of utility can be made – I am using a cardinal measure of happiness – then Arrow’s theorem does not hold (Sen 1970). The controversy therefore boils down to the reliability of the happiness data. Much work in psychology (see e.g. Argyle 1989), and an increasing body of work in economics (Oswald 1997; Di Tella, MacCulloch and Oswald 2001) suggest that the data are dependable.

GUY NEAVE

HIGHER EDUCATION POLICY AS ORTHODOXY: BEING ONE TALE OF DOXOLOGICAL DRIFT, POLITICAL INTENTION AND CHANGING CIRCUMSTANCES

1. INTRODUCTION Anachronism, one of the many banes of the historian, like many questionable methods can sometimes generate creative insights, provided of course it is not indulged in to excess. Nevertheless, there are both terms and concepts which lie at the forefront of today’s discourse in higher education that are, from an essential perspective, hard indeed to pin down, historically. The ‘Market’ is one, Knowledge Society another. Both the philosopher and the economic historian will readily agree, for instance, that markets existed and people behaved as if they obeyed an economic rationale long before Adam Smith set out to explain human behaviour and to displace it from the authority of that institution which, above all, was taken up with perpetuating an established social order based on divine Commandment and holy writ – namely, the Church. There is clear evidence in the late 18th century, for instance, of certain Oxford colleges displaying what today would be termed ‘market-type behaviour’ – or, more precisely, ‘niche-building’ – though, equally obviously, those engaged in these activities did not construe their action in such terms (Rothblatt 1997). Similarly, even without the benefit of Information and Communications Technology, Knowledge Society has nevertheless long been with us, if only for the fact that without Society, there is no knowledge to valuate. Indeed, any theologian worth his salt could reconcile Knowledge Society, the Market and the Book of Genesis with the greatest of ease. If one cares to think of it in these terms, Paradise Lost may be interpreted as the first recorded and direct example of what happens when knowledge is commodified and sold! It was also an abiding reminder of the consequences that flowed therefrom. Recasting this ancient event in present day terminology is no less an amusing conceit. It would have the Serpent as the Provider of Alternatives, Eve as salesperson (or University President) and the unfortunate Adam as the literal ‘consumer’ – or ‘end user’! Some would say we have been paying ever since for the knowledge of good and evil, which also accounts for the fact that the type of knowledge a God-fearing world saw as desirable was often furnished gratis et pro Deo, whilst the knowledge worth having was often dearly 127 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 127–160 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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purchased, and sometimes heretical. As students of policy know full well, there are no free lunches. And in Paradise, there were no free apples, either! In focusing on the rise of the market in present day higher education policy, the Douro seminar naturally brought together a predominantly economic perspective. Much of the exchange took place within the canons of that discipline. In this chapter, a slightly different slant is taken. In doing so, the appropriateness of that perspective is not contested, still less the centrality it has assumed in the way that the shared purposes of higher education are defined, the criteria on which the responsibilities assigned to higher education by government and society are determined and subsequently judged. Here the central concern lies with the rise of ‘The Market’ as a social and as a political construct and, no less significant, as a vehicle for restating both values and thus priorities which flow from them. In short, rather than tackling the issues posed from a standpoint internal to Economics – the technicalities of which are, frankly, far beyond my ken – I am seeking to place a different interpretation upon what appears to be the triumph of the economic rationale in the affairs of academe. To do this requires a little eclecticism grounded mainly in history, politics with the occasional whiff from the history of ideas. Few will bother to contest the claim that Economics stands today at the centre of that technical and political dialogue which accompanies the accelerated development of higher education, just as it occupies the centre stage in its possessing some of the most powerful concepts that sway governments and thus shape higher education. So powerful has it become that, to all intents and purposes, it resembles nothing so much as a species of doxology – that is, a text referential and justificatory that furnishes a quintessential statement of authoritative knowledge, sometimes deemed Sacred by those subscribing to it. Furthermore – and as if this were not enough – Economics constitutes an overarching framework within which public analysis of the multiple aspects that make up the institution of higher learning, amongst which student behaviour, staff performance and institutional governance entre autres, are explained, priorities set and action laid out. In the course of the past forty years, Economics has emerged as an all-pervasive, commanding, some would even claim, hegemonic frame. Through it, the university’s publicly acknowledged values and mission have been reinterpreted, redefined and, like the Ten Commandments, set in stone, though temporarily and with flexibility, all the better to adapt to that imprecise beast, ‘changes in the external environment’. That we admit – or even take this situation for granted – a species of situation acquise – is a phenomenon well worth our attention. 2. ACCOUNTS INTERNAL AND EXTERNAL It is all very well to justify the centrality of Economics by calling up such contemporary trends as European integration, cross-frontier flows of knowledge, or by allusions to the torrent of population movements around the globe as evidence of its relevance and stature. Certainly, a satisfactory account may be had from exploring this reconstruction of the human condition in keeping with the waxing and waning of particular economic theories. Or to do so against the rise and fall of

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contending schools of thought that governments and their servants latch on to as means of ensuring personal monuments both to their own passing understanding of, as well as being the vehicle through which that understanding is conveyed onward as their contribution to, the unfolding of human progress, individual fortune or the triumph of contending interests. Still, such an account can only be partial. It can only be partial because it springs largely from within its own economic frame of reference. It is self-justificatory, largely self-contained and predominantly selfreferring. Such an account, whilst plausible, explains itself simply by referring to itself. It is, literally, self-serving. In truth, the imperialism of self-referral is powerful indeed since it grants legitimacy to alternative accounts only insofar as they confirm and conform to its own self-established canon. Thus, alternative accounts enjoy validity so long as they are subordinate to, and accommodatable within, its own transcendental paradigm. Yet, the uncomfortable question of how this situation came about cannot be answered satisfactorily merely by retreating into the history of economic thought, though we may certainly start from there. In effect, contemporary higher education is not merely conceived and debated, run and judged with reference to the economic imagination and to its various behavioural, ethical and productivist derivatives or Ersatzen – individual competition and self-interest, input, throughput and output. The ties are much stronger. So much so that the present-day University is in truth possessed by the economic perspective, possession being understood both as a form of permeative intellectual dominance and in the more mystical – religious, if not daemonological – sense of being taken over by an operative mind-set or mentality that exercises a will and imposes its own purpose upon what was once conceived as an autonomous entity but which, under that possession, has dissolved into a model the autonomy of which has become conditional precisely and proportionately to the degree the University has yielded to that possession. 3. PIONEERS IN APPLYING ECONOMICS TO (HIGHER) EDUCATION If we ask ourselves the question ‘Where was the economic imagination first applied in a deliberate and systematic manner to the affairs of higher learning?’ we come up with some rather surprising answers. In the European setting, there is no doubt whatsoever. The systematic insertion of Economics as the prime driving force in the deliberate shaping and organisation of higher learning first took place neither in Western Europe nor for that matter in the United States. Rather, the first example of its systematic and system-wide application had its roots in the Soviet Union during the period which in Soviet history is identified with the New Economic Policy – that is, from 1921 onward (Carr 1971). Root and branch reform to tie higher education to industrial productivity and central planning accelerated thereafter particularly during the period of collectivisation and the putting in place of a planned economy that followed in the course of the next decade (Affanasiev 1992). Nowadays, it is fashionable to highlight the insensitivity and downright inefficiency not to mention the apparent inability of command economies rapidly to adapt to the changes that innovation demands and to make much of its notorious

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reluctance to take what was once termed ‘individual demand’ for higher education into account. Even so, higher education grounded in a command economy anticipated a number of generic features which, if they did not emerge in the same manner, remained central to the harnessing of institutional purpose to production, a concept which today parades under the flag of ‘the productivist’ interpretation of higher education’s underlying end. 4. HIGHER EDUCATION AND THE ECONOMY – SOVIET STYLE The first of these features, which assumed a very particular weight in the Soviet experience, was the rapid expansion and, at the same time, the differentiation of the non-university sector. The basic principle which systematically shaped Soviet higher education turned around the so-called ‘branch and sector principle’, in effect, the creation of highly specialised establishments closely and directly linked to the corresponding sector of the national economy and providing the appropriately trained manpower in keeping with the centrally forecast ‘human resources’ needs of that sector. At first, such sectors developed within the framework of what today would correspond to ‘comprehensive institutions’, that is, establishments with a wide range of faculties, often described in Soviet jargon as ‘multi-sectoral institutions and universities’ (Affanasiev 1992: 650). The subsequent strengthening of the nexus between higher education, collectivisation and the economy pushed the process of differentiation further. It did so in two directions. As the institutional base of higher education expanded in keeping with the demands of the economy, so sectors originally equated with departments inside universities, emerged as fullyfledged, self-standing, specialised institutions in their own right. Such specialisation brought about an astounding proliferation in different types of institution within what Western European terminology nowadays defines as the non-university sector. It also entailed redefining the place and purpose of the university. 4.1. The Place of the University The main task of the Soviet university lay in training researchers, academic staff for higher education and teachers for secondary schools. Certainly, the university retained that vital ideological task through the basic function of both political and cultural reproduction as it did elsewhere, though obviously not around the same values or social ethic. From this perspective, one might argue in favour of a certain continuity of generic function with its Western counterparts. However, in contrast with its Western European equivalents, the Soviet university was defined largely as a residual to the essential primacy of the specialised sector, in effect, a mirror image of the dynamic that shaped higher education in 19th century Western Europe, which defined the non-university sector as residual to the university. Other features of the Soviet system also merit our attention, not least because of the subsequent organisational patterns that followed upon its central mission – to service the productive sector, or, to revert to contemporary terminology, ‘to strengthen industry links’. One of the more telling involved the externalisation of

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control on the one hand and the avoidance of what one writer termed ‘academic seclusion’ and ‘corporativeness’ on the other – that is to say, the academic version of ‘restricted practices’. It did so by placing responsibility for academic governance, planning and programme development firmly in the hands of the appropriate economic authority in the state government (Affanasiev 1992: 654) – a measure justified on the grounds that academia did not have the technical capacity to determine, still less to operationalise, the specialised skills requirements of the particular economic sector to which their graduates were destined. If the Soviet system of higher education may be regarded as the first explicitly and systematically to link higher education to a productive order and to a vision, however perverted, of the collectivity grounded in an economic order, one may, by the same token, also argue that it was the first example of higher education conceived and operating as a ‘system’. 5. HIGHER EDUCATION AND THE WESTERN ECONOMIES This brings us to our second uncomfortable question. It is this: How may one explain the rise to pre-eminence of Economics as the prime driving force in the higher education of non-totalitarian societies and very particularly those in Western Europe? The ‘internal account’ as it is told through the unfolding saga of the discipline of Economics will certainly lay stress on the rise of the Human Capital Theory on the one hand and on the Residual Theory of Economic Growth on the other. Obviously, to go into their finer points would be Miltonian in the extreme and, like as not, prove a sore trial to those better versed in their arcania than I. Indeed, this is not my purpose. My purpose has less to do with the precision, plausibility or robustness of these theories so much as with the historical and social context that allowed them so rapidly to take root. To explain this, a good Leninist tactic is not wholly misplaced and, to do so, I will take one step back to move two steps forward. 5.1. An Unorthodox Slant on an Oft-told Tale Even the barest of tales subscribes to a common chronology. To some, the years 1960 and 1961 stand as a take-off point in the fortunes of the Economics of Education and the Economics of Higher Education more especially through the work, then unveiled, of Gray Becker, Theodore Schulz and Edward Denison. Since Human Capital Theory has its origins in the writing of Adam Smith more than two centuries ago, to ask why a time so inordinately long should pass before the happy notion flowered and bloomed, is not entirely idle. The answer does not lie, however, wholly in the realm of economics alone. Other factors were at work and not least in the waging of the Cold War, itself as much a clash between contending economic ideologies as it was a contest between political beliefs.

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6. THREE HISTORICAL DIMENSIONS ON THE RISE OF ECONOMICS IN EDUCATION If we place the launching of these two theories that are fundamental in the embedding of Economics into Education, against this broader historical and political backdrop, a slightly different interpretation emerges. It is an interpretation containing three aspects, which, not surprisingly, play their role out in very different spheres but spheres, which, for all their difference, were brought to a state of mobilisation through these two theories. These three dimensions have to do with the Cold War; with the politics of post-war reconstruction; and, finally, with demand for education outstripping those levels of provision that Western European countries had hitherto envisaged. It also has to do with a very particular role that Economics assumed in the politics of education within various Western European nations. 6.1. War and Reconstruction Whilst the aftermath of war in occupied Western Europe turned around physical rebuilding of factories, housing and schools not least (De Costa 1949) it also saw a further and radical advance in constructing the welfare state in France and Belgium as it did in Britain (foundation of the National Health Service in 1948, preceded by the 1944 Education Act). In neutral Sweden, the outbreak of peace saw the continuation of what was to be an enduring saga, unprecedented in European history, of a sustained commitment to educational reform, which began in 1940 (Heidenheimer 1974) and was to end three decades later with the reform of the Swedish university in 1977 (Premfors 1984). Occupation, Liberation and their immediate aftermath had proven to be a singularly fertile ground for proposals calling for educational reform, both amongst European governments in exile as too in those circles variously associated with Resistance movements, irrespective of their political allegiances (Neave 1992). And in their turn, the Allies envisaged equally radical measures of educational reshaping for their respective zones of occupation in the ruins of a vanquished Germany (Hearnden 1998; Philips 1989). 6.1.1. The Berlin Blockade and the Great Freeze on Reform Curiously, with the exception of Britain, where the detailed scheme for the overhaul of secondary education had been revealed just before D-Day, and Sweden, few if any of the blueprints which emerged at war’s end went beyond the stage of debate. Reconstruction of education, in short, remained physical – a matter of bricks and mortar. Even in Germany, despite the clear intention of the Western Allies to place schools and universities on a different ethical basis, often reflecting their own national systems of education, such intention was largely abandoned. Why this was so is not difficult to explain. From the standpoint of both political symbolism and the relations between the erstwhile Allies, the marker event occurred in the Berlin blockade of 1948–49, and the subsequent installation of Communist regimes in the German Democratic Republic, Poland, with the 1948 coup d’état in Czechoslovakia

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together with the assimilation of Central and Eastern Europe into the Communist sphere of influence. The impact of the Berlin blockade upon educational reform that waited in the wings was every bit as drastic as the imposition of the new regimes that accompanied the baggage train of the Red Army. From one perspective, it extended the basic Soviet principle of subordinating higher education to Party and State. The same process also extended the model of central control and economic planning as well. This is not to say that the forcible export of Soviet central planning squeezed the higher education systems of individual countries into a similar mould. National variations in Eastern and Central European systems of higher education were evident and continued to be so for the ensuring four decades (Neave 2003). The expansion westward of command economy systems not only caused the Western Allies to abandon any notion of radical overhaul to the education systems in their respective zones. It also terminated with extreme prejudice many of the proposals that called for reform on the home front and most especially those identified with left wing agendas, above all those coming from political parties with Communist leanings or sympathies. Reconstruction thus parted ways with reform. Whilst the former proceeded apace, the latter found itself plunged into deep political freeze, with the notable exception of Sweden. 6.2. Urbi et Orbit The second episode, which served to revive educational reform, occurred not in Europe but in the United States. Nevertheless, it too was a direct outcome of the ideological confrontation between East and West. An artificial satellite, roughly the size of a large grapefruit, launched into orbit by the Soviet Union in 1957 was more than a symbol. Its very presence seemed to suggest not simply that Soviet technology had laid American enterprise flat on its back and on the mat. More important by far, the orbiting Sputnik hinted at an intrinsic superiority of both the economic order that had created it and the underlying planning system that had shot it so successfully into the firmament. 6.2.1. The Cold War as a Mobilising Agent Given the planetary confrontation between advanced capitalism and State socialism, the possibility could not be dismissed that the latter did indeed possess an edge. In times of war – and cold wars are no exception – failure often begets a very old reflex. That reflex, born out of the pain of national humiliation, tends to lay the burden of failure either on the absence of a moral quality in the national fibre – or, in this case, the apparent failure of the Nation’s ingenuity in technical achievement – and to attribute ultimate responsibility for such shortcomings to the education system (Neave 1992). To this, the United States was no exception. Investment in education became the prime instrument for national mobilisation and took specific shape around the National Defense (Education) Act of 1958. The Act was significant for two reasons: first, it mobilised national effort around raising the output in higher education of manpower in science and technology. Second, it also extended backwards into the Nation’s high school system, the reservoir from which

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future scientists and technologists would flow. As the Act’s designation implied, education became an explicit and vital instrument for mobilisation, a central part in national defence strategy. 6.2.2. The Influence of Military Strategy upon Education and a contrario It must remain subject to some speculation how far the American initiative had direct consequences upon its NATO Allies, though later, allusions to the brake that shortages in skilled manpower had upon economic growth generally and defence in particular (Vaizey 1964: 9) suggest that the military considerations were not wholly absent, even amongst the Allies. Indeed, such considerations may have served to add weight to dealing with certain trends already visible in Europe, if they did not lay a new urgency upon them. In Europe, these trends were not, ostensibly or directly, related to the broader strategic and military aspects of the Cold War, though a case can probably be made for pursuing this sideline further. Rather, they related on the one hand to deeply laid social change and, on the other, to the fact that the physical reconstruction of the economic, industrial and educational infrastructure in Western Europe was to all intents and purposes complete by the mid-1950s. Put succinctly, now that reconstruction was complete – largely, it has to be said, thanks to American aid in the form of the Marshall Plan – the issue of educational reform began to peep above the parapet. In essence, the pressure for reform was the outcome of increasing demand first for what was termed ‘extended secondary education’ and second, the realisation by authorities that economic change itself – the drive towards technology-based industry and the subsequent press for scientific and technical manpower – required a general rise in the educational level of the population at large. Pressure for reform, to accommodate rising demand, found itself confined by the straightjacket of post-war reconstruction. 6.2.3. Issues Behind the Mobilisation of Education: Some European Differences There were, however, significant differences between Western Europe on the one hand and the United States on the other. These differences were dramatic and related to the different levels within the education system at which massification was to be realised. From a European perspective, when the drums of reform began to beat again – as they did from the mid-1950s onwards – the central issue was not primarily the massification of higher education, still less access to higher learning. It was, rather, access to upper secondary schooling and the massification of general academic education. If we make a rapid excursion across the major commissions and educational initiatives which gathered momentum in Western Europe during the latter part of the fifties, the concern about the future of mass upper secondary education, and the search for ways of accommodating it, are all too painfully evident. In Britain, the year 1956 saw the publication of the Crowther Report on the future of upper secondary education (Crowther 1956). In Belgium, the signing of the Pacte Scolaire (Mallinson 1967) two years later put an end to the century-long strife between Church and lay authorities for the financing of secondary education. Similar enactment took place in France the same year as part of a broader policy to develop

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comprehensive middle schools (Berthoin Reforms) whilst in Sweden, the rolling reform of compulsory schooling, focused around the comprehensive principle ‘one school type for a given age range’, was fast approaching the point where it would replace the historic system of vertical differentiation – which it did in 1962 (Husén 1974). Thus, America’s mobilisation, though obviously in no way planned to do so, took place against a similar backdrop in Europe, though from a strictly educational view, purposes and goals involved were different indeed. 6.3. The Final Piece of the Jigsaw: The Politics of Bureaucratic Survival There remains one final piece for the historical jigsaw that forms the background in the rise to fortune of the Economics of Education and the Economics of Higher Education to be complete. The missing piece is to be found not so much in education stricto sensu as in the politics of bureaucratic survival. Europe’s recovery from the ravages of war owed much to the massive injection of American resources, financial as much as physical, a task as massive in scope as in generosity. One of the conditions which the United States set down, however, was that a certain percentage of the equipment sent to Europe was to be carried in American ‘bottoms’ that is, by American shipping. To make sure this condition was fulfilled, a central agency was put in place to keep track of this and other aspects of the Marshall Aid Recovery Program. This agency was the Organisation for European Economic Co-operation, an intergovernmental body, which fulfilled the function of statistics gathering and monitoring of aid flows on behalf of Washington and the Allied governments in administering the European Recovery Program. Crucial though its role was, its existence was closely tied to the Program it scrutinised. Thus, with Europe’s economy well on the road to health, its indispensability waned accordingly. Bureaucracies and especially the intergovernmental species have like Lazarus an ability to rise from the tomb, often despite all expectations to the contrary. In 1960, the Organisation was assigned a new mandate, a resuscitation reflected in its new title as the Organisation for Economic Co-operation and Development (OECD). Its principle task was henceforth to serve as an intergovernmental forum for economic policy debate and development between the major Western economies. One of its first engagements, as if marking its new-found territory, was the Washington Conference, which in November 1961 set a growth target of 50 per cent in the Gross National Product of its member states for the decade 1960–70 (Kristensen 1964: 5). The Organisation rapidly assumed a powerful and strategic role as the crossing point not simply where Economics was systematically reviewed and derivative techniques applied to all sectors of education, higher included. As ambition rose, so the Organisation’s purlieu and overview both followed suit. Thus, regular and comparative reviews of the condition and development of its members’ education systems were introduced, subjected to international scrutiny and lessons drawn for national governments, policy makers and the scholarly community (Papadopoulos 1996).

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7. APOLOGIA PRO HISTORIA SUA If I have wandered down paths which from the strictly economic point of view may appear largely irrelevant, my purpose is to suggest that the meteoric rise of those two sub-sets of Economics – the Economics of Education and the Economics of Higher Education – may indeed resemble the birth of Athena, springing fully armed from the thigh of Zeus. But that, in turn, suggests we need to pay a little attention to the latter’s interesting condition. What is to be wondered at is how rapidly the Residual Theory of economic growth and Human Capital Theory were transferred from the desks of scholars to become the Ark of Covenant for educational planning in general and higher education in particular. In seeking an explanation for this – though I have no doubt that others are possible – my argument is that much has to be laid upon the very exceptional circumstances which preceded and surrounded their birthing. And, prime amongst these contributing factors was the maturing of longterm developments inside education itself. Added to this, and in its way, such an account is as much a renunciation of the internalist perspective on Economics as it is on Education, was the accelerating effect of mobilisation that the Sputnik crisis precipitated. 8. IMPACT OF ECONOMICS To this one might add that, if circumstances were singularly favourable to their fortunes at the end of the fifties, the Economics of Education and the Economics of Higher Education in their turn had immediate and telling influence upon the way educational reform was itself viewed. Not only did the new perspective provide a massive justification for increasing investment in education. It also furnished a utilitarian overlay to proposals for reform that earlier by their nature, content and purpose had been associated with a broader radical – and in Europe – left wing change to the social order. In other words, the opening up of secondary and, above all, higher education – which in a purely political agenda were previously looked upon as barely disguised proposals not far divorced from, if not closely akin to, the educational principles that accompanied totalitarianism – could now be justified by their promise to strengthen Western capitalism and, indeed, to ensure its survival. Put succinctly, the economic agenda rounded off the ideological edges and allowed the political agenda to be presented as the path of adaptation rather than the road to social perdition. Indeed, if one looks closely at the overall strategy that emerged in Western Europe, its fundamental duality was clear. Further investment in education at one and the same time made for the increase in economic efficiency and acceleration in the growth rate of the economy of nations – improving the competitive stance of European nations (which begs the question, ‘Against What?’) – and as an earnest of their social stability through opening up mass access to post compulsory education. Both parts of the diptych came together around the notion of social justice – that is, opening up educational opportunity to those hitherto marginalised by the working of education systems reconstructed, but not reformed, in the immediate post-war period.

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With the advantage that always comes with hindsight, it is clear that the application of economic theory to education was both decisive and of immense strategic significance. It imparted a long-term rationale which, on the one hand, sustained and, on the other, extended a form of educational mobilisation that began in the United States and rapidly took root in Western Europe. There, however, whilst Economics opened the prospect of setting education in general and higher education in particular, on an accelerated trajectory towards massification as a means to accelerate economic growth, the way in which reform was carried out and the context in which it was set, renewed an earlier initiative. 8.1. Elements of Continuity and Change As in any reform, there are elements of change and elements of continuity. And whilst change took the shape of unprecedented rates of growth in the number of students entering higher education, in the numbers of institutions built or upgraded to higher education status throughout the sixties, a goodly measure of continuity was also present. Such continuity was evident from the fact that, in Western Europe, mobilisation and its outcome, the massification of higher education, were wholly the work of the public sector. In effect, reform extended its scope and, to this extent, the opening up of higher education to the ‘reserves of talent’ (Husén 1974) in Western Europe stood as the final step in the construction of the welfare state, begun more than a decade and a half earlier. 8.2. Place of the Market The question that arises is, of course, ‘Where was the market in all this?’ The answer must surely be that the market, as we construe it today, was very certainly present. But the market occupied a place not greatly dissimilar to that occupied by the Cheshire Cat in Alice in Wonderland, becoming less substantial the nearer one approached it. If the market was certainly present, it did not possess the same ideological symbolism that it was to assume two decades later. On the contrary, the central symbolism that lay beneath reform throughout the sixties bore more kinship with social engineering, expressed through a rationality that combined a particular form of planning, itself spurred on through the application of Economics to education. The purpose of this enhanced planning was to raise the general educational level on the one hand, productivity on the other, together with an accompanying loosening up of the established social structure through enhanced mobility that hopefully would come in the wake of education democratised. Now the interesting aspect of social engineering does not lie primarily in the type of planning involved, nor necessarily the forecasted problems it sought to tackle, important though they were. Rather it would appear to lie in two basic assumptions. The very fact that reform in Western Europe took the shape of government intervention implicitly suggested that the market, on its own, was not up to the task of creating either the skills and still less to bring forward sufficient numbers of young people to the point in firm-based training at which such qualifications could

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be acquired, both of which economists of education identified as conditiones sine qua non for accelerating the pace of educational development and economic change. This is not to say that the market was incapable of building on the range of training or the numbers of those emerging, duly qualified from school or university. Rather, the role of the State was to prime the pump for industrial and economic expansion by acting directly on and through the education system. A second assumption is also worth bearing in mind. It presumed that, given the increase in the flow of highly qualified manpower, the market was capable of putting it to good use. 8.3. Educational Planning à l’Européenne These assumptions, one might argue, in major part shaped both the type of planning and the nature of State intervention. In Western Europe such assumptions, seen from an historical perspective, were not without precedent. They were, rather, the extension of that long-term secular trend which involved governments transferring the cost of education and training from firms and individuals to the public purse that was one of the features accompanying the establishment of compulsory public education and which gathered momentum from the late 19th century onwards. Certainly, exceptions to this existed, particularly in the German-speaking countries, which still placed reliance on firm-based apprenticeship training. But they were not in a position to provide highly qualified manpower. Nor for that matter was it their purpose (Kulhman 1970; Mende 1970). Planning in Western Europe from the sixties onward thus took a particular form and one comparable in no way with its Soviet equivalent. In essence, it was the planning of provision within the education sector. And whilst some countries, Britain being one, sought to bolster the output of graduates in science, technology and engineering, in no instance was there any attempt to intervene beyond the education system. Nor was there any attempt to control student demand, though later the introduction of numerical limits on certain faculties – the numerus clausus or numerus fixus – was extended to a number of high cost, long course programmes – medicine being one, dentistry and sometimes engineering. On the contrary, the planning of provision itself rested profoundly anchored in the principle of social demand, regulated by the traditional mechanisms and standards of achievement and merit at the end of secondary schooling – the Baccalauréat, the Abitur or the Maturità and their equivalents (OECD 1968). In effect, the essence of educational planning à l’européenne lay precisely in responding to student demand. It did not seek, nor was it politically acceptable to do so, to regulate student flows by aligning them closely, directly and rigidly upon the demands of the economy, though now and then governments sought to give some indication as to where they thought priorities lay. 8.4. … and the Wisdom Thereof This was to prove a wise course, although fraught with difficulty and tensions, not least because of the volume of student demand and more particularly from what

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might be seen as a species of sociological or perceptual lag in subject choice amongst the students themselves. We will return to this aspect later. Even so, by grounding the planning of provision upon the central pillar of social demand, the Western democracies, though obviously unknown to them at the time, were able to prevent the build up of social discontent and frustration which, ultimately, became a factor of prime importance in the collapse of the command economies in the Soviet bloc. Discontent there certainly was and if, in part, it had to do with the conditions under which massification proceeded, it was also fired by other considerations of a more partisan and ideological nature. Thus, planning by provision tended, by and large, to take the market for granted and concentrated on raising the numbers entering higher education. Not surprisingly, it concentrated on issues of access to higher education rather than on output. Indeed, the operationalisation of social justice was conceived precisely in terms of student growth rates on the one hand and changes in social class origins of students on the other. On these criteria the ‘performance’ of higher education was weighed in the balance. Interestingly, it was in these very dimensions – as well as cost – that international comparison of higher education systems found its roots in the work of the OECD, thus adding cross-national scrutiny to the national monitoring of progress – or backsliding. 9. THE BEST LAID TALES Expansion was not all plain sailing – far from it. One of the major difficulties planning by provision faced sprang from its own strategic purpose – namely to provide the market with suitably qualified manpower. Here, difficulties lay in two areas. The first involved the speed up of change in the structure of the economy and second, what was alluded to earlier as a species of ‘sociological lag’ in student perception of opportunity and career. In Continental Europe, access to careers in State service was one of the main functions and attractions of the historic university. Civil servant status was not only highly prized but also extended to occupations, which in Britain and America carried different status, as local, municipal or institutional employees – teachers being one example, academic staff another. Access to careers in public service was one of the main functions and attractions of the European university. In effect, the university in Europe was closely tied to the fixed price labour market as well as to the liberal professions (Bienaymé, Cerych and Neave 1986). Historically, it served what has been described as ‘Reserved Graduate Occupations’ which carried with them high standing, often high responsibility, sometimes an appropriate remuneration and fell largely in the public domain (Neave 1978). This was a ‘market’ the principle feature of which lay in its stability of employ on the one hand and thus its long-term predictability on the other. The crucial issue lay elsewhere – more particularly how higher education could serve the short-term demands of the private sector labour market.

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9.1. Short-term Demands of the Labour Market: Solutions New and Old One solution, long exercised in Western Europe, had been to develop special tracks or even special schools at the level of upper secondary education whose curriculum was closely aligned on commerce and business practice – Handelsschulen in Austria, Fachschulen in Germany, Beroeps Onderwijs in the Netherlands, to mention but a few. The strategy of planning by provision repeated this ancient practice. In the course of the sixties and early seventies, it rolled such specialist establishments up into higher education to form Handelshochschulen, Fachhochschulen and Hoger Beroeps Onderwijs. Not all higher education systems relied on this policy, however. Some, to meet the demand for middle management and high-level technicians – France, Britain and Norway, for example – founded a new sector – short-cycle higher education. This sector – the Instituts Universitaires de Technologie, polytechnics and district colleges respectively – was distinguished from the university by the ‘applied’ nature of its programmes, often by their shorter duration, but most especially by the training they gave, held to be ‘terminal’ – that is, it could be used immediately on the labour market (Furth 1998). The same policy was pursued later in Southern Europe, in Portugal in the late seventies (Amaral, Jones and Karseth 2002) Greece in 1983 and Austria even later in 1994 (Leitner 1996). Whilst aligned on the short-term private sector labour market, short-cycle higher education did not carry the same historic weight and standing as the university. Nor, for that matter did short-cycle establishments enjoy the same latitude for selfgovernment. On the contrary, they tended to come under the close oversight of municipal authorities in England (Brosan and Robinson 1972) and Norway (Sandvand 1976). In France, the Instituts Universitaires de Technologie came under the direct control of the Ministry of (Higher) Education (Doumenc and Gilly 1978). Nevertheless that did not prevent that educational plans of mice and high functionaries, in the words of Robert Burns, ‘oft tae gang a-gley’ and very particularly so in those systems, like the French, where access to higher education was open to all holders of the Baccalauréat. In effect, so long as access to the university was perceived as the path to the glittering prizes, enthusiasm for the second best remained somewhat dampened. Where the expanded non-university sector was successful coincided with those systems where entry to university was subject to selection, as was the case in the United Kingdom (Pratt and Burgess 1974). 10. THE UNRAVELLING OF HISTORIC TIES Behind this spotty success lay a deeper issue, which displayed all the characteristics of a very real crisis, particularly in the aftermath of the 1974 oil shock. Diagnosis and treatment varied according to disciplinary perspective. For labour market sociologists, it took the form of difficulties associated with ‘the transition to work’. For economists and those scholars of education concerned with the riddle of student choice of subject, with the changing demands of the labour market and their curricular consequences, the problem lay in the issue of ‘mismatch’, itself another

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dimension of the ‘sociological lagged response’ of the student estate. Such dysfunctions could, of course, be seen as maladies in their own right. In reality, they were pointers to a more deep-seated underlying condition and one that was of towering significance in Western Europe. The issue at stake was nothing less than the sundering of the ties between the university and public service, in short, the unravelling of that historic nexus between State and University which had accompanied the advent of the modern university in Europe, namely the university’s historic function to identify and equip the Nation’s best for responsibility in the service of the State, a function which had lain at the heart of the institution’s identity in European society for more than a century and a half. Precisely when the unravelling began is difficult, if not impossible to pinpoint with precision, if indeed there is much profit in doing so for effectively it was a process both protracted and subject to a variable chronology depending on the particular system of higher education involved. There are some pointers that allow us to set it in a reasonably accurate chronological framework. In Germany, for instance, a speech by the then Chancellor, Helmut Schmidt, to the Bundestag in 1976 was the first instance I have been able to find that mentioned the looming crisis in these terms (Neave 1978). Still, there are plenty of indications of an indirect nature to suggest the problem was present elsewhere. In France, the curtailing of university studies and the creation of a two-year first cycle in 1972 – effectively aligning the structure of university programmes with those in the sparsely populated Instituts Universitaires de Technologie and four years later, the call specifically to align second cycle studies (Licence and Maîtrise) on possible labour market outlets (Fragnière 1978) were more than straws in the wind. Indeed, the tightness of the public sector labour market had provided one amongst many sources of high discontent in the student estate that set Paris ablaze in May 1968. Farther afield in Sweden, the 1977 university reform, the crowning effort of more than three and a half decades spent overhauling the education system from cellar to roof, aligned undergraduate study around seven occupational sectors rather than around disciplines (Premfors 1984). 10.1. Massification and the Uncoupling from the Fixed Price Labour Market It can come as a surprise to none that the mass university could not be sustained in its claim to the same privileges, still less to the same identity that gave its elite predecessor special standing. Nor is it coincidental that the relationship of university to labour market should quickly become problematic in the same decade as the universities in Continental Europe reached and then rapidly surpassed the 15 per cent of the age group, a participation rate which is commonly held to mark the threshold between elite and mass higher education (Trow 1974). France attained mass higher education status in 1972, swiftly followed by Germany and Italy around the middle of the same decade whilst Britain followed with greater decorum a decade later – by the mid-eighties (Neave 1982; Williams in this volume). The usual account of the seventies viewed from within higher education, also points to another tipping point being reached in the course of the same decade. That

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tipping point was triggered by the inability of governments to continue subsidising the demand for higher education at the same level as they had done hitherto. In short, the demand for higher learning began to outstrip the capacities of the public purse (Clark 1983; Glenny 1979), a situation, once again, influenced by events external to higher education. This time, however, the pendulum of history swung in the opposite direction – towards a slow-down in economic growth, a disquieting rise in youth unemployment across Europe both of which began to bite towards the end of the decade. To this were added the cumulative effects of a general and marked falling-off in the birth rates of Western Europe which, in certain instances – the then Federal Republic of Germany being the most spectacular with Ireland an equally spectacular exception – had dipped below the replacement level, a situation further compounded by a ‘greying’ of the population (Le Bras 1991). The general miasma of dismay, disarray and disquiet was not confined to the world of learning. Nor was the downturn necessarily diagnosed in the same manner across the different disciplines that contributed to the study of higher education (for these disciplines see Becher 1992). In the domain of political science, for instance, the worm in the apple was seen in terms of ‘ungovernability’. Namely, that government had become so complex and costly that it was no longer capable of generating support amongst taxpayers and citizens and still less capable of forging a consensus for the classic Keynesian measures the situation appeared to demand (Guy Peters and Rose 1982). A variation on this theme, which focused on the repercussions that followed for the world of education, launched the concept of compensatory legitimation which, from an American perspective, argued that one way for European governments to remedy the situation was to offload some of their responsibilities to citizen groups as a way of maintaining influence. The same article also professed to see signs of this happening (Weiler 1986). Economic stagnation called into question both the legitimacy of government and more particularly the sustainability of those publicly funded services, education included, that figured as part of the welfare state. It was a curiously distasteful state of affairs and one of no little paradox. It seemed to suggest that, in a mass society, the elite and the well-off could no longer afford to bear the burden of their less fortunate fellow citizens. Whether the willingness of government subsequently to pursue this precept of de-solidarisation counts as another example of ‘government failure’, must remain a matter of opinion. 11. CHANGE IN DISCOURSE Taken together, such developments and their attendant interpretations give us an insight into another shift equally fundamental that took place on a different level, but one no less important for all that. Beyond the immediate material conditions that bore down on higher education and which very certainly reflected them, emerged an equally radical change in the discourse through which the affairs of higher education were debated and conducted. Such a change in discourse alerts us to changes to the way in which the idea of higher education itself was conceived and reconstructed. In a word, we find ourselves in the presence of a fundamental reframing of higher

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education. Such reframing involved recasting the dominant perspective in which higher education was both analysed and debated from being a sub-set of the political system (Premfors 1984). Instead, higher education, like the welfare state of which in Western Europe it formed a part, was relocated as a sub-set of the economic system. This modification was as much a watershed for the way in which higher education’s role in society was subsequently to be reinterpreted, policy reframed and institutions reshaped as those accumulated agreements and decisions which, beginning in the early 19th century with the Humboldtian Memorandum on the future University of Berlin, gradually incorporated the university into the political system. As we have argued earlier, incorporation into the political system also largely determined the particular type of labour market to which the system of higher education related (for another perspective on this see Scotford Archer 1978; Trow 2003; Nybom 2003). 11.1. The Wondrously Penetrating Power of Economics One may, if the spirit takes one, trace the origins of this changement dans les mentalités back over the past four decades. Indeed, it is largely the purpose of this chapter. As one does so, however, one cannot disregard the fact that the penetration of Economics into the world of policy making in higher education began, in Europe at least, as partner at best or as handmaiden at the worst, to a concept of higher education which firmly had it as part of the political system. Prior to the mid to late eighties, with the obvious exception of economists, public discourse on higher education in Europe was simply not conducted in terms of ‘the market’, even though none could ignore the centrality of that relationship. There were good reasons for what may appear to Anglo Saxon eyes as something greatly to be wondered at. Competition between establishments for students, one of the essential features of higher education in the United States, was utterly and totally absent. On the contrary, students it was who competed for places in the most prestigeful establishments. Nor did the successful bring with them fees of any consequence, if indeed they brought anything at all, save their youth and their wits. Rather, the university was part of ‘public service’ (Van Wageningen 2003) which the State specifically and knowingly built up and in doing so deliberately kept the market at arm’s length (Huisman, Maassen and Neave 2001). Thus, the ‘market’ occupied no specific place in the European university, which accounts for the way in which the essential problem of the linkage between higher education and the workplace was both presented and researched – either as part of manpower demands, disguised as ‘the transition to work’, as occupational choice or, alternatively, as the problem of subject choice and ‘mismatch’. Agreed, the earlier construction of the university’s purpose – the training, socialisation and induction into the political elite, its express and acknowledged mission since the days of von Humboldt and Newman – had lost much of its substance. Even so, this is not to say that the political construct withered on the vine. Rather, it persisted, though in a form slightly revised. Thus, within this particular optic, the place of social justice as a priority may be perceived both as a continuation of, as well as evidence for, what

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amounted in the sixties, to the firm and enduring embedding of higher education as a sub-set of the political system. After all, it was not for nothing that expansion in the provision of higher education during that decade developed around the rationale of social engineering and was interpreted in terms of the ‘democratisation’ of access to school and university. Both terms spring from a political vocabulary, not an economic one. 12. EXPLAINING NEW CONSTRUCTS To signal the arrival of a new construct of higher education is one thing. To explain it, however, is a very different kettle of fish. And here again, different accounts are possible depending on the particular setting one chooses to analyse. Most assuredly, the internal saga of this transformation, viewed within higher education itself, is necessary. It is not, however, sufficient and indeed, the logic of the proposition that the end of the seventies in Western Europe saw higher education beginning to migrate from the political ‘cosmology’ to the economic, makes such an account more than insufficient on its own. At one level, the displacement of a political discourse by an economic one simply reflected the fact that the problems foremost in the minds of European governments in the late seventies and early eighties were themselves taken up with the economy and with the quest for ways of restructuring it, above all the heavy industrial sector, severely mauled by undercutting from South East Asia. Added to this were further agendas of equal strategic weight, one of the more pressing being economic integration within the European Community. Thus at a macro level, the relationship between politics and economics inverted, with politics serving to define, negotiate and implement economic strategy. Just as significant, was the corresponding redefinition in the notion of efficiency which, if conducted in harness with economics to ensure social efficiency during the locust years of Social Democracy a decade earlier, was also stood on its head so that changes in the underlying social ethic enforced by scrutiny, assessed performance and competition were placed at the service of economic efficiency. At another level, however, the quest for greater efficiency applied to the groves of academe already had its harbingers, some of which turned around revising the relationship of higher education to the labour market. Others pointed in a slightly different direction, to contain cost, chief amongst which the abandoning of the quinquennial funding system for British universities in the mid-seventies and towards the end of the same decade, the introduction in France of a more complex system of budget allocation – the so-called GARACES system – which effectively uncoupled university funding from student numbers (Fréville Report 1981; Glenny 1979). These, and measures like them, were largely pragmatic as indeed were the across-the-board cuts carried out in 1981 by the British University Grants Committee. Similar exercises in cost-saving through the rationalisation across the university sector of human resource and programme allocation were undertaken in the same year by the Dutch government under the title “Taakverdeling en

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Concentratie Wetenschappelijk Onderwijs” (“Task Division and Concentration in Higher Education”). 13. ON THE ROAD TO THE MARKET: PRAGMATICS VS. IDEOLOGY Yet, the fascinating aspect of such measures – and it is a point which Gareth Williams develops in his examination of the higher education market in the United Kingdom though he does so from a perspective very different from the one developed here (Williams in this volume) – is precisely when pragmatic action meshes with ideological discourse. For whilst the point he makes – namely that in the United Kingdom ideology crept along in the footsteps of the pragmatic – has been noted by others as a curiosity in British higher education policy of the day, it begs a number of leading questions. These are: ‘Whose account is valid?’ ‘When does ideology become policy?’ ‘When does the symbolic begin to influence the real?’ Whilst such queries lie at the heart of this exploration, they take on a very special pointedness when applied to those two systems of higher education, often seen as the bridgehead in Europe of the market defined by Neo-Liberalism. These two systems are Britain and the Netherlands. For those who closely observed the unfolding drama of higher education in Western Europe during the early eighties up to – say 1988 – one thing was immediately apparent. The ghost of John Maynard Keynes and the notion of priming the economic – or for that matter, the educational – pump by deficit spending, that is, injecting further public resources into the economy to ‘kick-start’ it, had been thoroughly exorcised by 1982 and that with expedition and gusto (Neave 1982). What was to replace it remained less evident. The Dutch government and the British universities, whose autonomy had yet to be tried, both embarked upon measures to raise efficiency in the university sector, the first by reducing duplication in similar programmes across the university landscape – a measure made easier by the fact that universities in the Netherlands are, at most, within three hours train ride of one other; the second by reviewing their own internal administrative efficiency (Jarratt Report 1985). As Williams points out, here was adhocery at its most ingenious as was, for that matter, the way in which the University Grants Committee inflicted a thousand cuts upon its members in 1981. In both cases, the move towards ‘marketisation’ – that is the apotheosis of the economic imagination made policy – was nowhere envisaged. Rather both the Dutch Ministry and the British Universities were engaged in what could just as well be seen as acts of good husbandry, though drastic in the extreme. 13.1. Scratching the Ideological Overlay To ascertain when pragmatism begins to assume an ideological overlay is no idle affair. On the contrary, it may provide us with other insights into a rather broader problématique. This takes us into another realm, into the general process of decision making as distinct from policy, mere administrative enactment as distinct from coherent purpose and intent, and vision as distinguished from the merest routine.

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At their most banal, politics turns around presentation and negotiation of a series of proposals – the party programme – with the intent to shape the course of a country’s development around them. More to the point, political programmes, like justice, must be seen to be done. Success of the party – and re-election – hangs therefrom. In the complex equation of political calculus, two elements stand out. These are coherence and capacity. Coherence is not only its own virtue. To endow policy with coherence also testifies to clarity of intention as well as the capacity consistently to enforce it – a quality of supreme significance for it is well known in politics as in the waging of war (politics is war by other means) that intention does not always imply capacity. Nor, for that matter, does capacity imply intention. Coherence, however, covers two other dimensions. One implies the ability to demonstrate coherence between party programme – that is, intention – and subsequent enactment – that is, capacity. There is, however, another dimension to coherence, one that is rather more rarely achieved. This is coherence across that most precious of commodities in the political marketplace, to wit, time. To be able to show capacity across time is to demonstrate strength of will successfully applied. Success, in principle, ought to lie in being able to invoke both the presence of a consensus (held to be evidence of the public’s tacit backing for what one is doing) and, more important, the command of consensus in the country at large. To be able to call upon the command of consensus across time reinforces the apparent power of consensus in one’s own favour. In addition, like any demonstration of will successfully applied over time, it tends to plunge the morale of the Opposition into the slough of deepest despond and this, in turn, opens up further opportunities for extending the scope of the party programme to vistas new and sometimes into areas that the party programme itself had not envisaged when first drawn up. If we re-examine British and Dutch policy in the light of the politics of consistency and coherence, we have a powerful lever over the interplay between pragmatics and ideology in politics and policy making. And, indeed, we may also apply the perspective of consistency and cohesion to explain the epidemic spread of Neo-Liberalism into the groves of academe elsewhere in Europe. 14. IDEOLOGICAL MESHING The meshing of ideology with pragmatically grounded action involves, theoretically at least, two separate modes, retrospective and prospective. Retrospective meshing takes place when the party in power takes over into, or associates pragmatic previous routine enactments with, its own programme. The advantage to be had from such behaviour is that initiatives carried out as part of the routine of administration or, to revert to a previous concept, as decisions initiated by and carried out within a specific sub-sector, give credence and legitimacy to the ideology by demonstrating its capacity to act. In the case of the United Kingdom, for example, retrospective meshing would explain the plaintive remarks of the senior official in the Department of Education and Science, which Williams cites to such good effect. Within the particular sub-set of administration where that individual had

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his being, enactment is part of administrative continuity. Prospective meshing, by contrast, involves ideology acting to determine administrative enactment and, since this is held to be the usual modus operandi that binds government to administration, we will comment upon it no further. The virtue and, from the historian’s standpoint, the curse of retrospective meshing is that it accommodates a certain parallelism in policy formation, just as it also admits the reality of numerous alternative accounts running side by side and, at the same time, all having very different perceptions of the same events. There may indeed be particular circumstances when retrospective meshing becomes a matter of necessity, for instance, when the particular sphere, where routine administrative enactment is carried out, enjoys relative autonomy. Such self-management can sometimes be construed as going counter to the ideological set, thus posing as a challenge both to its legitimacy whilst revealing limits to the ability of ideology to demonstrate capacity by transforming itself into action. Certainly, both of these elements were present as higher education policy evolved in the United Kingdom in the course of the eighties. What remains unclear – and it deserves exploring in other settings – is how far the move towards Marketisation which is itself an ideological construct of economic theory, lends substance to a similar interplay between ideology, policy and the process of enactment elsewhere. By the late eighties, British, Dutch and French governments were firmly committed to the pursuit of greater economy, efficiency and output from their systems of higher education (Neave 1988) though not always as a deliberate move towards Marketisation. The quest for the same Holy Grail, however, involved very different tactics. For the United Kingdom, the road to salvation took higher education along the perilous reaches towards increasing centralised control over finance, funding allocation methods, sometimes over student numbers, the whole flanked by a battery of extremely fine-tuned instruments of scrutiny, assessment and evaluation, which were to tie funding to performance (Williams in this volume). It was an interesting spectacle indeed. As the British interpretation of Marketisation took shape and form, it saw Europe’s most autonomous system of higher education being forced into close embrace with a degree of centralised oversight that would have evoked the admiration of the Great Napoleon himself, and perhaps also of Monsieur Fouchet, his Chief of Police. The irony of the situation was exquisite for, at the selfsame moment, the homeland of the Corsican Ogre had just emerged from bitter strife over ways to loosen the stranglehold of the Napoleonic inheritance – close central control. Indeed, the uproar in the National Assembly had arisen precisely from the proposal to bestow upon higher education the joys of greater decentralisation and institutional initiative, though in measured doses, a policy essentially outlined in the two Higher Education Guideline Laws of 1984 and 1989. 15. PRAGMATISM, CYBERNETICS AND THE DUTCH The Dutch, however, present a no less interesting case for it can be argued that there, too, the path towards Marketisation posed the question of timing and purpose. If, today, it is possible to trace the first moves in the process, later to be identified in its

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full splendour with Marketisation, back to the early eighties, this perception may itself be due to the falsity and distortion that hindsight so often entails. There is, however, very substantial evidence to suggest that, even in the late eighties, the strategy of reform in the Netherlands was no less pragmatic than Williams’ interpretation of British developments at the same time. The major focus of Dutch administration certainly lay with saving costs and raising efficiency, not without reason for per capita public expenditure in higher education was amongst the highest in Europe (Jallade 1981). But administration was also concerned with higher education’s capacity to respond rapidly to external change in general and most particularly in the economy. The form this took is interesting, not simply on its own account but also for the fact that the model involved was inspired by cybernetics rather than by economic theory. The nub of the cybernetic model turned around devising a system of coordination that increased the ability of higher education both to respond on its own initiative to external change and to do so by setting in place mechanisms of feedback – the ‘feedback loop’ with the idea that both individual institutions and, at an aggregate level, the higher education system in toto became ‘self-adjusting’ through a process of continued interaction and reiteration. The cybernetic model required the strengthening of the individual establishment’s ability to shape its own response, which implied changes both in internal governance and in management. It also implied that mechanisms of feedback and monitoring were required at national level to allow individual establishments to develop what the military call ‘situation awareness’, that is, an overall picture of the situation without which planning one’s own response is likely to be both hazardous if not downright ineffectual. The cybernetic model, brief though its heyday was (as a form of discourse it had virtually vanished from the corridors of power by 1989), anticipated the broad strategic avenue down which the Dutch were to march towards Marketisation. The march led on to redefining the Dutch Universities Association as central to the process of institutional Evaluation. Furthermore, it introduced to the system both academic performance and output indicators (Jenniskens 1997). It brought about a fundamental revision to the structure and powers of management by neatly extracting governance from the participatory ethic that had existed since 1974 (De Boer, Denters and Goedegebuure 1998; De Boer 2003). Why the cybernetic model failed to go any further must remain, for the moment at least, in the realms of surmise. Perhaps the very fact that it was a ‘technical solution’ and therefore endowed with little public appeal, accounts for its disappearance. Another possibility – and it can certainly not be excluded – is that it fell victim to ‘retrospective meshing’ and that, whilst the essential strategy remained intact, it now flew another flag as it emerged out onto a broader stage of national politics. 16. THE FRUSTRATIONS AND SUBTLETIES OF TRANSITION Concentration on the point at which the policies preceding Marketisation moved from the pragmatic to the ideological, has shown itself to have a certain kinship with the Russian doll – examining the simpler dimension reveals others behind it.

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Attempts to determine chronology bring other issues in their wake – the transition of policy from the technical to the ideological, the mutation from the pure milk of economic theory to its application and translation to different historic and national settings. Thus, what appears at first sight to be a relatively straightforward exercise in chronology and sequence becomes a matter of considerable complexity. Nevertheless, it is essential if we are to grasp the full import of Marketisation. For what emerges from this brief examination of the ‘period of transition’ is that measures which involve broadly similar technical enactments, controlling cost, creating agencies to evaluate institutional performance, the setting of institutional objectives and the advent of conditional finance – all of which were as evident in France and the Netherlands as they were in the United Kingdom – were not necessarily presented or even viewed as leading inevitably towards Marketisation at the time. Even as late as 1996, French authorities still looked askance at the prospect of market forces determining the development of higher education (Attali Report 1996). Such hesitation in no way barred the path to introducing a policy of ‘contractualisation’, that is, setting an individual university’s funding in the light of its self-determined objectives for a period of four years. Nor, for that matter, did it stand in the way of a particularly French variant upon ‘financial diversification’, which extended the privilege of funding part of the higher education budget from central government to regional authorities. Likewise when we turn our gaze to systems where Marketisation was to take root – the United Kingdom and the Netherlands – we find that the development of higher education went in diametrically opposed directions – strengthened centralisation in an historically decentralised system in the former, reinforced institutional initiative in a system previously set in a largely centralised frame in the latter. 17. THE BROAD LANDSCAPE WHEREIN MARKETISATION IS LAID At this juncture, I do not propose to examine those measures individual countries introduced as part of the drive to Marketisation. Others have done this. And redundancy is always odious. Rather, I wish to explore another aspect of the interplay between Economics as a body of expert knowledge and ideology as the vehicle by which it is brought to bear on higher education. Seen from this angle, Marketisation, as understood in present-day Europe, is informed by a very specific economic theory: supply-side economics. However, in its translation to the world of political action, this theory has acquired, or is presented as endorsing, a range of prescriptive actions that have, as their common ground, the supremacy of Economics in shaping human affairs. This ideological overlay parades under various terms – Neo-Liberalism to its supporters, Ultra-Liberalism to its detractors and adversaries. Marketisation is the consequence of applying the programme of NeoLiberalism to social institutions – in this case, higher education. As with the arrival in the early sixties of the Economics of Higher Education in the analytic toolbox of policy makers, so with its ultimate triumph in 1989 – the influence of global confrontation between two economic ideologies was never absent. Still, circumstances were different, indeed. As with the earlier mobilisation

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around the Residual Theory and Human Capital Theory, the initiative came from the United States. This time, however, an earlier defensive posture had given way to an offensive one. Supply-side economic theory, with its emphasis the creation of resources rather than distributing them more equally, on competition rather than cooperation as the driving social ethic, was translated onto the political platform and identified with the then President of the United States, Ronald Reagan. Reaganomics, the neologism that emerged from the prospective ideological meshing between economic theory and political action, amounted to war continued through an economic dimension. Its ultimate purpose called for a strategy of outspending the command economies. In economic warfare, victory is achieved not on the battlefield. It is achieved through bankrupting one’s enemy, bringing about the collapse of their economy and thus of the social and political order, which rests upon it. War, however, also opens opportunities that, in all probability, would not otherwise have arisen. And whilst Reaganomics had, as its long-term purpose, to sap the strength from the command economies, the Falkland War (1982) between Britain and Argentina also played its part in creating that window of political opportunity in Britain, Europe’s pioneer in applying the precepts of Neo-Liberalism to the fabric of higher education. The Falkland War and the election that followed provided Margaret Thatcher with a hefty majority and thus the political means – and the time – to translate party programme into enactment. For its part, the inner dissolution of the Soviet order and the command economy became evident from around 1987 in Hungary (Darvas 1988, 1998) and in the Baltic States (Tomusk 2001). The collapse of the Berlin Wall, which followed two years later, combined a triumph both real and symbolic. Indeed, it was a rare example of an historical event endowed with the weight of a double symbolism. It coincided with the bicentenary of the French Revolution of 1789 and, by its location – Berlin – brought the conflict full circle, ending it at the very place where it had started – a cycle which, as I have sought to show, had direct repercussions on the field of educational policy as it did in the latter’s relationship with the discipline of Economics. Just as the Berlin blockade of 1948 brought the prospect of educational reform in the Western democracies to a halt, so the events forty-one years later opened up a new era and especially so in higher education. The collapse of command economy systems, and with it the virtual – though temporary – extinction of academia in the lands of Central and Eastern Europe, conferred immense credibility on policies of Marketisation, both as the basis for social reconstruction and as symbolic of freeing the individual from the shackles of Party and State. A process, which was not always uncontested in Western Europe, in Central and Eastern Europe was perceived to hold limitless promise and immeasurable potential both in its power to construct those societies around an alternative order, social, economic and political and to do so in a way as far from the dominance of Party and State as one could possibly wish (File and Goedegebuure 2003). The countries of Eastern and Central Europe, by putting an end to a totalitarian order and that with extreme prejudice, paradoxically accomplished what Engels regarded as the ultimate stage of Communism – throwing the State onto the scrap heap of History. By so doing they also fulfilled a point that

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some, and the British Conservative Party was one, saw as one of the more desirable goals that Marketisation should also undertake. Agreed, it was set out in terms more delicate as the ‘rolling back of the frontiers of the (welfare) State’, but the avowed intent remained strangely similar. 18. INTERPRETATION OF IDIOSYNCRASY Though it is only right to point out the possible eccentricity of the idea, I incline to the view that the Velvet Revolution did not serve merely to extend Eastwards the political programme and social vision that had built up around Neo-Liberalism. By embracing it as much as a symbol of personal liberation (which in its way, it claimed to be) as a programme for reform, the lesson was not lost on Western Europe either. That Central and Eastern Europe, though for reasons very different, embraced ‘market enhancing’ policies, consolidated the credibility of the overall strategy. More to the point, the opportunity to recommend and to try out solutions – above all in the area of system and institutional management – opened up and added considerably to the authority of the same strategy in the countries exporting facets of it. Thus we see a new impulse in the drive towards Marketisation, which from 1990 onwards accelerated in Western Europe as well. Thereafter, countries other than Britain and the Netherlands began to engage in reforms that brought the Market to a central position in determining the shape and priorities of higher education, amongst which were the Scandinavian countries, Spain and Portugal (Teixeira, Amaral and Rosa in this volume). Paradoxically, the collapse of totalitarianism in the East spurred on reform in the West. In Britain and the Netherlands, both of which were heavily committed to advising the governments of the newly liberated lands on ways to adjust higher education to the conditions required by a ‘free market’, the transition from the pragmatic to the ideological moved rapidly forward as did the pace of reform itself. 18.1. The Vision Unspeakable The vision of ‘The Market’ became the bridge that brought the two halves of Europe closer together. In both, Marketisation stood as a radical break from what had gone before. In Western Europe, it stood the earlier strategy of planning by provision very firmly on its head. In the sixties, as we have seen, planning by provision in Western Europe brought the State to the aid of the private sector by public investment in generating highly qualified manpower. Marketisation reversed the process. It summoned the private sector to the aid of the State. It also marked a fundamental break from many of the more established practices that had accompanied the development of higher education hitherto. Amongst the most marked were the resiting of the points of administrative control and monitoring of system performance which migrated from the input side of higher education to the output side both in funding as in the monitoring of student flows. System performance itself was no longer identified with social mobility as a major priority with the result that studies into social background of students on entry moved on to examine patterns of

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student achievement when they exited. And whilst access remained as a central preoccupation, it too changed locus from focusing on access to higher education to an equally close scrutiny of access to the labour market. Similarly, investigations into the diversity in ability of students entering, realigned themselves around the diversity in the quality of the training they received. And last, but not least, was the change in the role that a market-driven policy assigned to the student estate. No longer were students seen as privileged ‘recipients’ of knowledge devised for them by those who had mastered it – a relationship so old that its origins were beyond the memory of Man. Apprenticeship, the traditional term that designated learners, yielded place to students conceived as consumers. The student estate thus took on a prime and vital function as the main channel through which change was transmitted from society into the heart of academia, a novel view which, at the very least, balanced the long-established notion that students were the main channel through which knowledge was transmitted from university into society. Such were the changes in function, perception and status which, at institutional level, built up and accumulated as individual systems of higher education moved down the road towards Marketisation, itself less a goal so much as an ongoing and continuous process. They reflect a species of backward coupling by which the forces of economic change permeate higher education, a process that some students of organisational sociology described in terms of system coordination moving on from State and Academic Oligarchy towards the market nexus (Clark 1983: 270). If we take a broad view of the process in Europe as a whole, it is very clear that, in its initial stages at least, calling in the market involved two very different approaches in Western Europe and in Eastern and Central Europe. For whilst both involved redefining the place of established relationships with government and the State, in Western Europe marketisation turned around a voluntary ‘self-denial’ – which others might see as politically imposed – but which had the State stepping back from previous responsibilities. In Central and Eastern Europe, the collapse of the State created a species of political ‘space’ – a vacuum by other terms – rapidly filled by the initiatives of individual citizens or self-constituted groups (Tomusk 2003). To the adepts of Neo-Liberalism, no greater justification for their view of the State as a ball and chain around the feet of the entrepreneurial could be found than in the amazing proliferation of private universities, which arose from out of the imploding command economies in Eastern Europe. True, some were universities only by self-description and vouchsafed by the name plate over the door. Still, as they rushed in to meet the clamour of individual demand that the collapse of the command economy released, they certainly gave substance to the idea that economic change was more rapid if the invisible hand of the market was given full reign. Thus, ‘privatisation’ in higher education, above all in Romania, Poland and Hungary, took a form more rapid and more radical than it did in the Western democracies where privatisation was largely associated with changes in sources of institutional funding and revenue, rather than wholesale and outright shifts in patterns of ownership.

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18.2. Where to Clap Adam’s Invisible Hand In Western Europe, the place of Adam Smith’s invisible hand and, indeed, how far it should be allowed to work, what ought to be the balance between freedom to meet the diverse demands of the market, how far regulation should be maintained and how it should operate, were the questions of the moment. But the consequences that follow from a change driven by the economic imperative are not limited to economics alone. They lend themselves, as we have seen, to different interpretations as these effects are scrutinised by different disciplines. Since the culture, purpose and thus the identity of the European university has, for the past two centuries or so, been symbiotic with State service, the official status and conditions of employment of its staff are often closely aligned upon equivalent levels in national administration, it is not surprising that the shifting referential locus from government to economy, from the political to the economic, was first examined by European students of higher education from the standpoint of the change in the relationship with government. Thus, the consequences of Marketisation in Western Europe were often presented in keeping with the changes in function and operative responsibility of central administration – the shift from state control to state surveillance (Van Vught 1989) the rise of the ‘offloading state’ (Neave and Van Vught 1991) the ‘Evaluative State’ (Henkel and Little 1998; Neave 1988, 1998). Others, building on this perspective, mapped the various stages and the accompanying profile, purpose and areas of responsibility that central government still retained (Gornitzka et al. 1999). A third perspective evoked shifts in the relative importance of levels of coordination as responsibilities moved out from Ministry to region and sometimes back to the institutional level (Gornitzka and Maassen 2000). What these approaches have in common, of course, is a dynamic grounded in time. They take their departure from an historic condition or an established relationship with government, with stakeholders, with industry and analyse the direction in which it is evolving, sometimes to demonstrate the fulfilment of policy, others to point up the shortfallings between original intent and subsequent outcome. And in this respect they are themselves part of that intellectual perspective that assigns an historic value to the university and evaluates its fate or fortune over time. Perspectives such as these, whilst they note the growing complexity of the university, its fragmenting disciplines, its ever more disparate and diverse student body, the many and proliferating functions that institutional administration takes on, still believe in the possibility of imposing an interpretation and understanding that are consistent and all embracing. 19. REFERENTIAL SHIFTS AND THE MORE INDIRECT CONSEQUENCES Yet, the shift in the driving referent of higher education from the corridors of the Ministry to the confines of the Boardroom, from politics to economics is not simply a shift in the locus of power and influence. The referential culture, which shapes the university to an increasing degree, is that of the world of business. Indeed, the transition of the university from an institution of political socialisation to an establishment providing training and services has largely been accomplished by the

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taking over of practices and purpose from the world of commerce – individual assessment, evaluation of performance, of goals achieved or opportunities missed, competition as an all-pervasive ethic. And whilst the permeation of the university by business practice is undoubted, few are the countries which went so far as the United Kingdom in seeking explicitly to embed ‘business culture’ by a programme exactly shaped to this end. The British ‘Enterprise Initiative’ launched in 1994 was not overly successful. It serves nevertheless as a specific instance of a wider and more subterranean process. Certainly, all this may be justified in the name of greater efficiency, in the ability to meet the needs of the market, as well as society’s expectations, though these are often lumped together under the all-embracing rubric of ‘consumer demand’. But they also bring about other changes, some more subtle, others not. One of the most significant is the redefinition of higher education in terms of performance, delivery, quality, flexibility and adaptability. Whilst some of these qualities are operational, all partake of two features. They are neither specific nor unique to higher education, still less to its staff or students – nowadays better rendered as employees and consumers. These are very far indeed from being unique qualities found only in the university, qualities that would allow us readily to grasp its exact purpose and identity. Rather they are criteria shared with, and very certainly applicable – doubtless with greater immediate profit – to other types of establishments from supermarkets to detergent factories whilst not spurning fast food chains – even those that glorify their name by having a university to train their high fryers. The University finds itself evacuated of meaning precisely because of the way it is presented before the public – an institution bereft of any identity save as a unit of production, albeit knowledge production. Past and process vanish before the supreme purpose of ensuring today’s delivery of various product lines: undergraduates, graduates, researchers, innovators, inventions, patents, consultancies, good advice and – hopefully – tomorrow’s entrepreneurs by means that some of our more technocratic colleagues compare with ‘just in time’ delivery systems (De Vijlder 1996). 20. DEFINING THE UNIVERSITY IN A MERCANTILE WORLD I am not saying that incredible shrinkage or erosion in the ‘unique significance’ that once attached to the world of academia is wholly attributable to the power and influence of the mercantile construct alone. Business is as much an abstraction as The Market. If we go in quest for explanations of how unique meaning became detached from higher education, it is no bad thing to start with developments inside higher education itself. Vice-Chancellors, University Presidents and Rectors in their Magnificence, not to mention their staffs, are to a man engaged in doing precisely this. Thus, we are faced with an immense proliferation in university types – entrepreneurial, service, responsive, European, even teaching – a fine oxymoron indeed. Added to this list, admittedly a slightly more helpful category, are universities, open, distant, virtual, online, research or professional. The senses reel while understanding advances ever so marginally.

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Licentious blooming of a thousand new self-descriptors lends itself all too easily to mockery and irreverence. It ought not to, since it anticipates a serious issue. This issue turns around the phenomenon of institutional differentiation that appears to follow any close association with the economy, though, unlike the experience of the Soviet Union in the thirties, in Western Europe, today’s differentiation is most pronounced in the university domain rather than the non-university sector. It also appears to be more volatile. Yet, the scrabble to forge the striking logo, to occupy a satisfactory niche, may also be interpreted, not only as ‘brand differentiation’ or ‘public image building’ (which they are, of course) but also as frantic attempts to reassert a particular identity in the face of generic similarity, and institutional anonymity which take shape when higher education is presented in the Newspeak of the burgeoning Knowledge Economy as productive units. 21. CONCLUSION Those who had the misfortune to attend British schools in the Age when singing was still part of the common lot, will recall – doubtless with dread – that old Jacobite air ‘The Bonny, Bonny Banks of Loch Lomond’. They will also remember, though not necessarily understand the true import of, the refrain: “Ye’ll take the High Road and I’ll take the Low Road And I’ll be in Scotland a’fore Ye”.

In this chapter I have sought to explore the roads to Marketisation by taking what economists will almost certainly look upon as the ‘Low Road’ of History. I leave the High Road of Economic Thought to others. The Low Road begins precisely at the point where the economic imagination takes its leave. The Low Road has to do with context, political, social, institutional – in this case, military even – that marches alongside the train of economic ideas and with which they intertwine. Economic thought very certainly serves to modify that context and may in its turn be modified by it. So, this account has focused on social context and purpose, on the changes in metaphor used to trace and to illustrate shifts in the way the university was presented or perceived. Such an approach also serves as a way of understanding through a social and political perspective precisely how and why certain key ideas in Economics took on the power and wielded influence they did and do still. In a way, it is easier to clarify change the longer the period under review. This is a natural penchant for historians. All too often, it serves to explain why they do not have the time to be short! It also accounts, though only in part, for my moving this saga in the history of a policy – Marketisation – back over the past forty years. Marketisation lends itself to interpretation from many contexts, the political not least. But it needs also to be set and explained against values and policies, priorities and perceptions – however erroneous or muddle-headed they might appear from the height of our contemporary wisdom – that are already in place and which preceded it.

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21.1. Gleichschaltung: A Concept of Synthesis If one were to seek a single term to sum up the development of higher education and society these two decades past, the notion of Gleichschaltung – palely translated as ‘convergence’ – would be a good candidate, were it not for horrendous overtones it carries with it. Gleichschaltung may be rendered as ‘abruptly bringing all together in a single mould’. The evidence for this, one might argue, may be seen from the dimensions on which universities today are publicly assessed and others, some related to, others independent of, Marketisation but which nevertheless coincide with its rise. Gleichschaltung emerges at system level through the creation of a single sector system – Britain and Australia furnishing good examples, and extends through to function and task – revenue raising, lowering of unit costs, raising levels of efficiency and, though we have not touched upon it, the concept of benchmarking. Also contained in the concept are dimensions that cover both ‘policy style’ – in effect the way policy is devised and applied – and its general goals. If we take a bird’s eye view of Marketisation and the reforms in financing, governance and management now identified with it in Europe, two things have been accomplished; first, the ending of the ‘Guardian’ relationship between State and higher education; second, the speeding up in higher education’s capacity to respond to external change. 21.2. The End of the Guardian Relationship Obviously the two are inextricably welded together. They are reflected in that other great Unwertung aller Werten, namely the university driven by external forces, which both aggregate up around, and as such emerge in, that term of intellectual compression – Marketisation itself. Here, one may detect a certain paradox. In effect, the paradox arises from the Guardian relationship the university in Western Europe had with the State. The State acted as protective intermediary and as the guardian of the general interest, placed between university and the external world of naked interests (Huisman, Maassen and Neave 2001). The justification Wilhelm von Humboldt originally used in support of this arrangement, held that only the State was powerful enough to hold the world of particular interests in check. Thus, when economic perceptions changed and ‘particular interests’ became the tide that leads on to fortune in Western Europe, the drive to bring the marketplace into the university was no less dependent on the State for its success. The end of the Guardian relationship may be skirted and left aside – the keening of the nostalgic, mourning an Age that is passing. It would be an error, however. The Guardian relationship is very probably incompatible with Marketisation. Its real significance lies elsewhere. Its passing is, in a certain manner, the university’s version of the end of history, so often argued on the grounds that our present day experiences are so unprecedented that they have no need for reference points in the past. ‘Speeding up’ the ‘responsiveness’ of higher education to external society is not necessarily part of the original theory of supply-side economics so much as an addon by governments, a process earlier explained in terms of ‘ideological meshing’. It

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is important to make distinction between the theory and the subsequent development of a policy that chooses to give itself weight by claiming origin in the theory. There is, to my way of thinking, no evidence more revealing of Marketisation in higher education as an exercise in Gleichschaltung than the introduction, in the wake of conditional financing, of systems of incentive and chastisement – sometimes brought to bear on the institution, sometimes extending to the individual. It is not the presence of such procedures per se that supports the idea of Marketisation qua Gleichschaltung. It is the notion that people in organisations – even universities – only move when paid extra or threatened with penalty, competition or precariousness. Excellence, emulation, calling – the specific and previously non-monetary forms of motivation usually associated with higher education – and most important when associated with the notion of disinterestedness or the sense of a ‘higher calling’ – if they do not disappear, are acknowledged with a heavy social discount or mark down. In the ‘marketed university’, academic work is placed on a par with those qualities that all others elsewhere in the Knowledge Society must demonstrate above all – productivity, output, flexibility, eagerness to compete. Thus, under the notion of standards, performance and transparency, what once was termed the ‘private life’, higher education (Trow 1976) is aligned upon a general productivity – the very symbol of the world abroad – and as clear an example of Gleichschaltung as one might hope to find. 21.3. Servant of the Immediate Ending the Guardian relationship not only changes the metaphor of the university from the exceptional – one of a kind – to becoming one organisational form amongst many. Its consequences extend to two other areas. These too involve a fundamental change of the university as particular type of agent in the intellectual fabric and thus its identity. The marketed university has largely shed its public identity as the repository of the Nation’s history and past achievements. Rather, it now appears to dwell in a continuous present with a weather eye cocked towards an immediate future. At present, its public purpose is defined as responding to external short-term demands – a present made ever present and maintained by the foreshortened and regularly repeated ‘accountability and evaluation’ cycle, which, depending on national choice, may run from two to four years, a cycle the power of which is grounded in the ephemeral and bolstered by implicit threats to survival at the institutional level and precariousness at the individual. In short, the ‘marketed university’ reflects the post-modern condition. 21.4. Back to History and Doxology There are many ways of interpreting this mutation of the University in the Knowledge Economy. One is to see it as the final step in a long historical process reaching back over three hundred years – to the 18th century Enlightenment. This process is part of the secularisation of society in which Adam Smith had his part – that is, replacing the mysterious (in both senses of that term) with the rational – a

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process that may otherwise be represented as the ‘désacralisation’ of knowledge itself and a corresponding change in perception of the institution and in the condition of those of its denizens primarily responsible for the transmission of knowledge. The shift of that institution from the political to the economic which has been explored in this chapter, is the principal illustration of this long-term trend continuing. The end of one type of history, like the end of a coherent and consistent view of the university itself, ought not to be taken lightly or thrust to one side as the special pleading of ‘particular interests’. History is an alternative memory or, to be more precise, the memory of alternatives. Living continuously in the present runs the risk of depriving higher education of those alternatives or of the ability in public debate to refer to the more successful examples in the past that may provide a basis for alternatives in the present. This is why History can still contribute to policy which is, essentially, about weighing up alternatives and balancing options. If there are no alternatives that may be applied to the present, we return to Doxology with a vengeance. And in this respect the irritable and petulant cry, often heard from those who urge their case and will brook no objection, ‘There is no alternative’ strangely echoes at several hundred years remove that other, supreme example of Orthodoxy challenged ‘Extra Ecclesiae, nulla salus’. REFERENCES Affanasiev, Valery. “The Soviet Union.” In Clark, Burton R. and Guy Neave (eds). The Encyclopedia of Higher Education, vol. 1, National Systems of Higher Education. Oxford: Pergamon Press, 1992, 643–663. Amaral, A., G.A. Jones and B. Karseth (eds). Governing Higher Education: National Perspectives on Institutional Governance. Dordrecht: Kluwer Academic Publishers, 2002. Attali Report. “Pour un modéle d’enseignement supérieur.” 1996, http://www.peep.asso.fr/edpeep/Supl.html. Becher, A.T. “Disciplinary Perspectives on Higher Education: Introduction.” In Clark, Burton R. and Guy Neave (eds). The Encyclopedia of Higher Education, vol. 3, Analytical Perspectives. Oxford: Pergamon Press, 1992, 1763–1776. Bienaymé, Alain, Ladislav Cerych and Guy Neave. La Professionnalisation de l'enseignement supérieur. Paris/Amsterdam: Fondation Européenne de la Culture, 1986. Brosan, George and Eric Robinson. “Polytechnics – The People’s Universities.” In Carter, Charles (ed.). Higher Education Policy and Practice. Education Special. Harmondsworth: Penguin, 1972, 16–27. Carr, E.H. Socialism in One Country 1924–1926. 2 vols. Harmondsworth: Penguin Books, 1971. Clark, Burton R. The Higher Education System: Academic Organisation in Cross-National Perspective. Berkeley/Los Angeles/London: University of California Press, 1983. Crowther Report. 15–18. London: HMSO, 1956. Darvas, Peter. “Reform Policy and Changes in the Education System.” Higher Education Policy 1.3 (1988): 38–43. Darvas, Peter. “Hungary.” In Torsten, Husén, Neville Postlethwaite, Burton R. Clark and Guy Neave (eds). The Complete Encyclopedia of Education (CD-ROM). Oxford: Elsevier Science Ltd, 1998. De Boer, H. Institutionele Verandering en profesionele Autonomie: een empirisch-verklarende studie naar de doorweerking van de Wet ‘Modernisering Universitaire Bestuursorganisatie’ (MUB). Enschede: Centrum voor Hoger Onderwijs en Beleid, 2003. De Boer, H., B. Denters and L. Goedegebuure. “On Boards and Councils; Shaky Balances Considered. The Governance of Dutch Universities.” Higher Education Policy 11.2/3 (1998): 153–164. De Costa, S. World Yearbook of Education. London: Evans Brothers, 1949.

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De Vijlder, Frans J. Natiestat en Onderwijs: een essay over de erosie van de relatie tussen Westernse natiestaten en hun onderijssystemen. ’s Gravenhage: VUGA Uitgeverij, 1996. Doumenc, Michel and Jean-Pierre Gilly. Les IUTs: politique et idéologie. Paris: Edition du Seuil, 1978. File, Jon and Leo Goedegebuure (eds). Real-Time Systems: Reflections on Higher Education in the Czech Republic, Hungary, Poland and Slovenia. Brno, Czech Republic: Vuilin Publishers, 2003. Fragnière, Gabriel. “Changes in the Structure and Content of Courses.” European Journal of Education 13.1 (1978): 107–120. Fréville, Yves. Le Financement des Universités (Fréville Report). Paris: La Documentation française, 1981. Furth, D. “Short-Cycle Higher Education: Europe.” In Torsten, Husén, Neville Postlethwaite, Burton R. Clark and Guy Neave (eds). The Complete Encyclopedia of Education (CD-ROM). Oxford: Elsevier Science Ltd, 1998. Glenny, Lyman T. Funding Higher Education: Six-Nation Analysis. New York: Praeger, 1979. Gornitzka, Asa, Jeroen Huisman, Ann Klemperer, Peter Maassen, Leo van der Maartand and Oscar van Heffen. State Steering Models with Respect to European Higher Education. Enschede: CHEPS, 1999. Gornitzka, Asa and Peter Maassen. “Hybrid Steering Approaches with Respect to European Higher Education.” Higher Education Policy 13.3 (2000): 267–285. Guy Peters, B. and Richard Rose. Can Governments go Bankrupt? New York: Basic Books, 1982. Hearnden, Arthur. The British in Germany: Educational Reconstruction After 1945. London: Hamish Hamilton, 1998. Heidenheimer, Arnold. “The Politics of Educational Reform: Explaining Different Outcomes of School Comprehensivization Attempts in Sweden and West Germany.” Comparative Education Review 18.1 (1974): 388–410. Henkel, Mary and Brenda Little (eds). Changing Relationships Between Higher Education and the State. London: Jessica Kingsley, 1998. Huisman, Jeroen, Peter Maassen and Guy Neave. Higher Education and the Nation State. Oxford: Elsevier Science for International Association of Universities, 2001. Husén, Torsten. Talent, Equality, Meritocracy. The Hague: Martinus Nijhoff for European Cultural Foundation, 1974. Jallade, Jean-Pierre. “Editorial.” European Journal of Education 16.1 (1981): 5–6. Jarratt Report (Committee of Vice-Chancellors and Principals). Report of the Steering Committee for Efficiency Studies in Universities. London: CVCP, 1985. Jenniskens, Ineke. Governmental Steering and Curriculum Innovations: A Comparative Study of the Relation Between Governmental Steering Instruments and Innovations in Higher Education Curricula. Enschede: CHEPS, 1997. Kristensen, T. “Preface.” The Residual Factor and Economic Growth. Paris: OECD, 1964, 9. Kulhman, Kaspar. Schulreform und Gesellschaftlichen Prozeß Bundesrepublik Deutschland 1946–1966. Stuttgart: Klett Verlag, 1970. Le Bras, Hervé. “Demographic Impact of Post-War Migration in Selected OECD Countries.” Migration. The Demographic Aspects. Paris: Organisation for Economic Co-operation and Development, 1991, 15–26. Leitner, Erik. “Unequal Competition: Access to Universities and Fachhochschulen in Austria Between Open Policy and Selectivity.” European Journal of Education 31.3 (1996): 259–271. Mallinson, Vernon. “Education in Belgium.” Comparative Education Review 11.3 (1967): 275–287. Mende, Klaus Dieter. Schulreform und Gesellschaftlichen Proceß in der Deutschen Demokatischen Republik 1945–1965. Stuttgart: Klett Verlag, 1970. Neave, Guy. “Conclusion.” Nouveaux modèles d'enseignement supérieur et égalité des chances: perspectives internationales. Série Education No. 6. Luxembourg: Commission des Communautés Européennes, 1978, 126–132. Neave, Guy. “On the Edge of the Abyss: Overview of Recent Developments in European Higher Education 1980–1982.” European Journal of Education 17.2 (1982): 123–145. Neave, Guy. “On Shifting Sands: Changing Priorities and Perspectives in European Higher Education from 1984 to 1986.” European Journal of Education 21.1 (1986): 7–24. Neave, Guy. “On the Cultivation of Quality, Efficiency and Enterprise: An Overview of Recent Trends in Higher Education in Western Europe, 1986–88.” European Journal of Education 23.1/2 (1988): 7– 23.

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Neave, Guy. “War and Educational Reconstruction in Belgium, France and the Netherlands.” In Lowe, Roy (ed.). Education and the Second World War: Studies in Schooling and Social Change. London/Washington DC: The Falmer Press, 1992, 84–127. Neave, Guy. “The Evaluative State Re-considered.” European Journal of Education 33.3 (1998): 265– 284. Neave, Guy. “On the Return from Babylon: A Long Voyage Around History, Ideology and Systems Change.” In File, Jon and Leo Goedegebuure (eds). Real-Time Systems: Reflections on Higher Education in the Czech Republic, Hungary, Poland and Slovenia. Brno, Czech Republic: Vuilin Publishers, 2003, 15–37. Neave, Guy and Frans A. van Vught. Prometheus Bound: The Changing Relationship Between Government and Higher Education in Western Europe. Oxford: Pergamon Press, 1991. Nybom, Thorsten. “The Humboldt Legacy – Reflections on the Past, Present, and Future of the European University.” Higher Education Policy 16.2 (2003): 141–159. OECD. The Development of Secondary Education: Trends and Implications. Paris: OECD, 1968. Papadopoulos, George. Entwicklung der Bildungswesens von 1960 bis 1990: der Beitrag der OECD. Bern: Peter Lang Verlag, 1996. Philips, David. “Wartime Planning for the Re-education of Germany: Professor E.R. Dobbs and the German Universities.” Oxford Review of Education 12.2 (1989): 195–209. Pratt, John and Tyrrell Burgess. Polytechnics, A Report. London: Pitmans, 1974. Premfors, Rune. “Research and Policy Making in Swedish Higher Education.” In Husén, Torsten and Maurice Kogan (eds). Educational Research and Policy: How Do They Relate? Oxford: Pergamon, 1984, 207–240. Rothblatt, Sheldon. The Modern University and its Discontents: The Fate of Newman’s Legacies in Britain and America. Cambridge: Cambridge University Press, 1997. Sandvand, Ole Johan. Distrikt Hogskolerna eller selfstandige institujoner. Oslo: NIFU, 1976. Scotford Archer, Margaret. The Social Origins of Educational Systems. London: Russel Sage, 1978. Tomusk, V. The Blinding Darkness of the Enlightenment: Towards an Understanding of Post StateSocialist Higher Education in Eastern Europe. Turku: RUSE, 2001. Tomusk, V. “The War of Institutions, Episode I: The Rise, and the Rise of Private Higher Education in Eastern Europe.” Higher Education Policy 16.2 (2003): 213–238. Trow, Martin. Problems in the Transition from Elite to Mass Higher Education. Policies for Higher Education. General Report to the Conference on the Future Structure of Post-secondary Education. Paris: OECD, 1974. Trow, Martin. “The Public and Private Lives of Higher Education.” Daedalus 104 (1976): 113–127. Trow, Martin. “In Praise of Weakness: Chartering, the University of the United States and Dartmouth College.” Higher Education Policy 16.1 (2003): 9–26. Vaizey, John. The Residual Factor and Economic Growth. Paris: OECD, 1964. Van Vught, Frans A. (ed.). Government Strategies and Innovation in Higher Education. London: Jessica Kingsley, 1989. Van Wageningen, Anne C. De Staat van de Universiteit: een Rechtsvergelijkende studie naar de institutionalisering van de Universiteit in Nederland, Frankrijk en Nordrhein-Westfalen. Enschede: Centrum voor Hoger Onderwijs en Beleid, 2003. Weiler, Hans. “Legalisation, Expertise and Participation: Strategies of Compensatory Legitimation in Education Policy.” Comparative Education Review 28.2 (1986): 132–139.

ROGER L. GEIGER

MARKET COORDINATION OF HIGHER EDUCATION: THE UNITED STATES

1. INTRODUCTION With nearly 4000 accredited colleges and universities, serving more than 15 million students, the United States provides a laboratory for markets in higher education. This laboratory, furthermore, has become more market-like over the past quarter century. However, it remains a strange sort of market – one in which prices are not what they seem to be and competition is largely confined within market segments. Since 1980, privatisation has been the mega-trend in American higher education (Geiger 1989, 2004a). Privatisation in its broadest sense reflected a change in the zeitgeist: engagement with private industry and capital markets, once viewed with deep suspicion, was embraced as a social duty as well as a source of revenue. Hence, universities now eagerly sponsor cooperative programmes for education and research with corporations, and engage in commercial activities via research parks, patenting, start-up companies and venture capital funds. Moreover, the spirit of capitalism has found a home in higher education in the form of for-profit universities, the fastest growing segment of this industry. But privatisation has worked more fundamental change in the way Americans pay for higher education. The mushrooming of student financial aid in all its forms has transformed the economics of American higher education. For private colleges and universities, particularly the more prestigious ones, the current era has brought robust prosperity and confidence. In the public sector, privatisation has meant a steady substitution of student-derived revenues for those provided by the state. For institutions in both sectors, privatisation has meant intensified competition. But whether this represents the benevolent invisible hand of Adam Smith or the potentially ruinous competition of Joseph Schumpeter is a matter worth contemplating (Kuttner 1997). 2. MARKET COORDINATION The apotheosis of free market ideology has been accompanied by a kind of functional extension, actual or advocated, of market relationships beyond the forprofit realm of the economy. However, the operation of markets depends upon contextual factors that regulate, constrain or otherwise influence the economic forces of capitalism. Such factors play an even larger role in sectors that lie outside the for-profit sector, notably, education. Charles E. Lindblom has offered such an encompassing view in The Market System. Although he does not discuss higher 161 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 161–183 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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education specifically, his critical perspective on markets offers insight into these issues (Lindblom 2001). Markets, above all, perform the task of social coordination. Market coordination is the antithesis of central or government coordination. It has the virtue of being non-coercive since it proceeds largely through processes of mutual adaptation. But it is far from being the only form of social coordination. Considering just higher education, the distribution of opportunities for postsecondary instruction is a ubiquitous concern in modern societies, and hence invites a large degree of central coordination. Everywhere, the coordination of educational opportunity is heavily influenced by government decisions about the availability of places and the terms of attendance. In the same way, one might consider the coordination of the multiple social roles of universities. Market coordination certainly plays an important role here, but so do the actions of government, philanthropy and voluntary associations of universities themselves. From this perspective, the question becomes: What is the role of market coordination in the social coordination of universities? Market coordination ought to move social coordination in the direction of greater efficiency, but such movement occurs within a constraining structure. The domain of market coordination is limited by prior conditions and numerous contextual factors. In particular, in areas where large spillovers exist (i.e. where benefits or costs are not reflected in prices) prices are to some degree arbitrary. Additional factors as well constrict the domain of market coordination, and “its limited domain is a limit on its capacity to achieve efficient allocations” (Lindblom 2001: 175). Market systems are above all affected by the large role played by governments. Governments affect social coordination in three ways: they make significant purchases of goods and services; they penalise some activities through taxation; and they encourage behaviours they favour through subsidisation. The result is not a free market, but rather an administered market system (or quasi-market) – one, moreover, in which the values of the polity play a large role in affecting approved and disapproved activities. It is chimerical, Lindblom argues, to believe that unalloyed market coordination can achieve economic efficiency. Rather, a mix of factors, including values, determines at any moment the balance between market coordination and other forms of social coordination. For example, the United States made numerous explicit choices that tilted this balance toward markets. Most consequential were policies enacted at both the state and federal level that channelled public subsidies to students rather than institutions thereby enhancing choice and purchasing power. The federal government also brought legal action to prevent universities from cooperating instead of competing in the award of institutional student financial aid. The 1980 Bayh-Dole Act was the most conspicuous of government actions that encouraged the commercialisation of the results of academic research. And in the 1990s, the federal government decreed that the special facilities and treatments offered by university health care centres would no longer be exempted from the pricing system for managed health care. Each of these actions introduced an increment of market coordination into areas that had, in Lindblom’s words, very limited “capacity to achieve efficient allocations” (Lindblom 2001: 175). Yet, they also represented values that favoured voluntary choice and distrusted institutional determinations of the social good.

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The discussion that follows will invoke some of the properties of markets suggested by Lindblom. In particular, it will be seen that market coordination, efficient allocation, mutual adjustment and the role of pricing, all operate in different ways with different effects for different parts of the higher education market. Considered first will be the markets for input factors – graduate students and research funding – that attain perhaps the most efficient allocations, albeit without a significant role for pricing. Attention will next be directed to the vast market for undergraduate education. Here the market phenomenon that has attracted greatest attention from economists has been the competition for students in the selective sector of higher education. Closely linked is the general problem of pricing and price discrimination, complicated by the role of third party payers. Explanation is also required for the far larger market served by unselective colleges and universities. The different sectors of the vast American system will be identified by price, clientele and degree of market coordination. The final section will summarise the unique market dynamics of American higher education. 3. RESEARCH AND GRADUATE EDUCATION – PERFECT COMPETITION WITHOUT PRICES Taken as a whole, higher education in the United States is a mixed, not a market, economy. Governments supply a large portion of revenues. Income from endowments in theory gives some institutions a degree of independence from market pressures. In the language of non-profit organisations, universities are both donative and commercial enterprises in the way they derive their revenue. But universities need other resources too. The allocation of human resources creates markets that are largely internal to higher education. Moreover, these tend to be zero-sum situations, where institutions must compete for shares of finite resources. These input factors are seldom analysed in market terms, but market forces substantially affect them. Doctoral education, particularly in the sciences, is perhaps the most efficient competitive market in higher education. Each winter a limited number of students with the requisite qualifications apply to those science and engineering departments that they would most like to attend and that would be most likely to accept them. The applicants are well informed about the training they seek, and they are highly mobile as well. Each department is a small, autonomous producer, and the departments in each subject area collectively form a national market. Except for pricing, doctoral education approaches the requirements for perfect competition. Doctoral students are a necessary input for university science departments, serving as research and teaching assistants and sustaining doctoral programmes. For that reason, almost all of them are supported while undertaking their studies – in most cases with full tuition, some benefits and a liveable stipend. Each spring this market clears as participants, through mutual adjustment, work out the best match between applicants and departmental offers. The key feature of this market is that both applicants and departments vary in quality in ways that are fully understood by both parties: applicants and departments can therefore be ranked according to desirability. Thus, a dual competition takes

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place – departments seek to attract the most preferred students and students seek places at the most preferred departments in their field. This situation produces a queuing process of allocation. Top departments choose, and are chosen by, the best students; departments in the next tier do the same with the remaining students; and so on down the list. However, this market is highly competitive and the terms of competition fairly delimited. Even top departments could not attract the students they wanted if they offered too low a price, nor can top students bargain for a stipend much above the norm. Nevertheless, over time, the interplay of market forces affects the terms of this competition. Since the late 1970s, the supply of qualified students seeking doctoral education in the sciences and engineering has generally been less than the places potentially available for them. Market forces, in other words, have favoured applicants. One consequence has been a substantial increase in the number of international students. Universities have thus enlarged and improved the supply of applicants by substituting highly qualified international students for lower-ranked (or nonexistent) domestic ones. The number of doctorates granted to foreign nationals tripled from the late 1970s to the early 1990s, exceeding 50 per cent in engineering and 30 per cent in the natural sciences. A second development has been the gradual improvement of the support packages given to doctoral students. As they competed for better students, departments lengthened the time of guaranteed support and increased the value of stipends. The markets for professional schools – medicine, law and to some extent business – resemble those for doctoral studies, at least for institutions serving the national market. Regional and local markets play a larger role in professional education, where location strongly affects recruitment, but in the national markets the queuing process predominates. Top students are certainly prized, but in this case they are less likely to be paid to attend. Rather, the prevailing assumption is that students embarking on presumably lucrative careers should themselves pay for much of their training. Demand for places in professional schools has waxed even as interest in doctoral programmes waned (the result of another set of market forces). Market forces since the 1970s have thus favoured professional schools. Their reaction, it would seem, has been to gradually increase prices. Tuition for professional schools has accordingly risen well above that charged for undergraduate or graduate studies. Academic research constitutes an administered market in that the terms of exchange are set and administered by the agencies supporting research in cooperation with the recipient universities. In this market, university scientists are the sellers of research; outside funders are the purchasers. The service for sale – research – is literally priced at cost. That is, research proposals specify direct costs as defined by conventions in the field, with a mark up allowed for indirect costs. The crucial element in these transactions is the quality of the research proffered. Purchasers, given their objectives, seek to maximise the quality of the investigations they support; scientists compete for this support chiefly on the basis of the quality of the research they propose. The research market is beautifully efficient. It is nationally integrated, with various units of the federal government independently purchasing 60 per cent of

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research. At the same time it is highly decentralised, with no unit selling more than 2 per cent of the total. There are few informational asymmetries. Buyers and sellers know one another extremely well, exchanging visits, attending the same meetings and cooperating in evaluations. There is considerable latitude for negotiations between the parties over the terms of work. Forms of contracting are flexible as well. Agencies that wish to advance a scientific field typically invite investigatorinitiated proposals. Those with predilections for the direction research should follow issue ‘requests for proposals’ that specify those interests. Funders seeking research on particular topics can draft appropriate contracts with university scientists. Each of these arrangements represents a different combination of buyer interests and seller interests. By mutual adjustment these complementary goals are fulfilled. At the end of the day (or fiscal year) the market clears. The highest quality and most apposite academic research is supported by the funds available for these purposes. Academic scientists who endure the tribulations of grantsmanship may regard this process as neither beautiful nor efficient (although many would). The continual preparation and evaluation of proposals represent a kind of friction consuming scientific energy, but not entirely wasting it. Other kinds of difficulties arise. The 1990s witnessed allegations of fraud; problems of secrecy or vested interest; a congressional penchant for politically directed funding; and, as always, criticism of peer review (Savage 1999; Chubin and Hackett 1990). However, the indignation with which these matters are aired is testimony to the strength of normative values that uphold the system. The market for academic research has not only effectively coordinated the distribution of academic research over half a century, it has also shaped American universities (Geiger 2004b). A third critical input to higher education is the faculty. This market too is dominated, at least for universities, by the shared value of academic quality – the ability of faculty members to contribute to the advancement and dissemination of knowledge. The efficient allocation of faculty means placing the most talented individuals in settings that provide the most ample resources, including talented students. The market for academic labour operates toward the attainment of this ideal, but is impeded by high transaction costs (for individuals and institutions) and consequent low mobility. It also produces a very high level of qualification for faculty, at least at university level. The high level of qualification of university teachers is fundamental to universities as places of learning. It is also inherent to the distinctive character of faculty labour. The ticket of entry into the academic profession is the PhD – a prolonged, expensive and narrowly specialised form of training for which the individual alone is responsible. Once employed in a university, faculty members are expected to devote their career to fairly well-defined tasks that are predicated on their expertise (McPherson and Winston 1984). The institution, however, now supports the further development of this expertise by supporting professional development, but chiefly by under-utilising the instructional capacity of its faculty. An efficient academic labour market awards positions that afford the greatest opportunity for intellectual growth – the largest institutional investments – to scholars who have the greatest promise to contribute to learning. Potential faculty members are in fact exhaustively evaluated on precisely this criterion. The eminence

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of their graduate department, the recommendations of doctoral mentors and initial scholarship all attest to a candidate’s potential to advance knowledge in the field. Sponsorship plays a large role in fitting doctoral students for academic careers, but even those less favoured can advance to more nurturing positions through the strength of their scholarship. The process of fitting scholar and place is continuous. During the six probationary years that precede consideration for tenure, academics are expected to realise some of their promise. Universities that make the largest investment in junior faculty expect substantial and impressive accomplishments in order for tenure to be earned. Where less is invested, less is generally expected. This same process of measuring achievements against expectation, relative to the richness of the academic environment, continues throughout an academic career. The result is the development of expertise that far exceeds the minimum requirements of teaching all but the most advanced students. Hence, tenured and also untenured faculty members know far more than is necessary to teach the largely codified knowledge that is transmitted in undergraduate classes. Universities acknowledge as much by liberally substituting less qualified teachers – graduate teaching assistants or part-time instructors – for less advanced courses.1 But over-qualification in this sense allows faculty, as experts in specialised fields, to make more singular contributions in advanced instruction, in service to knowledge consumers and in furthering knowledge in their field. 4. THE MARKET FOR UNDERGRADUATE STUDENTS – THE SELECTIVE SECTOR Participants in the market for undergraduate education intuitively recognise that it is highly segmented, and many attempts have been made to identify the segments. One useful scheme was devised by the Carnegie Foundation for the Advancement of Teaching in 1970 and revised periodically until 1994 (CFAT 1994). It grouped institutions largely in terms of the level of degrees offered and quality, which only roughly approximated the segments of undergraduate education. An explicit attempt to characterise market segments was developed by Robert Zemsky and associates. They defined seven segments according to a combination of selectivity of admissions and graduation efficiency. Specifically, the categories range from the most highly selective ‘medallion’ institutions to those offering ‘convenience/user-friendly’ education to largely part-time students (Zemsky, Shaman and Ianozzi 1997).2 The segments differed in such input characteristics as tuition prices, financial aid, spending per student and student ages. They also produced predictable differences in outcomes such as graduation rates and subsequent earnings. In numerous papers Gordon Winston and the Williams Project on the Economics of Higher Education have developed another depiction of this market. Using data on educational costs and student financial aid, Winston divided public and private institutions into deciles based on the amount each institution subsidised a student’s education (Winston 2000). The resulting ranks showed educational costs varying by

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a factor of three from the first to the tenth decile in both sectors (data for 1995–96). Private college students who paid the highest tuition also received the highest subsidies. The same was true at the extremes for public students, at much lower tuition prices. The challenge for Winston has been to explain the market forces that produce this distribution – particularly to explain the economics of the selective private sector. The key concept for this endeavour has been peer effects – the notion that bright students contribute a vital and irreplaceable value to the education of their peers. First developed in a paper by Michael Rothschild and Lawrence J. White, this view sees students as inputs as well as outputs of higher education (Rothschild and White 1995). Winston has developed and tested the notion of peer effects in the papers of the Williams Project. Most importantly, he has shown how the importance of peer effects turns the competition for students into qualitative competition, and how that distinguishes the selective sector from the unselective parts of higher education: Competition at the top and the bottom of the hierarchy takes place in markets for two very different things. At the bottom, it’s competition in the product market for customers who will buy the output; at the top, it’s competition in the input market for scarce students (and faculty) quality that will improve a school’s educational quality and position (Winston 1999: 30).

This line of analysis has been synthesised into a more comprehensive model by Caroline M. Hoxby. The prime mover in unleashing these market forces, according to Hoxby, was the integration of a national market for higher education over the last 50 years (Hoxby 1997). The enlargement of the market for selective institutions by itself tended to produce increased segregation of students by ability level. Top students, given greater choice, have an interest in choosing the highest possible quality. Due to their role in educating one another (peer effects), high-ability students have an incentive to cluster together. Better students contribute to higher quality, which in turn attracts better students. Universities clearly recognise the value of such students and do all they can to attract them. Since the most effective inducement over the long run is high quality, they chiefly resort to qualitative competition. The alternative – price competition – in its cruder forms tends to restrict inputs, attract less qualified students and diminish quality. ‘Quality’ is unspecified here since it could reflect the effects of bright peers, abundant inputs or other attributes. In fact, the cumulative effects of such desirable inputs are the defining condition: increased spending for the enhancement of quality serves not only its immediate purpose, but by attracting more top students it has an additional effect – a multiplier – which boosts quality further still. Prestige ought to reflect quality, but far more is involved. As a function of consumer awareness, prestige is affected by the entire manner in which selective institutions market themselves and how they are treated in the media. Specifically, rankings advance their own definition of prestige, creating a ‘positional market’ (Winston 1999). Institutions compete doggedly for relative position within their own particular stratum, or for bragging rights about the company they keep (top 20, top 50 etc.). The positional markers in this competition (akin to positional goods in a

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true positional market) are measures of selectivity, costs or rank. Prestige is vitally important nevertheless because it relates so closely with institutional wealth. Qualitative competition has apparently spurred universities to augment educational spending, principally through the policy of high-tuition and high-aid, which will be considered next. The most prestigious institutions have been best able to make this approach work to their advantage. So, in this respect, prestige helps to optimise tuition revenues. Prestige also appears to be a critical factor in attracting voluntary support. Prestige for these purposes comes in many flavours. However, academic distinction, particularly in undergraduate education, seems to be the most potent factor in unlocking the generosity of alumni. High costs among private universities correlate closely with high selectivity, as measured by SAT scores. High levels of spending, in other words, appear to promote higher student quality. This pressure for evermore spending among the country’s wealthiest universities is now conventionally called the ‘arms race’ (Winston 1999). This process of escalating costs is inextricably bound with tuition pricing and financial aid. 5. TUITION AND STUDENT FINANCIAL AID The costs of higher education borne by students nearly doubled in real terms from 1978 to 1996. In the same years GDP and disposable personal income each grew slightly more than 50 per cent. Student tuition expenses, then, grew nearly twice as fast as the economy. So dramatic a rise in a national accounting category generally requires the tapping of some new source of revenue. In this case, the future earnings of students (and also parents) were transformed through loans into current expenditures. This new source of purchasing power permitted students to extend their outlays to keep pace with the rising level of tuition.3 A crude comparison suffices to make this point. From 1980 to 1996, gross revenues from tuition in American higher education increased from $24 to $55 billion (1996$). In the same period, federal student loans grew from $9 to $27 billion. Thus, federal loans alone represented well over half of the additional purchasing power (NCES 2000).4 (In 2001–02 federal student loans totalled $42 million.) Loans of course are not grants – there is an obligation to repay. Higher education is now obligated as well – to federal student loans for its financial sustenance. Since the 1980s, an ongoing debate has contested the relationship between student financial aid and the spiralling price of tuition (NCES 2001). Critics have alleged that universities have exploited federal grants and loans in order to raise tuition. In the case of outright grants, any independent effect would have to be negligible. These programmes have stringent financial need requirements and are capped at levels that limit their impact for high-tuition institutions. The situation with loans is more suspicious. Those who would deny a link between loans and tuition point to an absence of a short-term correlation between increasing loan volume and tuition boosts. On the other hand, given the sheer magnitude of loan volume, it scarcely seems possible that the substantial increase in the cost of attendance could have occurred without them (Hauptman and Krop 1998: 73).5 This

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latter position becomes more plausible if one examines the actual process of determining and awarding student financial aid. The financial aid process is highly standardised across the entire system of higher education. It could be depicted as a balance scale, where the ‘Estimated Cost of Attendance’ for a given institution is first placed on one side. The various forms of payment are then added to the other side until the cost is met. First comes the ‘Expected Family Contribution’, which is calculated using a standard methodology from the information on savings and income entered on the financial aid application form. The next addition is ‘Need-based Aid’ for which the student qualifies (if any). This group of payments includes Pell grants and the so-called campus-based federal programmes (Supplemental Opportunity Grants, Work-Study and Perkins Loans). The latter are all limited in size and restricted to lower-income students. Many states also provide student financial aid, which would be added at this point. The remaining deficit is met through various federal loan programmes and institutional financial aid. Most public universities have limited amounts of their own aid to offer, and some of that is often awarded for merit rather than need. Hence, the entire deficit is commonly met through loans. In private colleges and universities, the deficit is filled with a combination of loans and institutional aid (or tuition discounts). This last addition to the scales is critical, for it allows the cost of attendance to be met. Several details of this last stage are crucial to the operation of the system. First, guaranteed student loans, which are subsidised, have annual and total caps. These limits were last extended in 1992, and whether or not these limits should be extended is perhaps the most controversial item in the 2004 reauthorisation of federal student aid programmes. Students with substantial need at high-priced institutions generally borrow at the annual maximums. For additional needs, they might have recourse to the unsubsidised loan programmes, for students or parents. Hence, despite loan limits, the system is elastic in accommodating higher prices. Second, at private institutions, a trade-off exists between loans and tuition discounts. This allows universities room for manoeuvre in playing what Michael McPherson and Morton Owen Schapiro have called the ‘student aid game’ – basically, offering more attractive terms to more desirable students (McPherson and Schapiro 1998). Hence, the availability of loans by itself can facilitate tuition increases, but the combination of loans and discounts is far more powerful (Geiger 2002a). Third, despite such manipulations, the last dollar of aid essentially comes from the institution. For that reason, in high-tuition institutions increases in the cost of attendance, whether for tuition, room or board, largely have to be matched by more aid to eligible students. This creates a multiplier effect whereby cost increases produce proportionately larger increases in tuition prices. For example, given a tuition discount rate of 25 per cent, about average for private research universities, a university would need to raise tuition by $4.00 in order to get $3.00 of additional revenue. Actual discount rates in 2003 were over 30 per cent for private universities and near 40 per cent for private colleges (Lapovsky and Hubbell 2003). Although institutions can influence student choice through aid packages, discretion still lies with students. Student loan volume first exploded at the start of

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the 1980s, when highly advantageous loan terms created a strong incentive to borrow. Loans increased only moderately thereafter until the Higher Education Amendments of 1992 expanded eligibility and raised loan limits. Loan volume shot upward by 77 per cent in the next two years. The next seven years (1994–2001) saw a 50 per cent rise, despite unprecedented prosperity. Much of this growth occurred in unsubsidised loan programmes, which now are larger than the capped and income-restricted guaranteed loan programmes. Thus, much of the post-1992 growth seems to have been used for larger loans to middle-income students (Kane 1999). Such evidence suggests that the current escalation of loans is driven less by dire need, and more by a culture that encourages borrowing as a first resort. In the final analysis, the rise of the student loan culture, in combination with tuition discounts, created a situation in which the final increment required to meet the cost of attendance is always readily available. Under these conditions, student resistance to price increases in an economic sense (i.e. reduced demand), especially at the more prestigious and expensive institutions, has been virtually nil.6 Constraints upon tuition increases of other kinds nevertheless persist. They include the pricing structure of the industry, the nature of the student aid system and the potential threat of public opprobrium. However, since the 1980s, conditions have favoured the growth of a high-tuition/high-aid strategy. For institutions, high-tuition/high-aid depends on capturing significant amounts of other people’s money – either from families, student loans or state and federal grants. Because the latter sources are capped, revenues become increasingly sensitive to the amount of institutional aid required by students or, conversely, to parental incomes: the higher parental income, the more net tuition; the lower parental income, the more financial aid. During the 1990s, the amount of aid awarded increased for the weaker institutions, as did tuition discounts. Stronger institutions were able to resist this peril, in part by attracting sufficient numbers of students wealthy enough to afford their escalating prices. This situation is consistent with the Hoxby model – the increasingly competitive contest among selective colleges and universities to enrol the country’s best and brightest students. I have called this contest the selectivity sweepstakes, for short (Geiger 2002b, 2004a). Success in these sweepstakes, unofficially monitored by the rankings in US News & World Report, reinforces prestige and brings financial resources (Monks and Ehrenberg 1999). In no small measure this is because the best and the brightest, for reasons of cultural capital and cumulative advantage, come disproportionately from wealthy families. Educational capital makes them not only well prepared academically, but also able to negotiate the selectivity sweepstakes. Thus, the institutions that enrol students with the highest academic qualifications also have relatively low proportions of their students qualifying for financial aid. This relationship is shown in figure 1, which charts the percentage of first-year students receiving financial aid for the most selective private liberal arts colleges, all of which have similar costs of attendance. If this trendline were extended for all liberal arts colleges it would clearly continue to rise. Colleges with high-tuition on average provided aid to 69 per cent of their students in 2001, while colleges with tuition under $20,000, and by implication lower selectivity, aided 90 per cent of students. At the other end of the spectrum, the percentage of aided students in the

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Ivy League varied from 40 to 46 per cent. At these schools, 54–60 per cent of the students are drawn from the highest earning 6–7.5 per cent of households (Geiger 2002a). Figure 1. Liberal arts colleges 100

50

Aid

75

25

0 1500

1450

1400

1350

1300

1250

1200

1150

1100

1050

1000

SAT Scor es, 25th per centi le

Source: US News & World Report 2003

The current system of high-tuition/high-aid has produced two socially undesirable spillovers. First, as just indicated, it has tended to increase social stratification in the selective sector, that is, in the institutions, public and private, having the greatest academic quality. Second, it has introduced pervasive price discrimination particularly in the private sector. There, most students now pay different prices for the same educational services. When such discrimination was based solely on financial need, one could argue that equity was served. But that is no longer the case. Institutions learned to manipulate financial aid for their own purposes – a practice dignified with the title, ‘enrolment management’. Moreover, increasing portions of aid are now being awarded for ‘merit’, irrespective of financial need (discussed further below). Students are now pitted against their college or university to bargain over the price they will have to pay. Yet, the classic justification for the non-profit status of educational institutions is that it redresses information asymmetry between buyers and sellers. Because consumers cannot adequately monitor the quality of educational services, they prefer dealing with institutions they can trust not to take advantage of them to realise a profit.7 But maximising revenue now looks a good deal like making a profit. Private universities now engage in such deceptive practices as awarding less aid to earlyadmission students or front-loading the first year of aid packages (McPherson and Schapiro 1998).8 Students in the aggregate may gain greater wages through these arrangements, but each student must fend for themselves. Trust in this relationship can no longer be assumed.

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More theoretically, developments in American higher education have departed from the Hoxby model in some notable ways. First, the model requires considerable adjustment to account for the role of public universities in qualitative competition. Second, it fails to acknowledge historical contingency in the period before the current era when other forces seemed predominant. And third, the rise of merit aid would seem to cast doubt on the predicted dominance of qualitative competition. These anomalies reveal interesting features of this market. The Hoxby model posits a process of market integration during the half-century following World War II. However, not all parts of the model seemed to operate throughout this period. Her data reveal important discontinuities in the 1970s. During roughly those years, the highest quality institutions were unable to raise tuition, invest in greater quality or, by implication, engage in qualitative competition (Hoxby 1997).9 Their actions indicate that demand was too weak to give them sufficient pricing power to raise tuition. Or, their own resources were inadequate to leverage higher prices with financial aid. This situation changed around 1980. The greater availability of student loans, particularly to middle-class students, and the more aggressive use of institutional student aid, expanded demand and revenues. The high-tuition/high-aid strategy re-ignited qualitative competition and reinstated the virtuous cycle of improving students, income and reputation. Begun by the price/ quality leaders, this approach soon spread throughout the selective private sector. High-tuition/high-aid did not just re-start the dynamics of the Hoxby model – by removing price resistance it turbo-charged them.10 The proliferation of these activities soon brought complications. According to the model, price competition should not pose a threat because lowering prices would diminish quality. However, individual institutions had powerful inducements to attempt to steal good students from stronger institutions in order to enhance peer effects and reputation. Their best weapon was selective price reductions, or merit aid. Already committed to large amounts of institutional financial aid (through hightuition/high-aid), it was more beneficial for institutions to use their aid to attract the best possible students. This temptation was subdued for some time by cartel arrangements among the leading institutions that upheld the norms of need-blind admissions and only need-based financial aid. However, in 1991 the cartel was broken by a federal lawsuit, and later in the decade merit aid mushroomed. Interestingly, while high-tuition/high-aid spread from the leading institutions down the hierarchy, merit aid has advanced upward from the bottom (of the selective sector). Furthermore, it validates the contention of the peer-effects literature that desirable students are paid a ‘wage’ to attend. The prevalence and apparent success of merit aid add a complicating factor to market coordination in the selective sector. So does the competitive success of selective state universities. According to the standard definition of selectivity (i.e. the number of students rejected and average student quality) public universities are poorly suited to compete. Indeed, Hoxby states that their lower spending per student should place them at a disadvantage for attracting top students and achieving the peer-effects multiplier (Hoxby 1997). However, when the total market for high-ability students is examined, the majority attends research universities, and these students are about equally split between public and private ones (Geiger 2002b). Clearly, the stronger

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public universities have been able to hold their own in the selectivity sweepstakes despite a different instructional technology. State research universities on average are three times the size of their private counterparts and have larger proportions of undergraduates as well. Student-teacher ratios are 50 per cent higher than at private universities (and probably underestimated at that). Educational spending per student in 2000 was coextensive for the top half of public universities and the bottom half of private universities. Moreover, state universities have had to react to the increasingly fierce competition for highability students. Nevertheless, they have several assets. Although average student quality might be less than in the private sector, public universities obtain peer effects largely through internal differentiation. Students majoring in pre-med, physics, computer science or other demanding programmes will be grouped predominately with highly talented peers. The universities have sought to enhance peer effects by re-emphasising honours programmes and creating living-learning communities. They also actively compete for top students using merit aid. Public universities have a great cost advantage over even discounted private institutions (see below). Clearly, some students are price sensitive – especially top students wishing to reserve borrowing power for postgraduate studies. 6. MARKET SEGMENTS IN US HIGHER EDUCATION The great problem in analysing market coordination of undergraduate education stems from the arbitrary nature of tuition prices. In the private sector, arbitrariness arises from the disparity between listed prices and net prices, due to the prevalence of tuition discounting, as explained above. For example, private research universities charge very nearly the same listed tuition although their educational costs per student vary by a factor larger than two. In the public sector, pricing varies according to state subsidies for their colleges and universities. Here tuition prices vary by a factor of three, and so do state appropriations per student (Geiger 2004a). For almost all resident in-state students, however, tuition is less than the cost of room, board and other expenses. Hence the large discrepancies in tuition represent smaller differences in the cost of attendance. Averages in this situation are useful only to show general trends. In 1980 the tuition ratio (tuition revenue / tuition revenue + state appropriation) for public research universities was 0.22; currently it is 0.40. This figure is fairly representative for the public sector as a whole. The transfer of financial burdens onto students has largely occurred in successive waves of state financial distress at the beginning of each decade. Weak state appropriations for 2002 resulted in the largest tuition increases in history. But in 2003 appropriations were even worse and tuition increases greater. State universities now see dependence on tuition, which can be increased every year, as preferable to dependence on their fickle state legislatures. The following data for Fall 2002 give the range of tuition at public and private fouryear institutions.

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Table 1. Range of tuition at four-year colleges and universities, 2002–03 Institutions $

Proportion of total enrolment %

Private >24,000 20,000–23,999 15,000–19,999 9,000–14,999 <9,000

21.0 15.0 32.2 22.4 9.4

7,000–9,000 5,000–6,999 4,000–4,999 3,000–3,999 <3,000

5.2 16.8 22.6 30.6 24.8

Public

Source: Chronicle of Higher Education 29 August 2003: 27

Table 1 omits one significant class of students – those attending public universities outside their state of residence. They are typically charged 3–4 times the tuition for residents, or roughly between $12,000 and $17,000 in 2002. These students have become an important source of revenue for state universities in the selective sector. The table also omits the other costs of attendance for full-time students – room, board and incidentals for resident students, and other expenses for students commuting from home. With this information, an estimate can be made of the market prices and choices for undergraduates in the collegiate marketplace, expressed as bands of likely expenditures (see table 2). These bands roughly approximate the major segments of this segmented market. Table 2. Annual expenses, full-time undergraduate Segment 1 2 3 4 5 6

Tuition $ 24–28,000 12–17,000 4–9,000 2–5,000 2–5,000 1,500–2,500

Room & Board $ 7,000 7,000 6,500 5,500 n/a n/a

Expenses $ 3,000 3,000 2,500 2,500 2,000 1,500

Total $ 34–38,000 22–27,000 13–18,000 10–13,000 4–7,000 3–4,000

Segment 1 represents attendance at a highly selective private college or university. Approximately 7 per cent of undergraduates attend such schools, and perhaps 60 per cent receive financial aid. Segment 2 represents students in the selective sector who attend a public institution in another state and upper-middle class students at private universities receiving tuition discounts (40%) (Hill, Winston and Boyd 2003). This expense range is an arena of active competition between the better flagship public

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universities and selective private schools, but it would be speculative to estimate its size. Segment 3 indicates attendance in residence at a higher quality public research university for an in-state student. Perhaps half of these students receive financial aid, mostly in the form of loans. Segment 4 indicates attendance in residence at a regional public college or university for an in-state student. This may be the largest single group of undergraduates at four-year schools. Two-thirds of these students would typically be eligible for financial aid. Segment 5 represents the same type of institutions as segment 4 attended by students commuting from home. This pattern is particularly prevalent in urban areas where local public higher education is plentiful. This segment is for full-time attendance, but students in these circumstances frequently attend part-time or stop out for a time. Segment 6 represents full-time commuting students at community colleges. Onequarter of all full-time undergraduates, these students are also the least likely to complete a bachelors degree. Remarkably, an order of magnitude separates the cost of one year of college in the first and the sixth segments. Nevertheless, the distinction made by Winston between the selective and non-selective sectors pertains here. In the selective sector (segments 1–3), tuition pricing is radically different for public and private institutions. Private colleges and universities, as a whole, are over-priced and can only sell their places at a discount. This discount might be regarded as a ‘wage’ at the peak institutions, those few that could fill their classes with qualified full-payers without sacrificing student quality. But for the high-tuition institutions, as a whole, discounting is inescapable. High-tuition/high-aid allows them to capture a good deal of consumer surplus from affluent students while clearing the market with discounted billets. Public universities, in contrast, are under-priced, and are consequently able to charge a premium for their places, specifically by selling them to non-resident students. They consequently obtain considerably more tuition revenue per student than their resident tuition (Geiger 2004a). They thus operate below the region of significant elasticity in their demand curves (at least for in-state students). This fact was borne out in 2002 and 2003 when they were able to institute large percentage increases in their charges. However, the more expensive state universities may be reaching a point of demand elasticity. Specifically, as more desirable students have financial need greater than can be met through capped state and federal financial aid programmes, universities will have to meet that need through institutional aid (tuition discounting) or else face a substitution of wealthier for more qualified students (Geiger 2002a). The entire selective sector depends heavily upon market coordination, incorporating the extensive role played by student financial aid. As this market clears each spring, students and parents face delicate, often agonising choices involving trade-offs between quality and price. Hoxby has made a strong case that choosing the most selective (highest quality) institution will generally produce the greatest return on investment. However, other evidence suggests differences in

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majors and careers interact significantly with the effects of selectivity (Hoxby n.d.; Avery and Hoxby 2003; Mullin 2002).11 Thus, consumers appear to be gambling with their life chances no matter how they decide. This situation underlines the fact that this is a precarious market – one in which prices imperfectly reflect value, and choices are heavily dependent on the subjective (and hence changeable) preferences of consumers. The large middle of American higher education (segments 4 and 5) mixes academic and vocational/professional programmes for resident and commuting students. Very broadly it can be characterised as non-selective in admissions and oriented toward local or regional populations. The majority of students comes from the broad middle class. Often two-thirds of these students receive financial aid, and they display some sensitivity to price. Lower-income students may be eligible for grants, but for most students price increases mean borrowing more money.12 As a whole, there is little difference between these institutions in relative spending and, by implication, relative quality.13 The less costly private colleges compete with public institutions in these segments by offering substantial discounts to virtually all of their students. While this may be the largest sector in American higher education, market coordination plays a limited role. Government coordination is far more prominent in setting tuition, providing financial aid and determining spending levels, at least for public institutions. Public institutions operate within an autarkic state market, protected by low, resident tuition. Private institutions provide variable amounts of competition, depending on location. Elasticity of demand is a fact of life for many of these institutions, giving them limited pricing power. Public community colleges (segment 6) form the most open sector of higher education and, despite large recent percentage price hikes, also the cheapest. The role of community colleges varies from academic programmes, preparing students for transfer to four-year institutions, to vocational preparation for work. These relative roles depend considerably on the extent of articulation with four-year institutions, with considerable geographical variation. Community colleges provide a low-cost first stage of higher education, but with a low probability of completing an associates or a bachelors degree (Cohen and Brawer 2003; Dougherty 1994; Kane and Rouse 1999). In part, this is because community colleges accommodate students with the weakest academic preparation. For low income students, subsidisation may encourage participation but not necessarily achievement. The maximum Pell grant (currently $4075) largely covers the expense of attending a community college. In this case, Carolyn Hoxby has argued, “students have weak financial incentives to enter with the preparation they need or make the effort they need to make in order to derive the maximal benefits from college”. Moreover, “Pell grant students have only weak incentives to police their colleges and ensure the colleges offer sufficient education for the tuition being charged (to the federal government)” (Hoxby 1998: 55–56). Community colleges provide a variety of educational services to an exclusively local clientele. Market coordination plays a large role in what, when and where classes are offered. However, demand from full-time students, in particular, is

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strongly conditioned by government subsidies. In this sense, demand is artificially supported through a zero or negative price of attendance for some students. American society thus pays a premium, through student and institutional subsidies, to maintain the openness of this sector. Despite the inefficiency, this openness represents a social value that justifies extra expenditures. To complete this picture, a seventh segment of the US market must be included: for-profit institutions of higher education. Although less than 3 per cent of enrolments, the for-profits have been the fastest growing sector of higher education. Moreover, they tend to portray themselves as the vanguard of capitalist efficiency among bloated non-profit and public institutions. But capitalism greatly restricts their purview. The for-profit sector occupies niche markets, depends for its viability on third party payers and sells delimited packets of knowledge.14 The two niches in which for-profit higher education has flourished are technical/ vocational education and educational credentials for working adults. Longestablished corporate universities, like DeVry and Strayer, fill a gap in US education for technical training. They cater to students in their mid-twenties, well out of high school; and their chief attraction is the promise of jobs. They and their students thus have identical interests in providing/consuming education that will train valuable employees with useful technical skills (Ruch 2001). The interests of corporations and students diverge, however, over recruitment and financing. The more avaricious institutions exploit under-prepared students through aggressive practices in recruitment and financial aid, which result in low rates of completion and defaulted student loans. The technical for-profits find their clientele among high-risk students who have often done poorly in previous schooling. Considering this mission, they provide a valuable service to students who manage to complete a course. The University of Phoenix, through meteoric growth, has become the poster child of the for-profit sector. It caters to working adults and awards most of its bachelors and masters degrees in business and management. The niche Phoenix fills is defined less by content and more by the manner of delivery. Offering five-week modular courses to cohorts of students, Phoenix has minimised the opportunity costs as well as the effort required for earning its degrees. Other institutions carry this principle even further. For example, Cambridge College allows students to acquire a masters of education degree chiefly by attending a five-week summer course (Goldin 2003). When a credential is the goal, education can be streamlined. None of these institutions could operate on revenues from students themselves. The technical schools rely on federal (and state) student financial aid. A year’s tuition in 2003 was pegged at $9000–$11,000, which seems to be the most that can be milked from Pell grants and student loans. Institutional aid can be adjusted to cover any shortfall. No ‘consumer surplus’ is left with their customers, although in this case that term refers to a student’s eligibility for federal aid. Kaplan College, for example, derives more than eighty per cent of its revenues from federal student aid, and the corporation has been lobbying Congress to remove the regulation that disqualifies institutions exceeding the ninety per cent mark (Goldin and Rose 2003). Most working students at the University of Phoenix would fail to qualify for federal aid, but they are subsidised instead by employers, who pay tuition for the

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majority of students. Similarly, school boards subsidise their teachers for their five weeks at Cambridge – and give them a raise when they receive their degree. Unlike non-profits, for-profit universities replicate successful business plans by creating additional campuses. This mode of operation is made possible by the commodification of knowledge. At the University of Phoenix professional course designers start with ‘learning objectives’ and then assemble materials that will fulfil those objectives. Everything must be pre-packaged and simplified so that their shifting corps of part-time teachers can deliver identical material to students across the country, and so those students can subsequently demonstrate that they have met the objectives (Farrell 2003). In a real university a student identification card represents a key to unlocking the world’s treasury of knowledge, but in the for-profit sector a student’s tuition purchases a measured ‘product’. The for-profit segment of the American market largely delivers what it promises – career-enhancing educational credentials. In this respect these institutions have developed and exploited a distinctive segment of the market. Moreover, the nature of this market niche permits their distinctive economics. Credentialling encourages the commodification of knowledge, which in turn allows for the minimising of costs; third party payers do not police prices, which permits the maintenance of comfortable profit margins. As long as these conditions persist, the for-profit segment of the higher education market is likely to continue to expand.15 7. THE MARKET FOR HIGHER EDUCATION IN THE UNITED STATES The Schumpeterian notion of imperfect competition best characterises the market for higher education in the United States. It departs from the hypothetical ideal of perfect competition most importantly in that institutions offer differentiated products. Colleges and universities in fact go to great length to differentiate their educational offerings from those of their competitors. Student-consumers tend to choose, at least within market segments, more according to their preferences for those offerings than on the basis of price. Product differentiation in imperfect competition creates market power, or the ability to charge higher prices. Something analogous takes place in American higher education except that colleges and universities depend on market power to acquire resources of all kinds. Where there is excess demand for their educational offerings, institutions can choose their students and thereby enhance both peer effects and prestige. But far more is at stake. Institutions with favoured products convert their market power into greater streams of revenues from a variety of sources: from net tuition, gifts, research grants and sometimes state appropriations. Under capitalism, according to Schumpeter, such market power yields comfortable profit margins that fuel innovation and additional market advantage. In higher education, non-profit institutions recycle revenues primarily into knowledge assets – but also into ‘student assets’ – thus building quality that will further enhance the value of their products (Kuttner 1997).16 Several conditions help to prevent the margins implicit in these revenue streams from being competed away, as they would be under perfect competition. The returns

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to quality represent a virtuous cycle in which success begets success. Accordingly, successful institutions do not expand their operations (as for-profits do) but enlarge their assets instead. Nor can competitors easily enter this market (at least at the high end) given the barrier created by the high cost of such assets. Finally, price competition where it exists takes the form of differential pricing for individual students rather than a general bidding down of prices. This competition results in higher net prices for institutions having market power, as was clearly shown in figure 1.17 Since 1980 American higher education has experienced a steady expansion of market coordination. This trend has above all enhanced the choices available to many (but not all) students. Enhanced choice has encouraged mutual adjustment on the part of both students and institutions. It has also intensified competition, as students sought coveted places and institutions sought coveted students. Given the effects of cultural advantage, this competition has tended to work against norms of social equity, as explained above. One result has been a persistent concern that low income and minority youth have lower participation rates or predominantly attend low-cost and low-prestige institutions (Heller 2001). The counterweight to the market on this issue has been government coordination through the provision of regional and community colleges and through programmes of need-based financial aid. Critics of the bias toward markets in American higher education correctly perceive that further drift toward market coordination will only make it more difficult for governments to fulfil this counterbalancing role. Markets based on imperfect competition, to paraphrase Lindblom, will have an imperfect capacity to achieve efficient allocations (Lindblom 2001). This is certainly the case for the technical efficiency of the American market. As indicated, the market rewards the accumulation of knowledge assets; only the penury of the majority of institutions serves to minimise costs. However, technical efficiency should be an internal management goal, not a social one. Institutions that increase their knowledge assets appear to increase the quality and value of their outputs (Clotfelter 1996). But that very process invokes the more perplexing issue of allocative efficiency. To what extent has the advance of market coordination achieved a socially optimal allocation of resources among institutions of higher education? This question has no single answer in economic terms, since the multiple products of higher education (human capital, new knowledge, public service) cannot be weighed against each other. But it is still worth pondering. The distribution of resources per student in American higher education can be described as a normal distribution. According to Gordon Winston’s calculations for the mid-1990s, the private institution at the 85th percentile spent 38 per cent more than the median, while the 15th percentile institution spent 25 per cent less. In the public sector those markers were 32 per cent more and 22 per cent less (Winston 2000). This would appear to be a moderate degree of inequality, even considering that the private sector had substantially greater resources per student. Nevertheless, under the pressure of increasing market coordination, the trend has been toward increasing inequality, as one would expect under imperfect competition. Specifically, selective private institutions have been garnering greater resources

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compared with the public sector, and the most resource-rich institutions have gained the most wealth (Winston 2000; Geiger 2004a). This allocation and these trends need to be interpreted on a quality-adjusted basis: to what extent does the distribution of resources among institutions and students maximise productivity or social good? The skewing of resources can serve a vital function, as was seen in graduate education, faculty and research grants. Winston puts it more provocatively: “Indeed the increasing concentration of students with the greatest aptitude for education at schools with the greatest educational resources may well be A Very Good Thing for Society” (Winston 2000). But Winston also acknowledges that concentrations of resources, driven by the ‘arms race’, may be creating greater disparities than needed. My study of research universities suggests that this threshold has been crossed. In particular, the abundance of resources at leading private universities has permitted investments in student assets (top undergraduates) that have passed the point of diminishing returns, as the prevalence of merit aid would indicate (Geiger 2004a).18 Investments in knowledge assets might also produce diminishing returns: for example, bidding up salaries of star professors, as has happened most egregiously in business schools. But inefficient allocations are less likely in knowledge assets because there are larger possibilities for investment (compared with a finite number of top undergraduates) and because those assets have multiple uses. These allocative inefficiencies, however, are largely theoretical speculation. In the real world, returns from the Harvard endowment or gifts to the Yale Alumni Fund cannot be re-allocated elsewhere (without imposing a wealth tax, which would be a most unwelcome form of government coordination). A crucial fact about the segmented, hierarchical American market is that it mobilises resources from special interests that would never be awarded collectively to the industry. Alumni, individuals, corporations and foundations contribute to colleges and universities principally to enhance their particular quality or effectiveness. This is one of the key revenue streams, referred to above, associated with conditions of imperfect competition. And these revenues, including the income from past gifts preserved as endowment, serve to create and accentuate the qualitative differences that distinguish differential products. In the final analysis, what can the American laboratory and its quarter-century experiment in privatisation teach about market coordination in higher education? Just as capitalist markets generate inequality of wealth in the economy, market coordination in American higher education has tended to exaggerate financial inequality across colleges and universities and encourage social inequality in student access to educational opportunities. Indeed inequality – or the pursuit of qualitative advantage – is the great motivator within the wealthier and selective segments of the market. Market coordination has consequently widened the choices available to students and enlarged the resources garnered by institutions. One could argue that the United States has achieved a tolerably efficient allocation of higher education resources (with the anomalies noted), but one cannot attribute this achievement solely to the market. A significant degree of social equity is maintained only through the continual presence of government coordination, through support for public and community colleges and through the provision of student financial aid. The

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American interaction of markets and government has brought both excellence and equity in higher education. But the tensions are undeniable. They are manifested in every state capitol and in the United States Congress. Given these tensions, and the exaggerated claims trumpeted for the virtues of markets and competition, it is more vital than ever to understand both the advantages and the drawbacks of market coordination. NOTES 1

2 3 4

5 6 7 8 9 10 11

12 13 14

15

16

The increasing use of part-time faculty is a market phenomenon. For many institutions it is an adaptation to insufficient income. For universities, the stimulus is much the same, but it represents an attempt to preserve the highly competent faculty, as described, and to leverage their efforts with teachers in whom the university does not invest resources. This scheme is slightly modified in Zemsky, Shaman and Schapiro (2001). For an overview of the transformation of federal student aid policy from grants to loans, see Hearn (1993). See tables 331 and 359. Student expenses for room, board and incidentals also rose during these years; however, Pell grants, state student aid and institutional financial aid also increased the subsidy side. Hence, tuition and federal loans capture the largest change. This analysis is in substantial agreement with Hauptman and Krop (1998). Straight Talk summarises the case for denial and is unable to endorse either position (Report of the National Commission on the Cost of Higher Education 1998: 300–302). Evidence of price sensitivity has been found for lower-income students especially at non-elite institutions (Heller 1997). However, McPherson and Schapiro found “no evidence that increases in net cost inhibited enrolment for more affluent students” (1998: 39–40). Described by Henry Hansmann (1987) as contract failure. As in other things, the wealthier the institution, the less the incentive for sharp practices. During these years market differentiation persisted, but seemed most evident in the decline in student quality among the weakest strata of institutions. These fluctuations correspond with significant changes in private returns to higher education (Murphy and Welch 2001). This chapter cannot discuss the large literature on private returns to higher education. The controversy over the likely advantage gained by attending a selective institution is summarised by Ehrenberg (forthcoming). However, Murphy and Welch (2001) present evidence that patterns of returns change significantly over time. Research consistently finds that lower income students are under-represented, in part due to price sensitivity. While their participation rates have increased in line with higher income groups, their completion rates are far lower (Fitzgerald and Delaney 2002). See data in Winston (2000) and Hoxby (1997). Spending levels are likely to reflect local conditions – state policies, cost of living, unionisation etc.; not significant differences in quality. Many of these schools are part of state systems, and most students are state-bound because of tuition. This discussion considers only direct-contact, degree programmes. It thus excludes non-degree trade schools, the largest component of for-profit education, as well as corporate education. This discussion also omits online education for practical reasons. Online education is a growing and somewhat still speculative sector in which for-profit firms have been active (see “The For-Profit Higher Education Research Project at the Curry School” at http://curry.edschool.virginia.edu/forprofit/start.htm). The key question is whether the for-profits are expanding their markets or gaining market share? Most likely both phenomena are taking place. Much of their expansion has been overseas or online, thus expanding the market. But as they continue to expand for-profits will (or do) compete with traditional institutions offering credentials in business and education, with results that cannot yet be foreseen. Robert Kuttner (1997: 194–196) discusses Schumpeter’s conception of imperfect competition, but does not extrapolate to higher education. Corporate universities have not invested their profits in

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quality, but rather in expansion. The resulting growth thus rewards shareholders (and managers) with generous stock prices rather than distributed profits. 17 For the range of net prices at highly selective private institutions, see Hill, Winston and Boyd (2003). 18 That is, the competition for top students has driven up the ‘wage’ they command, and has also expanded the non-educational services provided to attract them (Geiger 2004a, chapter 3).

REFERENCES Avery, C. and C.M. Hoxby. “Do and Should Financial Aid Packages Affect Students’ College Choices?” NBER Working Paper 9482, Cambridge, MA: National Bureau of Economic Research, February, 2003. CFAT (Carnegie Foundation for the Advancement of Teaching). Classification of Institutions of Higher Education. Princeton: CFAT, 1994. Chronicle of Higher Education. The Chronicle Almanac, 2003–2004. 29 August, 2003, 27. Chubin, D.E. and E.J. Hackett. Peerless Science: Peer Review and US Science Policy. Albany: SUNY Press, 1990. Clotfelter, C.T. Buying the Best: Cost Escalation in Elite Higher Education. Princeton: Princeton University Press, 1996. Cohen, A.M. and F.B. Brawer. The American Community College. 4th edn. San Francisco: Jossey-Bass, 2003. Dougherty, K.J. The Contradictory College. Albany: SUNY Press, 1994. Ehrenberg, R.G. “Econometric Studies of Higher Education.” Journal of Econometrics. Forthcoming. Farrell, E.F. “Phoenix’s Unusual Way of Crafting Courses.” Chronicle of Higher Education. 14 February, 2003, A10–A12. Fitzgerald, B.K. and J.A. Delaney. “Educational Opportunity in America.” In Heller, D.E. (ed.). Conditions of Access: Higher Education for Lower Income Students. Westport, CT: Praeger, 2002, 3–24. “The For-Profit Higher Education Research Project at the Curry School”, at http://curry.edschool.virginia.edu/forprofit/start.htm. Geiger, R.L. Privatization in Higher Education: International Trends and Issues. Princeton: ICED, 1989. Geiger, R.L. “High Tuition – High Aid: A Road Paved with Good Intentions.” Paper presented at the Association for the Study of Higher Education Annual Meeting, Sacramento, CA, November, 2002a. Geiger, R.L. “The Competition for High-Ability Students: Universities in a Key Marketplace.” In Brint, S. (ed.). The Future of the City of Knowledge: The Changing American University. Stanford: Stanford University Press, 2002b, 82–106. Geiger, R.L. Knowledge and Money: Research Universities and the Paradox of the Marketplace. Stanford: Stanford University Press, 2004a. Geiger, R.L. Research and Relevant Knowledge: American Research Universities Since World War II. 2nd edn. New Brunswick, NJ: Transaction Publishers, 2004b. Goldin, D. “Colleges Ease Way for Teachers to Get Advanced Degrees.” Wall Street Journal. 22 September, 2003, A1, A14. Goldin, D. and M. Rose. “Kaplan Transforms into Big Operator of Trade Schools.” Wall Street Journal. 7 November, 2003, A1, A8. Hansmann, H. “Economic Theories of the Nonprofit Sector.” In Powell, Walter W. (ed.). The Nonprofit Sector: A Research Handbook. New Haven: Yale University Press, 1987, 27–42. Hauptman, A.M. and C. Krop. “Federal Student Aid and the Growth of College Costs and Tuitions: Examining the Relationship.” Report of the National Commission on the Cost of Higher Education. Straight Talk about College Costs and Prices. Phoenix: Oryx Press, 1998, 70–83. Hearn, J.C. “The Paradox of Growth in Federal Aid for College Students, 1965–1990.” In Smart, J.C. (ed.). Higher Education: Handbook of Theory and Research, vol. IX. New York: Agathon, 1993, 94–153. Heller, D.E. “Student Price Response in Higher Education: An Update to Leslie and Brinkman.” Journal of Higher Education 68.6 (1997): 624–59. Heller, D.E. “Trends in the Affordability of Public Colleges and Universities: The Contradiction of Increasing Prices and Increasing Enrollment.” In Heller, D.E. (ed.). The State and Public Higher

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Education Policy: Affordability, Access, and Accountability. Baltimore: Johns Hopkins University Press, 2001, 11–38. Hill, C., G. Winston and S. Boyd. “Affordability: Family Incomes and Net Prices at Highly Selective Private Colleges and Universities.” Discussion Paper 66, Williams Project on the Economics of Higher Education, October, 2003. Hoxby, C.M. “How the Changing Market Structure of US Higher Education Explains College Tuition.” NBER Working Paper 6323, Cambridge, MA: National Bureau of Economic Research, December, 1997. Hoxby, C.M. “Tax Incentives for Higher Education.” In Poterba, J.M. (ed.). Tax Policy and the Economy. vol. 12. Cambridge, MA: MIT Press, 1998, 49–81. Hoxby, C.M. “The Returns to Attending a More Selective College: 1960 to the Present.” ms. Department of Economics, Harvard University, n.d. Kane, T.J. The Price of Admission: Rethinking How Americans Pay for College. Washington, DC: Brookings Institution Press, 1999. Kane, T.J. and C.E. Rouse. “The Community College: Educating Students at the Margin between College and Work.” Journal of Economic Perspectives 13.1 (1999): 63–84. Kuttner, R. Everything for Sale: The Virtues and Limits of Markets. New York: Knopf, 1997. Lapovsky, L. and L.L. Hubbell. “Tuition Discounting Continues to Grow.” Business Officer March (2003): 21–27. Lindblom, C.E. The Market System. New Haven: Yale University Press, 2001. McPherson, M.S. and M.O. Schapiro. The Student Aid Game. Princeton: Princeton University Press, 1998, 39–40. McPherson, M.S. and G.C. Winston. “The Economics of Academic Tenure: A Relational Perspective.” In Breneman, David W. and T.I.K. Youn (eds). Academic Labor Markets and Careers. New York: Falmer Press, 1984, 174–199. Monks, J. and R.G Ehrenberg. “The Impact of US News and World Report College Rankings on Admissions Outcomes and Pricing Decisions at Selective Private Institutions.” NBER Working Paper 7227, Cambridge, MA: National Bureau of Economic Research, July, 1999. Mullin, A.L. “The Effects of Institutional Stratification on College Graduate’s Career Trajectories.” Paper presented at the Association for the Study of Higher Education Annual Meeting, Sacramento, CA, November, 2002. Murphy, K. and F. Welch. “Wage Differentials in the 1990s: Is the Glass Half-Full or Half-Empty?” In Welch, F. (ed.). The Causes and Consequences of Increasing Inequality. Chicago: University of Chicago Press, 2001, 341–364. NCES (National Center for Education Statistics). Digest of Education Statistics. Washington, DC: US Department of Education, 2000. NCES (National Center for Education Statistics). Study of College Costs and Prices, 1988–1989 to 1997– 1998, vol. 2: Commissioned Papers. NCES 2002–157, 158. Washington, DC: US Department of Education, December, 2001. Report of the National Commission on the Cost of Higher Education. Straight Talk about College Costs and Prices. Phoenix: Oryx Press, 1998. Rothschild, M. and L.J. White. “The Analytics of Pricing in Higher Education and Other Services in Which Customers Are Inputs.” Journal of Political Economy 103.3 (1995): 573–86. Ruch, R.S. Higher Ed, Inc. The Rise of the For-Profit University. Baltimore: Johns Hopkins University Press, 2001. Savage, J.D. Funding Science in America: Congress, Universities, and the Politics of the Academic Pork Barrel. New York: Cambridge University Press, 1999. US News & World Report. America’s Best Colleges, 2003 edn. Winston, G.C. “Subsidies, Hierarchies, and Peers: The Awkward Economics of Higher Education.” Journal of Economic Perspectives 13.1 (1999): 13–36. Winston, G.C. “Economic Stratification and Hierarchy Among US Colleges and Universities.” Discussion Paper 58, Williams Project on the Economics of Higher Education, November, 2000. Zemsky, R., S. Shaman and M. Ianozzi. “In Search of Strategic Perspective: A Tool for Mapping the Market in Postsecondary Education.” Change November/December (1997): 23–38. Zemsky, R., S. Shaman and D.B. Schapiro. “Higher Education as Competitive Enterprise: When Markets Matter.” New Directions for Institutional Research 111 Fall (2001): 31–33.

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‘MADLY OFF IN ALL DIRECTIONS’: HIGHER EDUCATION, MARKETISATION AND CANADIAN FEDERALISM

1. INTRODUCTION This chapter is a case study of markets and marketisation in Canadian higher education, with a particular emphasis on federal and provincial government initiatives since 1990. Like many other jurisdictions, markets have come to play an important role in Canadian higher education, and Canada’s federal and provincial governments have moved towards adopting policy approaches to higher education that are designed to stimulate competition. In some provinces there are clear examples of marketisation in higher education. However, what makes the Canadian case unique (and interesting) are the ways in which the boundaries of the market are framed, and the complex intersection of federal and provincial market-like initiatives layered on top of more traditional public sector regulation and granting structures. In other words, the importance and impact of markets and market-like mechanisms in Canadian higher education policy can only be understood within the broader context of historical developments in Canadian higher education and the evolution of public policy in this sector. 2. MARKETISATION – A SKETCH Today both the market and the idea of the market are enjoying unprecedented popularity. The market economy, argues its greatest proponents, is the only system that truly fosters individual choice, freedom and democracy (see Milton Friedman and Frederic Hayek, e.g.). Amartya Sen, the Nobel award-winning liberal economist, notes: “The virtues of the market mechanisms are now standardly assumed to be so pervasive that qualifications seem unimportant. Any pointer to the defects of the market mechanism appears to be, in the present mood, strangely oldfashioned and contrary to contemporary culture (like), he adds in parentheses (playing an old 78 rpm record with music from the 1920s)” (Sen 1999: 111). So dominant is the idea of the market that governments are seeking to emulate it and reproduce its dynamics in the public sector. The use of market mechanisms in higher education finance in varying degrees is both an international and growing phenomenon. Utilising the forces of the market – particularly competition – is regarded by governments as a sort of panacea for the many perceived ills that have 185 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 185–205 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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befallen higher education. The market metaphor has proven to be a potent one for the reform of university finance. This sort of ‘discovery’ of public markets can be explained partly by what Janice Gross Stein calls the “cult of efficiency”, whereby, she writes, “public markets are created when the state moves from directly providing social protection and invites others – public institutions, private and not-for-profit organisations – to compete for government funds to supply a public good. The logic of public markets is clear: when the supplier (the provider of public goods) is separated from the buyer (the state or its representative), providers will compete to supply public goods and efficiency will increase. Competition is the magic that promises efficiency” (Stein 2001: 84). Marketisation in higher education is used to describe a host of policy changes that ostensibly seek to make institutions more accountable to their truly vast array of stakeholders: students, employers and the tax-paying public at large, though this last group probably gets the biggest bum steer. It also refers to the introduction of decentralisation and the need for an increase in competition for both public and private funds. According to the Organisation for Economic Co-operation and Development, member countries are either adopting or contemplating: 1) the adoption of more sophisticated formulae for allocating funds for teaching and research; 2) developing separate mechanisms for funding teaching and research; 3) increasing the role student fees play in financing the system; and 4) implementing more competitively based ‘bidding’ schemes for public funds (OECD 1990: 79). This cluster of policies serves to require institutions to engage in greater competition, as Slaughter and Leslie (1997: 11) note, including “competition for moneys, whether these are for external grants and contracts, endowment funds, university-industry partnerships, institutional investment in professors’ spin-off companies, or student tuition and fees”. (In Ontario you could add public funds to that list.) A longer list of indices of market-like behaviour includes the sale of educational services and products, and institutional reorganisation that better supports the successful procurement of competitively allocated funds … (passim). In their work Academic Capitalism, Slaughter and Leslie (1997) take up the question of institutions’ increasingly entrepreneurial behaviour. The choice of titles for their work was informed by human capital theory, in which faculty as highly skilled labour constitute one of the three factors of production, and as such contribute to economic growth. It is through this lens that they view what they see as the increasingly entrepreneurial activity of faculty members themselves, as they progressively harness the resources and administrative apparatuses of universities to market their wares, work with spin-off companies and their marketing arms, and draw on the same offices to compete for and obtain funds from both public and private sources, internal and external. “Their [faculty] scarce and specialized knowledge and skills are being applied to productive work that yields a benefit to the individual academic, to the public university they serve, to the corporations with which they work, and to the larger society” (Slaughter and Leslie 1997: 11). The process of globalisation provides the backdrop to the changes in university finance that are described and documented by Slaughter and Leslie. The

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combination of the opening of global financial markets, the rise of supranational trade protocols and governance bodies, combined with the relative decline of the nation state means that pressures to reduce social spending in one nation become pressures of similar magnitude in a trading partner. This higher education reform, argue Slaughter and Leslie, is a consequence of the expansion of world markets, and has led to the creation of tighter linkages between universities and the marketplace in terms of an emphasis on science and technology research with commercial applications, as well as increasing the production of graduates in fields that enjoy a proximity to the market. Set against these global trends and pressures is the status of the unconditional block grant, reduced in part as a response to these pressures. Slaughter and Leslie argue that the relative decline in the block grant – which constituted a large and important source of universities’ operating income – creates a destabilised environment for universities. Therefore, a reduction in the form of US federal funding for postsecondary education, from a shift in the relative emphasis on the block grant to a user subsidy such as student aid, would require institutions to shift their energies to make up for that lost income: Universities seek to capture alternative revenues. But substitutes often carry stipulations; they require the performance of certain tasks. Collectively and individually, faculty perceive their greatest potential source of additional revenues to be in grants and contracts with government and with the private sector. Taking government block grants (as well as tuition fee revenues) as a given, they focus any marginal (additional) efforts on proposal writing, patenting, and developing and maintaining relations with potential funders (Slaughter and Leslie 1997: 71, italics in original).

The centrality of the notion of competition – implied in the scramble to make up for lost funds from block grant reductions – is also emphasised in the work of Dill (1997a, 1997b). Universities, he argues, now operate in numerous markets, for professors, students and research funds. Add to this the delegation of authority to institutions themselves accompanied by greater accountability controls on the use of funds (Dill and Sporn 1995: 3). In contrast to Slaughter and Leslie’s emphasis on the development and process of marketisation, with the importance they place on resource dependency theory and the ‘domino effect’ of shifts in resource dependence, Dill focuses on the attraction of the perfectly competitive market as a guide to reforms within higher education, particularly in the US, in an effort to achieve more efficient and equitable allocation of higher education. Dill (1997b) provides four examples of public policy trends in global higher education financing patterns that exhibit a reliance on, and derive theoretical coherence from, the logic of markets. The first, encouraged by the economists of such global organisations as the World Bank and UNESCO, is the trend toward ‘levelling the playing field’ between private and public institutions through the deregulation of the public sector, and directing increasing subsidies to the systems’ users. The theory behind such a move is that, in so doing, developing countries can more easily shift from an elite to a mass system, in the face of severe limitations on public spending. Dill’s second example of marketisation or ‘strain’ is the creation of ‘quasi’ markets in higher education, as in Britain, in which essentially the principles of competition are imported into public-funding allocation models. The third, and one

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increasingly a reality in both North American and European systems, is the requirement of institutions that they release greater amounts of information to the student-consumer, and develop mechanisms for achieving greater accountability for how these institutions use their funds. And lastly, the tendency, also a global phenomenon, that universities increase user fees in public systems, decrease institutional operating support and increase the funds available for student aid programmes (Dill 1997b). Like Slaughter and Leslie, Dill argues that universities and the governments that fund and regulate them are under increasing pressure to change the way public investments are made. To improve efficiency and make institutions more adaptable to the changing expectations of the global economy, importing market mechanisms were viewed as a superior means to achieving these changes than were more traditional ways. Higher education reform that exploits the tools of the market is in part a response to perceived government failure to rationally or efficiently determine supply, demand or the distribution of educational resources, and is achieved through the relaxation of regulatory regimes and the devolution of responsibilities to institutions themselves. However, consistent with Dill’s emphasis on viewing government as a less than silent partner in the process of creating and stimulating markets, he asserts that relaxing regulation in one area may create increased government control, or at the very least greater involvement, in another area. For example, the process of delegating discretion to the institution for finances or fee levels may also bring additional rules for accounting for the ways in which funds are used, as is the case, he asserts, in the US and the UK. A further example is provided by Ontario. In that province, universities have been granted greater freedom to set tuition fees in certain areas in exchange for directing a portion of fee increases to institutional student aid programmes. An important means of how governments control, interact with, and shape, markets is through regulation. Regulatory measures exist in higher education largely to control the behaviour of sellers in the market, and are concerned largely with the prices of various services provided by institutions. One of the major forms of regulation concerns tuition fees, and has been used by various governments to control the forces of supply and demand for undergraduate education. Governments do this through a variety of means, including tying the fee increase permitted to the operating grant, so that tuition fee increases over a certain government mandated level result in a reduction in the operating grant (they may, of course, also simply set the fee). Other potential means of penalising institutions is to limit access to the student assistance programmes of an institution’s students, or limit the funding of a number of spaces in such high cost programmes as medicine or dentistry (Dill 1997b). Comparing Slaughter and Leslie’s conceptions of markets in higher education produces no excessive degree of conflict and tension, but rather a markedly different emphasis. Dill’s investigation of the manner in which governments participate in the shaping, creation and stimulation of market forces admits to a greater recognition of the important role governments play in higher education markets. Governments continue to have a stake in the contribution of universities to national and regional

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economies. As Dill and Sporn (1995: 1) argue, “major universities, which in all countries, even in the United States, are increasingly seen by their governments as being among the remaining few and strategically most important state enterprises”. In this respect, then, the idea of markets provides a framework for change in the redesign and reconstruction of university finance policies. It is, however, in most jurisdictions the state that draws the blueprints of change and remains the architect of change. 3. THE TRANSITION TO MASS ‘PUBLIC’ HIGHER EDUCATION While Canadian higher education is generally described as a network of ‘public’ institutions, it is important to recognise the definitional ambiguities associated with how the terms ‘public’ and ‘higher education’ have been employed over time. Until the Government of Canada moved to provide direct financial support for the mammoth expansion of student enrolment following the Second World War, Canadian higher education involved a diverse range of institutional forms, including private secular, private denominational, and publicly supported institutions. Disputes between denominational institutions, and questions concerning which universities (if any) would be beneficiaries of government grants, received considerable public attention during the 19th century. Under the British North America Act of 1867, the Dominion of Canada was created as a federation with legislative responsibility for education assigned to the provinces, and it was the new provincial governments that were forced to confront what were frequently sensitive questions concerning the role of the state in relation to a university sector dominated by competing denominational institutions. A year after confederation, the Government of Ontario addressed the issue by declaring that it would only provide government grants to secular institutions. Each of the four new western provinces that emerged in the late 1800s and early 1900s attempted to avoid the issue entirely by creating one provincial, secular university and assigning the institution a monopoly over the authority to grant university degrees. A similar approach was later adopted by Prince Edward Island and Newfoundland. In Quebec, issues concerning the appropriate role of the state in higher education were complicated by the powerful educational role of the Roman Catholic Church within French-language society, and the predominantly Protestant affiliation of the powerful English-language minority; these issues would only be explicitly addressed under the broader social transformations associated with the ‘Quiet Revolution’ and the dramatic restructuring of Quebec higher education in the 1960s (Jones 1996). The Government of Canada’s WWII veteran’s benefit programme provided the first nudge towards the massification of what might generally be described as a network of small, modestly supported universities. The programme provided qualified returning veterans with the opportunity to access university degree programmes. Veterans were provided with direct government grants to cover living expenses, and universities were provided with direct per-student grants to cover the costs associated with creating spaces for what was then regarded as a short-term cohort phenomena.

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When the Government of Canada decided to support the continuing expansion of higher education in the 1950s it simply expanded the direct per-student funding approach that it had employed under the veteran’s programme. Federal government support was designed to encourage expansion, and the level of per-student grant (which increased over time) was determined with this objective in mind, but it is also important to note that it complemented, rather than displaced, existing sources of operating support. Federal operating grants were layered on top of other sources of income, such as tuition fees, provincial grants, donations and endowment income. From the perspective of the provinces, especially Quebec and Ontario, the federal government’s involvement in this policy sector was problematic. Constitutional responsibility for education was assigned to the provinces, and the provision of direct operating support to universities was nothing less than federal interference in provincial territory. In Ontario, for example, the federal government was providing direct support to denominational institutions despite the fact that these institutions were ineligible for provincial grants. The federal government attempted to deal with these constitutional concerns while continuing to support the continued expansion of higher education by shifting its approach to providing university operating support. Direct institutional grants were replaced with transfers to the provinces, initially through a formula linked to provincial government expenditures in the sector. Provincial government concerns over the ‘strings’ attached to the funding mechanism were only finally addressed through the creation of a new funding mechanism in 1977. The Established Programs Financing (EPF) mechanism replaced previous funding arrangements for higher education, health and hospital insurance into a single transfer programme involving a combination of tax point transfers and cash payments. The cash component of the transfer was based on provincial population and employed an equalisation formula designed to address provincial inequities. Hypothetically, there were no strings attached to these transfers, but for almost twenty years EPF was a central topic of conversation in the politics of Canadian higher education. The federal government routinely, and unilaterally, modified the formula while frequently accusing the provinces of using funds designated for higher education on other sectors. The provinces pointed towards the declining cash transfers associated with EPF in almost every discussion of higher education finance (Cameron 1991). While provincial governments had long assumed the primary legislative role over higher education policy, they now became the sole source of public operating grants for institutions of higher education. At a basic level, the provinces determined what constituted ‘public’ and ‘private’ higher education, while at the same time expanding the definition of ‘higher education’ in response to the changing demands of industry and the needs of the population. In most respects, the categorisation of Canadian universities as ‘public’ or ‘private’ simply denotes whether or not a particular institution receives direct operating grants from government. In legal terms, all universities, even those generally assumed to be ‘public’, are created as private, not-for-profit corporations. Canada’s ‘public’ universities are not owned by the state, and for the most part they function as autonomous, independent corporations. They differ from their private peers in that the provincial government controls the rules under which operating

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grants are distributed, and, beginning in the 1960s, governments gradually expanded the rulebook. By the early 1970s, a surprisingly homogeneous Canadian university model had emerged. With few exceptions, provincial governments only provided operating support to secular institutions, and the lure of government support catalysed the secularisation of many previously religious-affiliated institutions, and encouraged others to enter into affiliation arrangements with secular universities in order to have indirect access to at least a modest level of public funding. When the dust settled, all of the institutions with the legal right to grant secular degrees and have the word ‘university’ in their title received operating grant support from their respective provincial government. The massification of Canadian higher education resulted in the emergence of a relatively homogeneous network of provincially supported universities. Universities, however, did not emerge as the only degree-granting institutions in Canadian higher education. While provincial governments took explicit steps to prevent the creation of a market in university degree-granting during this period, they also effectively defined the boundaries of a market in the little-regulated sector of religious postsecondary education. Religious colleges, many with the authority to grant degrees in religious (primarily but not exclusively Christian) studies and/or theology, emerged in all Canadian provinces except Quebec and Newfoundland (Muir 1997). Offering a clear alternative to a secular university education, these institutions operate within a narrow niche. They are generally small, offer degrees with titles that are distinct from those offered by universities, rely on a combination of tuition fee income and annual donations, and receive almost no attention in public discussions of higher education in Canada. On the other hand, institutions within this sector have played important roles in terms of lobbying provincial governments for private ‘university’ status, and most of the private universities that emerged during the post-war era were denominational institutions that sought and obtained university degree-granting status. For example, Trinity Western University in British Columbia received this authority under a private member’s bill approved by the provincial legislature; several Alberta colleges obtained limited degree-granting authority under the procedures established by that province’s Private Colleges Accreditation Act; and Redeemer University College in Ontario received similar authority under legislation, following an institutional review. In other words, a number of these private religious colleges have now evolved into what is generally regarded as a modest, niche-market private university sector. In terms of the provincially supported university sector, annual government grants were provided in the form of block transfers with relatively little accompanying regulation. Universities were treated as largely autonomous entities, and they assumed responsibility for determining their missions, priorities and how the goals of the institution would be fulfilled. Provincial government grants had become by far the largest single source of university income, and many provincial governments also took steps to explicitly control the level of the second major source of income, tuition fees. Universities had considerable autonomy in terms of determining how they would use their resources, but, as Peter Leslie noted, there was little relationship between university income and performance. University

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administrators were often unable to affect the level of their institution’s operating grant even if they were to change the staff or structure of the institution, and, from this perspective, “how the university conducts its affairs is simply irrelevant” (Leslie 1981: 193). Canadian university education had become a public utility (Corry 1970), operated in a fiscal environment that generally eschewed institutional competition, and the only market-like elements focused on discussions of supply. Government policies for the university sector focused primarily on funding issues (especially grant and tuition levels), and generally involved limiting the level of provincial grants while encouraging institutions to do more (in terms of increasing access and enrolment) with less. Evaluated on the basis of this general policy thrust, Canadian universities were extremely successful. While the Canadian system was viewed as one of the few that met Martin Trow’s rather arbitrary threshold for categorisation as a ‘mass’ system in the early 1970s, participation rates continued to climb steadily over the next two decades. By the early 1990s, participation rates in Canadian universities were among the highest in the world, and by some measures had exceeded those in the United States (Lynd 1994). University income, calculated on a per-student basis, steadily declined over this time period. It is also important to note that, since the provinces controlled both the level of tuition and government grants, universities began to explore a multitude of other revenue sources. As Dill notes, universities function in a variety of markets, and, given their limited ability to influence income directly associated with their core teaching activities, universities began to focus new attention on areas that had greater potential in terms of providing financial flexibility. Many universities began to devote more attention to fundraising. Administrators of ancillary services, such as bookstores, printing services, parking, residences, etc., were frequently mandated to, at the very least, operate these enterprises on a ‘break-even’ basis, if not return a small contribution to the university operating budget. Since provincial government tuition fee controls focused only on university programmes leading to formal credentials, continuing education units, which offered non-credit courses as a service to the broader community, became viewed as a source of potential revenue. The emphasis within continuing education units gradually evolved towards more highend educational programming, including continuing professional education and career advancement courses (Einsiedel 1998; Jones 2001). Universities also turned towards research activity as a potential source of income, though the full potential of this revenue source was mollified by the specific nature of the research funding mechanisms. While the federal government had abandoned its direct support of university operating costs in favour of provincial transfers, by the early 1970s it had assumed the central role in supporting university research. Most of this support was channelled through three federal granting councils (the Natural Sciences and Engineering Research Council, the Medical Research Council,1 and the Social Sciences and Humanities Research Council), all of which operated competitive, peer-reviewed research grant mechanisms as well as competitive doctoral and postdoctoral fellowship programmes. University faculty submitted research proposals for the annual competition, proposals were adjudicated, and final

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decisions were made on which research proposals received support based on peerreview reports within the fiscal realities of the level of funding available to each council. In other words, the federal government determined the total level of support available to each council, and this decision framed the research competition process. More importantly, research funding focused only on the direct (not the indirect) costs associated with university research activity. Arguing that it was already supporting operating costs through provincial transfers, federal government granting councils did not support overhead costs associated with professorial salaries, physical plant, maintenance or the business costs associated with administering research grants (though the universities received the grants and assumed responsibility for paying the related bills, issuing accountability reports and other related expenses). In essence, universities were expected to absorb these costs from their general operating budgets, while these high-status research grants covered the direct costs associated with the specific research activity. From a budgetary perspective, research grants actually reduced institutional flexibility. The success of university faculty in these competitions implied status, the ability of the university to further its goals in terms of research, and generally contributed to the university’s research infrastructure, but it also implied institutional costs that were not covered by the grant and would need to be subsidised by the general operating budget. In other words, there were many reasons for universities to encourage faculty to pursue research council support, but these grants could not be regarded as a mechanism for increasing institutional income. Research contracts with private industry were another matter. Many universities developed policies requiring that overhead/indirect costs be recovered on all industry-sponsored research arrangements, though this was sometimes difficult to achieve in an environment where the major sponsor of university research (the Government of Canada) was not playing by the same rules. While research contract activity gradually increased, many universities also found that contract research could not be viewed as a panacea in terms of addressing the inadequacies of government operating support. The reality is that Canadian industrial investment in research in development was among the lowest of all OECD nations during this period, and generally focused on only a handful of economic sectors. As we noted earlier, by the mid-1960s, universities were not the only institutions in the emerging provincial systems of higher education. In order to respond to new labour market demands, all provinces created institutions that focused attention on vocational education, and, while the specific roles and structures of these institutions varied by jurisdiction, they shared a number of common characteristics. First, these community colleges were generally subjected to provincial government regulation to a greater degree than the universities, and in some cases were directly administered by provincial governments. Second, they tended to be comprehensive, often subsuming what had been specialised provincial technical institutes, and offered technical/vocational programming directed towards a range of industrial/ occupational sectors. Third, while there was significant variation in terms of the relationship between these institutions and the universities by province, with some playing a formal university-transfer role, all of these institutions were prevented from offering degrees, and so the completion of their programmes generally led to a

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‘certificate’ or a ‘diploma’ as a final credential. Fourth, like the universities, provincial operating grants and tuition fees (where permitted by government)2 generally represented their two largest sources of income with both controlled by government. There are two other common elements that are particularly important for this discussion. The first is that, while the core focus of these institutions was on credentialled postsecondary programming, many of the colleges became very active in short-term vocational training and upgrading under contract with local industry. By the mid-1980s, the Government of Canada had become a major purchaser of these services as it sought to provide skills training to the unemployed or to address specialised labour market needs. Unlike their postsecondary programming, which was usually heavily regulated by the provincial governments, this sector of activity was very market-oriented and largely entrepreneurial. The second is that, while provinces provided universities with a monopoly over university degree-granting, community colleges were never assigned the same monopoly over technical/vocational education. Private vocational colleges, operating in an environment of quite modest government regulation, operated in parallel with the new public colleges (see Davey 2003). In some vocational sectors, such as IT and business, the private and public sectors may function in direct competition, though most private colleges are small, highly specialised institutions that have tightly defined niche markets. However, some private colleges offer programmes that are roughly equivalent to community college diploma programmes, and would argue that their programmes meet the standards associated with university degrees; it is from within this category that the second group of institutions seeking private university status can be found. For example, DeVry, an American-based company, operates campuses in several Canadian provinces, and has now obtained approval to offer degrees in the province of Alberta. Private vocational colleges are far from a new phenomenon in Canada, and there has been a modestly regulated market in this sector of educational activity for most of the twentieth century, with considerable growth in the sector beginning in the 1980s and continuing until the dot.com implosion. Sweet (1993) notes that by 1989 Canadian proprietary schools recorded 190,000 enrolments, with 140,000 attending over 1000 schools and a further 50,000 enrolled in correspondence programmes. By the end of the 1980s, then, Canadian higher education was viewed as a largely public enterprise. While there were certainly concerns about the level of government support, universities and colleges had made substantial gains in terms of public access to higher education. In the case of universities, this took place in an environment that generally eschewed competition, at least in terms of degree programmes, and governments were reluctant to allow private institutions to participate in what had come to be viewed as a public, government-regulated area of activity. The small number of private institutions that did emerge were essentially reclassified religious colleges. Community colleges were subjected to even more government regulation and scrutiny, though they were increasingly competing, at least in some programme sectors, with private vocational colleges. The 1990s would bring major changes in both sectors – and many of these changes would be made

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under the guise of increasing competition and creating a market in Canadian higher education. 4. THE CHANGING ROLE OF THE FEDERAL GOVERNMENT By the late 1980s, deficit reduction had become a recurrent, if not ubiquitous, theme in federal government politics. Under the (Progressive Conservative) Mulroney Government, attempts to address the deficit had included relatively modest cuts to the EPF transfers, as well as to the budgets of the research councils. At the same time, however, the Mulroney Government initiated new programmes designed to strengthen university-industry research linkages and support research in strategic areas in order to improve Canada’s competitive position in what was now being viewed as an increasingly global economy. The research councils developed new strategic grant mechanisms, which in many respects used existing mechanisms to support targeted research areas, and the government initiated a new national Centres of Excellence Program designed to link leading researchers and related industries working in strategic sectors. Given that each Centre of Excellence linked researchers from different universities in different regions, it focused on the development of a national research infrastructure that transcended institutional and provincial boundaries. However, it was following the election of the (Liberal) Chretien Government that truly substantial changes in policy in order to address the federal budget were undertaken. Perhaps the most dramatic of these were associated with EPF. In 1995, the Government of Canada effectively created an expanded provincial transfer envelope by combining EPF (which covered health care and postsecondary education) with transfers under the Canada Assistance Plan. The new Canada Health and Social Transfer (CHST) involved a modified funding mechanism, but, more importantly, the level of funds transferred under this programme were substantially less than the allocations that had been anticipated under the former mechanisms. As Cameron (1997: 27) noted, “rather than the 4.4% cut claimed by the Minister of Finance, the real cut amounted to some 37%”. The fiscal impact of these cuts was immediate and dramatic. Provincial governments experienced a significant decrease in transfer payments, and, since most provinces were already cutting expenditures as a function of their own deficit reduction programmes, the implications for postsecondary education were particularly bleak. Most provinces initiated major cuts to postsecondary education. The second impact was that in many respects the cuts signalled the political death of federal transfers for postsecondary education. The CHST continues to exist, and hypothetically an important component of the transfer involves postsecondary education, but the political environment leaves little hope that any new funds devoted to the CHST will be associated with this sector. One pragmatic reason is that, even under EPF, the cash component of the transfer was gradually reducing suggesting that eventually the only remaining component would be a tax adjustment that had been in place for thirty years. The second reason is related to the political importance of Canadian health care policy which is quite simply viewed as far more

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important to the Canadian electorate than postsecondary education. Any discussion of increases in federal-provincial transfers focuses almost exclusively on the provision of increased support to provincially administered public healthcare programmes. Provincial transfers were not the only federal budget areas associated with postsecondary education to suffer. Each of the three granting councils experienced budget cuts of between 10 and 14%. By the end of the 1990s, Canada’s federal budget was balanced and the government began to turn its attention to a sector that it had prioritised in its original election platform: research and development (Wolfe 2002). Central to the government’s thinking was the need to strengthen Canada’s research infrastructure in order for the nation to compete in the new global economy. In addition to reinvesting in research undertaken by the existing research councils, its major initiatives involved entirely new programmes. The Canadian Foundation for Innovation (CFI) is a substantial initiative designed to strengthen research infrastructure while leveraging industry support for strategic research areas. Public research facilities (including universities and hospitals) submit proposals for the funding of specified infrastructure initiatives (including the creation of new research facilities/laboratories) involving matching (frequently private sector) support. The Canada Research Chairs programme is designed to create 2000 funded research chairs in Canadian universities. Together, these programmes represent perhaps the most significant investments in university research activities in national history. While both programmes are obviously designed to increase Canada’s competitiveness, and while both involve elements of competition in their allocative approach, their implications for markets and marketisation in Canadian higher education are somewhat ambiguous. Allocations under the Canada Research Chairs programme were based on prior success in annual competitions of the three granting councils. In other words, the programme offers substantive rewards to those institutions that were heavily involved in government-sponsored research before the programme was announced, but the allocative mechanism does not reward prior success in terms of university-industry linkages. In contrast, the CFI initiative, which emphasises support for large-scale research infrastructure, is designed to leverage external (non-federal government) support, and institutions are frequently in competition in terms of identifying appropriate partners, or in some cases are using other resources (including those that may be associated with their operating budget) to match CFI funds obtained under the programme. There are two significant implications of these programmes. The first is that, combined, they are leading to greater differentiation within what had formerly been regarded as a relatively homogeneous university sector. Some universities have always been more research intensive than others, and those that have been, especially those involved in research areas viewed as strategic in the context of the knowledge economy, are now receiving substantive support under these programmes. As the level of private research and development activity in Canada increases, which it is, a small number of institutions are being positioned to have an important advantage in this expanding area of market activity.

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The second implication is regional. While EPF allocations were designed to be equitable in terms of considering provincial populations and differences in provincial tax base, distributions by region or province are not considered within these new initiatives. The implications for some Canadian regions are rather dramatic. In comparison with how funds would have been distributed under EPF, universities in British Columbia, Alberta and Quebec have seen huge gains under these programmes, while the prairie provinces (Saskatchewan and Manitoba) and the maritime provinces (New Brunswick, Nova Scotia and Prince Edward Island) receive a much smaller share. There are several reasons for this, including regional differences in research activity given the multiple roles of postsecondary education, and differences in industry by sector (which has a significant impact on success for CFI funding). The basic reality is that some provinces do not have a strong industrial base in the sectors that have been most successful under the CFI arrangements. Finally, it is important to note that the Government of Canada has now acknowledged the importance of providing support for the indirect (overhead) costs of research and an initial grant to provide partial support for these costs has been allocated. However, it is too early to conclude that research overhead funding will now be an ongoing component of the government’s research funding. If this does occur, it will have a significant impact in terms of furthering institutional differentiation. 5. THE PROVINCES Canada’s provincial governments have always had somewhat different policy approaches to higher education, but there were also common themes, especially during the period from the 1970s to the early 1990s (Jones 1996). The modest reductions in federal transfer payments to the provinces, combined with, in some provinces, increasing concerns about the growing magnitude of provincial government budget deficits, and the recession of the early 1990s, led a number of provincial governments to reduce operating grants and increase tuition fees. With the massive reductions in transfers associated with the federal budget cuts of the mid-1990s, the provinces began to move in quite different directions. We will briefly review provincial policy change in three policy areas, institutional funding, tuition fees and research policies, with a particular emphasis on those jurisdictions that have emphasised competition and market-like policy approaches. Generally speaking, provincial operating support of postsecondary education declined during the latter half of the 1990s, and, while in many provinces this was generally accomplished by simply reducing the level of operating grants, several provinces also introduced new funding mechanisms and approaches. In concert with changes in financing on the federal front, the Government of Alberta began to make various adjustments to the ways in which universities were funded, beginning in 1994. Numerous policy changes in Alberta involve market-like policy instruments and many can be captured under three categories: changes in the balance of public and private finance (Rae 1996; Barnetson and Boberg 2000);

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erecting financial rewards to stress market-proximate programmes; and facilitating the commercialisation of university-based research. In terms of the shift in the balance of public and private funds, the government proceeded to decrease operating funds to the institutions by 21 per cent over three years, beginning in 1994. At the same time, the government opted to allow tuition fees to increase from a previous level of 12 per cent in 1989 to 20 per cent of net institutional operating income in 1994, and ultimately to 30 per cent by the year 2000–01. As Barnetson and Boberg (2000: 62) note, this was ostensibly done to “increase the responsibility of public postsecondary students … and [cover] the costs of learning to recognize the benefits of opportunities to learn”. The Government of Alberta also introduced a performance-based funding mechanism called the Performance Envelope. While the envelope represents only a small component of total provincial grants to postsecondary institutions, it became the first Canadian example of performance-based funding. Funds are allocated based on institutional performance in nine categories that stress government-identified themes of “responsiveness, accessibility and affordability” (Advanced Education and Career Development 1994). In addition to government-led efforts to encourage institutions to emphasise and develop more market-proximate programmes, the province envisioned an education system that gave “Albertans competitive skills to succeed in the evolving world economy. To do this, we need to increase private-sector participation in education and training at all levels. Business can foster the entrepreneurial attitudes and skills necessary to increase competitiveness” (Advanced Education and Career Development 1994: 63). A component of this effort included the creation of additional provincial funding envelopes that encouraged both private sector involvement and new programmes. One such envelope was the Access Fund, established to facilitate the creation of 10,000 additional, relatively low-cost spaces for students from 1994 to 1997 in areas deemed high demand by the chorus of business leaders. Areas included science, computer science, technologies, agriculture, among others, and full-time equivalents were funded at $2900 per student in comparison to the $8670 delivered through the funding formula. With respect to changes in the ways in which the province’s research enterprise was funded, the provincial government created several new envelopes. The Research Excellence Envelope provided competitively allocated funds for research infrastructure costs, such as specialised computer software and hardware, laboratory costs and unusually expensive research supplies. The Intellectual Infrastructure Partnership Program was intended to facilitate the transfer of knowledge and technology to the private sector for commercial application, as well as some possible use to stem brain drain and enable universities to retain their top science and technology faculty. The Infrastructure Renewal Envelope, also competitively allocated, went part way to modernising and updating lab equipment and the like, following a provincial review that recommended significant reinvestment in that area. Consistent with other provincial experiments with the introduction of marketisation in higher education funding models, the Alberta case illustrates a decidedly Canadian approach to the rather selective use of market mechanisms,

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coupled with a strong planning function for the state at the sub-national level (Barnetson and Boberg 2000; Young 2002). Drawing on Neave’s notion of the ‘evaluative state’, Alberta’s experiments with re-engineering its resource allocation models are replete with the dual, seemingly contradictory forces of governmentdriven change coupled with the selective use of market mechanisms. In a spirit similar to that of the western province of Alberta, the election of the Progressive Conservative Government in Ontario in 1995 meant a re-engineering in resource allocation for the province’s universities. Ontario reduced government funding to its transfer partners in the ‘MUSH’ sector – municipalities, universities, schools and hospitals – by 16 per cent. At the same time, tuition fees were permitted to rise by an average of 20 per cent, new funding envelopes were created, and the province embarked on stimulating research that more often than not had a clear private sector audience. In their first year, the Progressive Conservative Government allowed universities to increase the basic arts and science fee by an institutional average of 20 per cent. This meant that tuition fees for certain programmes could be increased in excess of that amount, however, revenue from tuition fees as a source of funds could not exceed 20 per cent. Furthermore, fees for graduate programmes in all areas were deregulated, as well as programmes in engineering, law, medicine, dentistry, management and all other programmes deemed ‘professional’. This latter policy change evoked substantial variation in fees across programmes. After a significant reduction in operating funds in 1996–97 of approximately 16 per cent, a portion of the realised savings was funnelled through a variety of special funding envelopes. In the province of Ontario, grants to universities actually began increasing in 1998, due in large measure to the introduction of a number of new earmarked funding initiatives including the Fair Funding Grant (though the recipients were the newer universities), the Access to Opportunities Program (discussed in detail below), the Graduate Scholarships in Science and Technology Program, the Learning Opportunities Task Force and the Research Excellence Awards (COU 1999). In 1998–99, grants increased to $1.61 billion from $1.59 (while revenue from tuition fees hit the $1 billion level system-wide), to $1.66 billion in 2000–01. This increase of $50 million was attributable in whole to the introduction of new, earmarked funds – approximately one-third for each of enrolment growth; a new Key Performance Indicators Fund tied to an institution’s graduation, student completion rates and levels of student employment following graduation; and further Access to Opportunities Program and Fair Funding grants. The grant allocated through the funding formula, or the basic grant, did not grow in any of those years. Like Alberta, the theme of market-proximity in university programming is also present in Ontario. The province initiated the Access to Opportunity Program, an initiative to ‘double the pipeline’ of computer science and engineering graduates. This programme was conceived of by the private sector for the province, after having failed to influence the federal government on immigration policy. A matching programme, the universities’ ability to raise funds for the expansion of IT programming, was rewarded with equal amounts from the province. Once again, Ontario followed Alberta’s lead in creating a competitively allocated funding

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envelope to finance some of the indirect costs of research. The Ontario Research and Development Challenge Fund, in which the provincial government will contribute one-third of total funds required to support initiatives that have secured private sector financing, is yet another iteration of the government’s preferred matchingfund approach to programme funding. Somewhat similar policy approaches are now emerging in the province of British Columbia. During most of the 1990s, this province took steps to expand its higher education intrastructure through the creation of new institutions, and its New Democratic (Social Democratic) Government had instituted a tuition fee freeze which meant that fees in this province were the second lowest in the country. The recent election of the Campbell Government signals significant changes in policy direction. The new government has introduced substantive funding cuts, deregulated tuition fees (fee levels climbed substantively in fall, 2003) and is beginning to introduce policy mechanisms that are not dissimilar to those found in Alberta and Ontario. Alberta, Ontario and British Columbia provide important examples of provincial governments that have shifted the public/private balance in higher education funding and introduced competitive, market-like funding approaches. At the other extreme, a number of provinces have taken steps to reaffirm the public nature of higher education in these jurisdictions. Quebec continues to operate a tuition freeze, and fees in this province are less than half of those found in Ontario or Nova Scotia (and there are no fees at the Quebec CEGEPs). Manitoba and Newfoundland have also taken steps to freeze tuition, and the latter actually reduced fees in 2003. Overall the picture is one of considerable diversity in terms of the direction of policy change. With respect to tuition fee policies, differences in tuition fee levels from province to province are more pronounced than ever before. With respect to the ways and levels of research funding, David Wolfe (1998: 2) notes that: Federal budget decisions in 1995 seriously reduced the level of research funding available to post-secondary educational institutions. Other initiatives of the federal government have introduced a new element of targeting into its approach to funding PSE [Post-Secondary Education] research. The provinces, for their part, have adopted new measures to fund PSE research as well, some in an attempt to fill a perceived policy gap, others in response to federal initiatives. The result is an escalating sense of confusion and lack of clarity in their respective roles in, and responsibility for, the PSE research component of Canada’s science system. In this field, as in other jurisdictional areas, there is a pervasive sense of overlap, duplication and spillovers between the two levels of government.

6. MARKETS, MARKETISATION AND CANADIAN HIGHER EDUCATION Lord Ronald said nothing; he flung himself from the room, flung himself upon his horse and rode madly off in all directions (Leacock 1969: 54).

There have always been markets in Canadian postsecondary education, especially if one uses a wide-angle lens to observe the range of institutions that operates programmes directed at secondary school graduates, as well as the plethora of activities, products and services associated with these institutions. The great postwar expansion that led Trow to categorise Canada as a ‘mass’ system by the early

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1970s was accomplished largely by viewing higher education as a ‘public’ activity deserving of significant government investment. But even during this period there were proprietary vocational training schools operating postsecondary programmes that freely competed in this educational sector with little government regulation, and in some cases directly competed with vocational programmes operated by provincially supported community colleges. It is important, however, to note the timing and form of this initial phase of the expansion of ‘public’ higher education. The massification of Canadian higher education took place in parallel with the rise of the Canadian welfare state and during a time period of expanding government investment in a range of sectors. It also took place in the context of a booming post-war economy when governments had considerable fiscal flexibility. The form involved the expansion of funding directed towards a network of private, not-for-profit, secular universities (and the expansion of this network by creating new universities modelled on existing institutions), the creation of new public institutions to offer postsecondary vocational training (and, in some provinces, university transfer or pre-university programmes) and the regulation of tuition fees. Provincial governments regulated degree granting, and they assigned the secular, publicly supported universities a public monopoly. Markets generally functioned in areas of postsecondary activity that were either outside the boundaries of the ‘public’ sector or in areas of activity where it became clear that the activity was not subsumed by the government’s understanding of ‘public’ higher education. The former included for-profit vocational training schools and not-for-profit religious colleges. The for-profit sector operates in an extremely challenging and competitive market environment and there has been considerable merger/restructuring activity in the last few years (including a recent decision by DeVry to withdraw from its activities in the province of Ontario). The latter came to include a range of products and services where it became clear that each institution had the discretion to determine whether product/service costs would be subsidised by the institution’s operating budget. By the 1980s, many Canadian community colleges were involved in highly competitive markets associated with the provision of specialised training programmes under contract with private industry or the Government of Canada. Both universities and community colleges began to rethink their ancillary operations (such as residences, parking, food services, etc.) with a view towards increasing revenues by marketing their meeting/conference facilities and catering services. University continuing education units, once viewed as public service units, became repositioned as centres for revenue generation or, at the very least, were mandated to recover all operating costs from fee revenue. Many of these units began to focus on high-end continuing education programming, including specialised certificate and diploma programmes. Professional faculties had long been involved in continuing professional education, but they began to actively compete in the growing market for specialised continuing professional education courses and programmes, and these activities now frequently contribute revenue to the university/faculty operating budget. None of these activities is new, but there is little doubt that reductions in institutional operating grants, especially in the mid- to late 1990s, forced institutions to look for ways of reducing expenditures (by finding

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ways of reducing the level of subsidisation of activities where there was potential for service reduction or unit self-funding) and/or increasing revenue. Universities began to develop new hybrid relationships and partnerships with industry and enter into creative service-contract arrangements. Across the country, the share of university revenues associated with non-government, non-tuition fee sources increased. The core source of ‘public’ support, however, continues to be in the form of provincial government operating grants. Two provinces have now introduced performance-based funding mechanisms that influence a modest component of operating support, and most provinces have introduced a range of other targeted funding programmes. A number of these funding programmes employ mechanisms that are designed to stimulate competition among institutions. In some provinces, especially Ontario and Alberta, there are clear examples of marketisation in higher education. In other words, markets and marketisation in Canadian higher education are playing an increasing role both in terms of institutional participation in marketlike activities and in terms of the shift in the mechanisms employed by government to target and direct certain spheres of institutional activity. At the same time, however, the Canadian approach to employing market-like policy instruments has involved a number of interesting features. First, and perhaps most important, is the fact that these policy instruments are layered on top of core operating support and, frequently, other targeted funding mechanisms that are not designed to stimulate market-like activity. Since the core element of provincial government funding continues to be general operating grants designed to support the universities’ autonomously determined goals related to teaching, research and service, there is no tradition of tracking the distinct costs of each of these functional areas of activity. There are detailed resource allocation processes that focus on the distribution of resources between operational units, and there are clearly mechanisms in place to monitor and audit unit expenditures, but budget and resource allocation decisions are based on the model of an academic unit that engages in teaching, research and service. In other words, universities do not know in precise terms the costs of their teaching activities because these costs are never disaggregated from operating budget-supported research and service activities. The absence of cost data by function suggests severe limitations in any discussion of true markets in Canadian higher education. Second, market-like policy instruments in Canada have tended to focus on supply, rather than demand. For example, the Canadian brand of marketisation has deployed market-like instruments to stimulate the supply of: 1) research through, for example, the Canada Foundation for Innovation and the Canada Research Chairs initiatives; 2) student spaces through changes in government funding allocation mechanisms in some provinces; and 3) student financial assistance through an Ontario Government initiative. In this way, the Canadian brand of marketisation retains an element of traditional central planning, and thus preserves the power of the state in the steering, design, priorities and overall management of the higher education enterprise. In terms of research policy, it is important to recall that Canada’s private sector investment in research and development lagged behind many other developed nations, and so some of these research funding mechanisms are designed to strengthen Canada’s university research infrastructure while also

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stimulating greater private sector investment through matching programmes. In other words, these initiatives are designed to steer private industry as well as universities. It is also important to recall that many of these new initiatives involve government financial support for only a component of the costs associated with a particular activity based on the assumption that other revenues will be leveraged from private industry, or absorbed by the institution. Institutions are dealing with two levels of government operating multiple layers of funding mechanisms and targeted programmes that are pushing and pulling them in different directions. Given the absence of cost data by function, we know relatively little about the impact of these new initiatives on the higher education sector as a whole. What are the implications for the balance between teaching and research? What are the implications for faculty work, remuneration and reward structures? Given that so many of these initiatives have focused on research, have they led to changes in terms of the quality of the student experience? This emphasis on supply means that the implications of high-tuition policies in some provinces are somewhat different than what one might find in some other jurisdictions. In a time of government grant reductions, tuition increases have simply been viewed as a mechanism for sustaining institutional revenue so that the supply of student spaces can be maintained. The impact is to shift the balance of private/ public support, but, with a few exceptions, there is little sense that high-tuition approaches are having a substantial impact on the aggregate ‘demand’ side of the equation,3 or leading to greater institutional responsiveness to market forces. Experiments with very high fees in certain professional programmes (such as law, medicine and dentistry) are certainly having a positive impact on institutional revenues (and institutional differentiation, since only a small number of institutions offer these programmes), but it is important to note that these were already highdemand programme areas with restricted enrolment levels. The unique political and structural arrangements associated with Canadian federalism have also had a significant impact both on the manner in which marketlike policies have been adopted, and on the outcomes of these policies. The noteworthy themes on this front are twofold. Given the precariously maintained but generally observed agreement on the division of financing responsibilities between the federal and provincial governments, the potential exists for a disharmony in policy ends and means. An example of this disharmony may be in the area of research funding: where provincial research funding for overheads may be allocated using some form of market-like mechanism, the allocation of federal research monies may be predicated on a formula based on past performance in other peerreviewed research competitions. It is important to ask, then, what is the result of these seemingly ‘incompatible’ resource allocation models? Can both models – even inadvertently, perhaps – serve the same ends without sharing the same means? Might these ‘cross-purpose’ research-funding strategies blunt the impact of efforts on one policy level to stimulate a market-like dynamic among institutions? Despite the potential disharmony in federal and provincial policies, there is nonetheless strong evidence to suggest that the outcomes of marketisation policies include the growth of regional disparities in terms of support for university research,

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and increasing institutional differentiation based on new ‘supply-side’ government definitions of prioritised or privileged activities. An example of policies that generate such disparities includes those of the innovation-minded variety, which strive to foster the creation of ‘non-virtual’, physical centres of excellence. Both provincial and federal policies tend to emphasise and encourage specialisation, differentiation as well as the ‘clustering’ of institutions’ research foci – the latter a notion that riddles the majority of federal innovation policy documents. And, although not synonymous, policy intended to encourage the formation of non-virtual research clusters at one institution or at several proximate institutions results in a disparity of resources among institutions. As resources beget resources, this disparity is reproduced, as better-endowed institutions are better able to secure yet additional funds. Has there been an increasing emphasis on markets, marketisation and institutional competition in Canadian higher education? The answer is clearly yes, but these policy changes have to be understood in a context of continuing core operating grant support, significant differences in provincial government policies by jurisdiction that range from tuition deregulation to maintaining low tuition levels to promote student access, and a wide range of targeted funding mechanisms that are not competitive or designed to stimulate market-like activity. It some respects Canadian higher education policy is ‘riding madly off in all directions’ with quite different provincial policy approaches, with two levels of government attempting to steer institutional activity, and with a range of policy approaches including, but certainly not limited to, marketisation. NOTES 1 2 3

Medical research funding has now been reorganised and is the responsibility of the Canadian Institutes for Health Research. Quebec collèges d’enseignement général et professionel (CEGEPs) do not charge a tuition fee. Generally speaking, full-time fees for postsecondary programmes in the colleges are substantially lower than the fees charged to full-time university students. The key question is whether high fees are having an impact on the levels of participation of lower socio-economic groups, or whether student financial assistance policies continue to provide appropriate need-based support to address this concern. This topic is the subject of a number of ongoing studies.

REFERENCES Advanced Education and Career Development (Government of Alberta). New Directions for Adult Learning in Alberta (White Paper). Edmonton: Advanced Education and Career Development, 1994. Barnetson, Bob and Alice Boberg. “Resource Allocation and Public Policy in Alberta’s Postsecondary System.” Canadian Journal of Higher Education XXX.2 (2000): 57–86. Cameron, David. More Than an Academic Question: Universities, Government and Public Policy in Canada. Dalhousie: Institute for Research on Public Policy, 1991. Cameron, David. “The Federal Perspective.” In Jones, G.A. (ed.). Higher Education in Canada: Different Systems, Different Perspectives. New York: Garland Publishing, 1997, 9–29. Corry, J.A. Farewell the Ivory Tower: Universities in Transition. Montreal: McGill-Queen’s University Press, 1970. COU (Council of Ontario Universities). Facts & Figures: A Compendium of Statistics on Ontario Universities. Toronto: Council of Ontario Universities, 1999.

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Davey, Richard. “Procedural Diversity in Ontario’s Non-Degree Sector: A Study Describing Educational Processes in a Private Career College and a College of Applied Arts and Technology.” Unpublished doctoral dissertation, University of Toronto, Toronto, 2003. Dill, David D. “Markets and Higher Education: An Introduction.” Higher Education Policy 10 (1997a): 163–166. Dill, David D. “Higher Education Markets and Public Policy.” Higher Education Policy 10 (1997b): 167– 185. Dill, David D. and Barbara Sporn. “The Implications of a Postindustrial Environment for the University: An Introduction.” In Dill, David D. and Barbara Sporn (eds). Emerging Patterns of Social Demand and University Reform: Through a Glass Darkly. Oxford: Pergamon Press, 1995, 1–19. Einsiedel, A.A. “Changes and Emerging Trends in the CE Function on University Campuses.” Canadian Journal of University Continuing Education 24.1 (1998): 9–24. Jones, Glen A. “Governments, Governance, and Canadian Universities.” In Smart, J.C. (ed.). Higher Education: Handbook of Theory and Research, vol. XI. New York: Agathon Press, 1996, 337–371. Jones, Glen A. “Islands and Bridges: Lifelong Learning and Complex Systems of Higher Education in Canada.” In Aspin, D., J. Chapman, M. Hatton and Y. Sawano (eds). International Handbook of Lifelong Learning. Dordrecht: Kluwer, 2001, 545–560. Leacock, Stephen. Nonsense Novels. Toronto: McClelland and Stewart, 1969 (1910). Leslie, Peter. “New Directions in Financing Canadian Universities.” In Nowlan, D.M. and Richard Bellaire (eds). Financing Canadian Universities: For Whom and by Whom? Toronto: Institute for Policy Analysis of the University of Toronto and the Canadian Association of University Teachers, 1981, 192–207. Lynd, D.J. “Increases in University Enrolment: Increased Access or Increased Retention?” Education Quarterly Review 1.1 (1994): 12–21. Muir, William R. “Higher Education in Saskatchewan.” In Jones, G.A. (ed.). Higher Education in Canada: Different Systems, Different Perspectives. New York: Garland Publishing, 1997, 93–114. OECD. Financing Higher Education: Current Patterns. Paris: Organisation for Economic Co-operation and Development, 1990. Rae, Peter. “New Directions: Privatization and Higher Education in Alberta.” Canadian Journal of Higher Education XXVI.2 (1996): 59–80. Sen, Amartya. Development as Freedom. Oxford: Oxford University Press, 1999. Slaughter, Sheila and Larry Leslie. Academic Capitalism: Politics, Policies and the Entrepreneurial University. Baltimore: John Hopkins Press, 1997. Stein, Janice Gross. The Cult of Efficiency. Toronto: Anasi Press, 2001. Sweet, Robert. “A Profile of Private Vocational Schools.” Canadian Journal of Higher Education XXIII.3 (1993): 36–63. Wolfe, David. “The Role of the Provinces in PSE Research Policy: A Discussion Paper.” Unpublished paper prepared for the Council of Ministers of Education, March, 1998. Wolfe, David. “Innovation Policy for the Knowledge-Based Economy: From the Red Book to the White Paper.” In Doern, G.B. (ed.). How Ottawa Spends 2002–2003. Toronto: Oxford University Press, 2002, 137–150. Young, Stacey J. “The Use of Market Mechanisms in Higher Education Finance and State Control: Ontario Considered.” Canadian Journal of Higher Education XXXII.2 (2002): 79–102.

SIMON MARGINSON

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1. INTRODUCTION F.A. Hayek rejected governmental action to secure specific social ends, so turning his back on all policies designed to secure opportunities or redistribute benefits. He argued that, left to themselves, human beings would naturally evolve a liberal social order, grounded in competitive markets, where their future welfare would be one of the unanticipated consequences of their instinctual responses to market signals (Hayek 1948; 1952; 1967). In The Road to Serfdom Hayek, following Herbert Spencer, described competition as “the principle of social organisation”. “The modern movement for planning is a move against competition as such”, he declared (Hayek 1944: 27, 29). To interfere with the market was to jam the natural motor of this unreflective evolutionary progress. At the same time, Hayek was a vigorous advocate of laws and policies designed to secure the forms of the market order itself. It is important not to confuse opposition to this kind of planning with a dogmatic laissez-faire attitude. The liberal order is in favour of making the best use of competition as a means of coordinating human efforts, not an argument for leaving things just as they are. It is based on the conviction that where effective competition can be created, it is a better means of guiding individual efforts than any other (Hayek 1944: 27).

The essential Hayekian political project, the construction of a market order, was outlined in the three volumes on Law, Legislation and Liberty, completed in 1979 as the Thatcher regime, the first ‘Hayekian’ government, was beginning its work on British policy. But a market order is just another mode of ‘social organisation’. The plan to construct a market order based on competition and artificially ‘naturalise’ that competition, is, after all, just another act of social engineering, another plan.1 This tension at the heart of Hayek, between conservative ‘spontanaeism’ and liberal rationalism, between market naturalism and market construction, is reproduced in the strategies of contemporary governments that work within the Hayekian imagination, especially but not only in the Anglo-American countries. The outcome of the Hayekian project, with its characteristic tension, varies by policy sector. In some sectors markets existed prior to the Hayekian project, in others they did not. Some state-created markets remain state determined, more than others. In some sectors there is neither freewheeling economic competition nor managed marketgame: for example, in social sectors such as health care in Western Europe, or basic 207 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 207–240 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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education in most countries, a Hayekian competitive order has scarcely been established at all. In higher education, which in its modern form at least was always a government constructed sector, policy strategies lean more to Hayekian rationalism than Hayekian ‘spontanaeism’. In its natural state, higher education embodies an interinstitutional competition between universities for social prestige, linked to a positional competition between students for access to the most favourable opportunities, and a personal competition between professors for academic prestige. Yet these competitions are readily modified by collaboration and a common interest in the intellectual and national-cultural missions; and prior to the neo-liberal era, these competitions rarely took the form of an economic market as such. Even in the USA the ‘market’ in higher education was more an ideological fiction than a working economic system, at least until national student loans were introduced. It is Hayekian rational governments that have extended the market order to higher education by enhancing the competitive element and metamorphosing it into an economic form. And once that strategic policy decision is taken, to form and naturalise a Hayekian market order in higher education, national governments never really let it go. The objective of market reform in higher education is to set in place an autonomous market machine, running like a clock, with spontaneously selfregulating behaviours that are based on market signals. At the same time government sets the boundaries of the market, often determines its inclusions and agents, standardises its products and influences if not legislates its prices. Maintaining a high potential for political involvement, because higher education is a primary site of individual opportunity, the knowledge economy and technological innovation, from time to time governments are tempted into interventions to secure particular outcomes, even distributional ones – exactly what Hayek warned them against – just as in the previous Keynesian era, before neo-liberalism, though at a lower level of popular expectation. The result is a ‘market’ in higher education that only imperfectly replicates the classical forms of an economic market. Coordination based on economic competition is blended with formula-based allocations (both naturalised and controlled), and over-determined by top-down managers in government and semicorporate universities. Buying and selling, expanding and contesting, are shot through with arbitrary policy actions. The liberal divide between public and private is never clearly established. Nevertheless, this is a different kind of higher education system to the state administered systems that characterised most OECD countries before the neo-liberal era. While power has not been fully devolved to the agents of spontaneous order, institutions now have part responsibility for fundraising and policy outcomes. While the academic mission continues, and there is much continuity, institutions have been transformed by the economisation of competition and of globalised relations; by price signals; and by corporate legal forms and business models of organisation. Australian higher education is a useful example of a national education system, government administered and funded until the late 1980s, into which a rolling series of market reforms was introduced. The process is well advanced, particularly in the

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creation of economic forms of competition and marketable products, the installation of prices, about to spread to undergraduate education, and global entrepreneurship. Marketisation is not complete in the sense of a Hayekian market order, and probably never will be, but has been around long enough to discern consequences. An examination of the market in Australian higher education might be useful for those national systems where the reform agenda is less advanced. This examination can also be fed into the larger process of critical evaluation of the Hayekian project, in education and other policy sectors, that is now overdue. 1.1. The Chapter The chapter begins with notes on the elements of markets in education, and on the ‘goods’ produced in higher education. It focuses on higher education as a competition in positional goods, which has consequences for the forms of market segmentation (see also Geiger in this volume) discussed in the subsequent analysis. The chapter provides a brief history and background to the present Australian system of higher education, before analysing the forms and mechanisms of the system as a government-managed national competition, with the institutions arranged in a segmented hierarchy. The analysis falls into two parts: the domestic Australian system, and the role of Australian universities in international marketing. The chapter closes with an account of the Nelson reforms, which introduce a feebased market into Australian undergraduate education from 2005; and the Australian position in the WTO/GATS negotiations on cross-border trade in educational services. 2. POSITIONAL COMPETITION IN HIGHER EDUCATION In particular, the prestige of universities is an end in itself. This underpins the older, pre-Hayekian competition in higher education. Universities strive on the one hand for social and academic prestige, on the other, for economic capacity and revenues. The outcomes of each of these forms of competition are fed into the other. Revenues help the university to build prestige, especially in a neo-liberal era. Prestige is instrumental for gaining revenues. The attractiveness of universities to bright students, especially those from leading families – their relative attractiveness as sites for positional investment – remains crucial to them. Hayekian national markets in higher education rest on this older positional competition (Hirsch 1976), rather than abolishing it. ‘Positional goods’ produced in higher education are scarce educational opportunities that are seen to confer on students potential or actual social advantages. Positional goods are produced in a hierarchy of value: some are more valuable than others. As Hirsch put it in Social Limits to Growth: “Positional competition … is a zero-sum game. What winners win, losers lose” (Hirsch 1976: 52). Positional competition in higher education is a dual competition in which institutions compete for the custom of the most preferred customers, while consumers compete for entry to the most preferred institutions. Prestige sustains

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competition for entry into the most sought-after institutions, and the competition generates high student entry scores. This sign of ‘competitiveness’ (scarcity) becomes the variable sign of prestige, locating each institution within the prestige hierarchy: the mechanisms of competition for prestige reproduce prestige itself and sustain the relative standing of institutions that produce it. Wealth follows prestige: wealthy families invest in high value positions in education so as to maintain their positions of social leadership, positions which provide necessary (though not sufficient) conditions for reproducing incomes and wealth in the next generation. Positional markets in higher education are a matching game in which the hierarchy of students/families is synchronised with the hierarchy of universities, and individual market choices are determined by status goals. These dynamics of positional competition shape the potential and outcomes of Hayekian market reforms. Within any one nation there is an absolute limit on the number of positional goods at a given level of value. The number of such goods cannot be expanded without reducing their unit value. When an exclusive education becomes more broadly available, it ceases to be exclusive. Because there is an absolute limitation on the number of high value positional goods, there is also a limit on the number of high value producer institutions, and on the size of those high value institutions. Elite institutions do not expand production to meet the full demand, like capitalist businesses. Their ultimate lodestone is not maximum market share or even maximum revenues; it is consumer preferment, social status and the academic status (especially in research) that helps to maintain their social status. It is only at the lower levels of the hierarchy that positional competition operates more like a textbook economic market. Weaker institutions must market hard to attract students to fill their places and secure revenues. Their success is always provisional, and contestable. A positional market necessarily combines competition with oligopoly and market closure. Whether there is high-tuition or not, this market is never freely competitive. A university with elite status has a limited number of high value competitors, and its status maintains student custom and resources. Providing they sustain that prestige, its market value is unassailable. The more intense is the student competition for entry into the elite institutions, the less those elite institutions are required to court the consumer in the conventional manner, by dropping prices or providing more and better services. For every dissatisfied customer there is another ten to take their place. A Hayekian intensified competition strengthens the status, bargaining position and resources of the top tier institutions. As demand expands relative to the supply of places their prestige spirals upwards and they raise tuition prices, centring their augmented resources not on better services but on further building their prestige. To emphasise, what sustain their prestige are not customer friendliness or strong teaching (though they find it wise to make noises about teaching quality), but research reputation and the mechanisms of positional competition itself. Elite universities need to look sharp, but they do not need to be fundamental innovators.2 To reproduce market leadership requires not risk taking, but ordinary prudence. The top of the positional hierarchy in education tends to be very stable over time. All of the leading institutions in Australian higher education are 45 years old or more..

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At the lower levels it is possible to move some way up the positional hierarchy. But lower and middle level institutions find it difficult to gain general recognition for their best programmes (in a positional market, quality is equated with elite status); and they find it is almost impossible to move into the top group of institutions, except perhaps over a long period, as the size of the system expands. Middle level producers cluster as ‘second choice’ status choices, or as specialists, where they compete directly with each other, more than with institutions in the top group. Positional markets tend to segment into different groupings, sub-markets, with the segments aligned in a vertical hierarchy and firm barriers limiting upward movement between segments. The downsides of the positional market in higher education are market closure, the inch-forward isomorphistic character of innovations that are institution-driven (autonomous research groups do better), and the generation of individual frustration and dead-weight social costs. When everyone stands on tiptoe, no one gains a superior vantage: students and their families have to invest more than they expect to achieve the same social outcomes. Meanwhile, the ‘race to the bottom’ in the lower segments, marked by hyper-marketing and cost-cutting, force quality down. The more intense the competition, the more these effects become apparent. Adam Smith’s invisible hand does not apply. “The connection between individual and aggregate advance is broken” (Hirsch 1976: 7–8). Positional competition reduces the general welfare. Perhaps the extreme case is the ultra competitive Korean education system, where parental spending on private tutoring, designed to secure their children’s entry to the most prestigious schools and universities, is a remarkable 3.2 per cent of GDP (OECD 2000)! For the most part these investments fail to achieve their intended private objectives. They cancel out. When social interaction of this [positional] kind is present, individual action is no longer a sure means of fulfilling individual choice; the preferred outcome may be obtainable only through collective action (Hirsch 1976: 5).

For Hayek the conservative, inherited hierarchy was the bedrock of social order. When market reforms inspired by the rationalist liberal Hayek are introduced into higher education on top of an existing positional hierarchy, the natural effect is to reinforce that positional hierarchy. Intensified competition per se strengthens the position of the leading institutions and their hold on all of the rewards of competition. An increase in the role of prices and a reduction of public subsidies tend to stratify resource allocation, so that, again, a higher proportion of total resources becomes centred on the elite institutions. To the extent that it strengthens the role of the price mechanism, and weakens entry via academic achievement, market reform tightens the economic nexus between affluent families and leading institutions. The leading institutions can retain their academic and social identities, yet play the fast-moving entrepreneur where it suits them, as in creating intellectual property in biotechnology, or, as in Australia, in international marketing. As the economic side of competition bites deeper, executive leaders might become cynical about the values associated with ‘their’ elite university, but they keep their market advantage. Weaker institutions face a debilitating choice between marginal academic integrity and entrepreneurial excess. Elite universities generally welcome

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market reform. They have much to gain: the naturalisation of Hayekian market competition not only stratifies resources, it reduces contestability, and naturalises the inherited university hierarchy itself. This might suggest that when governments committed to the Hayekian project intensify competition and introduce prices, they should also take special measures to ensure contestability, restrain price increases, separate quality from status, and place efficiency and customer responsiveness pressures on the elite institutions. In practice all such measures face a dilemma: either they are token (e.g. league tables based on quality assurance scores never really disturb the hierarchy, regardless of the outcomes), or they interfere unduly with the market – they involve governments in ‘picking winners’ or, worse, redistributing the starting positions in the race. Measures to increase contestability are probably the most important potential correctives, but elite institutions can summon significant social resources in their defence; and such measures must work against the grain of Hayekian marketisation itself. 3. HIGHER EDUCATION IN AUSTRALIA Australia gained national independence from Great Britain in 1901, retaining some constitutional links, and stronger economic and cultural ties. (The cultural ties lasted longest, though they are now part transferred to the United States.) Until the Second World War higher education was limited to six small colonial foundations, educating one young person in every 100 and with tentative research programmes in selected areas of the sciences (Selleck 2003). After the war, as part of the new governmental agenda of national reconstruction, the Australian National University was founded as a specialist research centre in physics, the life sciences, the social sciences and Asia-Pacific studies (1946). During the long post-war boom that followed, as demand for professional labour and for access to higher education spiralled upwards, new universities were opened, followed by non-research institutions of higher education, the vocational colleges of advanced education. From 1957 the national government assumed a growing responsibility for funding and planning the national system. A national consensus on the need to increase taxes to pay for education developed. By 1974, on the brink of the oil shock and the transition to neo-liberal government, there were 19 universities and 77 colleges of advanced education, ranging from small sites for the arts and teacher training to large multipurpose institutes of technology purported to enjoy close links to industry. The public institutions were coordinated by the government’s Tertiary Education Commission (CTEC): the role of private institutions was negligible. Higher education was 90 per cent funded by the national government and student fees had been abolished. More than 15 per cent of 19 year olds were enrolled in higher education, more than twothirds received support for their living and educational costs, and public expenditure on higher education had reached 1.5 per cent of GDP (Marginson 1997: 11–45). Australia had built a national capacity in basic research and doctoral training in all fields of study, and for university training in all professions. This meant that

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ultimately it was no longer dependent on the universities of the UK, though with the growth there were labour shortages, and British staff were still recruited. The CTEC intervened closely in budgets and capital developments but left the institutions a relatively free hand in academic matters. Research was largely funded and organised by the universities themselves. 3.1. The Dawkins Reforms After 1975 public funding was frozen, enrolment growth slowed, for 12 years no further universities were opened, and cost and demand pressures increased. In 1984 and 1985 a new policy discussion emerged, inspired by Thatcherism and originating from the coordinating departments of Treasury, Finance and Prime Minister and Cabinet. There a consensus had emerged that Australia could no longer afford free education, and the way forward lay in market competition via tuition fees, industry funding, international marketing and private universities. In 1986 the coordinating departments pressed on an unwilling CTEC – which knew this was the thin edge of the wedge – a Higher Education Administration Charge (the HEAC) of $250 per full-time student. In 1987 and 1988 the Labor Party minister, John Dawkins, announced a major reconstruction of the national system. Dawkins combined the creation of a managed national market and the introduction of user charges with the broadening of access and, on the face of it, some levelling of the positional hierarchy. The Dawkins policies were remarkably successful. They were implemented almost in full. Dawkins planned an expansion of funded enrolments of 60 per cent by 2001: the target was reached by 1994. He established a single unified systemcompetition of universities in place of the binary system of universities and colleges, encouraging mergers and upgrading the larger colleges to university status. Eventually this led to the creation of 18 new public universities, doubling the total number of institutions with that title. The new universities drawn from the former college sector were expected to conduct research and doctoral training and permitted to apply for the full range of public support. Two private universities also gained official recognition, though at first they received no funding support and were uncompetitive and small. Whereas previously all funds had been distributed on the basis of the enrolment distribution between institutions, Dawkins announced that “institutions will be able to compete for teaching and research resources on the basis of institutional merit and capacity” (Dawkins 1988: 28). Though he was unsuccessful in working out a scheme for performance-based funding in teaching, a part of each institution’s grant was allocated on the basis of measured research performance. He also established competitive bidding in areas such as innovations, and created national research funds, open to competition, as the principal mechanism for funding research projects. Dawkins also opened the way for plural funding and selected tuition fees. He wanted to defray costs and he hoped that commercial activity would bring the universities into a closer, more productive relationship with industry. In place of 90 per cent government funding, the government deregulated fee charging for

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international students and postgraduate vocational students. Institutions were free to set their own fees and to expand fee-paying international enrolments as they saw fit. At the same time the government introduced the Higher Education Contribution Scheme (HECS) to cover part of the cost of undergraduate tuition. The HECS was fixed at a standard AUD $1800 per annum per full-time student, which at the beginning represented an average 25 per cent of course costs. The 25/75 split of costs between student and government was held to represent the ratio between private and public benefit. The HECS soon came to substitute for government fiscal costs: between 1986–87 and 1989–90, public funding per student declined by 38.0 per cent in constant price terms (Marginson 2001: 206). However, the main innovation was that the HECS was paid back through the tax system on an incomecontingent basis. Students accumulated a HECS debt indexed on the basis of price movements with no other interest rate. They were not obliged to start repaying this debt until their annual income reached a threshold level, initially fixed at average weekly earnings. The HECS was a ‘soft’ tuition charge with little deterrent effect. Studies found that at its initial level, the impact of the HECS was neutral in socioeconomic terms (Aungles et al. 2002). Unlike direct fees, the HECS deterred students from poor backgrounds at the same rate as other students, enabling user charges without blocking access, which was Dawkins’ objective. The HECS was not a market fee. It did not create direct buyer-seller relations between universities and students. It was criticised for stopping short of the neo-liberal programme. However, it launched a new policy rhetoric about higher education as a private good and helped to legitimate user charges of all kinds, ultimately paving the way for a general price regime. The HECS, international fee deregulation and the reformulation of the national system as a government-managed competition were to be the first in a series of policy changes that layered more and more aspects of market competition onto existing practices, without diminishing Canberra’s capacity to steer the system. The government retained its hold via the terms of competitive bidding; its power to say yes or no to particular projects (e.g. new buildings); the performance regime in research, which over time reconstructed research in a product format; and the standardisation of definitions, funding units and statistical data collections. At the same time, institutions were expected to professionalise their executive management and to take responsibility for their own financial planning, asset management and strategic development, including their global activities. Increasingly, government envisaged universities as competitive firms whose bottom line was their own interest as firms: their resources and their competitive position. This model was consistent with the dynamics of the old positional competition in status, so that transition to the Dawkins model of quasi-market competition was more seamless than expected. At the same time, the outcome proved to be less egalitarian than Dawkins had hoped. The leading institutions were best placed to compete for competitively distributed public funds and to turn their positional status into market revenues. The new universities were never funded at a level sufficient to establish a solid basic research infrastructure in all disciplines. From the beginning they were forced into an applied research orientation, and to chase immediate dollars rather than long-term scholarly capacity. Further, professional entrepreneurial managements formed more

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quickly than academic cultures: in these universities, in the tension between institutional agency and disciplinary agency that seems necessary to all universities, the dice were loaded in favour of the former. And some of the younger, smaller pre1987 universities also found themselves struggling to sustain basic research. 3.2. Subsequent Policy Changes Labor added an option for up-front payment of HECS at the point of enrolment, at a discounted rate; and created a national committee to oversee the development of quality assurance processes (1993–95). In 1995 it abolished automatic indexation of government grants, increasing the cost pressures on universities. In 1996 there was a change of government. In its first budget the Liberal-National Party coalition increased HECS charges by an average of 65 per cent, and differentiated HECS on the basis of field of study. The flat rate of $2442 per year was replaced by three bands: $5500 in law, medicine, dentistry and veterinary science; $4700 in science, engineering, agriculture, architecture and business studies; and $3300 in the humanities, arts, education and nursing. In addition the HECS repayment threshold was lowered from $28,495 in 1996–97 to $20,701 in 1997–98, and the rate of repayments was increased. HECS was still easier to bear than direct fees, but now hit students harder. A 2002 study by government researchers found that the 1996 changes lowered demand among school leavers by 9000 students per year and demand among mature age applicants by 17,000 places per year. Part-time students and older students were the most affected. Between 1996 and 2001, the participation rate of 40–44 year olds fell by more than one-fifth. Students from poor backgrounds tended to shift from the highest HECS band to the lower bands (Aungles et al. 2002). Nevertheless, undergraduate education remained largely without market prices. The government tried to encourage full cost undergraduate fees by permitting them to be charged to up to 25 per cent of students in each undergraduate course. However students had little incentive to purchase fee-based places because of the broad availability of HECS places, and the absence of income contingent student loans to cover the cost of tuition. In 2001 the government introduced such an income contingent loans scheme, the Postgraduate Education Loans Scheme (PELS), at a cost of $1 billion per year, but it was confined to postgraduate fee-paying courses. The 1996 budget also halted growth in government/HECS-funded places and reduced the average rate of funding. University operating grants were reduced by 5 per cent over three years; and given the effects of cost inflation on non-indexed government grants this aggregated to an effective reduction in operating grants of 12–15 per cent and a cut in total funding of 5–12 per cent depending on institution. This created severe and immediate cost pressures, larger class sizes, problems in libraries and growing dependence on ‘throw away’ casual teachers. At the same time institutions were permitted to ‘over-enrol’ students at a marginal rate of funding: a device copied from the UK for expanding access on the cheap. More fundamentally, development trajectories were changed. University leaders realised that they had no choice but to increase market-generated incomes to fill the hole left by the decline in public funding. That meant stepping up ‘non-core’ activities (Pusser 1999/2000)

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such as fee-based courses, hiring out the facilities, and consultancy. In some institutions, fee-based education soon became essential to resourcing the tenured academic ‘core’. Between 1996 and 2001 the number of domestic students, restricted by fiscal limits on government-funded places, grew slowly, from 580,906 to 614,076 (5.7 per cent) while international student numbers jumped from 53,188 to 112,342 (112.2 per cent). Between 1995 and 2000 the average OECD country increased its tertiary education enrolment rate by 27 per cent. Australia increased its tertiary enrolment rate by just 6 per cent (OECD 2003). Among domestic students there was sharp growth just in fee-paying postgraduates, where universities were free to enrol anyone who would pay, especially in vocational masters programmes in business studies and computing/ICTs. Between 1996 and 2002 coursework masters graduates rose from 14,708 to 34,108 (131.9 per cent), half of whom were international students. Table 1. University revenues by source, constant prices, 1990, 1996 and 2002 Source of funding

Government HECS from students International student fees* Postgraduate student fees Undergraduate student fees Continuing education fees All other sources** Total

Total funding from this source 1990 1996 2002 $s mill. $s mill. $s mill. 4006 5108 4964 689 1019 1777 170 580 1405 15 98 220 0 0 68 57 87 99 917 1903 2724 5854 8795 11,257

Proportion of total funding by source 1990 1996 2002 % % % 68.4 58.1 44.1 11.8 11.6 15.8 2.9 6.6 12.5 0.3 1.1 2.0 0 0 0.6 1.0 1.0 0.9 15.7 21.6 24.2 100.0 100.0 100.0

Constant 2000–01 prices *Includes international students at all levels of study **Includes payments for contract research, donations and bequests, investment income etc. Source: DEST 2003

Under the post-1996 incentive structure universities shifted their funding base rapidly. Between 1996 and 2002 student payments under the HECS rose from $1019 to $1777 million. Annual taxpayer funding declined by $144 million, and the proportion of total university funding from public sources fell from 58 to 44 per cent. Funding from the student rose from 19 to 32 per cent, including 16 per cent from markets outside the core HECS-funded teaching and research (see table 1). Between 1996 and 2002, revenue from international student fees increased from $580 million to $1405 million (142 per cent) and fee income from domestic students in degree and diploma courses rose from $98 to $288 million. Whereas in 1996 international students provided 6.6 per cent of total university funding, by 2002 the level of dependence on this source had reached 12.5 per cent. These data help to explain the striking prevalence, in many universities, of an executive-led business culture (Marginson and Considine 2000); and the ever growing focus on marketing

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and market revenues, at the expense of academic capacity and a larger public role. Markets and growing private funding did not demonstrate that the universities were engaged more effectively with industry in the knowledge economy: most of the new private money was from students, not industry, which provided only 5 per cent of the costs of research (ABS 2003) and a negligible share of the costs of teaching. In 2000–01 prices, government funding per unit of student load fell from $10,689 in 1990 to only $7797 in 2001 (DEST 2003).3 Over the same time period total funding per unit of student load rose from $15,548 to $17,113. This suggests the universities had gained overall, but it was not that simple. Though the new private monies might appear to have replaced the old public money, in the more entrepreneurial climate, universities expanded functions such as marketing, offshore branch campuses and international student recruitment, student servicing, financial planning, asset management, fundraising, quality assurance and executive salaries. Total revenues were spread more thinly over this expanded range of functions, so that there were fewer resources for teaching and research. In 2001 only 37.5 per cent of university staff were engaged in teaching. The average number of students per staff member rose from 14.2 in 1993 and 15.6 in 1996, to 20.4 in 2002 (see table 2). Table 2. Average students per academic staff member, Australian universities 1993–2002 (Full-time equivalents) 1993 14.2

1994 14.2

1995 14.6

1996 15.6

1997 17.2

1998 17.9

1999 18.3

2000 18.5

2001 19.1

2002 20.4

Source: DEST 2003

The downward pressures on quality were exacerbated by policies in particular sub-sectors. For example, when the government deregulated fee-based coursework masters programmes, institutions competed with each other for market share by shortening the length of programmes. In this ‘race to the bottom’, the normal masters fell from two full-time years to fifteen months or one year. Institutions competed on the grounds that they could provide a masters degree more quickly and cheaply than their rivals: remarkably, they offered not more or better education, but less education. Another example is the research system, which was modelled as a competitive economy based on measured outputs. The government allocated performance-based funding on the basis of each universities’ record of grant income, research student numbers and publications. The outcome was that the quantity of publications outputs expanded but unit quality deteriorated. According to Butler (2003), between 1988 and 1998 Australia’s share of publications in the Science Citation Index increased by 25 per cent, but its share of citations declined from a position of 6th in a ranking of 11 OECD countries in 1988, to 10th place by 1993, and there was a widening gap with 9th place. “Australia’s increase in output appears to be at the expense of impact” (Butler 2003: 147). One reason was that Australian articles were published in lower status journals. These achieved the same levels of government funding as high status journals, and were easier to access. Despite rhetorical commitment to student needs (‘serving the stakeholders’, ‘customer focused’, ‘student-centred etc.), there is no research-based evidence

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demonstrating that universities became more responsive to students, or that teaching improved. Because the conjunctural reduction in public funding weakened the material conditions for teaching and learning, the specific effects of market reform are difficult to assess. Nevertheless, it is significant that in a deregulated environment driven by scarcity, universities placed a higher priority on expanding their corporate functions than on maintaining resources for teaching. Even in market-strong areas such as business and ICTs, student-teacher ratios increased; although on the whole academics in these fields had more funding support for support staff, equipment, travel and research costs, including time relief. Few universities could use market-generated revenues to shore up those academic disciplines unable to generate substantial fees. Outside the elite universities, there was great pressure on the basic disciplines in the sciences, social sciences and humanities. In many institutions separate departmental units disappeared, merged into larger generic teaching groupings: academic activities designed to create knowledge and transmit learning were becoming peripheral to the ‘real’ university. In this context the introduction of a national system of quality assurance in 2000 was a marketing exercise for international consumption, and a means of managing resource politics by passing responsibility for outcomes from government back to universities. It was unlikely to generate substantive improvements in intrinsic quality, for example, by correcting the quality to quantity slippage in the research market that Butler identified. 4. FORMS OF THE NATIONAL MARKET Prior to the Nelson reforms of 2005, the Australian higher education system exhibits the forms of an economic market more strongly in some respects than in others. There is a defined field of production and consumption, and identifiable products. The protocols governing entry, together with the regime of government funding, tend to protect existing institutions from effective competition in mainstream undergraduate degrees and research activities; contestability is poor. Interinstitutional competition for resources and prestige is intense; though in undergraduate education, there is a classic positional competition yet to take an economic market form. The role of prices is significant in other areas. Entrepreneurial behaviours are widespread but not universal. Among students there is little evidence of textbook consumer behaviour. 4.1. Field of Production and Consumption In 2002, the publicly funded national system covered 896,621 students enrolled in 36 public universities, three private universities and several minor sites, both public and private. Nearly all students – 98.2 per cent – were enrolled in public institutions (DEST 2003). At all of these universities and colleges, academics were eligible to apply for government research funding. A 1999 survey identified a further 31,212 students enrolled in 79 private institutions outside the national system (Watson 1999).

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4.2. Entry and Exit The public institutions are established by state government legislation – aside from those located in the territories, which are subject to the constitutional authority of the national government.4 These institutions, and the three private universities (in table 3), self-accredit programmes and degrees. The other private institutions, and their programmes, are subject to external accreditation by state governments. This is normally granted for a five-year period, subject to renewal. This group includes some for-profit providers. To gain accreditation, institutions must satisfy requirements as to academic standards and financial viability. Use of the title ‘University’ is restricted. Though in the past there has been variation between the states in relation to this, it is now the subject of a national agreement between all accrediting agencies. As well as offering satisfactory academic programmes and a viable business plan, to be eligible for the title ‘University’ an institution must provide teaching and research across a broad range of fields of study – which excludes small specialist ‘universities’– and must provide conditions of academic freedom; its governing body must be independent of commercial or other singular interests; and it must provide evidence of future financial viability (Department of Education and Training 2004). Given that without accreditation no institution is eligible for national government funding, it is very difficult to mount an institution that is sufficiently comprehensive and resourced to satisfy all of these conditions, without consensual support from state and national governments. Many proposals for private universities have failed to secure accreditation. Even an institution that gained accreditation would face the hurdle of securing national government funds so as to be genuinely competitive. It is particularly difficult for a foreign owned university to break into the national system (see the discussion of GATS, below). Hence the degree of contestability is low, protecting the existing institutions. Further, it is generally assumed, though the matter has not been tested, that state and national governments would prevent any public university from become bankrupt. There is no instance of exit from the national system. 4.3. Competition Between Producers As noted, while competing for social and academic prestige, institutions also compete for economic revenues from public and private sectors. Universities compete for the preferences of high scoring school leavers, and for the best quality research students – who correspondingly compete for the most sought after places. The principal economic competitions are first, for research funding, in the form of competitive academic schemes based on merit, and targeted research projects in the government and corporate sectors; and second, for tuition from international and postgraduate students. Institutions also sell services in short courses, continuing professional education, and consultancy; and compete for philanthropic support. The producer market is differentiated and segmented (see discussion below).

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4.4. Identifiable Products The outcomes of research – project reports, publications, continuing grant applications, patents and copyrights – are readily understood in a product format, whether the research is commercial or academic in origin. Teaching services are standardised on the basis of credentials. All programmes of study offered by accredited tertiary institutions are lodged in the Australian Qualifications Framework,5 which defines levels, and equivalences between universities and vocational and training institutions. There are no discipline-based reviews or processes of standardisation on a national basis. Quality assurance mechanisms are institution-centred not discipline-centred; ‘good teaching’ awards are understood in generic terms, and there is no department-based research assessment along British lines. 4.5. Prices and Monetary Exchange In Australia international education and vocational postgraduate education are fully fledged capitalist markets. Universities set the prices they choose and can expand the number of students without limit. In international education, Australian universities are more market minded and entrepreneurially aggressive than American universities (Slaughter and Leslie 1997). There is little subsidisation. While the USA provides scholarships to a quarter of international student (IIE 2003), in Australia in 2002, the ratio of full fee-paying places to scholarship places was 61 to 1 (DEST 2003). However, in undergraduate education – at least, up until the Nelson reforms (see below) – where the USA provides student loans for tuition, enabling high student mobility and creating a quasi-voucher national market,6 in Australia there is choice-based inter-university positional competition in each capital city but little national mobility, and prices play a minor role. Less than 3 per cent of domestic undergraduate students (6537) paid fees in 2002. All other undergraduates were enrolled in HECS-based places with costs shared by student and government. The number of HECS places is capped by government. In 2003 the cost of the HECS was AUD $3680–6136 per full-time student per annum and repayments began when annual income reached $24,365 (Nelson 2003b). 4.6. Market Behaviours Australian universities exhibit entrepreneurial behaviour on a broad basis. The period since 1990 has been marked by a spirit of enterprise and expansion, led by executive leaders whose power within institutions has grown relative to traditional academic authority. In executive circles, the model of university as competitive business is highly influential. The business model has become interpenetrated with older academic forms of organisation, and bureaucratic structures. Resource managers, under executive control, have become dominant vis-à-vis traditional academic governing bodies such as academic boards and faculty assemblies, which rarely have resource powers. Universities have also established specific corporate structures to finance and market research, and manage commercial teaching, often in

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partnership with other universities and corporations. There are visible tensions between the business model and academic cultures (Marginson and Considine 2000). Among academics the incidence of entrepreneurial behaviours varies by field. It tends to be more dominant in the fields most successful in market terms, business and ICT, and in the post-1987 universities. Academic cultures in the older universities are fairly resilient, and the professions continue to exert their traditional influence in relation to engineering, law and the health-related occupations. There is little evidence that students behave like textbook consumers. Significantly, student organisations explicitly reject that characterisation.7 Students and their families can purchase published guides to the choice-based market, including data on university resources, graduate ratings of courses, and graduate starting salaries and employment rates. However, a 1999 study of the factors influencing the choices of prospective undergraduates found that “applicants focus on broadly conceived course and institutional reputations when making their selections”. Further, “course entry scores, and by implication ‘university scores’, serve as a proxy for quality in prospective students’ eyes” (James, Baldwin and McInnes 1999: ix, 75–77). Applicants had low detailed knowledge of the teaching quality and lifelong earnings potential of particular courses. This kind of choice making behaviour is consistent with behaviour in a positional market but not with behaviour in a human capital market. 4.7. Positional Segmentation The segmentation of the Australian system is shaped by history and funding. The elite institutions, the ‘Sandstones’ or Group of 8 – Queensland, Sydney, NSW, Melbourne, Monash, Adelaide, WA and ANU – are the older foundations (see table 3). Table 3. Segments of the national market, Australian higher education Segment Sandstones (8)

Universities U Melbourne, U Queensland, U Sydney, U New South Wales, Monash U, Australian National U, U Western Australia, U Adelaide

Description of segment Groups include all the first foundations (except Tasmania), with sandstone in their central precincts; Anglophile, overwhelmingly dominant in their capital cities, as positional and research leaders. Melbourne is 92 in the world (SJTUIHE 2003). Also includes three of the earlier post-war foundations strong in both areas: the ANU as number 1 in Australia in research and 49 in the world. The UNSW is strong positional competitor to Sydney. Monash is actively global onshore and offshore.

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Gumtrees (11)

U Tasmania, U Wollongong, La Trobe U, Macquarie U, Griffith U, U Newcastle, James Cook U, Flinders U, Murdoch U, U New England, Deakin U

The other pre-1987 universities, modernist in inspiration and with mostly Australian native plantings (hence ‘Gumtrees’). In the 1980s often research and organisational innovators but now conform to sandstone-led competition. Some have lost ground in research. Some specialise in regional provision, distance programmes, fee-paying postgraduates or internationalisation. Those with medical faculties are better placed than others.

Unitechs (5)

Curtin UT, Queensland UT, U South Australia, Royal Melbourne IT, UT Sydney

Robust ‘university-for-the-real-world’ (QUT) vocational pitch linked to areas of applied research and strong entrepreneurial cultures, though not always as explicitly vocational as might be expected. Variable success, with Curtin and QUT strong. All are large, and some economically stretched. Academic values need development.

New universities (12)

U Western Sydney, U Canberra, Swinburne UT, Victoria UT, Edith Cowan U, Northern Territory U, Southern Cross U, Charles Sturt U, Central Queensland U, U Southern Queensland, U Ballarat, U Sunshine Coast

Variable segment. Some regional specialists in metropolitan (UWS, VUT) or nonmetropolitan (Southern CU, CSU, CQU, USQ, UB, U Sunshine C) areas; several highly dependent on the global market, distance education or both (CQU). Some high student-staff ratios. Research in pockets not across-the-board, though some areas of strength. Academic values need development.

Private universities (3)

Australian Catholic U, U Notre Dame Australia, Bond U

ACU is funded on the same basis as the public universities and has similar characteristics to institutions in the New University segment. The other two receive selected government subsidies but remain small despite sandstone buildings and Notre Dame’s good social support base. Economically, it has been hard to compete against HECS-based universities. The Nelson reforms change all that, by introducing government-supported low interest income contingent loans for fee payment in both public and private sectors from 2005 (providing there is no change of policy resulting from the federal election expected in late 2004).

Italics indicates institutions ranked in the top 500 by the Shanghai Jiao Tong University (SJTUIHE 2003) Source: author

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The elite segment is defined primarily by school leaver preferment as measured by entry scores,8 and research prestige and performance as measured by the quantity of research grants, including grants per staff member, the numbers of publications and research students. Medical faculties underpin prestige and research funding (see table 4, column 2). Medical research in Australia is successful in comparative international terms. The older universities, especially Sydney, Western Australia and Melbourne, also enjoy what are in Australian (though not American) terms relatively high levels of income from donors and private investments, further insulating them from market forces. The government’s Institutional Grants Scheme (IGS) is allocated competitively on the basis of research performance.9 This provides a useful indicator of segmentation (Nelson 2003b: 103–104). In 2003 the Sandstones received between $29.8 million (Melbourne) and $15.3 million (Adelaide) in IGS grants; next were Tasmania and Wollongong – Gumtrees with medical faculties – each with $7.0 million. The allocation of Australian Research Council (ARC) Discovery grants follows a similar pattern (see data on competitive research performance in table 5, columns 5–8). In the allocation of total National Competitive Research Grants, including both ARC grants and National Health and Medical Research Council grants, universities with established medical schools did noticeably better than others.10 Research activity is open to merit-based contestation, but like school leaver status it is also open to prestige-generates-prestige effects, and it is sensitive to the funding base. Before 1987 the Gumtrees were funded by government on the expectation that they would conduct basic research in all disciplines. It is difficult for them to sustain this function, given that public funding is down, and the Sandstones are better placed to attract competitive research funding and student fees. Nevertheless, the Gumtrees mostly perform much better than the Unitechs and the New Universities in national competitive research grants per effective staff member. The Unitechs have focused on income generation via international education and postgraduate fees, and maintain selected areas of research concentration. If they wish, the Sandstones can internationalise while sustaining general research intensity. In the other segments, institutions are more likely to face trade-offs. Thus the national market competition sustains sandstone hegemony at the expense of the resources and prestige of all other universities. Arguably, what is seen as ‘true quality’ in Australian higher education is centred on fewer institutions than at any time since the formation of the modern mass system in the 1960s. Where all institutions draw on their competitive position to pay their own way, there are winners and losers, these patterns tend to be self-reproducing, and it is no longer possible for all universities to be world class universities, as once was the expectation in Australia.

Med

Studentteacher ratio 2002

Research student share 2002 %

Internat’l student share 2002 %

Flexible delivery share 2002 %

Total income 2002

Non-current assets 2002

$s mill

$s mill.

Institut’l Grants Scheme 2003 $s mill

Y Y Y Y Y Y Y Y

39,378 37,498 42,305 42,333 52,010 11,979 15,885 16,188

18.1 18.8 17.0 19.3 19.0 17.8 16.2 16.5

9.9 9.8 8.2 6.3 5.6 12.5 11.5 9.3

19.9 14.9 17.4 24.4 27.9 16.8 16.0 15.3

3.0 7.5 3.9 10.1 23.8 0 0 7.5

856.3 814.5 816.3 701.5 735.4 461.7 360.4 334.2

2612.4 1416.6 2698.2 1273.3 1218.0 1364.2 1134.9 661.4

29.8 28.3 27.1 25.4 19.3 16.6 16.1 15.3

Y N N N Y Y Y Y N N N

13,750 18,764 24,930 27,239 30,969 23,502 13,189 13,644 12,734 18,202 33,033

19.7 20.9 18.6 26.2 19.7 19.1 21.1 17.0 19.5 22.5 24.9

7.5 5.5 5.5 3.8 4.1 5.3 5.1 6.6 6.0 4.5 2.7

9.1 35.0 13.3 24.2 17.3 12.8 10.5 12.1 17.4 6.7 12.9

10.9 1.1 0.7 17.5 7.5 7.5 17.0 10.9 24.1 81.9 54.7

199.7 210.1 314.0 295.9 350.7 256.9 173.5 177.2 156.0 148.3 325.8

269.8 392.8 593.5 812.8 801.4 709.3 387.1 242.5 312.5 338.8 665.3

7.0 7.0 6.3 6.2 6.1 5.4 4.9 4.5 4.3 3.8 2.9

N

33,240

20.6

4.8

34.0

11.5

360.9

623.6

5.2

SIMON MARGINSON

SANDSTONES U Melbourne U Queensland U Sydney U New South Wales Monash U Australian National U U Western Australia U Adelaide GUMTREES U Tasmania U Wollongong La Trobe U Macquarie U Griffith U U Newcastle James Cook U Flinders U Murdoch U U New England Deakin U UNITECHS Curtin U Technology

Total student 2002

224

Table 4. Segments of the national market, Australian higher education, 2002–03 data

N N N N

39,192 30,627 38,280 29,290

25.7 22.5 23.0 19.2

2.8 5.7 4.8 3.1

12.9 29.0 34.9 17.9

15.1 22.0 3.7 0

365.2 286.1 478.2 287.7

516.1 618.0 1224.4 730.1

4.9 4.5 4.5 3.6

N N N N N N N N N N N N

35,361 10,419 14,404 19,475 23,829 5612 11,961 39,776 21,763 24,271 6615 3947

22.1 22.6 24.2 16.1 20.9 19.8 22.4 33.4 38.3 20.2 23.8 27.5

2.7 2.5 3.7 3.4 3.5 3.8 3.8 1.1 1.5 1.3 2.8 1.6

21.6 17.7 22.2 23.5 16.0 6.1 14.1 20.9 42.2 26.4 31.9 10.5

4.5 [0.04] [0.01] 1.9 24.4 26.3 52.9 83.4 40.9 81.0 0 11.3

296.7 105.8 233.2 277.8 202.9 91.6 89.7 187.4 210.6 118.6 106.9 32.5

639.8 178.4 398.1 632.6 487.3 150.5 172.4 337.1 182.9 154.4 216.5 57.3

3.2 1.7 1.7 1.7 1.4 1.2 1.2 1.2 1.0 0.9 0.5 0.1

N N N

11,894 2832 n.a.

18.9 n.a. n.a.

2.8 1.0 n.a.

8.1 18.7 n.a.

8.9 1.7 n.a.

104.4 20.2 n.a.

176.8 38.6 n.a.

0.5 0.1 0.1

– –

6250 896,621

– 20.4

– 5.1

9.6 20.6

– 19.2

69.4 11,614.1

233.1 25,496.2

0.4 277.6

225

*Private university funded as public universities Med = Medicine Faculty (Y=Yes, N=No). Dollar amounts in current prices. Research student share = research students as proportion of all students. International student share = fee-paying international students as proportion of all students. Flexible delivery share = proportion of students external (distance) students or multi-modal students, distinct from internal (wholly campus-based) students. Student-teacher ratio = ratio of effective full-time students to effective full-time academic staff designated teaching only or teaching/research, including casual staff. Institutional Grants Scheme awarded competitively on research performance: formula is 60% research grants, 30% research students, 10% publications count Source: DEST 2003; Nelson 2003b; Australian Vice-Chancellors’ Committee 2002

AUSTRALIAN HIGHER EDUCATION NATIONAL AND GLOBAL MARKETS

Queensland UT U South Australia Royal Melbourne IT U Technology Sydney NEW UNIVERS. U Western Sydney U Canberra Swinburne UT Victoria U Technology Edith Cowan U Northern Territory U Southern Cross U Charles Sturt U Central Queensland U U Southern Queensland U Ballarat U Sunshine Coast PRIVATE UNIVERS. Aust. Catholic U* U Notre Dame Aust. Bond U MINOR SITES [various] TOTAL

Research staff EFT 2001

Publications 2001

National Competitive Research Grants 2001 Per effective full-time staff $s mill. $s

New ARC Discovery Grants 2003

Institut’l Grants Scheme 2003 $s mill

2109 2280 2179 1891 2153 1502 1256 1148

3908 3669 3473 2669 2935 1491 1830 1512

9.9 9.8 8.2 6.3 5.6 12.5 11.5 9.3

2203 2135 2145 1885 1902 1674 1236 1317

62.8 48.9 50.0 45.5 34.0 *19.2 39.1 37.2

29,788 21,452 22,943 23,529 15,786 *– 31,157 32,382

104 81 98 81 56 137 46 36

29.8 28.3 27.1 25.4 19.3 *16.6 16.1 15.3

631 587 1015 667 980 832 512 684 462 447 716

1030 1024 1359 1031 1283 1236 679 905 761 820 899

7.5 5.5 5.5 3.8 4.1 5.3 5.1 6.6 6.0 4.5 2.7

585 502 625 540 713 643 332 512 380 340 645

12.9 8.8 10.5 8.3 7.8 11.5 5.7 12.4 6.9 6.2 4.7

20,499 14,931 10,332 12,409 7996 13,835 11,040 18,192 14,954 13,880 6624

22 14 24 23 22 22 6 10 7 9 11

7.0 7.0 6.3 6.2 6.1 5.4 4.9 4.5 4.3 3.8 2.9

824 961

1592 1105

4.8 2.8

549 835

5.3 4.9

6432 5121

11 13

5.2 4.9

SIMON MARGINSON

SANDSTONES U Melbourne U Queensland U Sydney U New South Wales Monash U Australian Nat. U* U Western Australia U Adelaide GUMTREES U Tasmania U Wollongong La Trobe U Macquarie U Griffith U U Newcastle James Cook U Flinders U Murdoch U U New England Deakin U UNITECHS Curtin U Technology Queensland UT

Research students 2002 Share of enrolments %

226

Table 5. Research competition in higher education, Australia 2001–03

806 1003 726

1741 1831 918

5.7 4.8 3.1

607 470 442

4.3 3.4 5.0

5297 3346 6892

13 15 13

4.5 4.5 3.6

885 254 388 511 548 148 257 461 329 365 143 87

942 265 537 654 824 213 449 434 316 326 187 62

2.7 2.5 3.7 3.4 3.5 3.8 3.8 1.1 1.5 1.3 2.8 1.6

443 155 269 316 520 89 160 259 198 131 85 32

4.6 1.9 2.4 2.2 1.8 1.2 1.5 1.9 1.0 1.4 0.5 [0.01]

5159 7332 6294 4372 3289 7885 5920 4132 2995 3832 3754 98

4 2 10 1 3 2 1 5 0 3 3 0

3.2 1.7 1.7 1.7 1.4 1.2 1.2 1.2 1.0 0.9 0.5 0.1

337 10 n.a.

338 27 51

2.8 1.0 n.a.

114 n.a. 31

0.5 n.a. 0.1

1496 n.a. n.a.

1 0 0

0.5 0.1 0.1

252 31,345

377 45,703

– 5.1

25,995

0 475.3

---15,165

12 921

0.4 277.6

227

*ANU data in column 7 are comparable to other universities, but not data in columns 5–6 and 811 **Private university funded as public universities Research staff: number of staff designated teaching/research or research only. Research student share: research students as a proportion of all students. Publications covers scholarly books, chapters, refereed journal articles and refereed conference papers. National Competitive Research Grants per effective fulltime member of staff refers to staff designated teaching/research and research only. ARC = Australian Research Council. Discovery Grants awarded on academic merit across all fields except medical sciences; grant distribution indicates high calibre researchers. Institutional Grants Scheme distributed competitively on the basis of research performance: formula is 60% research grants, 30% research students, 10% publications count Source: DEST 2003; Nelson 2003b; Australian Vice-Chancellors’ Committee 2002

AUSTRALIAN HIGHER EDUCATION NATIONAL AND GLOBAL MARKETS

U South Australia Royal Melbourne IT U Technology Sydney NEW UNIVERS. U Western Sydney U Canberra Swinburne UT Victoria U Technology Edith Cowan U Northern Territory U Southern Cross U Charles Sturt U Central Queensland U U Southern Queensland U Ballarat U Sunshine Coast PRIVATE UNIVERS. Aust. Catholic U** U Notre Dame Aust. Bond U MINOR SITES [various] TOTAL

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SIMON MARGINSON

5. AUSTRALIA IN THE INTERNATIONAL MARKET Institutions, and national higher education systems, are globally connected; being simultaneously implicated in local, national and global activities (Marginson and Rhoades 2002; Marginson and Sawir 2003). Cross-border relations are partly structured by universities themselves, partly in bilateral and multilateral dealings between national governments. The global12 market in international education is a global market in positional goods. Whereas in most countries, national positional competition predominates, the global market in positional goods is growing rapidly. It plays a more important role in some countries than others. While 2 per cent of students in OECD nations access foreign education each year, in Australia in 2001, incoming students were 13.9 per cent of students in higher education (see table 6). Table 6. Principal exporters and importers of tertiary education, 2001 OECD exporters

International students Number

USA UK Germany France Australia Japan Canada Spain Belgium Austria

475,169 225,722 199,132 147,402 110,789 63,637 40,667 39,944 38,150 31,682

Importers from OECD

Proportion of all students % 3.5 10.9 9.6 7.3 13.9 1.6 4.6 2.2 10.6 12.0

International students Number

China Korea India Greece Japan Germany France Turkey Morocco Italy

124,000 70,523 61,179 55,074 55,041 54,489 47,587 44,204 43,063 41,485

Proportion of all students % n.a. 2.3 n.a. 11.4 1.4 2.6 2.0 2.6 n.a. 2.3

n.a. = data not available Source: OECD 2003

5.1. The Global Market Unlike the national positional market, the global positional market is not subject to absolute limitations on the number of high value educational goods, the scope for producers to enter the market, or the capacity for continuous expansion. As long as there is a hierarchy of nations, students can invest in global positional goods by moving up the scale. Research into student preferences suggests the USA is much the most preferred destination (e.g. Mazzarol et al. 2001). This has profound implications for higher education outside the United States. For the first time, a foreign education has come onto the agenda of every middle class family. Bringing a new and superior layer of high value positional opportunities within view (if not necessarily within reach) relativises the local Ivy League. The global market disturbs

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229

the traditional conservatism of national positional markets: suddenly, venerable and unchallengeable universities become less attractive, and more vulnerable. They begin to be undermined by the gravitational pull of the global markets; the global character of research and judgments about the value of knowledge; and the in-yourface visibility of American institutions in a networked era. In 2001 there were more than 1.6 million international students worldwide. While there is a significant volume of non-commercial student exchange, particularly between European countries, almost half of all cross-border educational flows consist of students from Asia-Pacific countries who invest in education in OECD nations. English-language nations enrolled 71.6 per cent of all international students from Asia in 2001 (OECD 2003). Asian-Pacific demand for foreign education as a positional good will continue to expand. The role of mobile skilled labour in business, ICTs and research is growing (Tremblay 2002). Englishlanguage skills are increasingly useful. Foreign education is also a doorway to migration, especially to the USA: the other English-language countries play a bridging role. The Asia-Pacific nations constitute well over half of the world’s population, including three of the four largest nations: China, India and Indonesia, and ten of the world’s 16 cities with over ten million people, representing huge concentrations of present and future demand for education. There is significant unmet demand for tertiary education, especially in China, but also much demand for English-language education even in countries such as Korea and Japan with good quality and capacity in domestic higher education. Further, in much of the AsiaPacific, the habit of private investment is entrenched. In Korea 70 per cent of domestic spending on tertiary institutions is private, in Japan 56 per cent, in Indonesia 56 per cent, in China 43 per cent (OECD 2003). 5.2. The Global Market in Australia The United States is the largest supplier of international education. Its role as a demand magnet is closely linked to American economic, technological and cultural hegemony; which underwrite the strength of the universities – a recent international comparison found that of the world’s 50 leading universities on the basis of research performance, 35 were in the USA (SJTUIHE 2003) – and render it attractive as a site of lifetime opportunity. The USA also attracts high calibre research degree students with generous scholarships and working visas; and smoothes the way for high calibre international graduates to migrate. Nevertheless, international education in Australia has grown rapidly. Australia has become the fifth largest provider of all forms of tertiary education and is now the third largest supplier of degrees after the USA and the UK. The overwhelming majority of Australia’s foreign students, 85 per cent, are from the Asia-Pacific. The largest source countries in 2002 were Singapore (29,956), Hong Kong China (26,956), Malaysia (23,725), mainland China (19,596) and Indonesia (11,981).

Institution

Offshore international students Share of all students Number %

International research students Share of all students Number %

Revenue from international fees Proportion of all revenues $s mill. %

14,499 10,330 7850 7378 5586 2543 2472 2017

27.9 24.4 19.9 17.4 14.9 16.0 15.3 16.8

2030 565 0 635 35 684 436 274

3.9 1.3 0 1.5 0.1 4.3 2.7 2.3

358 499 523 374 549 287 203 357

2.5 4.8 1.3 5.1 9.8 11.3 8.2 17.7

111.1 115.9 112.1 77.9 65.4 28.8 27.6 19.6

15.1 16.5 13.1 9.5 8.0 8.0 8.3 4.3

6598 6563 5370 4274 3319 3015 2210 1655 1389 1252 1221

24.2 35.0 17.3 12.9 13.3 12.8 17.4 12.1 10.5 9.1 6.7

1191 2109 335 1102 1135 1011 678 451 26 242 724

4.4 11.2 1.1 3.3 4.6 4.3 5.3 3.3 0.2 1.8 4.0

180 207 107 51 150 154 73 109 109 92 88

2.7 3.2 2.0 1.2 4.5 5.1 3.3 6.6 7.8 7.3 7.2

55.9 43.1 40.6 27.7 25.5 28.1 16.3 13.9 10.7 15.4 5.9

18.9 20.5 11.6 8.5 8.1 10.9 10.4 7.8 6.2 7.1 3.9

SIMON MARGINSON

SANDSTONES Monash U U New South Wales U Melbourne U Sydney U Queensland U Western Australia U Adelaide Australian National U GUMTREES Macquarie U U Wollongong Griffith U Deakin U La Trobe U U Newcastle Murdoch U Flinders U James Cook U U Tasmania U New England

All international students Share of all students Number %

230

Table 7. Fee-paying international education, Australian universities, 2002

13,371 11,313 8881 5242 5042

34.9 34.0 29.0 17.9 12.9

6257 5510 6587 1014 168

16.3 16.6 21.5 3.5 0.4

220 413 980 105 110

1.6 3.7 11.0 2.0 2.2

102.7 84.1 45.1 49.3 57.0

21.5 23.9 15.8 17.1 15.6

9187 8333 7645 6406 4574 3818 3193 2107 1845 1686 413 345

42.2 20.9 21.6 26.4 23.5 16.0 22.2 31.9 17.7 14.1 10.5 6.1

1913 5980 4180 0 64 1647 0 1164 663 1404 0 68

8.8 15.0 11.8 0 0.3 6.9 0 17.6 6.4 11.7 0 1.2

63 102 82 107 140 413 53 14 44 112 15 16

0.7 1.2 1.1 1.7 3.1 10.8 1.7 0.7 2.4 6.6 3.6 4.6

79.5 10.1 38.2 15.8 29.2 25.0 34.1 5.2 12.1 6.8 3.9 2.6

37.7 5.4 12.9 13.3 10.5 12.1 14.6 4.9 11.5 7.6 12.0 2.8

961 530 24

8.1 18.7 n.a.

103 0 0

0.9 0 0

13 4 n.a.

1.4 0.8 n.a.

4.5 0.9 n.a.

4.3 17.7 n.a.

601 185,058

9.6 20.6

27 50,412

0.4 5.6

54 7274

9.0 3.9

1.3 1449.8

– 12.5

*Private university funded in the same manner as public universities Source: DEST 2003

AUSTRALIAN HIGHER EDUCATION NATIONAL AND GLOBAL MARKETS

UNITECHS Royal Melbourne IT Curtin U Technology U South Australia U Technology Sydney Queensland UT NEW UNIVERS. Central Queensland U Charles Sturt U U Western Sydney U Southern Queensland Victoria U Technology Edith Cowan U Swinburne UT U Ballarat U Canberra Southern Cross U U Sunshine Coast Northern Territory U PRIVATE UNIVERS. Aust. Catholic U* U Notre Dame Aust. Bond U MINOR SITES [various] TOTAL

231

232

SIMON MARGINSON

When offshore enrolments are included, in distance education, partner institutors and branch campuses, mostly in East and Southeast Asia, there were 185,058 international students enrolled in Australian universities in 2002, including 50,412 (27 per cent) offshore. This compared to 46,187 students in all categories in 1995.13 International education is Australia’s third largest services export, while also offering the government fiscal relief by funding 13 per cent of university revenues. As noted, in 2002, the universities earned $1.45 billion in student fees (see table 7). In 2001 Australia earned $4.3 billion from all forms of international student spending including fees, food, transport, accommodation, living costs and entertainment (Nelson 2003b: 35). In 2002, 13 Australian higher education institutions – one-third of the national system – enrolled more international students than did the University of Southern California, the largest single American provider in 2002–03 with 6270 students (IIE 2003; DEST 2003). International students constituted more than one in five students at nearly half the universities: Monash, NSW, Macquarie, Wollongong, RMIT, Curtin, South Australia, Central Queensland, Southern Queensland, Charles Sturt, Western Sydney, Victoria, Swinburne and Ballarat (DEST 2003). At Central Queensland University there were 9187 international students on seven campuses, including Fiji, 42.2 per cent of all students (DEST 2003). Because of their reputational strength the Sandstones are in the best position to attract foreign trade; but along with Monash (14,499), the Unitechs at RMIT (13,371), Curtin (11,313) and South Australia (8881); the New University Central Queensland (9187), and the Gumtree Wollongong (6563) have been the most entrepreneurial (see table 7). Monash owns campuses in Malaysia and South Africa. The University of New South Wales also has a strong international programme. Because it has been market driven, the growth of international education has been uneven by field of study. Some degrees offer more global positional benefits than do others. In both higher education and VET more than two-thirds of enrolments are concentrated in business studies and ICTs. In credentials, the main growth has been in bachelors degrees and coursework masters. Compared to most export nations, Australian universities have a weak role in the provision of research degrees to foreign students. In 2001, only 5.4 per cent of Australia’s international students were research students compared to 18.1 per cent in Switzerland, 16.6 per cent in the USA and 11.6 per cent in the UK (OECD 2003).14 5.3. Why Has Australia Been Successful? Australia benefited from a productive coincidence of supply factors under its control, and demand factors outside its control. Australia had 30 years experience in educating Asia-Pacific students, initially through the Colombo Plan; and when the commercial market was opened in 1985–87 many universities moved quickly and effectively. The government coordinated marketing in the Southeast Asian capitals via education centres located in Australian embassies; providing the appearance of government-guaranteed quality, and reducing mutually destructive promotion wars.

AUSTRALIAN HIGHER EDUCATION NATIONAL AND GLOBAL MARKETS

233

The government also ran a generous visa policy. However, the most important supply-side factor was the financial incentive. As noted, public funding per student was trending down (Marginson 2002); and international marketing the main source of discretionary revenues. Above all it is this factor that explains the entrepreneurialism that gripped Australian universities in the 1990s (Marginson and Considine 2000). On the demand side, the American dollar and sterling both appreciated during the 1990s, providing Australia with an export price advantage. Total fees and living costs were more than one-third cheaper in Australia (see table 8), creating a decisive advantage relative to the USA and UK. Australia also benefited form being closer to Asia, and from a reputation for greater security and stability, a more tolerant social atmosphere and, perhaps, a more attractive climate compared to the American midWest and the UK. All of its institutions offered these benefits, not just the sandstones. In global markets universities locked out of the elite segment of their national systems can position themselves as providers of high value goods for international students. It is easier to raise full fees from foreign students than from domestic students. Table 8. Comparative cost of foreign study in the English-language countries, Master of Business, 2001 Country

USA (private unis) USA (public unis) United Kingdom Canada Australia New Zealand

Visa charge

Annual tuition fees (median)

Annual living costs (average)

Total annual costs (median)

$US

$US

$US

$US

45

24,810

8529

33,339

45

10,898

8529

19,427

48

10,376

8783

19,159

81 156 45

5944 7055 6209

6906 5427 5503

12,850 12,482 11,712

Total annual costs exclude visa charge. Exchange rates as at 1 June 2001 used for conversion to USD 15 Source: IDP 2001

This suggests that the spectacular growth of higher education in Australia was not grounded in superior quality, but in burgeoning demand, business acumen driven by a combination of scarcity and opportunity, an adequate quality English-language product, a good location and a cheaper price. Yet while Australia could sustain high volume, standard cost, standard quality degrees in business and ICTs, it was unable to attract many high calibre international research students, and the national government, to shift the ethos of international education ‘from aid to trade’, made little attempt to offer a more generous scholarship regime. The outcome was that in the global matching process that constitutes the global positional market, whereby

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SIMON MARGINSON

the hierarchy of student demand becomes matched with the hierarchy of nations as suppliers, and the exporter countries find their specialisation and their appropriate global segment level, Australia has become positioned as the global polytechnic. A strong quantitative presence in the global education market does not necessarily translate into a flourishing university system, national sovereignty and self-definition, the optimum global outcome, or even a deeper engagement by Australia with other cultures and economies. The stubbornly monocultural character of the curriculum, the failure to develop the national capacity in Asian languages, and the relatively poor rate of offshore movement by Australian students – in 2001 the ratio of incoming to outgoing students was 19:74, the highest in the OECD (OECD 2003) – have limited the larger potential of education exports. Nevertheless, universities have become much better networked internationally, especially in the Asia-Pacific, creating incalculable long-term possibilities. Between 1990 and 2001, formal agreements between Australian and international universities increased rapidly, from 340 in 1990 to 3894 in 2001. Of the latter, 2631 agreements were for academic collaboration, including research (AVCC 2002). The global market offers all Australian institutions, elite or not, a wider set of strategic options, identities and development paths. They can concentrate on international marketing in Australia, or build activities offshore or specialise in online linkages. Some can build a much larger profile of active research collaborations. Suddenly institutions find themselves operating in more than one sphere at the same time, local/national and global, using the outcomes of strategies in one sphere (resources, networks, reputation) as inputs in the other. By the same token, they face new tensions between domestic and global investment paths, especially given the heightened resource scarcity. While strategy is becoming increasingly global, most of the resources underpinning universities continue to be locally sourced, from government and students. Fiscally, it has suited the national government to point to the export revenues of the universities, but for universities in medium sized nations like Australia, a strong global strategy – one opening up the full range of academic potential, not just fee-based revenues themselves – rests on an academic capacity that is still dependent on the national government. 6. POLICY DEVELOPMENTS At the time of writing in 2003, the principal policy developments were the Nelson reforms to higher education, constituting a further round of marketisation, and Australia’s part in the GATS negotiations on the liberalisation of educational trade. 6.1. An Undergraduate Price Market: The Nelson Reforms The new policies led by the Minister for Education, Science and Training, Brendan Nelson (2003a), to be introduced in 2005, make three main changes. First, though the HECS remains a payment from students to government, covering a part only of the cost of the student place with the balance paid by government, it has been moved closer to the forms of a market fee. Individual universities can now vary the level of

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235

HECS freely, at up to 25 per cent above current levels, or downwards to zero, fixing it at $0–7670 per annum in 2005. Prestigious universities, and perhaps some others, will opt for the maximum possible HECS. Second, public universities will be able to charge direct tuition fees at whatever level they like for up to 35 per cent of the places in each course. Third, fee-paying students in both the public universities and accredited private institutions will be eligible for income-contingent loans under the government-backed FEE-HELP. Repayments under both HECS-HELP and FEEHELP16 will be income contingent, with no real interest rate, though students taking loans under FEE-HELP will be subject to an additional annual surcharge of $2000. Under these new arrangements a differentiated price-based undergraduate market is created, based on a voucher-like system of subsidised loans. With the cost gap between full fee places and HECS places reduced, many students will opt for feepaying places in prestigious universities and courses rather than HECS places in less desired courses. The cost gap between HECS places in public universities and fee places in private institutions is also narrowed, making a large-scale private sector viable for the first time. For students, overall costs rise sharply. There are two compensatory policies: scholarships of up to $24,000 per course for a small number of students from low socio-economic status or isolated backgrounds; and a higher income threshold for repayments under HECS-HELP and FEE-HELP, an indexed $35,000 per year (not incidentally, this higher repayment threshold also helps to make full fee places economically viable). Later, the government could create a reunified undergraduate market, with variable levels of public subsidy per place, by lifting the cap on maximum HECS, extending HECS arrangements to the private sector, and abolishing the surcharge on FEE-HELP funded places. The norms would be inverted. The student contribution to the costs of a publicly funded place (the HECS) would be replaced by a public subsidy (‘scholarship’) for part of the costs of fees. The old principle of the HECS – a charge without deterrent effects – would be abandoned. The Nelson reforms bring Australian cost levels and structures closer to those of the USA. One effect of increasing the domestic price of prestige Australian degrees will be to encourage investment in American degrees. The Nelson reforms largely close the cost gap between an Australian HECS place and an American in-state public place. In the longer term, full fee places supported by FEE-HELP will allow prestige Australian universities to charge American private sector level fees. A University of Sydney or Melbourne law degree at $25,000 per year would exceed production costs but many students would pay this for the positional value of the degree. Drawing new private investments from those affluent families already accustomed to investing in fee-paying secondary education, the leading universities will strengthen their resources. Part of this will be ploughed into research capacity, including remuneration for high academic performers. By strengthening the competitive position of the Sandstones, and comforting them with an extra resource cushion, the reforms will reduce pressures for efficiency and customer responsiveness at the top end. At the same time, the rising cost of HECS, fees and the income contingent loans will stream low income families away from high cost, high value places. At the lower levels of the hierarchy, there will be a ‘race to the

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bottom’ as institutions struggle to fill their classes. Some may charge zero HECS, creating grossly under-resourced free places. Both strategic options facing the lower tier institutions – varying HECS down, and investing more resources in marketing – tend to reduce the available resources for teaching and learning, and thin out their already inadequate research capacity. The outcome is a neater, tighter and fiscally cheaper positional market: one that is more closed than before, with rather less threat of competition from below. (Note that in the longer term this fiscal cheapness might be more apparent than real given the potential public costs of FEE-HELP.)17 The overall effect of the Nelson reforms is to stretch the vertical hierarchy and widen the gaps between segments. Price variation enables a more differentiated set of economic choices, but is matched by steeper variations in educational quality. 6.2. Australia and WTO/GATS In its negotiating proposal in relation to the trade liberalisation discussion via the World Trade Organisation/General Agreement on Trade in Services (WTO/GATS), the Australia government sought to open up export markets for its education providers. The document listed numerous impediments to trade, including visa requirements, foreign exchange requirements, qualification recognition, restrictions on ownership and foreign equity, lack of regulatory transparency, employment restrictions, and import restrictions on educational materials (1 October 2001). At the same time, Australia also stated that governments must “retain their sovereign right to determine their own domestic funding and regulatory policies/measures” (WTO 2001). Australia agreed to permit the entry of foreign providers into the Australian domestic system, but refused to endorse the GATS provision on ‘equal treatment’, reserving the right to direct government subsidies exclusively to local providers, so that foreign providers would be unable to compete on equal terms. Australia favours a genuinely open trading regime, in both directions, only in relation to cross-border online education. This is consistent with the limitations on contestability within the domestic market (see above), and constitutes much the same exporter double standard as the position adopted at GATS by the principal global exporter, the United States. 7. CONCLUSION Australia has travelled further down the road to an economic market in higher education than have most other nations. The introduction of price signals into undergraduate education from 2005 lifts the process of marketisation to a new level. Hayekian reform has had one clear-cut success: a lucrative and expanding export industry. This is on a massive scale, and the positive spin-offs include the creation of public goods, such as closer international relations, bringing with them the benefits of cultural exchange. At the same time, the industry is grounded more in specialisation (the high volume provision of coursework degrees in business and

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ICTs) than a broad-based global engagement, and its success is unduly dependent on a weak Australian dollar. In other respects the outcomes of market reform appear to be disappointing. There is no evidence that responsiveness to student-customers has improved; and the average quality of published research appears to be in decline (Butler 2003). Arguably, the trend to cost efficiency has been driven by 15 years of reductions in government funding per student, rather than changes in production determined by allocative efficiency. When a government-managed economic market driven by prices and resource competition is imposed on top of the traditional positional market in higher education, the outcome is not the textbook market driven at the intersection of supply and demand, of neo-classical economic imaginings. Unless special measures are taken to enforce contestability and better, to break the hold of the leading universities, the economisation of competition actually tends to strengthen the dominance of universities in the elite group that are best placed to compete on the terms of the reformed system. However, enforcing contestability requires arbitrary policy interventions, and while these might be well grounded in expert state judgment – a quality under-appreciated in the neo-liberal era – they undermine market coordination and its dollar-driven automation. Further, policies that are pitched against leading universities appear perverse, given the need to enhance global competitiveness, and would confront vigorous social-political resistance. The rise and rise of elite universities promises to develop stronger nodes of global competitiveness, centred in the principal global cities, but in the Australian context of high scarcity of public funding, it is occurring at the expense of the quality of the bulk of higher education institutions – particularly their capacity to maintain a broad range of research programmes, basic and applied/commercial, across all fields of study. The global market is not subject to the same limitations as the national positional market. All institutions can offer an expanding number of valuable positional goods to foreign students, providing that they are seen in the international market as adequate in quality terms. In principle, global relations offer all universities a broad range of strategic options. Nevertheless, the Australian experience shows that a wholly commercial approach to the global market is unlikely to generate sufficient surplus to finance long-term research infrastructure in the core disciplines; and all else being equal, it tends to weaken academic practices vis-à-vis corporate practices – unless this tendency is corrected by public policy. This effect also limits the long-term global potential. NOTES 1

2 3

The comment of conservative philosopher Michael Oakeshott on Hayek’s The Road to Serfdom (1944) was that “A plan to resist all planning may be better than its opposite, but it belongs to the same style of politics”. For discussion of this tension in Hayek, see for example Galeotti (1987) and Kukathas (1989). Ivy League institutions tend to ‘wait and see’ in relation to innovations in academic field boundaries, or educational and administrative practices, running with innovations once they are successful elsewhere. Data for 2002 are not available because of a series break in the data on student load, due to changed definitions.

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Universities are accountable to the state governments for fulfilment of their public obligations, and responsible management of their affairs, including their commercial activities. Yet because since 1974 the states have played only a very minor role in funding, the main policy influence has long been exercised by the national government. This split between state legislation and national government financing, financial and policy accountability, data collection and planning, and policy leadership, is a principal structural difficulty in Australian higher education. See the Australian Qualifications Framework web site at http://www.aqf.edu.au. Mobility is also facilitated by the high incidence of student residence among younger undergraduates, and student job-holding on campus. See the National Union of Students web site at http://www.unistudent.com.au. Recent national data on student entry scores are not available. In 1993 the Sandstones between them attracted more than 60 per cent of the top quintile of school leavers in each state/territory. The extreme case was Western Australia, with 86.2 per cent (DETYA 1998). The IGS formula is income from research grants (60 per cent of the IGS), the number of higher degree research students (30 per cent) and publications over the previous two years (10 per cent) (Nelson 2003b: 103–104). Medicine at James Cook University and Griffith University is still in the process of becoming established. ANU received special national funding for its four research schools and in 2001 its research school staff were not eligible to compete for most forms of National Competitive Research Grants, including ARC grants. This was changed in 2003, when the ANU’s special research support was reduced and ANU research school staff were permitted to compete alongside staff of other universities. Thus the ANU data in column 7 are comparable to the data for other universities, but not the data in columns 5–6 (2001) or column 8 (IGS allocations are based on previous research performance). Here the term ‘global’ refers to systems, networks and relationships flowing across and between nations and institutions. ‘Globalisation’ is the process of widening, deepening and speeding up of this worldwide interconnectedness (Held et al. 1999). There were also 39,845 students in vocational education, 15,112 in schools and 49,380 in intensive English courses in 2001 (AEI 2003). The Australian English language college (ELICOS) sector was similar in size to that of the USA where there were 51,179 IEP students in 2002 (IIE 2003). An exception is the Australian National University, where there were 357 international research students in 2002, 17.7 per cent of all international students, and 3.0 per cent of all students were research degree international students. See also Marginson and Sawir (2003). Australian dollar = 0.54c, New Zealand dollar = 0.43c, Canadian dollar = 0.66c, Pound sterling = $1.46. The new fees/loans system from 2005 absorbs the PELS system of loans for fee-charging postgraduate courses introduced in 2002. Part of HECS debts is not recovered due to graduates leaving Australia, and instances of insufficient lifetime earnings. The non-repayment factor in relation to the present HECS is estimated to be about 20 per cent. The increase in the level of average income contingent debt suggested by FEE-HELP and higher levels of HECS after 2005, and the higher repayment threshold, would increase the nonrepayment factor. The cost is borne by the national government.

REFERENCES ABS (Australian Bureau of Statistics). Research and Experimental Development, Higher Education Organisations, Australia. Catalogue Number 8111.0. Canberra: ABS, 2003, http://www.abs.gov.au. AEI (Australian Education International). Statistical Data on International Education in Australia. Canberra: AEI, 2003, http://aei.detya.gov.au/general/stats/stats.htm. Aungles, P., I. Buchanan, T. Karmel and M. MacLachlan. HECS and Opportunities in Higher Education: A Paper Investigating the Impact of the Higher Education Contributions Scheme (HECS) on the Higher Education System. Research, Analysis and Evaluation Group, Department of Education, Science and Training (DEST). Canberra: DEST, 2002. AVCC (Australian Vice-Chancellors’ Committee). Key Statistics on Higher Education: Internationalisation. Canberra: AVCC, 2002, http://www.avcc.edu.au/policies_activities/resource_analysis/key_stats/index.htm.

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Butler, L. “Explaining Australia’s Increased Share of ISI Publications – The Effects of a Funding Formula Based on Publication Counts.” Research Policy 32.1 (2003): 143–155. Department of Education and Training. Draft Guidelines for the Approval to Operate as a University in Victoria. Melbourne: State of Victoria, 2004, http://www.eduweb.vic.gov.au/highered/reports&papers/DraftMinGuidelines.doc. DEST (Department of Education, Science and Training). Selected Higher Education Statistics. Canberra: DEST, 2003, http://www.dest.gov.au/highered/statinfo.htm. DETYA (Department of Education, Training and Youth Affairs). The Characteristics and Performance of Australian Higher Education Institutions. Higher Education Division, 1A/98, Occasional Paper Series. Canberra: DETYA, 1998, http://www.dest.gov.au/archive/highered/otherpub/characteristics.pdf. Galeotti, A. “Individualism, Social Rules and Tradition: The Case of Friedrich A. Hayek.” Political Theory 15.2 (1987):163–181. Hayek, F.A. The Road to Serfdom. London: Routledge and Kegan Paul, 1944. Hayek, F.A. Individualism and Economic Order. Chicago: University of Chicago Press, 1948. Hayek, F.A. The Sensory Order. Chicago: University of Chicago Press, 1952. Hayek, F.A. Studies in Philosophy, Politics and Economics. London: Routledge and Kegan Paul, 1967. Hayek, F.A. Law, Legislation and Liberty: The Political Order of a Free People. vol. 3. London: Routledge and Kegan Paul, 1979. Held, D., A. McGrew, D. Goldblatt and J. Perraton. Global Transformations: Politics, Economics and Culture. Stanford: Stanford University Press, 1999. Hirsch, F. Social Limits to Growth. Cambridge: Harvard University Press, 1976. IDP Education Australia. Statistics on International Students. Canberra: IDP, 2003, http://www.idp.com/marketingandresearch/research/internationaleducationstatistics/default.asp. IDP Education Australia, with Australian Education International. Comparative Costs of Higher Education Courses for International Students in Australia, New Zealand, the United Kingdom, Canada and the United States. Sydney: IDP, 2001. IIE (Institute for International Education). Data on International Education in the USA. New York: IIE, 2003, http://www.iie.org/. James, R., G. Baldwin and C. McInnis. Which University? The Factors Influencing the Choices of Prospective Undergraduates. Evaluations and Investigations Program, Higher Education Division. Canberra: DEST, 1999, http://www.dest.gov.au/archive/highered/eippubs/99-3/whichuni.pdf. Kukathas, C. Hayek and Modern Liberalism. Oxford: Clarendon Press, 1989. Marginson, S. Educating Australia: Government, Economy and Citizen since 1960. Cambridge: Cambridge University Press, 1997. Marginson, S. “Trends in the Funding of Australian Higher Education.” Australian Economic Review 34.2 (2001): 205–215. Marginson, S. “Towards a Politics of the Enterprise University.” In Cooper, S., J. Hinkson and G. Sharp (eds). Scholars and Entrepreneurs: The University in Crisis. Melbourne: Arena Publications, 2002, 109–136. Marginson, S. and M. Considine. The Enterprise University: Power, Governance and Reinvention in Australia. Cambridge: Cambridge University Press, 2000. Marginson, S. and G. Rhoades. “Beyond National States, Markets, and Systems of Higher Education: A Global Agency Heuristic.” Higher Education 43.3 (2002): 281–309. Marginson, S. and E. Sawir. “University Leaders’ Strategies in the Global Environment: A Comparative Study of Universitas Indonesia and the Australian National University.” Paper presented at the Association for Studies in Higher Education Conference, Portland, Oregon, USA, 12–13 November, 2003. Mazzarol, T., G. Soutar, D. Smart and S. Choo. Perceptions, Information and Choice: Understanding How Chinese Students Select a Country for Overseas Study. Canberra: Australian Education International, 2001, http://www.dest.gov.au. Nelson, B. (Commonwealth Minister for Education, Science and Training). Our Universities: Backing Australia’s Future. Canberra: DEST, 2003a, http://www.dest.gov.au/highered/index1.htm. Nelson, B. (Commonwealth Minister for Education, Science and Training). Higher Education. Report for 2003 to 2005 Triennium. Canberra: DEST, 2003b, http://www.dest.gov.au/highered/index1.htm. OECD. Korea and the Knowledge-based Economy: Making the Transition. Paris: OECD, 2000. OECD. Education at a Glance. OECD Indicators. Paris: OECD, 2003.

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Pusser, B. “The Role of the State in the Provision of Higher Education in the United States.” Australian Universities Review 42.2 & 43.1 (1999/2000): 24–35. Selleck, R. The Shop: The University of Melbourne, 1850–1939. Melbourne: Melbourne University Press, 2003. SJTUIHE (Shanghai Jiao Tong University Institute of Higher Education). Academic Ranking of World Universities – 2003. SJTUIHE, 2003, http://ed.sjtu.edu.cn/ranking.htm. Slaughter, S. and L. Leslie. Academic Capitalism. Baltimore: Johns Hopkins Press, 1997. Tremblay, K. “Student Mobility Between and Towards OECD Countries: A Comparative Analysis, in OECD.” International Mobility of the Highly Skilled. Paris: OECD, 2002, 39–67. Watson, L. Survey of Private Providers in Australian Higher Education 1999. 00/4, Evaluations and Investigations Program, Higher Education Division. Canberra: DEST, 1999, http://www.dest.gov.au/archive/highered/eippubs/eip00_4/survey.pdf. WTO (World Trade Organization). Communication from Australia: Negotiating Proposal for Education Services. S/CSS/W/110. Geneva: WTO, 2001, http://www.wto.org/english/tratop_e/serv_e/s.

GARETH WILLIAMS

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No one intends to establish a market economy: such a state of affairs comes into being through the individual bargaining arrangements of people exchanging goods and services to maximise their advantages and minimise their deprivation (MacRae 1974: 73).

1. BACKGROUND At the peak of the marketisation surge in UK public utilities and services in 1994, the senior Department of Education and Science official who had been in charge of higher education policy throughout the 1980s wrote: “For my own part, I have always found it hard to discern any clarity of theme or practice which would justify an assertion that a ‘market approach’… was being pursued” (Bird 1994: 83). In keeping with the English tradition of philosophical and policy pragmatism, theoretical discussion of markets in higher education has tended to follow policy rather than pave the way for it. For most of the two and a quarter centuries since Adam Smith published The Wealth of Nations, market transactions have been treated as the natural form of economic intercourse and the task of government intervention has been regulation to prevent or minimise the effects of market failure (the period from 1940 to 1980 was the exception). It is the contention of this chapter that British higher education stumbled into a closely regulated higher education market through a series of ad hoc responses by universities and government to immediate problems and there are many loose ends and unanticipated consequences. The United Kingdom was one of the first countries to adopt the new public management policies of the 1980s and 1990s. The relatively slow growth of the UK economy throughout the forty years following World War Two, compared with most other OECD countries exacerbated by the world economic depression of the later 1970s, brought about a severe crisis of confidence in what had for three decades come to be known as the progressive consensus over social welfare and public control over the provision of public services and utilities. The Conservative government elected in 1979 had one overriding aim: to lower the near hyperinflationary price rises of the preceding few years and to do so by reducing public expenditure. Higher education was initially a bit player and subsequently an incidental actor in the dramas of the 1980s that ended with its transformation following the 1988 Education Reform Act and the 1992 Higher and Further Education Acts. 241 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 241–269 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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However, as institutions, British universities provided fertile soil for the growth of market forms of organisation and entrepreneurial behaviour. They possessed most of the eight conditions often said to be necessary for markets to work (e.g. Jongbloed 2003).1 First they were autonomous property-owning institutions with their legal independence guaranteed by Royal Charter2 or Parliamentary Statute. This gave them considerable independence from direct governmental or parliamentary intervention. Each university was fully responsible for the management of its own financial affairs and this meant that financial survival was not guaranteed. Universities also had a very high level of discretionary powers in their academic affairs. They appointed and employed their own staff, recruited their own students from a national and international clientele, decided their own curricula and awarded their own degrees. They were subject only to the constraints imposed by their charters and these were couched in very general terms. In addition, British universities throughout the twentieth century shared, with their counterparts in most Western countries, the belief that their academic staff should undertake both teaching grounded in high scholarship and research at the cutting edge of knowledge. Finally, although in 1980 universities received most of their funds from the government, they were required to render little account of the use of these funds. It was the realisation by government in the 1980s that it could set conditions on the use of the funds it provided that has been at the heart of much of the friction between universities and government in recent years. In economic terms, British universities remain independent, non-profit, multiproduct enterprises whose core business is the creation and dissemination of knowledge. They decide their own profile of outputs and the processes they use to produce them. They depend very heavily on public funds but they are not legally required to do so. Their status as charitable foundations does not permit them to distribute profits but they have full discretionary powers over any financial surpluses they achieve. Until 1980 virtually no use was made of this power because universities were assured of an incremental rise in funds from the government year after year. Government became seriously involved in the funding of these enterprises only after the First World War and the dominant source of finance only after the Second World War. At that time, in the late 1940s, partly because of the experiences of Nazism and Fascism, the mainstream political ideology in the West was strongly in favour of decentralised control of educational institutions which was thought to underpin intellectual freedom, particularly in a country with no written constitution. The UGC3 system enabled universities to be financed largely by government but to remain free from political involvement in the management of their academic affairs and their internal resource allocation. Governments made grants to the system as a whole and not to any individual university. The UGC, whose twenty members were broadly representative of university interests, was responsible for allocating money to individual universities and the government took no overt part in this. The UGC applied the principle of institutional autonomy to its own allocations to individual universities: they were single ‘block’ grants made on a more or less incremental basis for five years at a time, with only a very general indication of the bases on which the grant had been calculated. Universities were free to spend their recurrent

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income as they wished, provided they remained within the provisions of their charters, which were framed in very broad terms. Until 1988 successive governments accepted that their main role was to subsidise universities and, from time to time, to exhort them to behave in accordance with what the government considered to be the public interest. However, it was largely left to each university to decide whether it would heed the government’s exhortations.4 The period between 1945 and 1980 was a golden age for British universities and the academic staff working in them. They were funded generously by the state as institutions whose main function was to form the new generation of national leaders in the public service, in scientific research and the liberal professions.5 The state met most of their costs and made very few demands on them. Academic criteria alone dominated their decision making in both teaching and research. A generation of university teachers came to believe that this was the natural order of things and injudiciously assumed that it could continue indefinitely. One example of the complacency of this belief was the view, expressed by some in universities in 1981, that all members of the UGC should have resigned en masse rather than accept the severe financial cuts imposed by a recently elected government with a clear parliamentary majority (see Kogan and Kogan 1984). 2. TRANSFORMATION However, the transformation of UK higher education in the 1980s cannot be understood on the basis of the universities alone. From the late nineteenth century onwards there had developed alternative institutions of postsecondary education concentrating mainly on technical and vocational training for young people from relatively poor families. These institutions were the responsibility of local education authorities. One early indication of government impatience with some consequences for university independence was the reorganisation of these disparate colleges into a separate sector of higher education directly under public control in the late 1960s, contrary to the recommendations of the Robbins Report.6 This gave rise to the binary system in which the polytechnics and other colleges of higher education were to be funded primarily as teaching institutions where applied research was to be subsidiary to their core function of expanding student participation. However, from the viewpoint of central government policy implementation, local authority control was in practice little better than the autonomy of the university sector, since the polytechnics were to remain under the control of the local education authorities which were themselves, at the time, centres of independent political power. By 1980 the public sector of higher education was becoming large enough and politically and economically strong enough to challenge the monopoly power of the universities. Many of the developments of the following two decades can best be understood in terms of the competition between two different conceptions of the underlying purposes of higher education and the competing vested interests which grew up around them.7

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The 1980s was a decade of radical change. But it was change initiated by wider economic policy choices rather than a result of carefully debated ideas about the finance and organisation of higher education. The government was elected on the basis of promises to reduce inflation and to cut taxation: it proposed to achieve this by reducing what it saw as waste in the public services resulting from excessively bureaucratic forms of organisation. In many public services this resulted in fundamental changes in their structures: nationalised industries and public utilities were privatised, and internal markets were imposed on others.8 In the university sector consisting of autonomous institutions, such structural change was unnecessary. However, in part because it wished to reduce the political power of the local authorities, the government gave other higher education institutions a legal status similar to the universities in its 1988 Education Reform Act. Almost all the other changes of the past fifteen years have been achieved by keeping higher education institutions short of money and manipulating the terms on which public funds were made available to them. Soon after the 1979 election the new government imposed massive public expenditure cuts. Higher education’s share was the removal of all public subsidies in respect of students whose permanent residence was outside the European Community.9 This removed about 6 per cent from the income of universities. In the following year there was a further reduction of 10 per cent in the government grants to higher education institutions.10 Although these expenditure cuts were made purely for public expenditure reasons, they were a watershed in terms of their effects on universities and perceptions of appropriate forms of public finance for them (Moore 1987). A generation of academic staff and academic managers had learned to rely completely on annual incremental increases in government funding. The shock of the 1981 cuts was traumatic. When faced with the need to reduce expenditure and possible bankruptcy, universities were confronted with some of the harsh realities of independence. Some assumed that the cuts were a once and for all surgical operation and recovery of the long established status quo ante would be rapid. One vice-chancellor, who eventually lost his job as a consequence of the financial near bankruptcy of his university (see Shattock 2003), cited Winston Churchill and stated that his university’s policy in the face of the cuts was to “keep buggering on”. Others adapted to the new situation very quickly and realised that the post-war age of unconditional government generosity to the universities was over and that new sources of finance had to be found. They set about actively recruiting students from overseas, particularly the boom middle eastern and Asian countries and exploring other ways they could turn their knowledge and skills into income streams for the universities. In 1984 the Conservative government was re-elected with an increased majority and it became generally accepted that the policy of financial stringency across the public sector would be a permanent feature of the UK political scene. All universities now realised that income generation from other sources was essential if they were to survive. Consensual collegial management structures were no longer able to perform effectively in the new climate. Committees were pruned, finance offices became larger and more powerful, central management teams were

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established, primitive computerised resource allocation models were developed. Universities were proving capable of looking after themselves financially if they had to. Among the income generating strategies vigorously pursued by many universities from the mid-1980s onwards were: x x x x x

energetic recruitment of full fee-paying foreign students; establishment of university companies to sell teaching and research services; formalisation of consultancy services by members of academic staffs and charging of full direct and indirect costs for any services provided; creation of science and business parks; renting out teaching and living accommodation at times when it was not required by students (Williams 1992).

Such explicit marketing activities, combined with financial stringency, raised a variety of management problems and instigated wide-ranging management changes in universities and colleges.11 Traditional collegial styles of management were unable to cope with the much harsher financial environment and the realisation that government could no longer be relied on to guarantee the financial survival of any university. “Save half, raise half” was the much cited response of Warwick University (e.g. in Williams 1992 and Clark 1998). Many others soon followed Warwick’s example. This immediately raised questions of how far it is appropriate for a university to go in generating income from any source that is not part of its core mission of scholarly teaching and research? Should income generation take precedence over other aspects of a university’s mission? How well could activities that were undertaken primarily for income generation cohabit with traditional academic activities? One aspect of this debate that still generates tensions in the academic profession is the extent to which success in income-generating applied research and consultancy should supplement, or replace, traditional academic criteria in making staff appointments or promoting staff to senior positions.12 Despite the emerging problems, success in such ventures by several universities showed that they were able to generate supplementary income by responding to market opportunities when it was necessary. No university was bankrupted by government expenditure reductions in the 1980s though some came near to it (see Shattock 2003). One clear quantitative indicator of market success was that by the middle of the 1980s British universities were recruiting more foreign students than they had in 1979, the last year in which they were fully subsidised by the British government. However, there were some examples of governments needing to bail out universities. One example that undoubtedly influenced government thinking when it was drafting the 1988 Education Reform Act was that many universities claimed to be unable to reduce their staffing levels in response to the expenditure reductions because they had given most of their teaching staff lifetime tenured contracts13 very early in their careers (Shattock 2001). In 1983 the government had to set up a special early retirement scheme to allow universities to recompense staff for the loss of their

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lifetime tenure and this proved very expensive. Furthermore there was evidence that it was often the most able staff who could find employment outside the British university sector and were most likely to take advantage of the terms offered. This was one of the main reasons why the government removed the legal right of universities to offer lifetime tenured appointments in the 1988 Act. It may be seen as a further step in the regulation of a market-oriented system, but it was also a response to a specific financial pressure. However, the overall success of universities in dealing with financial stringency made possible the next major step by the government, which was to formalise the procedures that had evolved initially as a response to financial exigencies. The 1988 Education Reform Act acknowledged the successful market performance of the universities. It transformed them from partners of the state in the provision of highlevel teaching and research into audited vendors of academic services to the state. That this was the intention is confirmed in letters sent by the Secretary of State for Education to the chairmen of the Universities Funding Council and the Polytechnics and Colleges Funding Council on the day the Education Reform Act passed into law. I shall look to the Council to develop funding arrangements which recognise the general principle that the public funds allocated to universities are in exchange for the provision of teaching and research and are conditional on their delivery … … I very much hope that it will seek ways of actively encouraging institutions to increase their private earnings so that the state’s share of institutions’ funding falls and the incentive to respond to the needs of students and employers is increased (Letter from the Secretary of State for Education to the Chairman of the Universities Funding Council 31 October 1988).

New higher education funding councils with explicit terms of reference to implement government policies replaced the University Grants Committee. Their members were appointed by the Secretary of State for Education and were drawn from outside higher education. These funding councils responded to the Secretary of State’s exhortations by instituting a system of ‘financial memoranda’, in effect contracts with each university, which specified what was required from the money allocated, and establishing formula funding models that set ‘prices’ for each student recruited by a university. 3. FINANCIAL INCENTIVES AND THE ACHIEVEMENT OF MASS HIGHER EDUCATION By the late 1980s government policy was being influenced by the inauguration of the annual OECD statistical series Education at a Glance. These revealed authoritatively that UK rates of participation in higher education lagged well behind most OECD countries. This and a growing belief in the importance of a wellqualified labour force for success in the rapidly emerging knowledge society shifted government concern from saving money to the need for expansion to underpin economic growth. Until 1988 the universities had claimed that further expansion must be achieved at existing levels of average cost per students, which the Treasury

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(Ministry of Finance) considered would be too expensive (Bird 1994). The Department of Education and Science called the bluff of both parties. In 1989 the government transferred about 20 per cent of the core funding away from direct payments to institutions and used it to subsidise payment of fees by students directly to their universities and polytechnics. In effect this was a student voucher scheme that covered about a quarter of the teaching costs of universities and colleges. The universities had by now become accustomed to the active recruitment of students from abroad and they began to apply their newly found marketing expertise to the recruitment of British (and EU) students at marginal costs. These two changes, formula funding based on student numbers and fee subsidy of at least a quarter of teaching costs, set the scene for an explosive expansion of student numbers. After more than a decade of financial stringency, higher education institutions were short of cash and for the first time the polytechnics and colleges were able to take their own financial decisions. Additional students meant additional money. They responded to the changes in funding mechanisms by recruiting as many full cost students as the funding councils allowed, and then as many ‘fees only’ students as they could find. The Polytechnics and Colleges Funding Council, which existed from 1988 to 1992, accentuated these incentives by holding back up to 10 per cent of the funds available and held what was in effect an auction for this money. Each year polytechnics and colleges were invited to offer places for additional students and convincing bids at the lowest price received additional resources up to the point at which the money made available by the government ran out. In the following year the average allocation per student was reduced to the realised average after the bidding was completed, thus reducing standard income per student for all institutions whether or not they had participated in the bidding process. All had to join in or lose money. The universities were also drawn in for political reasons, since they needed to show they could increase their ‘efficiency’ (i.e. reduce their costs) as well although the effect was not direct. The net result was a 75 per cent increase in new first degree enrolments between 1988 and 1994 with many institutions doubling their enrolments over the five-year period. One consequence was a very sharp fall in the average income from public funds per student which fell by some 25 per cent over the same five-year period. The debate began about whether piecework buying of teaching services was an appropriate way of financing universities and if so what kind of regulation of the market was needed. At the same time, and partly as a consequence of the declining income from each additional UK (and EU) student, all universities and colleges continued to exploit even more vigorously the overseas student market. The expansion policy of the early 1990s was so successful that by the middle of the decade the government was becoming concerned on two counts. One was a fear higher education institutions14 were showing insufficient regard for quality as student numbers exploded at ever decreasing unit costs. The other was that, despite the partial replacement of student maintenance grants by loans and the fact that through the marginal cost pricing mechanism described above each additional student was costing public funds less than the previous average cost per student, the expansion was so rapid that total government expenditure commitments to higher education were growing at an unacceptable rate. In 1995, therefore, the expansion

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policy was reversed, a clamp was imposed on further uncontrolled expansion and a university became liable to a ‘fine’ for every student it recruited above the target number set by the Higher Education Funding Council. The ceiling on student numbers lasted until 1998 when the new Labour government reversed the policy of restricted enrolments and began to encourage further expansion, a policy development that culminated in February 2003 when a major government White Paper confirmed that: National economic imperatives support our target to increase participation in higher education towards 50 per cent of those aged 18–30 by the end of the decade. Participation in England is already 43 per cent (DfES 2003: 57).

However, the government is discouraging expansion of traditional three-year university degrees. The White Paper also announced that: We want to see expansion in two-year, work-focused foundation degrees; and in mature students in the workforce developing their skills (DfES 2003: 60).

The Higher Education Funding Council for England has been instructed to concentrate additional funding for teaching on two-year ‘foundation degrees’. The market is now firmly regulated through the conditions set on receipt of public funds. Each university and college is set target numbers of students each year and is paid a ‘price’ for each student recruited up to this target.15 The quality of the education provided is monitored by the Quality Assurance Agency (QAA). Unless a course is deemed to reach an acceptable standard the funds provided for that course may be withheld. In practice this sanction has not been used directly because universities have discontinued the very small number of courses that are deemed not to have reached the required standard. At the other end of the spectrum university departments whose courses are judged by the QAA to reach a very high standard may be given higher target student numbers, and hence higher potential income from the funding councils. For research, each university is given a basic allocation according to the quantity and quality of its research as determined by a four-year ‘research assessment exercise’ in which their research during the previous four years, and potential for the future, are peer reviewed.16 This is another feature of contemporary English higher education where the market is regulated by government-influenced collective decisions. Each university department is given a score from 1 to 7 depending on the extent to which a national peer review panel deems its research to have met national and international standards during the previous four years. This part of the exercise is based largely on academic criteria.17 However, the formula which converts these scores into cash depends very heavily on government policy and fierce bargaining between universities. Tables 1a and 1b show the current main coefficients of the formulae. Any department with a score of less than 418 in the latest research assessment exercise receives no basic research funding. Conversely a medical department with a score of 5* receives about 5.4 times as much per member of staff` as a history department with a score of 4. Obviously the universities with many high scoring departments argue for this weighting to be increased and those with lower scores seek to have the gradient made flatter. During the twenty-year period in

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which the research assessment exercise has been in operation this gradient has become considerably steeper thus concentrating available research funds in fewer universities. The 2003 White Paper (DfES 2003) proposes to make it steeper still. Table 1a. RAE ratings converted into funding weights for each unit of assessment 2001 RAE ratings 1 2 3b 3a 4 5 5*

Funding rates in QR model 0 0 0 0 1 2.793 3.357

Source: Higher Education Funding Council for England 2003: 15

Table 1b. The three subject cost weights High cost laboratory & clinical subjects Intermediate cost subjects Other subjects

1.6 1.3 1.0

Source: Higher Education Funding Council for England 2003: 14

Since the mid-1990s higher education institutions have also been eligible to receive ‘third leg funding’ from the higher education funding councils which is broadly intended to provide a basis for work that serves business and the community other than through academic teaching and research – short training courses, consultancy etc. All universities and colleges are eligible to receive such funds but they must be bid for and are allocated on a competitive basis depending on the amount of effort the university appears to be willing to put into this range of activities. These funds are at present very small in relation to those for teaching and research but the 2003 White Paper has announced that they will expand considerably over the next few years (but they will remain tiny compared with mainstream academic research).19 Although the principles underlying the funding of teaching and research and third stream activities are easy to state, each of the broad streams is itself a network of trickles of funds, four price bands for teaching subjects, eighty research assessment categories and individual bids for third leg funds. The details of the formulae and procedures involved are complex20 and it is partly through manipulation of the small print of the formulae that government policy is put into practice. For a university, determining the appropriate strategy to maximise institutional income and safeguarding it in the future are major responsibilities of any senior management team and governing body. Long-term academic reputation, day-to-day cash flow, career development of staff, student learning and student welfare, the state of the buildings and equipment and relations with the local,

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national and global communities must all be balanced. It is this interplay between micro-policy initiatives and universities’ responses to them in relation to their shortterm and long-term marketing strategies that the implementation of much government policy with respect to higher education depends. 4. THE REGULATION OF TEACHING QUALITY The new funding mechanism introduced by the 1988 Act was intended to stimulate expansion but the extent of its success in doing so was entirely unexpected. It was appreciated, however, that expansion combined with reduced public funding per student would bring risks to quality, and another political game began in which universities and government competed to control the quality assurance process. The initial establishment of quality assurance procedures by the universities was typical of many markets in which commercial suppliers, while competing fiercely with each other, collaborate to meet an external threat to their collective wellbeing. In this case the threat perceived by the universities in 1989, was government infringement of their autonomy by setting up an agency to monitor and regulate the quality of their teaching. The universities themselves, therefore, set up the Academic Audit Unit, which had the mission of ensuring that suitable quality assurance mechanisms were in place in every university, and that they were operating effectively. In the event this did not convince the government of the day that it offered adequate safeguards for students or taxpayers and in 1992 quality assessment committees were established within the funding councils.21 These organised direct observation and monitoring of teaching in individual teaching programmes. For a few years, therefore, universities, which had had little previous experience of external evaluation of the quality of their teaching, had two competitive agencies monitoring their teaching quality.22 In 1997, after a lengthy debate, the two agencies were combined into the QAA, performing a function not dissimilar from the regulatory agencies of the privatised public utilities. Acceptable standards of teaching, externally assessed, are now a condition of the receipt of government grants. The parallel intention to reward universities and colleges adjudged to have particularly good teaching has proved more difficult to implement. Why should extra taxpayers’ money be given to institutions that are already providing high quality teaching? This contrasts with research where a strong case can be made to concentrate resources where the best research is done.23 This has led to another not entirely anticipated market response. There is a strong case for concentrating research funds where they appear likely to be used most effectively. At the level of individual universities and departments, the rewards for research success are very considerable so universities have been encouraged to shift resources out of teaching, for which, beyond the minimum threshold, there are very few additional rewards, and into research for which the financial rewards of a high research assessment score are very considerable. It is possible, however, that the quality of at least the documentary support for students has improved as departments have sought to obtain high scores from their QAA inspections.

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5. DIVERSIFICATION OF FUNDING SOURCES AND ITS CONSEQUENCES During the ten years following the 1981 cuts, most universities increased their nongovernment income very considerably (Williams 1992) and this trend has continued almost unabated since then. In 1979–80 over 75 per cent of the income of British universities came directly from the government, the corresponding figure is now less than 40 per cent (HESA 2003) and in several universities much lower. One consequence of this diversification of funding sources is that the spectrum of activity considered legitimate for universities has broadened considerably. From being institutions dedicated to research and high-level learning teaching many have become quasi-commercial enterprises selling services in the knowledge industry to a wide range of purchasers. This has now been formally recognised by the Higher Education Funding Council which has recently established a third stream of public funding to underwrite links with business and the community. Another consequence of the diversification of funding sources was that proactive management of universities and polytechnics became much more visible. Financial management in particular was strengthened. Nearly all universities now have a resource allocation model (RAM)24 which is essentially a set of formulae that constitutes a planning and management tool for allocating resources on a systematic basis to each cost centre in a university. Departments and centres which are not financially viable within their RAM allocation must reduce their costs, raise income from other sources, seek subsidies from the rest of the university because of their non-financial contributions to its wellbeing, or become candidates for closure. RAMs vary from those that retain most strategic decisions25 as the prerogative of a central strategic management group within the university, allocating financial resources to dispersed cost centres only for day-to-day spending, to models which delegate most spending decisions to devolved cost centres while the central management group monitors only their overall income and expenditure position and a few quality indicators such as research assessment and teaching quality scores. Some RAMs mimic the criteria used by the funding councils in their allocations to the university, and others are built up within the institution itself based on its own perceptions of its mission and financial priorities (Jarzabkowski 2002). Centralised strategy and funding of new initiatives with considerable devolution of authority to implement the strategies and initiatives are now very common in British universities. Sometimes faculties, such as medical schools and business schools, have considerable independent income generating powers, and it is not uncommon for business schools, for example, which often have close links with wealthy outside interests to be able to negotiate specially favourable terms for themselves. It is often in the university’s interests to do this because a successful business school can often bring considerable income into the university’s general funds even if it is ‘taxed’ at a relatively low rate. Other faculties, such as the natural sciences may, in contrast, require heavy subsidies from elsewhere in the university but they may be considered worth paying for because of the prestige associated with a successful physics department for example. A recent development is for many strategic decisions also to be devolved to faculties or ‘schools’. Medical schools, business schools, engineering schools and

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law schools are often powerful enough and rich enough to be able to employ sufficient, appropriate staff to take nearly all decisions, including the employment of academic staff, by themselves with no more than light oversight by the central management team to ensure that such matters as tax and employment law, and university policies with regard to equal opportunities are not being contravened. A very recent trend in university restructuring is to group many of the traditional arts and sciences departments and faculties into a ‘school’ to which similar decisionmaking powers can be devolved. Full devolution to constituent organisational units is possible only in universities with a very powerful institutional culture that overcomes the obvious fissiparous tendencies inherent in such devolution (Williams 1992). One of the most successful English universities, Cambridge, which has for historical reasons always had a very diffused decision-making structure is beginning to question whether the university’s resources are used as efficiently as they ought to be. London University, which was also almost completely decentralised in its financial decision making, effectively split apart at the beginning of the 1990s and the remaining powers of the central university are vestigial. They would probably disappear altogether were it not for the fact that legally all the degrees awarded by the constituent schools and colleges of the university are London University degrees and several of the more powerful constituent colleges are considering the possibility of acquiring the legal right to award their own degrees. One problem, which financial devolution and the development of RAMs has highlighted, is that of overhead or indirect costs. It is in part a technical accounting matter and in part a question of values related to fundamental ideas of why a university exists as an institution. At the technical level, as in any integrated organisation, each of the production sub-units needs to cover its own direct costs, make a contribution to the common services of the institution as a whole – for example, the student registry, the finance office, information services – and contribute funds which can be used directly or indirectly for new developments. The traditional way of meeting such indirect costs, when the majority of funding came in the form of a single block grant from the government, was through ‘top-slicing’. Broadly this meant that the resources needed were top-sliced from the overall allocation before the remainder was allocated to the devolved cost centres. In a market-oriented university this procedure has two major disadvantages: first, that while the operational cost centres are subjected to rigorous financial discipline through the operation of the formulae there is perceived to be little such discipline for the central services; and second, that they are treated as free services by the operating departments, for example, books and journals are requested from the library regardless of cost or likely level of use. The most widely debated issue of this type is the use of physical space in the university. If classrooms and staff offices are ‘free’ there is an understandable incentive for each cost centre to demand and hold on to as much space as possible. Claims about under-utilised space are one of the main criticisms made by external critics of the management of universities. The most common successor to top-slicing is ‘taxing’, though it is rarely called that. A levy is imposed on all income earned by departments whether commercially

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or from central funding through the RAM. The simplest version is a standardised levy on all the income of each cost centre. This is little different from top-slicing in effect, but it does highlight another difficulty – different rates of usage of each service by different cost centres. A research group may claim that it makes little use of the student registry or undergraduate library while a predominantly teaching department in the humanities may question the need to pay for researchers to have access to each new development in information technology as soon as it comes along. An alternative is differential taxation, depending on the perceived intrinsic value to the university of any activity or its perceived ability to pay. Such differential taxation shades into charging for such services as library and computing. In London, for example, colleges now buy tickets for students and staff whose work requires them to use the university central library. The central university careers services are funded in much the same way. There are few British universities that have not had fierce debates about such matters during the past two decades, and many have had several versions of such tax/levy/user-charging models. Many of the routine activities now needed to operate teaching and research activities are the subject of user-charging procedures. This is one of several areas of management where new technology has helped to make internal markets work. Postage, telephones, teaching and research consumables such as paper and floppy disks can be charged to the individual or group who use them instead of being seen as a free bureaucratically managed service. As universities have come more and more to depend on diverse income generating activities to supplement and sometimes replace core income from government, the RAM has evolved into not only a set of resource allocation formulae, but a strategic management tool. It is both a taxing and a spending instrument. In addition to the technical accounting issues, the use of RAMs raises questions that go right to the heart of the nature of a university as an institution. Should ‘taxes’ be proportional or progressive? Should those departments able to earn large amounts of commercial income be expected to pay higher taxes than those with fewer opportunities to do so? How much should the former be expected to subsidise the latter? Should different kinds of income generating activity be taxed to the same extent or in the same way? Some are very close to the core ‘mission’ of the university, for example, fees from overseas students. These may need to cover their full costs in terms of all the university facilities used by such students. But should they go beyond this? What contributions should they make to the research of the university’s academic staff? If it is the case, as some claim, that research and teaching are completely symbiotic, the same proportion of their fees should be used to contribute to the research programme as the proportion of the total income of the university. But is this reasonable or plausible? Other income generating activities, for example, some consultancy activities or leasing out of physical facilities, may be seen to contribute little directly to the core mission of the institution. They may be worth doing only if they generate a surplus that can be used to support the mainstream academic activities. In these circumstances it is reasonable for a RAM to start from the position that the university as a whole should retain any financial surpluses. However, this

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immediately raises the problem of incentives, especially for academic staff. Why make an effort to generate such income if there are no benefits to the individual or to the group to which they feel primary loyalty? One solution is to establish semiautonomous university companies and consultancy units to undertake such work and transfer their ‘profits’ to the university. However, this disguises the incentives issue rather than solves it. There are numerous examples of ‘spin-off’ companies that have split off entirely from the university when their managers believed that the risks of failure were low enough to make it worthwhile retaining all the surpluses for the company rather than sharing them with the university. Intellectual property rights to discoveries made by those working for a university are probably the most controversial issue of all in this area. When a scientific discovery is poised to generate significant income there are usually at least three claimants to it – the individual researchers who made the discovery, the university that employed them when they were making it and the commercial company or companies that developed it from academic research to the product for sale. Traditionally in the UK the university has been squeezed between the first and third of these and many important discoveries have generated little or no income for the university26 where the discovery was made. However, a very important dimension of the market orientation of the university has become its assertion of its rights to a significant share of the income generated from the exploitation of the commercial rights to any intellectual property generated by its members. Cambridge University, probably the most prolific generator of commercially exploitable intellectual property in the United Kingdom, has been engaged in a fierce internal debate over this issue throughout 2003.27 The emergence of formula funding of universities by government and of RAMs for resource allocation within them are clearly indications of a very market-oriented approach to the funding of universities. However, it is very far from the widely quoted idea of a free market. Both externally and internally the operation of the market is very highly regulated through a range of auditing and monitoring procedures and through a large number of regulatory procedures which control staff salaries, admission of students and, most controversially at the time this is being written, tuition fees charged to undergraduate students. 6. THE STUDENT FEES ISSUE Until the 1940s, universities received about one-third of their income from student fees (Robbins Report 1963). From then onwards the level of fees was reduced and an increasing proportion of them was paid from public funds for reasons of social equity. By 1980, universities received less than 5 per cent of teaching income in the form of student fees and for all UK students this was paid from public funds as part of the system of financial support for students. This financial support was ‘means tested’, that is, the amount a student received depended on their declared family income.28 Some observers considered it anomalous that universities received public funds for the same activity through two different routes and recommended that fees

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should be consolidated into the general grant from government to universities and colleges. However, the existence of two funding streams was critical in 1989 when the government adopted a policy of low cost expansion of student numbers. Fees were raised to levels that covered about a quarter of the teaching costs of universities but they were still to be paid out of public funds, so there was no opposition from students or their families. Universities were allowed to retain all the income they received from any student they recruited on a fees only basis and the government undertook to meet the costs. The fees became in effect student vouchers, which appeared to have covered the marginal costs of teaching additional students in many universities. The effect of any additional students recruited was, however, taken into account in the formulae determining the following year’s core grant to universities (see above). Recruiting ‘fees only’ students drove down the average cost per student so any university that did not increase its student numbers seriously risked losing money. The consequence was an explosive expansion for six years as universities competed with each other to attract as many students as possible. All universities, even the most elite, were drawn into this scramble to some extent, although some chose to supplement their income in other ways, for example, by expanding the proportion of more profitable foreign students or postgraduate and research students.29 By 1995, the explosive expansion of student numbers had proceeded to such an extent that, for reasons indicated above, the government called an abrupt halt to it and several universities and colleges that had based their financial plans on continued expansion of UK student numbers (borrowing money to build residences for them, e.g.) found themselves in serious financial trouble. The debate about whether part of the cost should be borne by students themselves or by graduates who were on average receiving considerable financial benefits from higher education began in earnest. This threatened to become a major issue in the 1997 election and a National Committee of Enquiry into Higher Education was set up with a timetable that meant it would not report till after the election. The Dearing Committee’s report appeared in 1997 a few weeks after the new Labour government had been elected with a large parliamentary majority. The Dearing Committee recommended that the tuition fee component of teaching costs should be paid by graduates in the form of income contingent repayment of loans available to them as students. This was not, however, acceptable to the new Labour government, which replaced the Conservatives in 1997, in part because it was thought that allowing wealthier families to pay the fees for their children up front would be unfair to lower income families, while a complete loan scheme would not make additional money available to the universities for several years. Apart from relaxing the ceiling on student numbers it was willing to fund and exhorting universities and colleges to further rapid expansion of students from social groups hitherto under-represented, the new government continued the policies and practices that were encouraged by the 1988 and 1992 Acts. However, the 1998 Teaching and Higher Education Act moved a step further in the direction of a commercial higher education market by requiring the fees, which had previously been paid out of public funds, to be paid by the students themselves. This shifted

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about 25 per cent of the cost of teaching on to students and their families.30 The Act allowed universities to charge less than the prescribed tuition fee but not to charge more. This was also seen by many universities as a further move to tighten government control of the higher education market. Until 1998 universities had been able to charge any tuition fees they chose to impose, though in practice little use was made of this power: all universities charged their undergraduate students the fees that the government was willing to reimburse. As a result of the 1998 Act, universities are no longer permitted to determine the maximum fees they charge their UK and other EU students on first degree courses if they wish to continue receiving public funds. Fees are not related to the cost of courses or to the anticipated financial benefits of studying different subjects or at different institutions (see figure 1). Fees of students from families with low incomes are subsidised. The aim is to transfer some of the burden of further expansion on to relatively affluent households, without further increasing inequality in higher education provision. Figure 1. Percentage earnings premia associated with degrees from different universities 1995*

hourly earnings % premia

Percentage earnings premia associated wi degrees from 30 universities 1995

20 15 10 5 0 -5 -10 -15

<-------------- UNIVERSITIES ----------------

*

Compared with average earnings of graduates (after adjustment for subject and degree class, prior A level score and parental social class). Source: Conlon and Chevalier 2002

However, this has resulted in serious political problems for the government. Despite the introduction of fees paid by students, the universities and colleges remained seriously short of money and there was growing evidence of deteriorating buildings and staff recruitment difficulties in some disciplines that the government considered important for national economic success. In February 2003, the government announced its intention to permit universities to charge tuition fees of up to three times their present level but to allow students to borrow the money necessary to pay their fees and to repay them after graduation (at zero real rate of interest) out of subsequent income once their earnings rise above average levels

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(DfES 2003). At the time of writing, November 2003, the Queen’s Speech (the statement of government legislative plans during the year 2003–04) has announced the intention of passing a law in the current session of parliament to implement these proposals. This has raised enormous controversy in the popular press and the issue has become a political football. At one end of the spectrum many universities are claiming that a maximum fee of £3000 a year is insufficient to meet their financial needs or to allow a real market for undergraduate students. This attitude is broadly supported by the most popular universities, which are unlikely to have difficulty in filling all their available places even at very much higher fee levels. At the other extreme there are many people who believe that any fees for first degree studies are unethical and discriminate against students from less affluent backgrounds. This includes many members of the government (Labour) party. They are supported by the Liberal-Democrat centrist party, which has traditionally opposed all charges for education and has a policy of raising taxation to meet necessary costs.31 The debate was given a further twist in the summer of 2003 when the main opposition Conservative Party announced that it too would oppose the imposition of marketbased undergraduate fees when it is debated in parliament. The Conservatives propose to restrain public expenditure on higher education by cutting back on student numbers and steering more students into the less expensive and more vocational further education sector. At the time of writing, public opinion is almost equally divided on the issue and the outcome is very uncertain. This appears to be another higher education financial issue that will be decided on extraneous political issues, such as the halo effect of the controversy about the Iraq war, rather than a reasoned debate about the benefits and costs of alternative mechanisms of financing higher education. The personalities of the Prime Minister and his Secretary of State for Education may prove to be the deciding factor. They are very strongly staking their personal reputations on the equity of allowing universities to charge higher fees to wealthy and potentially wealthy students. Another dimension of the debate is that the proposal is accompanied by a further tightening up of government regulation of the higher education market. In order to reduce the likelihood of students from poor families being excluded from attendance at the most popular universities, the government is to appoint an ‘access regulator’ who will need to be assured that any university charging more than minimum fees to its undergraduate students has measures in operation to increase participation from social groups without a strong tradition of participation in higher education. However, despite what some observers see as unwarranted government interference in the free market, UK universities remain in many respects remarkably independent. They are able to take most of their own commercial and academic decisions. They can set their own fees for all but their bachelor degree courses. No formal qualifications are needed for entry to a higher education course. Each university takes its own decisions about which students to admit and is constrained only by its market image and a concern to ensure that students who are admitted have a good probability of completing their courses without too much trouble and within a reasonable period of time.

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7. THE BRITISH ‘MODEL’ OF MARKET-ORIENTED MASS HIGHER EDUCATION AND ITS CURRENT DILEMMAS The term mass higher education hints at the deskilled production line first celebrated in Adam Smith’s pin factory. However, despite criticism of commodification, and McDonaldisation (e.g. Hayes and Wynyard 2002), autonomous universities competing in a mass market may be the most effective way of avoiding standardised production line provision of academic services in the provision of mass higher education. The motor car industry has come a long way in both quality and variety since Henry Ford’s customers were able to have any colour so long as it was black and never has there been more variety or better quality to choose from, for those who like to eat in gourmet restaurants. In attempting to evaluate the effects of marketisation on British higher education, it is important to distinguish the effects of massification, financial stringency and marketisation and the interactions between them. In brief, the main effects have been: 1) much greater efficiency as measured by most quantitative indicators; 2) much expanded and less distinct boundaries of both ‘the university’ and ‘higher education’; 3) diversification with standardisation of processes and outcomes within similar categories of activity; 4) radical changes in management arrangements within higher education institutions. 7.1. Efficiency Unambiguous measures of efficiency in higher education are beset with problems arising from difficulties of defining output and quality. Any quantitative measures are, therefore, at best indicators of changes that appear to have occurred in relation to specific policy or management objectives. With this important proviso in mind there are many indicators that the unit of output per unit of input has increased considerably, at least in terms of overt public policy objectives, during the past 15 years. As figure 2 shows, the percentage of young people entering higher education in England rose from less than 15 per cent in 1980 to over 35 per cent in 2000. The White Paper of 2003 claims the proportion is now 43 per cent. In Scotland and Northern Ireland the figures were higher in both years. However, during the same period public expenditure per student fell by nearly 35 per cent in real terms. According to OECD figures the percentage of GDP devoted to tertiary education in the UK fell from 1.2 per cent to 1.0 per cent between 1993 and 2000 (OECD 1993, 2002, 2003). These falls did not, however, lead to a discernible loss of quality. Course completion rates remain high, despite the creation of a new group of universities in 1992, and the UK now has the highest age related graduation rate in the OECD area (OECD 2002, 2003). There is no quantitative evidence that the quality of these graduates has fallen. Recent figures suggest that the economic

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benefits of graduation remain high as figure 3 shows. At the same time research output remains high. The publications rate of academics in the United Kingdom and the citation rates of these publications in recognised academic journals remain among the highest in the world. Quantitative indicators leave little doubt that, from the viewpoint of immediate government policy, the changes have been successful. Figure 2. Age participation index1 Age Participation Index* percentage 45 40 35 30 25 20 15 10 5 0 1980

Women Men & Women Men

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

*Entrants to higher education as % of 18 y.o. population 1

Entrants to higher education as percentage of 18 year old population. Source: Bekhradnia 2003: 26

Figure 3. Private real rates of return to university level education 1999–2000

% rate of return

Private real rates of return to university le education 1999-2000

Men Women

20

1-Italy 2-Japan 3-Canada 4-Germany 5-Sweden 6-Netherlands 7-France 8-Denmark 9-US 10-UK

16 12 8 4 0 1

2

3

4

5

6

7

8

9

10

Source: Blondal, Field and Girouard 2002: 19

However, there are questions about the ‘quality’ of degrees. Although it is not often disputed that the standards achieved by the best graduates are at least as high as they have always been, there are concerns about the range of performance between the top and bottom graduates: between those who are immediately able to go on to successfully complete doctoral programmes for example, and those who just manage to scrape a pass at bachelors level. These are very difficult questions to answer especially since there are issues both of ranges of performance within single subjects and disciplines and between disciplines. But further work is clearly needed

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before we can confidently assert that the rapid evolution of a regulated market has improved efficiency without detrimental effects on quality. It is also relevant to note the considerable evidence that the efficiency improvements of the past two decades have been achieved at the expense of academic and other staff. According to Shattock (2001: 27) “the academic profession is fragmenting … [and] … mass higher education has greatly reduced the faculty’s political standing but … the university system has allowed itself to be downgraded by its own failure to recognise the implications of differentiation and the changed relationship between the state and higher education …” The removal of lifetime tenure in 1988 was an obvious explicit deterioration of conditions of employment but there have been many others. Over the 16-year period from 1986 to 2002 average academic salaries did not increase in real terms. Between 1991 and 1998 salaries of academic staff fell by 18 per cent compared with staff in the public sector and by 30 per cent compared with pay in the economy as a whole (Bett Report 1999). Other indicators of the extent to which academic staff have paid for the apparent efficiency gains are the increased workloads resulting from larger numbers of students per teacher and less security of employment. In 1998 nearly a quarter of the academic staff in the pre-1992 universities and approaching a half of those in the post-1992 universities were employed part time (Bett Report 1999). Claims of stress are widespread. From the viewpoint of society as a whole it is certainly true that the purpose of higher education is not to secure attractive lifestyles for its employees and certainly it was one of the claims of government in the 1980s that many of the resources devoted to higher education were used more to meet the demands of academic staff than to improve the education of students. It is also the case that in most disciplines at the end of the 1990s it was still possible to recruit academic staff with little difficulty (Bett Report 1999). However, at some point reductions in the net benefits of any profession affect rates of entry into it. This effect can be both quantitative and qualitative. Quantitatively it may become impossible to fill job vacancies. There is evidence that this point has already been reached in some specialist areas such as economics and electronic engineering, and in professional areas such as law and accountancy where the market demands of other employers are very high. But even more of a long-term threat to higher education, partly because it is more difficult to measure, is the maintenance of the quality of academic staff. If a sufficient number from the best of each generation of graduates do not become researchers and teachers in higher education there is a serious danger of slow long-term quality decline. The threat is insidious because its effects are slow and often not objectively measurable, at least not from one year to the next. 7.2. Boundaries of Higher Education The boundaries of higher education have expanded along three dimensions. a)

The creation of new universities out of former polytechnics and colleges took place within the boundaries of what was conventionally

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know as higher education but simultaneously there has been a substantial expansion of higher education courses, including many twoyear programmes, in lower level further education colleges. b) New subjects have entered the higher education curriculum, professional areas such as nursing and tourism and quasi-professional areas such as media studies. c) The traditional core missions of teaching and research have been supplemented by a wide range of activities that is in part similar to the longstanding public service function of United States universities but there can be little doubt that the massive expansion of such work in British universities in the past two decades has been primarily market driven. A process whereby an activity, for example links with local industry, is embarked on, initially as a way of generating income through research, consultancy or contract teaching, has gradually become mainstream, partly because of the need to offer career prospects for the staff who engage in it, so that by the mid-1990s the higher education funding councils recognised such work and introduced a new stream of government to underpin it.32 7.3. Diversification, Standardisation and Equity Despite the creation of a quality assurance agency, British higher education is not more standardised overall than it was in the 1970s. Twenty years ago I wrote “In universities students are offered effectively a three or four years honours degree or nothing” (Williams and Blackstone 1983: 44). A similar claim could not be made today. Yet the effects of the quality assurance movement have been to ensure that within each category of higher education activity the experience of students is under pressure to converge regardless of where they are studying the subject. Subject specific curriculum development groups are attempting to ensure that what is taught on undergraduate history courses is equivalent in all universities and the pressure is even greater where professional qualifications are involved. Teacher training courses, for example, have been virtually standardised across the whole of England. Standardised products often appear in a mass market because customers find them convenient. A mid-range family saloon meets a certain range of expectation with respect to engine power, safety and comfort, and a franchised chain of restaurants can be relied on to meet known quality standards. The more complex the product the more valuable to many consumers is the knowledge that there are guaranteed standards. A measure of standardisation in higher education is particularly useful to students without a family tradition of going to university or attendance at a secondary school with close links to several universities. The transaction costs of acquiring information about an individualised product are otherwise too high for many students. In most markets there is a range of standards between which customers can choose. Usually there is a trade-off between quality and price. In the United Kingdom, at least rhetorically, equity in higher education has tended to mean not

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that students should be aware of the implications of attendance at different universities but that they should have a broadly similar experience whichever higher education institution they attend. Many countries continue to have at least two explicit higher education product ranges. In the UK the binary system was abandoned and a unified system created because it was believed that two explicit product ranges conflicted with principles of equity if access to the preferred model was restricted. UK higher education policies in the 1990s have attempted to find solutions to the problem of coexistence of diversity and equity mainly through diversity within individual universities. The competitive financial mechanisms promoted by government have had the consequence of encouraging most universities to try to offer courses and research across a very wide range of subjects and types of student, partly because some activities – research, for example – are perceived as being potentially more rewarding to the university and its staff, than others. Many proposals for squaring the diversity-equity circle have been made in the past ten years and several were aired in the recent government White Paper (DfES 2003). One is for students to be well informed about the implications of particular choices and to pay, at least proportionately, for what they get. Another is for universities to cross-subsidise some students, or some activities, at the expense of others.33 Some universities may be able to succeed in one market niche, others somewhere else. Some may attempt to generate a financial surplus through ventures that are not part of the core university mission but can be used to subsidise it. Thus students at a university that makes profits from the conference trade, for example, are able to benefit from a more expensive range of services. However, as soon as either of these happens there is an inherent conflict between diversity and equity. Diversity and differentiation must mean that the missions and clientele of courses differ. Whatever the intentions, some students will get better financial deals than others or, at least, appear to do so. If the prices to students of all courses are required to be equal some will receive better value for money than others. If prices (tuition fees) are allowed to differ some will not be able to afford the higher priced options. If the government decides to provide extra subsidies to students in institutions that do not generate additional income this is a deterrent to enterprise and thus a net loss of income to the sector as a whole. 7.4. Changes in Management The explicit ‘marketisation’ of British higher education was largely a series of responses to immediate crises. Even the ‘National Committee of Inquiry into Higher Education’ (Dearing Report 1997) was mainly concerned with finding ways of dealing with immediate crises of funding and quality assurance. Counter-factual history is not a very useful exercise but it is of some interest to reflect on what might have happened if universities had not been autonomous institutions at the time of the 1981 cuts and subsequently had depended on prescribed line item budgets from government. What is not hypothetical is that when mass higher education and the worldwide growth of belief in markets as efficient

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ways of allocating resources and promoting economic advance led to the growth of the new public management concept of ‘steering from a distance’ by government, British universities were in a uniquely privileged position to take advantage of the new circumstances. However, whereas in many other countries steering from a distance involved loosening rigid state control mechanisms, in the UK the emphasis was on the strengthening of government instruments to steer the system. Among other measures this has involved attempts to strengthen the non-academic control of universities and colleges so as to lessen their ability to serve what the government has seen as academic self-interest. Many British universities are now large commercial enterprises and need, at least in part, to be run as such. Business acumen is now at least as important as academic expertise for their top managers. The changes that have been experienced over the past twenty years are obviously not unique to the United Kingdom. However, the British tradition of university autonomy elicited a particular kind of response when universities were subjected to severe financial reductions in the early 1980s. There has been, for example, no significant privatisation in British higher education because the universities have already had the legal status of private organisations, so any successful initiative by a private organisation can immediately be taken up by an existing university which has the advantages of existing market visibility. British universities have begun to experience the growth of entrepreneurial management styles. The rewards of financial success within the university have risen and the penalties of failure have become more severe. One indicator is the widening salary gap between those at the top of academic hierarchies and those at the base. Vice-chancellors’ salaries have risen very much more rapidly than average academic salaries in the last ten years. At the other end of the spectrum there has been a huge increase in part-time and short-term research and teaching staff, many of whom have poor pay and career prospects. Unsurprisingly many such employees are women. Underpinning the success of new public management were the dramatic changes brought about by the rapid developments of information technology. These had several effects on British higher education. One is the acceleration of changes that have been happening for the past three hundred years – the speeding up of global communications. Information about successful (and unsuccessful) innovations can be round the world in a matter of minutes. Evaluations of the causes of success or failure are usually not far behind. Information and knowledge are as susceptible to such developments as manual work was to the harnessing of steam, petro-gas and electrical energy in earlier centuries. This is especially relevant to higher education, the leading information industry. The worldwide use of the English language has given British universities particular opportunities and challenges in this area. It accentuates the need for them to respond rapidly to changing demands and they were early adopters of advanced electronic information systems. A second consequence of the rapid changes in information technology is simply that both collegial and bureaucratic management arrangements are too slow to keep pace with the pace of change. This is particularly relevant to higher education with its long production period and long-term effects throughout the lifetimes of its

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participants. Outdated universities can continue to do damage for many decades. It was the shock of the 1981 cuts and the realisation that they were not going to be reversed after the 1984 election that accelerated the growth of modern management information systems in most British universities. No longer was it possible for university managers to buy themselves out of difficulties when problems arose – easing out unsuccessful appointees, building or renting additional space when in other parts of the university lecture rooms were under-utilised. It was essential to foresee crises rather than simply reacting to them when they arose. The new information technology enabled senior managers to keep their fingers on the pulse of the universities while devolving most of the day-to-day decisions to those who were directly involved. Although this applied to nearly all areas of business activity it is particularly powerful in enterprises like universities where much of the expertise necessary for the successful operation of the organisation is near the base of the organisational hierarchy. In practice, almost certainly, the most important contribution as a proximate cause of the development of a tightly regulated market in British higher education, are the implications of information technology for management information systems. The development of high powered systems for the creation, transmission, storage and retrieval of management information has meant that governments and senior university managers have been able to avoid detailed administrative controls, while at the same time increasing their capacity to steer systems and institutions in directions indicated by their own policy priorities. The concept of controlling a system or organisation by the manipulation of management information is the main way complex systems like higher education can be ‘steered from a distance’. An essential feature of effective markets is the unimpeded flow of information and this is equally important to those who seek to regulate them. The sophisticated RAMs referred to in this chapter, which are at the heart of successful universities’ responses to financial stringency, government steering from a distance and producing usable financial surpluses from a diverse variety of income sources, would have been quite impossible without sophisticated computerised information systems. 8. CONCLUDING REMARKS This chapter has outlined the unfolding of a story with five interwoven strands: financial stringency, organisational responses to it, expansion, growing political concern about accountability for the use of public funds and information technology. Although the move towards monetary market forms of organisation and behaviour began early in the United Kingdom compared with other European countries, it is important to remember in the context of the history of British universities how recent it is. In 1989 the Higher Education Quarterly opened a themed issue on marketing higher education with the thought that: “This issue of the Quarterly will probably shock some readers. The idea of marketing a university is about as far from Newman and von Humboldt, or, for that matter Bloom and Bok, as it is possible to get” (p. 95).

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Certainly, in 1980, British universities already had most of the attributes usually deemed necessary for a system to be considered a market. However, it is difficult to link the British experience of markets in higher education to much of the theoretical literature on the subject. Market-like behaviour before the end of the 1980s was limited to competition for the best students, research recognition and for research grants. The rewards for success were higher prestige and more interesting teaching for staff, which can probably be linked closely to their research when the students are very academically able. However, universities were well funded by government with few conditions attached and they had little need to exhibit monetary market behaviour until they became really short of cash in the 1980s and expanded rapidly in the 1990s. When they started to behave like self-interested, market-oriented institutions seeking short-term profit maximisation, government unsheathed its latent powers to regulate them. Markets of some sort exist in any society. Even in the former Soviet Union, markets of some sort existed under the surface and were necessary in order to lubricate the frictions inherent in a centrally planned economy (Stiglitz 2003: 138). The important issue for public policy purposes is not the existence of a market but the extent and the way markets are regulated. What are providers and purchasers allowed and encouraged to do, how are they regulated and how are the regulations enforced? Undoubtedly, ideology underpinned the changes described in this chapter, both their formulation and their implementation. ‘Changing the culture’ was the watchword of many university managers throughout the 1990s. However, in the United Kingdom it was primarily an ideology that had its roots outside higher education and it was tempered by political necessities and opportunities. The initial driver was scepticism about the efficiency of centrally provided public services and a growing unwillingness, expressed through the adversarial political process, to pay taxes for them. In such a situation the explicitly economic market, usually expressed through the resource dependency inspired concepts of new public management, became an attractive way of providing a very wide range of services. But from the point of view of the rest of society, markets need to be regulated. Universities, which had always been legally and financially autonomous institutions protected by a very strong belief that this is an essential protection of intellectual freedom, were easy targets for public expenditure cuts and pressures to find supplementary and alternative sources of finance. They were also relatively law abiding and easy to regulate through setting conditions on government financial allocations to them. The substance of the story of UK higher education during the past quarter century is essentially one of university responses and government reactions to these responses. This is a rather different conclusion from that of Kogan and Hanney (2000: 32) who concluded from their important study of higher education reform that by the 1990s “universities had become unequivocally public institutions, and part of the public policy frame”. British universities are certainly part of the public policy frame, but that does not make them public institutions. Rather a market that was once generously financed from public funds and very lightly regulated has become one that is parsimoniously financed and subject to very many more conditions on the receipt of public funds.

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Bismarck once famously remarked that “war is too important to leave to the generals” and for similar reasons mass higher education is too politically important to leave to the professors, but in Britain at least, while central government determines policy, the strategy and tactics remain the responsibility of universities and their staff. Where there may be a difference with soldiers on the battlefield is that within the higher education sector there are very many conflicting values and interests. Economics and politics have been inextricably intertwined, but a British university can still opt out of any government measure it does not accept – if it is prepared to accept the financial consequences. NOTES 1

Though it is not clear to me that all the conditions are thought necessary for a market to operate. Indeed it is the claim of MacRae’s quotation at the top of the chapter that markets will operate in any community where individuals can make exchanges of goods, services or cash and it is the institutional and regulative structure that determines the way the market operates. Maybe it is a black market as in the former Soviet Union (see Stiglitz 2003); or it may be an almost completely free market in which each trader makes their own rules, for example, drug trafficking. In English higher education before 1980 and now, there was a market in which ‘A’ level scores (secondary school leaving certificate) were the currency with which students ‘bought’ places in the university of their choice and universities gained prestige (and more interesting teaching responsibilities) by recruiting the students with the highest scores (see Moore 1989). For an examination of the market implications of such a system see Dill (2003). 2 The legal basis of the most recent generation of universities, designated in 1993 out of former polytechnics and colleges, is Parliamentary Statute. For practical purposes the difference is small, though the academic staff of the ‘new’ universities have far less influence at the top levels of institutional governance than in the older universities (Shattock 2002). 3 The University Grants Committee, consisting largely of members of the academic staff of universities, advised the government on university needs and distributed government grants to universities. 4 For a useful account of the UGC in its heyday see Shattock and Berdahl (1984). 5 Although the generosity became somewhat less liberal after the world oil crisis of the 1970s and the emergence of some unemployment amongst recent graduates. 6 The Robbins Report was a major government sponsored enquiry into the future of higher education, which published its report in 1963. One of its prime recommendations was that in due course all major higher education institutions should become autonomous universities. 7 Tyrell Burgess (1982) described these as the ‘service’ and the ‘autonomous’ sectors of higher education: one driven by social and economic needs for qualified manpower, the other by the disinterested pursuit of ‘scholarship’. 8 Amongst a large literature on this ‘new public management’ in the UK, Power (1997) and Pollitt (1990) are widely cited. 9 One sign that this was a hasty and ill thought out measure was the fact that initially it was intended to apply to European Community students as well. It was only when legal action was threatened that it was accepted that the Treaty of Rome required all students from within the Community to be treated on the same terms as UK students. 10 A very readable, if somewhat polemical account of these events and their immediate effect on universities is given in Kogan and Kogan (1984). 11 A new specialist literature on higher education management began to emerge, for example, Lockwood and Davies (1985) and the Jarratt Report (1985). 12 One solution that has been fairly widely adopted, especially but not solely in the universities that were created after 1992, has been to create parallel career paths in which specialists in various forms of income generation can earn high salaries but not senior academic titles. In some cases they have been academic titles as well. It is thought that this increases their respect by the more traditional academic profession. A more mundane problem was tax status. Legally, universities and colleges are

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13 14 15 16 17 18 19 20 21

22 23 24

25 26

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charitable institutions. This gives them a variety of tax privileges provided they keep within the terms of their charitable status. However, if they start to make profits (and when does a surplus become a profit?) from their income generating activities, and particularly if this puts them into direct competition with private sector companies, it may be seen as unfair competition and can lead to large tax demands. There were economic reasons for this to achieve the necessary growth in staff numbers at reasonable immediate cost during the expansion of the late 1960s (see Williams, Blackstone and Metcalfe 1983). By this time, following the passage of the 1992 Higher and Further Education Act (which can be seen as an addendum to the 1988 Act), the great majority of students were in institutions called universities. There are four price bands: medicine, laboratory subjects, part laboratory subjects and other subjects. The research assessment exercises began in 1985 as part of the UGC’s attempt to justify the research funds received by the universities but not by the public sector institutions (polytechnics and colleges). Strictly speaking the score is 1–5 but level 3 is split into 3a and 3b and level 5 is supplemented by a 5* indicating that all the research in a department is deemed to have reached world standards. A score of 4 indicates that most of the research is deemed to have reached at least ‘national levels of excellence’. In 2003–04 the amount allocated for ‘business and the community’ funding in England is £58 million, compared with £1042 million for research and £3399 for teaching. A useful description of the current formulae is available from the Higher Education Funding Council for England web site at http//:www.hefce.ac.uk. The full story of these developments needs also to take some account of what was happening in the non-university sector up to 1992. The polytechnic and college sector was, until 1992, under the academic tutelage of the Council for National Academic Awards whose primary function was to ensure that the degrees offered in polytechnics and colleges were equivalent to those in universities. Some had more quality regulation than this to contend with. For example, teacher training departments were frequently and rigorously inspected by Her Majesty’s school inspectors. In other words, normative criteria are not considered so important in research: though the public policy debate makes much of the argument that it is not ‘fair’ that some students are taught in a research intensive environment while others do not have this advantage. In early 2000, a HUMANE (Heads of University Management and Administration Network in Europe) survey of the use of resource allocation tools in universities showed that 80 per cent of UK higher education institutions used RAMs in the distribution of their internal resources. The figure has almost certainly increased since then. Such as those about major new initiatives or appointment of academic and other staff. In some ways this issue is the sharpest example of the transition from a traditional view of the social role of the university and market economy view. Traditionally academic staff have competed to establish priority in the publication of the results of their research. That has determined their standing amongst their peers, their academic careers and eligibility for major scientific awards and prizes. Now a new consideration has appeared in many areas of scientific research. Results are not published until commercially exploitable aspects of them have been protected by patents. An interesting smaller scale example where practices differ between, and indeed within, universities is the copyright and right to royalties on books written while doing research in the university. While it is usual for authors to be allowed to retain royalties on books they have written, this practice is not universal and research staff who are not on permanent contracts, for example, sometimes find that their royalties belong to the research centre that employed them. Until 1976 the means-testing arrangements were such that students from very wealthy families were required to pay fees themselves that covered about 5% of their teaching costs. In that year, in a fit of misconceived equity, the Labour government removed this requirement so that no UK student had to pay any fees for first degree education. The whole issue of financial support for students can be seen as an aspect of the marketisation debate, but in this chapter it is considered only to the extent that it impinges on the issue of the income earned by universities and colleges. For example, at the London School of Economics, 65% of students now come from outside the United Kingdom and at Imperial College, London 30% of the students are doing higher degrees of some sort.

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30 The rationale for this decision, which had been much debated for at least five years (by economists for much longer) and recommended in principle, though not in the precise form the government adopted, by the National Committee of Inquiry into Higher Education (the Dearing Committee), was the pressing need of many universities for more money and the government’s perception of the political impossibility of raising the taxes necessary to provide it, and the acceptance of the evidence that a very high proportion of the beneficiaries from higher education were students from relatively affluent families, most of whom were able to use their university qualifications to earn well above average salaries. Students from poorer families continued to have fees paid from public funds. 31 In Scotland, where the Liberal Democrats formed part of the government coalition, fees were abolished in 2000, though a graduate endowment scheme, in which graduates are expected to reimburse the higher education sector as a whole after graduation, has much the same effect from the point of view of individuals. 32 At the national macro-economic level this stream of funding has been justified on the grounds that it facilitates technology transfer from the university laboratory to the production line, but there is little convincing evidence that many such activities actually do so. 33 For example, it is expected that the requirements of the ‘access regulator’ will be met by offering some kind of means-tested bursaries for students from less wealthy families. The cost of these will have to come either directly or indirectly from the students who are paying the higher fees.

REFERENCES Bekhradnia, B. 20 Years of Higher Education: Looking Back 10 Years and Forward to the Next Decade. Oxford: Higher Education Policy Institute, 2003. Bett Report. Independent Review of Higher Education Pay and Conditions: Report of a Committee chaired by Sir Michael Bett. London: HMSO, 1999. Bird, Richard. “Reflections on the British Government and Higher Education in the 1980s.” Higher Education Quarterly 48.2 (1994): 75–91. Blondal, S., S. Field and N. Girouard. “Investment in Human Capital Through Post-Compulsory Education and Training: Selected Efficiency and Equity Aspects.” Working Paper No. 333, OECD Economics Department, 2002, http://www.olis.oecd.org/olis/2002doc.nsf/linkto/eco-wkp(2002)19. Burgess, T. “Autonomous and Service Traditions.” In Wagner, Leslie (ed.). Agenda for Institutional Change in Higher Education. Guildford UK: SRHE, 1982, 70–79. Clark, B.R. Creating Entrepreneurial Universities: Organisational Pathways of Transformation. Oxford: IAU/Pergamon, 1998. Conlon, G. and A. Chevalier. Financial Returns to Undergraduates. London: CIHE, 2002. Dearing Report (National Committee of Inquiry into Higher Education). Education in the Learning Society, Report of the National Committee. London: HMSO, 1997. DfES (Department for Education and Skills). The Future of Higher Education (White Paper). London: HMSO, Cm 5735, 2003. Dill, David D. “Allowing the Market to Rule: The Case of the United States.” Higher Education Quarterly 57.2 (2003): 136–157. “Editorial.” Higher Education Quarterly 43.2 (1989): 95–98. Fisher, Shirley. Stress in Academic Life: The Mental Assembly Line. Buckingham, UK: SHRE & Open University Press, 1994. Hayes, Dennis and Robin Wynyard. The McDonaldization of Higher Education. London: Bergin & Garvey, 2002. HESA (Higher Education Statistics Agency). Resources of Higher Education Institutions 2001–02. Reference Volume, 2003, http://www.hesa.ac.uk/. Higher Education Funding Council for England. Funding Higher Education in England: How the HEFCE Allocates its Funds. June, 2003, http://www.hefce.ac.uk/Pubs/hefce/2003/03_29.htm#exec. Jarratt Report. Report of the Steering Committee for Efficiency Studies in Universities. London: Committee of Vice-Chancellors and Principals (CVCP, now UUK), 1985. Jarzabkowski, P. “Centralised or Decentralised? Strategic Implications of Resource Allocation Models.” Higher Education Quarterly 56.1 (2002): 5–32.

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Jongbloed, B. “Marketisation in Higher Education, Clark’s Triangle and the Essential Ingredients of Markets.” Higher Education Quarterly 57.2 (2003): 110–135. Kogan, M. and S. Hanney. Reforming Higher Education. London: Jessica Kingsley, 2000. Kogan, M. and D. Kogan. The Attack on Higher Education. London: Kogan Page, 1984. Lockwood, Geoffrey and John Davies. Universities: The Management Challenge. Windsor, UK: NFERNelson, 1985. MacRae, Donald. Weber. Glasgow: Fontana, 1974. Moore, Peter G. “University Financing 1979–86.” Higher Education Quarterly 41.1 (1987): 25–42. Moore, Peter G. “Marketing Higher Education.” Higher Education Quarterly 43.3 (1989): 25–42. OECD. Education at a Glance. Indicators 1993. Paris: OECD, 1993. OECD. Education at a Glance. Indicators 2002. Paris: OECD, 2002. OECD. Education at a Glance. Indicators 2003. Paris: OECD, 2003. Pollitt, Christopher. Managerialism and the Public Service: The Anglo-American Experience. Oxford: Basil Blackwell, 1990. Power, Michael. The Audit Society: Rituals of Verification. Oxford: Oxford University Press, 1997. Robbins Report. Higher Education: Report of the Committee Appointed by the Prime Minister Under the Chairmanship of Lord Robbins 1961–63. London: HMSO, Cm 2154, 1963. Shattock, M. “The Academic Profession in Britain: A Study in the Failure to Adapt to Change.” Higher Education 41.1–2 (2001): 27–47. Shattock, M. “Re-balancing Modern Concepts of University Governance.” Higher Education Quarterly 56.3 (2002): 235–244. Shattock, M. “University Makeover.” Education Guardian Weekly. 9/12/03, http://education.guardian.co.uk/egweekly/story/0,5500,1102383,00.html. Shattock, M. and R. Berdahl. “The British University Grants Committee 1919–1983: Changing Relationships with Government and the Universities.” Higher Education 13.5 (1984): 471–500. Stiglitz, Joseph. Globalisation and its Discontents. London: Penguin, 2003. Williams, G. Changing Patterns of Finance in Higher Education. Buckingham, UK: Open University Press, 1992. Williams, G. and T. Blackstone. Response to Adversity. London: SRHE Research into Higher Education Monographs, 1983. Williams, G., T. Blackstone and D. Metcalfe. The Academic Labour Market. Amsterdam: Elsevier, 1983.

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RAPID EXPANSION AND EXTENSIVE DEREGULATION: THE DEVELOPMENT OF MARKETS FOR HIGHER EDUCATION IN THE NETHERLANDS

1. INTRODUCTION This chapter applies the concepts about markets, market failures and market mechanisms to the higher education sector in the Netherlands. Historically, the Dutch case has always been a fitting addition to comparative higher education studies and it does so again here by offering the reader a fine example of ‘marketisation’ in practice. A number of sweeping legislative acts passed between the mid-1980s and mid-1990s effectively transformed the Dutch higher education system from a state-controlled group of less than a dozen universities to a largely autonomous and vastly expanded two-tier system where the government’s role is best embodied in the automobile roundabout metaphor that Ben Jongbloed presents in his chapter in this volume. When this philosophy governing the relationship between higher education and the state began shifting towards ‘steering at a distance’ (OCW 1985) in the early-1980s, few could have predicted that nearly 150 years of state control was about to be almost entirely cast aside in favour of a much more open higher education marketplace. The system as it stands today is divided into two tiers: a university sector that consists of 14 institutions1 and a professional education sector (Hoger Beroepsonderwijs) which consists of 56 institutions or, as they are called in the Netherlands, hogescholen. For the purpose of comparison, in 2001–02 there were a little less than 324,000 students in hogescholen and approximately 173,000 students enrolled in universities. The professional education institutions are a relatively recent addition to the Dutch higher education landscape; as late as the early-1980s they essentially constituted a mixed bag of around 350 very small, highly specialised vocational schools that were still classified by the government as secondary education providers. It was not until 1985 that they officially became part of the higher education sector. In 1987 a substantial number of mergers took place that reduced their numbers to 85 and created a number of new hogescholen that were larger, at least in terms of enrolments, than several of the existing universities. Today the curricular and programme diversity of the hogescholen varies from large institutions offering bachelor- and masters-level degree programmes in most major academic 271 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 271–290 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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fields to smaller institutions specialising in the provision of arts, education and health-related or technical programmes. Unlike the universities, hogescholen do not provide postgraduate education programmes. In comparison to other countries, the traditional divide between public and private higher education in the Netherlands is rather hazy. When looked at by form of organisational control, the distinction is quite clear: public institutions are those established by the state, and private institutions are those founded by religious and other non-denominational organisations. However, in 1970 and after decades of debate, the view that the state should financially support all education providers and not just public institutions firmly took hold and privately organised higher education institutions began receiving the same levels of government financial support as their public peers. This policy still remains in force today and as a result the higher education system is often referred to as the publicly funded system, even though only two of the 56 hogescholen and 9 of the 13 universities are publicly controlled.2 Next to these institutions is a much smaller and more narrowly defined group of universities and hogescholen that can be categorised as the truly private sector of Dutch higher education. These providers have the legal authority to grant academic degrees but, importantly, do not receive any public subsidies for education. The private universities include five very small theology schools, a ‘humanistic’ university and the University of Nijenrode, which only provides postgraduate business education. As of 1999, these seven ‘universities’ combined enrolled approximately 1240 students. There are also between 50 and 60 private hogescholen. These institutions tend to have very small enrolments with disproportionately large numbers of part-time students and they frequently offer programmes delivered as short courses. It is not known precisely how many students are actually enrolled at any given time but some estimates place the total number at around 35,000 (Jongbloed and Salerno 2002). Much of what defines the government’s relationship with higher education is rooted in one important piece of legislation that this chapter will repeatedly make reference to: the Higher Education and Scientific Research Act of 1993 (wet op het hoger onderwijs en wetenschappelijk onderzoek or WHW). This act coalesced some 17 different areas of higher education legislation, from public financing and quality assessment to the integration of all laws separately governing the different university and HBO sectors, into one streamlined regulatory framework. The WHW’s origins are traceable to the government’s 1985 Higher Education Autonomy and Quality (Hoger Onderwijs: Autonomie en Kwaliteit or HOAK) memorandum, which was the first official white paper to espouse a largely hands-off approach to direct government involvement in Dutch higher education. An important piece of policy that followed the publication of the HOAK memorandum and preceded the passing of the WHW was the establishment of a planning cycle that would serve as a platform for discussing national higher education objectives and subsequently developing a unified strategy to achieve them. The results of these planning efforts are documents referred to as Higher Education and Research Plans (hoger onderwijs en onderzoek plan or HOOP). Begun in 1987, these plans were updated every two years until 2000 when they moved to a four-year cycle. The HOOP documents are both forward and backward

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looking; using institutions’ annual reports they review what universities and hogescholen accomplished as well as how funds were actually spent and then outline a new set of national education and research objectives in light of contemporary economic and social conditions. The general theme of the HOOP 2000 plan, for example, was to further increase higher education institutions’ autonomy and to give them a greater role in determining what education objectives they would seek to pursue. In a sense, the WHW represented the policy implementation phase of a sevenyear effort to build a much simpler, yet more comprehensive, higher education framework whose cornerstones were regulatory flexibility and greater institutional autonomy. It greatly reduced the existing number of statutes and regulations3 and simultaneously tied the new legislative framework to the HOOP cycles, whose consultative process between higher education institutions and the Ministry of Education has given institutions more of a direct role in shaping the rules under which they operate. A particularly relevant aspect of the WHW is that it makes explicit three guiding principles for where and when government intervention in higher education affairs should take place: • The government should intervene to prevent undesirable developments only where self-management by the institutions is likely to have unacceptable results. • Government intervention should primarily take the form of remedying imperfections in the system ex post. • The instruments at the government’s disposal should be characterized by a minimum of detailed regulation (OCW 1993: 7 of the annex).

These principles provide a nice starting point for examining Dutch higher education markets and market failures because they succinctly clarify the broader goals policy makers had (and still have) in mind when formulating or implementing policies. In this respect it simplifies our analysis since we do not have to speculate as to the government’s intentions or motives. Furthermore it provides a way to evaluate whether or not the policies and regulations in place are indeed consistent with the ideology on which they are supposed to be based. The rest of the chapter proceeds in a fairly straightforward fashion. The next section documents the rules and regulations influencing each of eight provider and consumer freedoms (see also the Introduction and Jongbloed in this volume). Then, a much broader view is taken through an exploration of how government intervention has worked (or in some cases not worked) to redress market failures or imperfections stemming from factors like information asymmetry and externalities. 2. THE EIGHT MARKET CONDITIONS IN THE NETHERLANDS The first freedom is that of new providers to enter the higher education market. The guidelines and regulations concerning the establishment of new higher education institutions in the Netherlands are laid down in the WHW. To become or remain a publicly funded higher education provider, institutions must demonstrate that they satisfactorily comply with a wide range of provisions related to areas of:

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quality assurance planning and funding personnel study programs offered registration, teaching, examinations and the awarding of doctorates educational entry requirements students and their legal protection administration and organization (OCW 1993: 9 of the annex).

Because the names of all publicly funded universities and hogescholen are actually listed in the WHW, establishing a new institution requires amending the current law. The act also makes provisions for private institutions to become approved higher education providers. Such institutions are not eligible for public subsidies to support their operations but they are legally entitled to grant state-recognised academic degrees. In order to obtain ‘approved’ status, an institution must satisfactorily demonstrate to the Ministry of Education that they adequately comply with all provisions in the WHW related to: 1) quality assurance; 2) educational entry requirements; and 3) registration, teaching, examinations and the awarding of doctorates (OCW 1993: 10 of the annex). In addition, approved providers are also required to submit annual reports on the institution’s activities and the results of all quality assessment exercises to the Ministry of Education. If an approved institution fails to meet these requirements or the Ministry deems that the education quality provided is perennially inadequate, then the institution may have its approval status revoked. The second freedom is the producer’s flexibility to specify the product. Until this year, the regulations governing the establishment of different study programmes were explicitly defined in the WHW. No institution could introduce a new programme without prior approval from the Ministry of Education and proposals from both publicly funded and approved institutions had to be reviewed by an advisory committee, the Advies Commissie Opleidingen (ACO). The ACO’s task was to evaluate the merits of the proposed programme in light of a number of factors including the extent to which it fit the government’s macro-efficiency objectives4 and any unique attributes of the proposing institution. The Minister of Education usually followed the judgment of the ACO in which case the programme would qualify for public funding (if it came from a publicly funded institution) and enrolling students would be eligible to receive financial aid. Where the ACO chose not to endorse a proposed programme, the Minister still retained the power to approve it.5 An important safeguard built into the WHW was a rigorous procedure for removing study programmes. Before closing a programme the Education Minister had to announce his intentions of doing so in the next HOOP thus forcing him to first consult with several different government bodies, including the Education Council (Onderwijsraad) and parliament, before a final decision was made. Institutions in danger of losing a programme were also required to receive an official warning and at least three months to rectify the situation or consult with the Minister directly. As a result, the procedure for actually closing a study programme often took several years.6

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With the widespread introduction of bachelor/master degree programmes in 2003, the responsibility for programme registration shifted to the newly established National Accreditation Organization (NAO). Institutions must now request programme registration and submit to the NAO a profile description of the programme, financial overviews and staff descriptions. They must also indicate whether it is a completely new programme or one already being offered at another institution (Jeliazkova and Westerheijden forthcoming). This purely factual view on the extent to which higher education institutions can establish new programmes only presents part of the picture. Within any given programme there is considerable room for customisation because the WHW grants institutions broad powers to design their own curricula and to determine both the type and level of resources allocated to different academic programmes. As such, once a programme is officially recorded in the government’s Central Registry of Higher Education Programs, institutions still retain a high degree of flexibility to mould the programme to their student or regional labour market needs. The third freedom for producers is their flexibility to use available resources. Over the past 15 years, the Dutch government has progressively devolved nearly all responsibility for human resources management to higher education institutions in both sectors. The process effectively began in 1989 with the establishment of collective bargaining for all public sector employees and was later tailored to the higher education sector in a 1994 amendment to the WHW. This latter piece of legislation specifically transferred most decision making over personnel management to the institutions, with the exception of what De Weert (2001: 198) calls the primary protocols: job evaluation, salary scales and standard working hours. In 1999 these remaining responsibilities were also transferred to the higher education institutions. Today, the universities and hogescholen negotiate with respective trade unions through intermediate bodies7 to develop national collective labour agreements. A similar, albeit more abrupt, deregulation of publicly funded university and hogescholen capital took place in the mid-1990s. In 1994 all hogescholen were required to purchase their land and buildings from the government. Though this entailed substantial borrowing from the private market, each hogescholen received (and still receives) supplementary funding as part of their core government education appropriation to help subsidise repayment. In 1995, the ownership of all university land and buildings was also transferred to the institutions but in this case at no cost. Along with this ‘gift’ the government also increased each university’s block funding with supplementary funding to help institutions cover maintenance and other capital costs.8 Where financial resources are concerned, the Dutch government allocates core funding for education provision in block grants. Though the nominal amount of each institution’s grant is formula based and strongly slanted towards such factors as graduation rates and student enrolments, no restrictions are placed on whether funds must be used for any particular activity (e.g. teaching) or internally allocated to particular academic departments, faculties or institutes.9 The fourth freedom for producers is the flexibility to determine prices. Dutch higher education institutions are permitted to operate in many external markets.

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Regulations are for the most part absent, leaving universities and hogescholen relatively free to set their own prices and engage in a wide range of incomegenerating activities. They may go out into the capital markets and take up private loans or seek out donative resources to enhance endowments. In addition, institutions are also free to develop and maintain business incubators, engage in contract teaching,10 forge university/industry research partnerships and do private consulting. The WHW stipulates that each year the Ministry of Education sets the tuition rates charged to full-time students in both universities and hogescholen for the coming year. Since 1993 the rates have been identical for students enrolling in either type of institution and as of 2002–03 it was €1396. It is also a uniform fee, which means that both first degree and postgraduate students pay the same rate. Only where students are part time, come from non-European Union countries or have exceeded the nominal study duration period for their particular programmes are higher education institutions permitted to establish differentiated fees. Though the latter two are officially in place, there is little data to document the extent to which such practices occur. The part-time student fee policy was first implemented in 1996–97. Since its introduction hogescholen have continued to charge both parttime and full-time students identical rates while in the university sector a considerable degree of tuition differentiation has occurred. By the 1999–2000 academic year, four of the 13 universities were charging part-time students as low as €840 while two were charging up to €1089 (Canton and Jongbloed 2001). The WHW does not regulate tuition for approved higher education institutions.11 The first consumer freedom is the individuals’ freedom to choose a provider. In general all higher education institutions have open admissions policies. Enrolment in hogescholen is open to any students holding a HAVO, SBO or VWO certificate.12 The only exception to this rule is in cases where a hogescholen degree leads to particular professional qualifications, in which case institutions may impose additional entrance requirements.13 Students who obtain a pre-university secondary education certificate (VWO) are automatically entitled to enrol in any Dutch university. University admission is also open to those already enrolled in hogescholen provided students have received their hogescholen propaedeutic certificate, or have already completed a hogescholen degree. General exceptions to the open admissions system can be found in three numerus fixus decrees. The program fixus is in place where student demand is perennially greater than what the Dutch labour market is capable of supporting. In the universities this applies primarily to health-related programmes like medicine, dentistry and veterinary science but for architecture as well. In the hogescholen these programmes include various types of therapy programmes, tourism and journalism. The number of students allowed to enrol each year is determined by the Ministry of Education in consultation with various professional organisations in these fields. The other two mechanisms are known as the capacity fixus and the institutional fixus, each of which is in place where student demand exceeds national or institutional teaching capacity. Since 1999, any student scoring above a particular threshold on their secondary education qualifying examinations is automatically entitled to enrol in fixus-related

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programmes. All remaining students are selected primarily through a weighted lottery system where weights are determined by the scores students receive on their secondary education qualifying exams. Since 2000 a more decentralised selection procedure has also been in place to give individual institutions the opportunity to identify students with special talents or motivations. Up to 10% of an institution’s numerus fixus places may be allocated in this way. The second consumer freedom is the extent to which individuals can choose the product. On a macro level, students’ freedom to choose an educational product is strongly tied to the institutions’ freedom to provide various academic programmes. Open admissions coupled with geographically dispersed higher education institutions mean that in most cases if students want to enrol in a particular programme then the only real barrier they face is their personal willingness to possibly move to a different part of the Netherlands for their studies. On a micro level, the freedom to choose an educational product is akin to selecting which classes are taken as part of a recognised degree programme and here greater restrictions are naturally in place. The WHW gives individual institutions the right to structure their degree programmes as they see fit which means that the decision over how rigorous any curriculum may or may not be varies even within particular universities or hogescholen. In some fields, such as engineering, the curriculum is generally well defined and highly structured so students have little room for choosing which classes they would like to take. In other cases, like public administration programmes, required classes may constitute only 65% of the curriculum, leaving students considerable freedom to choose from a set of elective classes to finish their degree requirements. The WHW also permits students to develop personalised study programmes. Individuals are required to produce a proposed plan and then submit it to the most ‘relevant’ institutional examination board for approval. All higher education institutions are required to establish such a board for each study programme they offer. If the board approves the proposal then it is deemed an official programme and is subject to all regulations governing institution-registered study programmes. The third freedom might be called freedom of information as it relates to the asymmetries that limit students’ abilities to make well-informed decisions. Efforts to reduce information asymmetry are evident in quality assurance mechanisms, policies that promote greater transparency and even third party rankings of institutions and/or departments.14 Until quite recently the Dutch government approached quality assurance in both publicly funded and approved higher education institutions by requiring each to conduct their own internal evaluations (through the use of external visiting committees) and subsequently demonstrate that programme quality remained at a level acceptable to the Ministry of Education. Government subsidies were not tied to the results of these evaluations, though an Inspectorate for Higher Education was in place to monitor whether institutions pursued any recommended improvements and whether visiting committees followed pre-agreed procedures and quality measures. All universities were required by the Inspectorate to develop action plans for underperforming programmes. If these plans were neither developed nor acted upon, the Ministry of Education issued the institution a warning that the programme in question would be dropped from the Central Register if changes were

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not made. By most accounts, this was a rather successful tactic, with only one warning issued to a university and less than a handful to various hogescholen throughout the 1990s (Boezerooy 2003: 60). Coinciding with the implementation of the new bachelor/master degree structure, a new umbrella accreditation system came into effect in 2003. All academic programmes at publicly funded and approved higher education institutions now have to undergo NAO accreditation in order for their degrees to be officially recognised, for their students to be eligible for various forms of student support, and for the programmes themselves to be eligible for state subsidies.15 Efforts to promote transparency are also outlined in the WHW. All higher education institutions are required to submit annual reports that not only detail budget activities but also “developments in the shaping of teaching and research policy at the institutions concerned”. In addition, all institutions are required to draw up biennial institutional plans, which must be made available to the public, that “contain the substance and details of the institution’s intended policy” (OCW 1993: 11 of the annex). The last freedom is more of a condition: the extent to which individuals pay prices covering the producer’s actual costs. With a political system that has historically leaned to the left, it is not surprising that the Netherlands has always been of the mind-set that the social benefits of an educated society clearly justify substantial financial support for education. As a result, the goal of ensuring access has historically preempted efforts to make students pay any substantive amount for the attractive private returns they derive. This view has been perpetually reiterated in the Dutch governments’ HOOP documents, though the figures tell the story much more succinctly. If measures like tuition as a percentage of direct education costs are examined, it can be seen that since the early-1990s the ratio for university students has hovered rather steadily at approximately 17% and for hogescholen students only slightly higher at around 21%. Tuition has increased steadily since the mid-1980s and often beyond the inflation rate though these rises have largely been compensated for by generous financial aid packages. The establishment of the Student Finance Act (WSF) in 1986 afforded each full-time student a basic grant, the possibility to obtain a means-tested supplementary grant and the ability to secure student loans. While the basic grant has steadily given way to larger supplementary grants and an increased reliance on student loans, by 2002 the average net tuition for an academic year was €1185 for students receiving only a basic grant and €968 for students also receiving supplementary grants (Boezerooy 2003: 43). 3. DISCUSSION It can be seen that higher education in the Netherlands has simultaneously undergone rapid expansion and extensive deregulation in a remarkably short period of time. As late as 1976, the Dutch system still consisted of only a dozen universities and practically every aspect of their operations was subject to strong government control. Not thirty years later, the same system now includes over 70 publicly funded institutions grouped into two distinct tiers and, as the last section clearly

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shows, control has largely shifted to the institutions. The government’s role today is no longer that of a social planner but more like a parent whose task is to set parameters on the environment and only to penalise, or interfere, when limits are exceeded. The relatively short time period in which Dutch higher education markets have ‘opened up’ naturally raises questions over whether potential market failures have counterbalanced the economic gains policy makers sought to achieve. Higher education does not fit very neatly into the traditional economic theories of firm behaviour or, for that matter, analyses of the markets in which they operate. Gordon Winston (1997) summed it up nicely when he asked, “Why can’t a college be more like a firm?” There he suggested that many of the factors giving rise to market failures, including information asymmetry and idealistic objectives, are not only prevalent, but actually play a substantive role in shaping university behaviour. My point is that market failures and imperfections are unavoidable and to be expected. As a result, any interventions put in place to rectify such situations should not necessarily be immediately cast in a negative light. The critical question is not whether higher education markets look like perfectly competitive markets but instead whether the policies or regulations put in place are both warranted and fair. In light of the findings from the last section, it seems that, where the Dutch government continues to intervene in the functioning of higher education markets, the policies and regulations employed are well intentioned and carefully designed to redress market failures or imperfections arising from information asymmetry and the presence of externalities. Below this idea is explored in greater detail by looking at four such examples and a discussion on how government intervention has worked, or in some cases not worked, to promote smoothly functioning markets is provided. 3.1. Barriers to Entry Barriers to entry are indeed problematic for the effective functioning of perfectly competitive markets but they are far less threatening where higher education is concerned because they work to remedy information asymmetry problems that are inherent to buying an education. Individuals are not in a position to weigh the value of the education they purchase against its costs until long after it has been purchased. In the absence of barriers to entry like government standards or regulations on personnel, degree examinations and student rights, education providers hold a competitive advantage over consumers that produces both opportunity and incentive for less-than-reputable higher education providers to enter the market and sell a low quality education for a disproportionately high price. There is also an efficiency argument for governments to establish institutional and programme barriers to entry. If we think of higher education institutions as corporations then governments can simply be seen as the principal shareholder; they make substantial financial investments of scarce taxpayer funds that produce dividends in the form of a more stable economy, social structure and stock of highly productive labour. Like any shareholder, they have a vested interest in seeing that

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public money is not spent on institutions or programmes whose outputs generate considerably lower returns for the same cost. Thus the Dutch government’s imposition of such regulations on the establishment of new higher education institutions (and for that matter the establishment of degree programmes) is warranted: it protects students from illegitimate providers looking to take advantage of their inability to weigh education costs against the value of what they are purchasing. At the same time, barriers to entry also work to ensure that governments get a better social rate of return on their investment. By forcing providers to meet some set of minimum standards as a precondition to granting state-sanctioned academic degrees, they signal to students that the education they are purchasing will have some value. The follow-up question is whether barriers are too excessive and keep potentially legitimate providers out of the market. In theory, approved (i.e. private) higher education institutions in the Netherlands are not required to meet any academic standards beyond those imposed on publicly funded institutions and they have the same freedom to establish new programmes. Also, approved institutions do not have to meet the personnel, administration and organisation requirements, or planning and funding provisions demanded of publicly funded institutions. What is more, in some instances their denominational status allows them to usurp macro-efficiency criteria and offer duplicate programmes because of the unique student population they serve. At first glance this seems as though it would encourage private providers to enter the marketplace and give rise to a more competitive private sector than that which presently exists. The chapter will return to this issue later to show how other forces have worked to counteract the potential gains from this policy. Where barriers to entry do seem to have benefited some providers more than others is in patterns of new programme establishment between universities and hogescholen. From the mid-1980s until the early-1990s, both sectors saw a large number of new academic programmes created. However, after the passage of the WHW in 1993 the HBO-Raad16 became increasingly concerned that expansion had proceeded too quickly and was endangering the hogescholens’ relatively new status as legitimate higher education providers. In order to strengthen the programmes already in place, the HBO-Raad, in collective agreement with the hogescholen, imposed a three-year moratorium on establishing any new programmes.17 With no competition from the hogescholen, the universities were ideally positioned to establish new programmes as they saw fit. In the end, though, this did not occur. The large number of new programmes established earlier on, coupled with the macro-efficiency objectives outlined in the WHW made it extremely difficult for universities to get new programmes approved. During this period, the ACO rejected some 75% of all new programme proposals. One factor eventually gave hogescholen a competitive advantage over universities and that was their different mission. By the latter half of the 1990s, ACO was giving less weight in its proposal evaluations to aspects of programme quality and more weight to whether or not macro efficiency would be harmed. Thus, when the self-imposed programme moratorium was lifted in 1997 a second wave of hogescholen proposals commenced but, unlike the earlier expansion, this time it was characterised by a large number of applications for vocationally oriented

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programmes. Many of these proposals were very similar to established programmes, having just enough superficial differences to justify their implementation. In fact, they were so vocational that some questions were raised as to whether these programmes should really even be regarded as ‘higher’ education.18 Nonetheless, their ability to demonstrate that such programmes were indeed different was sufficient enough to pass macro-efficiency criteria, which allowed the hogescholen to continue the rapid programme expansion they had begun in the late-1980s and carry it through to the present. In sum, the regulations governing institution and programme establishment in the Netherlands were designed to create a level playing field for all higher education providers but they have not necessarily worked as intended. The rapid increase in programme establishment prior to the implementation of the WHW limited universities’ opportunities to create new programmes when the hogescholen voluntarily stepped back to consolidate and regroup. Later, when the moratorium was lifted, the hogescholen were able to capitalise on ACO’s changing criteria in a way that universities could not, simply because their mission allowed them to create a number of marginally differentiated vocational programmes. The need to correct information asymmetry market failures through regulation can also be used to help explain the recently revised quality assurance policies. The old programme recognition and quality assurance structures were put in place to accommodate the needs of the Netherlands’ internal labour markets. However, one of the main reasons many European countries are in the process of moving to the bachelor/master model is to meet the anticipated needs of a more integrated European labour market. Programme and degree uniformity is expected to increase human capital mobility by reducing the prevailing uncertainty over whether the value of a degree from the Netherlands is more or less than a comparable degree in France or Germany. In other words, the market failure created by information asymmetry does not change but the population of individuals that quality assurance mechanisms seek to protect will. The new accreditation policy that ties both programme recognition and public funding to NAO decisions can simply be seen as an international extension of the existing internal framework. If students outside the Netherlands are going to want to study in Dutch institutions then they will first have to be convinced that the degree they would obtain has value in other European countries. 3.2. Tuition Fixing The practice of not allowing producers (institutions) to set their own price schedules (tuition) is fundamentally at odds with the economics of a smoothly functioning competitive market. In light of policy makers’ efforts to create a market-oriented higher education system it is interesting that this one artefact from the old system is still in place. No clearly defined rationale to support such a policy is readily forthcoming but the most likely explanation has strong political and cultural undertones. A long history of liberal politics in the Netherlands has fostered a strong public belief that education is a public good and should therefore be heavily

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subsidised by the government. Generations of students have paid very low tuition fees and, though the cost burden is slowly but steadily shifting in the direction of the student, any efforts to make substantial changes have met with stiff public resistance, as the revolts in the mid-1990s clearly reveal.19 If we look to the HOOP documents and jointly consider fixed tuition in conjunction with open admissions and financial aid policies, it would seem that the Dutch government views any losses in market functionality as being more than compensated for by redressing market failures associated with distributional inequities and promoting access. While correcting such failures is a legitimate pursuit, and the idea certainly holds intuitive appeal, the problem is that the literature on the topic provides practically no empirical evidence to support the idea that, at least in the Netherlands, lowering tuition increases access.20 Instead, not allowing institutions to flexibly determine their own tuition schedules seems to be an excellent example of what Wolf (1993) called a non-market, or government, failure. First, while setting low tuition may correct one form of distributional inequity (by helping to ensure that students from lower income families are not priced out of the education market) it creates another by unfairly subsidising students in costly programmes to a greater extent than those in other programmes. Allowing students in the physical sciences, whose laboratory-based and capital-intensive programmes are considerably more expensive to provide, to pay the same tuition as students enrolled in low-cost social sciences or humanities programmes means the government is subsidising a greater percentage of some students’ education costs than others. Such a subsidy has neither a merit nor need-based function; the benefits simply accrue to those individuals having preferences for such programmes.21 While some economists have questioned why widespread uniform pricing is still so pervasive, even in countries like the US (Rothschild and White 1993), in countries like New Zealand the government recently established tuition minimums and maximums for a large number of academic programmes and subsequently gave higher education institutions the freedom to charge students differential tuition fees so long as they did not exceed the parameters laid out by the government. In the Netherlands, being able to charge such fees has become an increasingly poignant issue, especially among university rectors (Boezerooy 2003). Second, if we accept that commonly held belief that prices (tuition) act as one signal of institutional (or programme) quality then the use of uniform tuition rates also generates information asymmetry by making it more difficult for students to properly discriminate between institutions or programmes. The problem is actually compounded in the Dutch case because tuition rates are not only the same across different universities and hogescholen but they are also the same in both sectors. Interestingly, this trans-sector price uniformity was only implemented in 1993. Before that time, the Ministry of Education used to set different tuition rates for each of the two sectors. Finally, some research suggests that institutions use their wealth to adjust the net price students are required to pay in order to draw higher quality students and indirectly raise institutional prestige. A growing body of economics research on higher education institutions in the US (e.g. Epple, Romano and Sieg 2001; Winston 1999; Hoxby 1997; Rothschild and White 1995) argues, among other

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things, that institutions capable of securing high quality students are in a much stronger position to leverage their research capabilities by substituting faculty involvement in education with students educating each other (in the literature this is known as peer effects). While open admissions policies and the inability to set tuition rates have historically hindered the rise of an institutional ‘elite’, there is anecdotal evidence that some Dutch universities are now working harder within the existing framework to attract high quality students. Perhaps the best example of this is the recent establishment of the ‘University College’ located at the University of Utrecht. Similar in character to the small and elite liberal arts colleges in the US, approximately 600 students live on campus in small residential communities designed to promote peer interaction. The curriculum relies heavily on small class sections (each student is also assigned a personal tutor at the beginning of the year) and is structured to give students a classical education more in preparation for graduate study than for a professional career. Admission to the University College is selective and students must submit letters of recommendation as well as partake in on-campus interviews to be considered. While the university can only charge the government set tuition rate, all students have to pay their boarding expenses which as of 2003–04 are just over €3000 per year. 3.3. Third Party Subsidies and Inefficiencies Another non-market failure is what Wolf (1993) calls the ‘disjunction between costs and revenues’ (cited in Van Vught 1997: 221). This occurs when the consumer’s revenue does not fully cover the producer’s costs and some third party (i.e. government) ends up subsidising the difference. To understand where the actual failure arises, we must look to the problem that third party funding creates. The simplest way is to look at public versus private funding for higher education from an equity standpoint. Since both individuals and the general public receive gains from individuals obtaining a higher education, in principle, each party should cover the relative costs of the gains they incur. So, for example, if the average private return to a higher education is 15% and the average public return is 10% then, by the rule above, the government should subsidise 40% of the total education costs (10% divided by 25%). We have already seen that in the Netherlands social benefits to individuals obtaining a higher education, like lower crime rates, better health, greater political participation and a more productive workforce, are regarded as perfectly rational reasons for substantial government investment in higher education. The downside to such generous support, however, is that it also creates a fertile environment for input waste. Where students pay only a fractional amount of the total education cost they have little incentive to fully take advantage of the resources that institutions place at their disposal. In essence it creates a classic moral hazard where the government fits the role of an insurance provider.22 Since students and not higher education institutions actually control education production, excessive government subsidies act as an incentive for students to under-utilise institutional resources. The problem

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is that neither the government nor the institutions can know whether waste has occurred or to what extent until after the fact. This is a form of inefficiency because both the government and institutions could have put those resources to more productive use in other markets, such as academic research. If we assume the equity argument is valid and that public subsidies should reflect the relative gains from social returns to education then the proportion of education costs students in the Netherlands pay (17% for students in universities and 21% in hogescholen reported earlier) implies that the social returns to higher education would have to be around four times greater than the private returns. Though this may be true, as estimating public and private returns to education with any degree of precision is an inherently difficult task, this differential still seems to be absurdly high. The more likely case is that there is indeed a non-market failure in the form of over-subsidisation. Interestingly, the Dutch government seems to have recognised this as well and has gradually taken steps to curb student waste through policies aimed at imposing stricter performance requirements on students’ financial aid portfolios (Vossensteyn 2002). This began in 1993 when the government started looking to trim the amount of funding made available for student aid. In the face of studies showing that graduation rates were declining and students were taking much longer to complete their degrees than in the past, the government elected to introduce a ‘progressrelated’ grant system. All students would receive a grant to cover their tuition but if a student did not pass at least 25% of their study credits taken that year the grant automatically converted to an interest-bearing loan. Three years later this policy was re-engineered so that, rather than provide all students initially with grants, they would instead first be given loans. Only by meeting study progress requirements could the loans progressively be converted into grants.23 3.4. Public Monopolies? Earlier it was mentioned that the provisions in the WHW relating to establishing approved higher education institutions and to academic programmes at approved institutions should have given rise to a much stronger private higher education sector in the Netherlands than what exists today. As a rule, we generally think of competition as always being good for the customer because it forces providers to continuously innovate, strive to be productively efficient and to be more responsive to consumers’ needs. Without private institutions to keep them in check, existing public institutions may choose to retreat into their geographical domains and do the bare minimum necessary to procure their public subsidies. In other words, they may begin to look and even behave like regional monopolies. While it is clear that approved private providers only play a marginal role in Dutch higher education, few if any would suggest that the publicly funded institutions look anything at all like monopolies. Rapid deregulation not only brought about greater institutional autonomy but particularly much more fiscal autonomy as well. As a result, the benefits and costs of establishing new research and educational programmes or even maintaining existing ones faced much greater

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scrutiny as the gains or losses accrued directly to the institution. In stark contrast to the monopolist’s tendency toward stagnation, what has happened instead is that both universities and hogescholen have become increasingly cost conscious and more responsive to the demands of their customers in an effort to stabilise or secure new forms of revenue to support their increasingly diverse portfolio of education and research activities. In short, they are more apt to look like Clark’s (1998) entrepreneurial universities than regional monopolists.24 This is best seen in university-wide figures showing how third-stream, or contract-based, revenues have increased in the past several years.25 For example, between 1997 and 2001, university revenues from foreign sources increased by 312%, from €8.1 million to €33.5 million. In the same time period revenues from contract teaching went from €40.8 million to €95 million (132%) while revenues from industry-sponsored research grew from €71.1 million to €125.1 million (76%). Deregulation also brought about a good deal of fiscal stress. A good example of this was the Dutch government’s decision in the mid-1990s to give universities ownership of their land and campus facilities, which in retrospect proved largely to be a white elephant. Though the government increased each institution’s basic subsidy (via a separate university investment budget) to help counter the increased cost burden, the supplement did not fully cover the additional costs. This meant that universities had to come up with additional revenues almost immediately and most are still suffering today. A recent newspaper article reported that six universities in 2001 and seven in 2002 ended their fiscal years in the red largely because of insufficient funds to cover their capital costs (UT Nieuws 2003). An even bigger problem is looming for those institutions where major capital expansions took place in the late-1950s and early-1960s. In the near future these buildings and facilities will all be required to undergo significant renovations to bring them up to standard. Though the government will likely step in and help defray part of the costs, in the long run, this will further compromise some universities’ already fragile financial position. These observations support the notion that Dutch higher education institutions do not behave like complacent monopolists but they still do not explain why the introduction of market-type mechanisms failed to spur competition from the private sector. One part of the answer is that the government already created a competitive sector when it made the hogescholen proper higher education institutions. The widespread mergers that took place in 1987 were primarily implemented to realise scale economies and create a set of financially viable institutions capable of complementing, but also competing with, the existing university system (Goedegebuure 1992). This is where the tendency to classify Dutch institutions as publicly funded or approved rather than public or private distorts perspectives about competition in the higher education market. Because universities and hogescholen both receive equal treatment under the law (in much the same way that research universities and small state universities do in the US) it is easy to forget they are still distinct sectors competitively engaged in some cases for the same students. During the 1999–2000 academic year, one out of every four students receiving a universitypreparatory certificate in secondary education was enrolled in a hogescholen even though their qualification entitled them to a spot in a university (CBS 2002: 12–13).

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In other words, almost a decade before passing the WHW the government had already set in motion plans to create a more competitive higher education market. Yet it is access to financial resources that has been the main factor keeping approved private institutions from positioning themselves as formidable competitors to the publicly funded sector. Ineligible for generous state subsidies and seriously lacking sizeable endowments, the tuition which approved providers must charge in order to cover their costs is much higher than the government-set rates for publicly funded institutions. Students will only be willing to pay these higher prices if they believe the value of the education they would receive is worth the added price. To date, however, only the University of Nijenrode has really been able to persuade students that their high-tuition brings with it commensurately high benefits and even then it is important to remember that Nijenrode is not a true private university in the traditional sense. Much of its success has come by channelling all of its available resources into providing just postgraduate business education and by courting students from a lucrative market where companies are willing to either partially or fully subsidise employees’ professional development. The difficulties that come with having to unfairly compete on price are further exacerbated by limitations on student financial aid. Only full-time students are eligible to receive such support under Dutch law and many programmes offered by approved providers are part time. In addition many of these institutions enrol a large number of adult students and government rules do not allow individuals older than 27 to receive any aid. Finally, the only other reason why students would specifically seek out private providers is if they believe the quality provided by public institutions is in some way deficient. This is probably one of the reasons why private providers in neighbouring Germany have started to make inroads, but there is no evidence that quality is suffering in the Dutch public system. Macro-efficiency objectives ensure that a diverse, yet balanced, array of institutional programme offerings is available to students, and the system as a whole is not facing capacity problems. The regulatory framework (i.e. HOOP and the WHW) is flexible enough to accommodate changing national objectives or labour market needs, and per-student funding remains well above the OECD mean. Moreover, the government has repeatedly demonstrated that it is committed to quality assurance especially by tying public funding to the new accreditation scheme. While it may not be readily apparent, the two-tier system is in place to promote competition in higher education output markets and the rapid devolution of fiscal responsibility coupled with the need to remain financially viable has forced institutions to behave more like entrepreneurs than monopolists. At the same time, while barriers to entry are designed to allow new private institutions to enter the market, two characteristics of the current regulatory framework still work to keep new providers out. One is that low government established tuition rates make it nearly impossible for private institutions to compete with publicly funded institutions on price. The other is that macro-efficiency objectives and high quality assurance standards in the publicly funded system make it difficult for new or existing private providers to identify quality shortcomings or underdeveloped programme areas in which they can pursue niche-carving strategies.

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4. CONCLUSION Perhaps the best way to characterise the interactions between government regulation and higher education markets in the Netherlands is to say that the Dutch government has put considerable effort into making sure they do not have to put in considerable effort. The overall thrust of the major policies implemented in the past 20 years has increasingly been geared towards less government management and more oversight. Higher education institutions today have broad autonomy to use their available resources as they see fit and they have considerable freedom to determine the type and content of the academic programmes they offer. Provided that institutions’ actions fall within a loosely defined set of government parameters designed to ensure public funds are used efficiently and that academic quality is not in jeopardy, institutions are generally free to go about their business as they please. In this respect, the philosophy of steering at a distance has worked rather well. The higher education market has simultaneously undergone a rapid transformation in a short period of time and, for the most part, planners’ efforts have met with notable success. Students have considerably more choice today than they did twenty years ago in terms of where and what they want to study. Institutions have much more operating autonomy, which they have used to branch out into a wide array of education and non-education activities. Many of the imposed regulations have promoted competition, worked to minimise student input waste and kept the quality of institutions or their academic programmes respectable. Not all is perfect, of course. This chapter has shown that there are still policies, like tuition setting, which run counter to the principles of a free market and do not seem to have a strong economic justification for still being in place. Rapid deregulation has generated fiscal stress and forced institutions in both sectors to become increasingly revenue driven, possibly to the point that their core missions of education and basic research are being sacrificed. At certain times barriers to entry have worked to favour hogescholen over universities. And, while competition takes place within the publicly funded system, approved private higher education institutions are still effectively blocked out of the Dutch higher education market by tuition policies and the bad luck of having to compete with a well-managed, publicly funded system. Such problems are bound to exist but the Dutch government has repeatedly proved to be forward looking and willing to change. The Netherlands was the first European country to adopt the bachelor/master model and subsequently revamp their accreditation system in response. Today there is even talk of more ‘demand-side’ steering and serious consideration has been given to implementing, at some point in the future, a funding model based on student vouchers. Already several experiments with a voucher-style system are on the drawing board and one is currently underway in a small number of hogescholen. In all probability, higher education in the Netherlands has not stabilised and will continue further down the path of marketisation in the years ahead.

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NOTES 1 2 3 4

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

20

This includes the Open University which only provides distance education. The three private, publicly funded universities are: 1) the Catholic University of Nijmegen; 2) Tillburg University (formerly known as the Catholic University of Brabant); and 3) the Free University of Amsterdam. In the foreword to the WHW, it is suggested that the total number of legislative regulations was reduced from over 2000 to approximately 300. Macro-efficiency weighs such issues as whether or not a particular programme fits into national objectives and whether it results in programme duplication. An equally important consideration is whether research in such areas is also warranted. In general, proof that there is suitable student demand for a programme carries the most weight. Moreover, institutional denomination is also taken into account, which means that private institutions may be allowed to offer such programmes even if they are already in place in public institutions. However, where the ACO did support a proposed programme if the Minister chose not to establish it, he was required to report this to parliament. For approved (i.e. private) institutions a less stringent procedure to remove programmes is in place. The Minister must still issue an official warning but only needs to seek the advice of the Education Council rather than announce his intentions in the next HOOP. The representative body for hogescholen is the Association of Universities of Professional Education (HBO-Raad) and for universities it is the Association of Dutch Universities (Vereniging van Nederlandse Universiteiten or VSNU). This topic and its implications are discussed in greater detail in the next section. A more detailed discussion of public funding for higher education in the Netherlands and in several other western European countries is presented in Kaiser, Vossensteyn and Koelman (2001). Here contract teaching is taken to mean short, professional development courses on specialised topics that are offered to businesses or other external consumers. To get a feel for the price differential between public and private institutions consider the University of Nijenrode’s 13-month international business MBA course where tuition is €24,000. The HAVO and SBO secondary education programmes are designed for students seeking to pursue vocationally oriented careers while the VWO programme is designed specifically to prepare students for university education. In such cases the Ministry must approve these requirements in advance. The popular Dutch publication Elsevier puts out an annual publication similar to that by US World and News Report in the US called De Beste Studies. Academic programmes at both universities and hogescholen are ranked based on surveys of students and teachers across the Netherlands. For a good historical review of higher education accreditation policies and procedures in the Netherlands, including the recent establishment of the NAO, see Jeliazkova and Westerheijden (forthcoming). The HBO-Raad is an umbrella organisation that works to protect the political interests of the hogescholen as well as to oversee quality assurance in the sector. More information can be found at: http://www.hbo-raad.nl. In a few cases some hogescholen chose to go against the moratorium though an overwhelming percentage of the proposals they submitted were rejected. The proliferation of ‘non-official’ higher education sectors, particularly in a number of southern European countries (Kokosalakis 1999), has resulted in some researchers referring to these institutions as pseudo-universities (Altbach 2001). In 1995 the government proposed raising tuition fees by one thousand Dutch guilders (approximately €453). In protest, thousands of students went to the city of Utrecht’s central train station, one of the largest and busiest station in the country if not Europe, and sat on the train tracks, which effectively halted train services across most of the country. In the end, the Dutch government chose to raise tuition by only five hundred guilders and to spread the increase over three years. Canton and De Jong (2002) estimated an error-correction model of student demand for higher education in the Netherlands and found no statistically significant short-run or long-run relationships between tuition and student inflow. In their review of the literature they report six studies of which only one found a statistically significant, negative relationship between tuition fees and student enrolments (Sterken 1995). The conclusion from another study (Oosterbeek and Webbink 1995) they

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22

23 24

25

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reviewed, was that demand for higher education in the Netherlands was ‘completely inelastic’ (Canton and De Jong 2002: 9). There is an argument for government to more heavily subsidise education in certain fields in order to help meet labour market needs. The problem with uniform pricing though is that the benefits only accrue to students in programmes whose costs are disproportionately high, not in fields where the labour market necessarily faces a shortage. On a side note, a parallel argument can be made when comparing cost differentials between postgraduate and first degree programmes, but this issue is not entirely clear in the Dutch context because postgraduate students usually do not take many required courses. The standard economic example of a moral hazard problem is with automobile insurance. If an individual purchases automobile insurance they are less likely to drive safely, so the reasoning goes, because a third party (the insurance company) has already agreed to pay for any damage. In the case of higher education, we can equate students’ resource use to driving safely. They will care less about wasting resources because some third party (government) is paying for them. In practice, as long as students passed at least half of their first year exams, the loan for that year would be converted into a grant. For succeeding years loans would only become grants if students completed their academic programme within two years of its intended duration. The freedom institutions have to flexibly allocate resources coupled with their need to remain financially viable may lead to concerns over whether the production of universities’ core products, education and basic research, are being subjugated by more financially lucrative activities that provide much-needed revenue. This issue has received more than passing attention in the US, particularly in light of the contract developed between the University of California at Berkeley and the pharmaceutical company Novartis. These figures were privately supplied by the Netherlands Ministry of Education.

REFERENCES Altbach, P.G. “The Rise of the Pseudouniversity.” 2001, http://www.bc.edu/bc_org/avp/soe/cihe/newsletter/News25/text001.htm. Boezerooy, P. Higher Education in the Netherlands. Enschede: CHEPS Higher Education Monitor Report, 2003. http://www.utwente.nl/cheps/publications/downloadable_publications/downloadablesenglish.doc/. Canton, E. and F. de Jong. “The Demand for Higher Education in the Netherlands, 1950–99.” CPB Discussion Paper 12. The Hague: CPB Netherlands Bureau for Economic Policy Analysis, August, 2002. Canton, E. and B. Jongbloed. “The Dutch Higher Education System.” In Higher Education: Getting the Incentives Right. The Hague: Sdu Uitgevers, 2001, 15–34. CBS. Jaarboek Onderwijs in Cijfers 2002 (Yearbook, Education in Figures 2002). Centraal Bureau voor de Statistiek: Kluwer, 2002. Clark, B.R. Creating Entrepreneurial Universities: Organizational Pathways of Transformation. Oxford: Pergamon, 1998. De Weert, E. “The End of Public Employment in Dutch Higher Education?” In Enders, J. (ed.). Academic Staff in Europe: Changing Contexts and Conditions. London: Greenwood Press. 2001, 195–216. Epple, D., R. Romano and H. Sieg. “Peer Effects, Financial Aid, and Selection of Students into Colleges and Universities: An Empirical Analysis.” 2001, http://www.andrew.cmu.edu/user/holgers/jae_brookings.pdf. Goedegebuure, L.C.J. Mergers in Higher Education: A Comparative Perspective. Utrecht: Lemma, 1992. Hoxby, C.M. “How the Changing Market Structure of US Higher Education Explains College Tuition.” NBER Working Paper 6323, Cambridge, MA: National Bureau of Economic Research, December, 1997. Jeliazkova, M. and D.F. Westerheijden. “Country Report: The Netherlands.” In Schwarz, S. and D.F. Westerheijden (eds). Accreditation in the Framework of Evaluation Activities in the European Area. forthcoming. Jongbloed, B.W.A. and C.S. Salerno. Funding and Recognition: A Comparative Study of Funded Versus Non-funded Higher Education in Eight Countries. The Hague: Ministerie van Onderwijs, Cultuur en Wetenschappen/SDU, 2002.

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Kaiser, F., J.J. Vossensteyn and J. Koelman. Public Funding of Higher Education: A Comparative Study of Funding Mechanisms in Ten Countries. CHEPS Policy Report. Enschede: CHEPS, 2001. Kokosalakis, N. (ed.). Non-official Higher Education in Europe. Athens: Gutenberg Press, 1999. OCW (Netherlands Ministry of Education, Culture and Science). Hoger onderwijs: autonomie en kwaliteit (HOAK) (Higher Education: Autonomy and Quality). Zoetermeer: Ministerie van Onderwijs en Wetenschappen, 1985. OCW (Netherlands Ministry of Education, Culture and Science). The Netherlands Higher Education and Research Act: Everything You Always Wanted to Know About the Higher Education and Research Act (But Were Afraid to Ask). The Hague: Ministerie van Onderwijs en Wetenschappen, 1993. Oosterbeek, H. and H.D. Webbink. “Enrollment in Higher Education in the Netherlands.” Economist 143.3 (1995): 367–380. Rothschild, M. and L.J. White. “The University in the Marketplace: Some Insights and Some Puzzles.” In Clotfelter, C.T. and M. Rothschild (eds). Studies of Supply and Demand in Higher Education. Chicago: University of Chicago Press, 1993. Rothschild, M. and L.J. White. “The Analytics of the Pricing of Higher Education and Other Services in Which the Customers are Inputs.” Journal of Political Economy 103.3 (1995): 573–586. Sterken, E. “De collegegeld-gevoeligheid van deelname aan het WO.” Economische Statistische Berichten 80 (1995): 454–456. UT Nieuws. “Zeven universiteiten in de rode cijfers.” 26, 11 September, 2003, 1. Van Vught, F. “Combining Planning and the Market: An Analysis of the Government Strategy Towards Higher Education in the Netherlands.” Journal of Higher Education Policy and Management 10.3/4 (1997): 211–224. Vossensteyn, J.J. “Shared Interests, Shared Costs: Student Contributions in Dutch Higher Education.” Journal of Higher Education Policy and Management 24.2 (2002): 145–54. Winston, G.C. “Why Can’t a College be More Like a Firm?” Discussion Paper 42, Williams Project on the Economics of Higher Education, May, 1997, http://www.williams.edu/wpehe/DPs/DP-42.pdf. Winston, G.C. “Subsidies, Hierarchy and Peers: The Awkward Economics of Higher Education.” Journal of Economic Perspectives 13.1 (1999): 13–36. Wolf, C. Markets or Governments: Choosing Between Imperfect Alternatives. Cambridge, MA: MIT Press, 1993.

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IS THERE A HIGHER EDUCATION MARKET IN PORTUGAL?

1. INTRODUCTION Markets or market-like mechanisms are playing an increasingly important role in higher education, with visible consequences both for the regulation of higher education systems and for the governance mechanisms of higher education institutions. However, despite the market-friendly attitudes of many governments, it remains to be seen if higher education markets have been really implemented or instead if markets are only a rhetorical device. In the first part of this chapter we use the set of conditions for the establishment of a market in higher education, as presented in the introduction to this volume, to assess the importance of market mechanisms in Portuguese higher education, with special emphasis on such aspects as contestability, consumer information and full cost payments. In Portugal a large private higher education sector has developed since the mid-1980s, and this might be seen as an indication of the emergence of a higher education market. However, there are significant differences between the regulatory frameworks for different segments of the Portuguese higher education system – universities and polytechnics, public and private institutions – which do not fit into the idea of a free market. In this chapter it is suggested that, despite the presence of a significant private higher education sector, Portugal is still a far cry from having a higher education market, due essentially to the absence of the most important conditions characterising a free market. In the final part of the chapter we present a critical analysis of the regulation mechanisms used over the last two decades in Portugal. It seems that after passing the autonomy laws for the public higher education sector, the state experienced difficulties in steering the system while the absence of effective market regulation has become evident. Apparently, the absence of the state’s steering capacity and the crisis resulting from the lack of efficient regulation, combined with a more stringent economic situation, are driving higher education policies towards what might be called a model of state interference. This has significant consequences for the mechanisms and modes of institutional governance. However, once more, consequences appear to have different levels of importance for the different segments of the system. We conclude our chapter with a critical analysis of the most recent proposals for changing the legal framework of the higher education system, 291 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 291–310 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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namely, by examining to what extent these changes are promoting or hindering market mechanisms in Portuguese higher education. 2. THE EIGHT CONDITIONS FOR THE EXISTENCE OF A MARKET: THE PORTUGUESE CONTEXT In order to clarify the discussion about the role of markets in higher education, one needs to be more specific about the real meaning and implications of markets. There are various possible ways of trying to assess the relevance of market mechanisms within one specific sector of activity. In the following sub-sections, we use the one suggested in the introduction to this volume to analyse the role of market mechanisms in the context of the Portuguese higher education system. Our analysis will pay particular attention to the different segments of the Portuguese higher education system – universities and polytechnics, public and private institutions – since there are significant differences between the regulatory frameworks for each of those sub-sectors. Additionally, and whenever relevant, we will point out differences between teaching and research activities in higher education institutions, even if our analysis focuses mainly on teaching and more specifically at the undergraduate level. 2.1. Freedom for Providers 2.1.1. Freedom of Entry The Constitution of the Portuguese Republic (1976), in its article 43, recognises the freedom to teach and to learn as a fundamental right of every Portuguese citizen. Moreover, the same article prevents the state from controlling the right to plan education and cultural development in accordance with any philosophical, aesthetic, political, ideological or religious precepts. It also establishes that public education shall be non-denominational, and guarantees the right to establish private and cooperative schools. This latter freedom is confirmed by article 75 of the Constitution which grants the right to establish private and cooperative schools. The same article forces the state to establish a network of public educational institutions to meet the needs of the whole population, and commits to the state the tasks of recognising and supervising private and cooperative education, in accordance with the law. Besides being a binary system with universities and polytechnics, Portuguese higher education is also characterised by the simultaneous existence of public and private sub-systems. Accordingly, when analysing the free entrance condition for the existence of a free market, it is necessary to consider the freedom of entry of both public and private higher education institutions. Public higher education institutions are state owned and their creation is an act of government that in general takes the form of a decree-law approved by cabinet. On the other hand, private institutions cannot start operating without approval from the Ministry. In Portugal, public higher education institutions are almost totally financed by the state. On the contrary, private institutions do not receive any permanent direct

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support from the state. However, the state may finance some of their activities such as student grants, the training of academic staff, incentives for investment, support for research projects, merit scholarships for students, and support for loan systems or other types of support included in contracts (as established in article 10, point 1 of Law 1/2003).1 Due to this situation, one may conclude that free access of private higher education institutions to the market is restricted by the costs linked to the initial investment necessary to set up a new private higher education institution. This is probably one of the reasons why the majority of Portuguese private institutions have chosen specific programmes of study with low investment/low running costs, the so-called ‘paper and pencil’ programmes. One may wonder why private institutions developed so fast under these apparently unfavourable market conditions. In 1989, the Minister of Education dramatically increased the demand for higher education by lowering the entrance requirements. The number of candidates almost doubled overnight, largely exceeding the capacity of public institutions. Consequently, those students unable to find a place in public institutions were left with an option: to either not enter higher education, or find a place in a private institution despite paying higher fees and probably getting lower quality training. The present situation is quite different. The number of candidates applying to higher education has decreased due to demographic factors while large investments in the public sector over more than a decade have significantly increased the number of vacancies in public higher education institutions. As the number of total vacancies (public and private) today largely exceeds the number of candidates, competition for students between institutions – public or private, universities or polytechnics – is a reality. This occurs because the financing of institutions is basically proportional to the number of enrolled students (even in the public sector).2 Nevertheless, this competition tends to be won by the public universities because they are older and more prestigious, the level of tuition fees is (still) very low – especially when compared to private higher education institutions – and they are perceived as being of higher quality (see Amaral and Teixeira 2000). Mergers between institutions may also contribute to the establishment of new providers, though in Portugal this is not very significant, at least so far. Nevertheless, due to the enormous difficulties that private higher education institutions are facing (because of the decline in student numbers in recent years and enhanced by the fact that the number of places in the public system is already greater than the total number of candidates), mergers – or even bankruptcies – may become a real possibility in the near future. 2.1.2. Freedom to Specify the Product Until recently, the different segments of the Portuguese higher education system had quite diverse levels of autonomy when specifying their products. Public universities were granted (article 7 of the University Autonomy Act – Law 108/88 of 24 September) full pedagogical autonomy, meaning that in practice they had almost complete freedom to start, suspend or cancel study programmes, and to define their contents – and they have used this capacity quite extensively. At present, there is

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even some feeling that public universities were granted too much pedagogical autonomy that makes achieving effective coordination of the sector almost impossible. It is true that the Ministry must register new degrees,3 but it cannot refuse registration unless the degrees do not meet the regulations (e.g. problems with the duration of the programme or the total number of credits necessary for obtaining the degree). If that is not the case, then the Ministry’s only option for trying to dissuade the institution from starting the new study programme is determining that students enrolled in that programme will not be counted for funding purposes, but so far this has never happened.4 By contrast, public polytechnics are not allowed to create, suspend or cancel study programmes: they have to submit all proposals for the Ministry’s specific approval. It is true that polytechnics have always expressed their indignation at what they consider second-class treatment relative to public universities. As competition for students rises they have also increased pressure on the government to be granted the same level of autonomy as public universities. On the other hand, private institutions are also subject to strong control by the Ministry: they must ask for permission before starting or modifying any study programme, and they must apply for state recognition of all their degrees and diplomas in order to command the same status and recognition for academic and professional purposes as those conferred by public institutions (Amaral and Rosa 2003). It is true that private institutions have a good lobbying capacity and, until recently, they were able to get permission to start new programmes. However, this was a very time-consuming process, sometimes taking several years, and there was always a feeling that decisions were of a random nature. However, as competition for students became very fierce, private institutions also voiced their complaints against unfair treatment when compared with public universities.5 Recently, several professional associations (for instance, engineering, architecture and pharmacy) have initiated accreditation systems that may further decrease the institutional freedom of product definition. It is possible that accreditation exercises will induce some increase in the homogeneity of study programmes. One can therefore conclude that, as different segments of the Portuguese higher education system enjoy quite different degrees of freedom in specifying their products, this condition does not allow for the proper operation of a free market. In fact, this view is confirmed by the institutions themselves. Public universities often recognise they have enough pedagogical autonomy, and that allows them some strategic capability. In contrast, private universities often complain about their lack of pedagogical autonomy which they regard as a serious limitation to the definition of a consistent strategy. Public polytechnics are also dissatisfied about their current level of autonomy. Notably, they clamour for a level similar to that awarded to public universities.6 There are no legal dispositions conditioning the type of research to be performed at higher education institutions. In principle, each research unit (or any researcher for that matter) has almost complete freedom to specify the research activity to be developed, so long as ethical and moral issues are respected. Nevertheless, in practical terms it is possible to say that this freedom is conditioned by the financing

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available, and by the priority areas defined by the state (or for that matter by other national and supranational organisations such as the EU). This issue of national and supranational research priorities plays a very relevant role in the definition of the priority research areas within a higher education institution, a research centre or even the research activity of a single academic, as in general researchers try to adapt their projects to the more fashionable areas where funding is more abundant. Finally, there are also those issues related to the specification of other types of higher education products, such as the ones related to cooperation with society (services provided, cultural offerings, training courses not leading to a degree). In this context it is possible to say that Portuguese higher education institutions have a considerable degree of freedom. (It goes without saying that these types of activities are not the ones that make the reputation of a higher education institution.) One could also consider specific additional services offered to students, namely, in the new areas of lifelong learning and e-learning. In this context, the degree of freedom of higher education institutions, in all sub-sectors, is considerably high, once there are no legal dispositions that restrict the offer of this type of product. Nevertheless, we do not consider this as the central issue regarding this second condition for the existence of a higher education’s market, either in Portugal or elsewhere. 2.1.3. Freedom to Use Available Resources This condition has to do with the freedom each higher education institution has to decide about the deployment of its own resources, including financial means (budgets and financial assets), personnel (teaching and non-teaching staff) and students. Portuguese private institutions are not financed by the state, their prime source of funding being fees paid by students. Consequently, they have almost total freedom to decide how to use their financial means. On the contrary, public higher education institutions are almost completely financed by the state, which gives them annually a lump sum for running costs (excluding investments). This annual budget is calculated using a formula that mainly takes into account the number of enrolled students, the qualifications of staff, and the disciplines – favouring experimental and medical degrees that demand more laboratory classes and lower student/staff ratios. According to the University Autonomy Act, passed in 1988, and to the Statute and Autonomy of Polytechnic Higher Education Institutions Act, passed in 1990, both types of public higher education institutions have considerable degrees of autonomy, including financial and administrative. The Decree-Law 252/97 of 26 September, developed further the administrative and financial autonomy of public universities. Nowadays, it is possible to state that public higher education institutions are free to use their budgets as they wish, allocating their resources to accomplish their own goals.7 In this sense, they now own their buildings and are allowed to invest in new facilities; they obtain loans in the capital market (though this requires governmental authorisation); and participate in business incubators, science parks and start-up companies established by their own teachers and graduates. They also have freedom to build reserves, accumulating financial capital. Portuguese public higher education institutions are free to find additional financial

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sources, provided they respect their mission and goals and do not enter into unfair competition with private organisations. Funds for research activities are mostly provided by the science budget rather than the education one,8 and they cover three main areas: research grants for postgraduate studies, research grants for individual research projects, and multiannual funding to recognised research centres – the most significant area in terms of resources being the second one. Research projects are selected on a competitive basis using recommendations from international panels of experts.9 Funds are transferred through the Foundation for Science and Technology (FCT) directly to the research units integrated in higher education institutions (as organic units) or to research projects that have been submitted to the FCT. In this sense, and according to David Dill (2003), it is fair to consider research financing as a mechanism that promotes both the market and competition in the Portuguese higher education system. In Portugal, the decision about the qualifications of the personnel of public institutions, the definition of their employment conditions, their careers and salaries are established in law, as both teaching and non-teaching staff are civil servants. In this context, the degree of freedom higher education institutions have to use this type of resource is rather limited, being restricted by the legal framework applied to civil servants. The Statutes of the University Academic Career (Decree-Law 448/79, published 13 November) and the equivalent for the polytechnic sub-system (DecreeLaw 185/81, published 1 July) established the conditions and terms of the teaching staff’s careers. Hence, it is not possible for each higher education institution to negotiate individual salaries, specific duties or possible fringe benefits. It is also impossible to hire a specific academic, paying a different salary rate according to their quality, skills and competencies. In terms of private institutions, there is not much information available regarding these resources. The few known elements suggest that the staffing situation is more flexible, with institutions following more closely the (less demanding for the employer) general legislation regulating labour contracts rather than the traditional academic regulations and they have a large percentage of non-permanent positions. However, in terms of structure, many institutions tend to follow to some extent the framework established for public institutions. The academic career is similar to that existing in public institutions, though the lack of qualified staff in many private institutions often results in the employee occupying a higher position but with lower qualifications relative to their public sector counterpart. Some have referred to higher education as a ‘customer input technology’ (Rothschild and White 1995). In this context, students are not just ‘customers’ of the higher education system, but also ‘inputs’, as it is believed they co-determine the learning process of their colleagues.10 If we consider students as inputs, then they can also be considered as available resources and in that sense it is important to see the degree of freedom that Portuguese higher education institutions have in the selection of their future students. Can higher education institutions freely select their own students? Is it possible for them to deny the access of students to a specific study programme?

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In Portugal, the Ministry of Science and Higher Education, following consultation with the higher education institutions responsible for study programmes, annually establishes the value of the numerus clausus for each programme. New students must compete for a vacancy on a national tender, each student applying for a maximum of six study programme/institution combinations, ranked in the student’s order of preference. Students are then placed according to their preferences and their relative marks in the national competition. So long as students fulfil the access requirements established for each study programme/ institution, an institution cannot avoid enrolling them. This applies even for those programmes offered by private institutions. In short, higher education institutions are entitled to define the requirements for access of new students to each individual study programme, but then the institution loses control of the process, those requirements being used by a national commission that organises the tender for vacancies. In this context it is fair to say that, in Portugal, and until now, higher education institutions do not have the freedom to choose their students, even if they have some say in the establishment of the access conditions to each of their study programmes (through the access exams and the numerus clausus). 2.1.4. Freedom to Determine Prices The freedom to decide about prices to charge consumers is a cornerstone of the existence of a true market, as this is understood as a mechanism for allocating resources on the basis of signals transmitted through the price mechanism. In higher education this would mean that institutions are free to decide the value of fees students will pay. Nevertheless, in most countries that have introduced tuition fees for the public sector, their value is lower than the real cost of higher education. In these cases the government supports the major share of higher education’s costs by transfers from the state budget, which in turn is supported by the taxpayers’ contributions. Moreover, it is noteworthy that the value of tuition fees is usually determined by the state, often their value being the same for all students, regardless of the study programme and institution in which they are enrolled. This is the present situation for public higher education in Portugal. Public higher education institutions charge their students a tuition fee, its value being established by the government nationally. Tuition fees have the same value for every study programme and for every institution, and are equal to the minimum monthly wage. Fees paid by students enrolled in public institutions do not cover the real costs of higher education: they are in fact a very small proportion (about 7–8%) of total costs. Private higher education institutions are obviously free to determine the fees their students will pay and, in this case, fees effectively represent the real cost of a study programme, as government does not fund these institutions. Thus, fees paid in public institutions are much lower than those paid in private institutions, meaning that the possible competition between public and private higher education institutions is quite limited by the cost gap paid for attending these two types of institutions. Private institutions complain that they are the victims of unfair competition from the public sector and strongly support a voucher system to avoid this situation.

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In the case of public higher education institutions it is necessary to make a distinction between graduate and postgraduate higher education, because in this latter case public institutions are free to establish the fees they believe are adequate for both their masters and PhD programmes. It is worth mentioning that as postgraduate studies are not financed by the state, fees paid by students are much closer to the real cost of their study programmes. 2.2. Freedom for Consumers 2.2.1. Freedom to Choose the Provider From the consumer point of view, the first necessary condition of a free market is the freedom to choose the service provider. In the higher education context this implies that students are able to freely choose the higher education institution where they wish to do their studies, so long as they hold the necessary access qualifications. In Portugal there are no regional limitations to higher education access. This is not the case in other countries where students can freely enter a higher education institution in their region but have to compete for places in higher education institutions of other regions. In Portugal, the access system is national, although polytechnic institutes due to their regional character can reserve a percentage of their annual vacancies for local students, and there are also some vacancies in the mainland higher education institutions reserved for students from the Islands of Madeira and Azores. There is no legal discrimination against graduates from private higher education institutions, insofar as the institution is accredited. This is particularly the case in public employment where formal qualifications can be a major determinant, but less so in private employment where preference for graduates from some institutions can more easily influence decisions, namely by taking institutional reputation into consideration. Although there are no legal restrictions to the freedom of choosing a provider, there are important economic restrictions. Firstly, students enrolled in public institutions pay only very modest tuition fees (around €300 per year), while students enrolled in private institutions pay full cost fees. This situation represents a very severe limitation in terms of the choice of provider, since the option for a private higher education institution implies additional tuition fee costs, the value of which is several times that of fees paid in public higher education institutions. This differential adds to the widespread perception by the public that public institutions are on average better than private ones, with the effects clearly apparent in the ranking of choices of candidates.11 Secondly, this freedom is also restricted if students want to enrol in higher education institutions away from their parents’ residence. In Portugal, and considering only the public sub-system and the (low) fees students have to pay, it is in principle possible for students to freely choose the institution and study programme they want to enrol in. Nevertheless, and in practical terms, the situation can be quite different because the option for one particular institution can include additional costs for the student, namely costs related to transportation, food and

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accommodation. As there is a generalised numerus clausus system for every study programme (public or private), it may well happen that a student cannot find a place in a particular study programme in a public institution at a reasonable distance from home. In this case, the student may prefer to enrol in a similar study programme at a local private institution instead of enrolling at a distant public institution as the higher fees paid will be offset by saving the additional costs of displacement. In Portugal, scholarships are means tested so it is quite possible that many students will only get a reduced scholarship or even no scholarship at all. This also means that enrolments in private institutions are almost exclusively local, as students are not likely to add the payment of higher fees to the costs of moving away from their parents’ residence.12 The few data available indicate that there is some movement of students, especially to the major cities where most prestigious institutions tend to be located. In a survey of 5000 students, it was found that roughly 50% of the students enrolled in public institutions studied away from home. In contrast, only one-quarter of those in private institutions were in a similar situation (see table 1). Table 1. Distribution of enrolled students according to region of origin (N = 5000)

Other region Same region

Public universities Public polytechnics % % 49.4 50.3 50.6 49.7

Private HEIs % 26.8 73.2

Source: Balsa 1997: 158

However, this mobility does not seem to be the result of students moving freely around the country in order to attend the best programme or the best institution, but rather it appears to be a move towards the closest large city which has institutions of large size with a broad scope of programmes. In another study (Cabrito 2002: 160) it was found that most students moved to other regions because the programme (46.6%) or the type of institution (14.3%) they preferred did not exist in their region. Only a very small proportion of those who moved (5%) indicated that they searched for institutions of the same type as those existing in their area. Hence, most students will hardly move if the programme they want to attend is in their region, regardless of the institution’s prestige. These results suggest that economic restrictions do not allow for the emergence of a free market. It is in this context that private institutions are strongly in favour of the establishment of a voucher system that would eliminate the price advantage of the public sector. In the voucher system, the state would no longer transfer public funds directly to public higher education institutions. Instead, the state would give students the total amount of money necessary for their education, allowing them to buy freely from their preferred higher education institution, either public or private. It does not seem probable that this scenario will happen in Portugal in the near future, despite some neo-liberal inclination of the present government and some strong support from a number of opinion makers. Indeed, very recently the Minister of Science and Higher Education has said that vouchers for higher education will not be a reality in

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the short- or even medium-term. At present, the private sector enrols about one-third of all higher education students while the public sector enrols the remaining twothirds. This means that moving to a generalised voucher system would correspond to an indirect transfer of public funds to private institutions; this would increase the higher education total budget by about 50%, which is impossible under the present economic conditions.13 Nevertheless, even if a voucher system were implemented there remains the problem concerning information available to students about the several existing higher education institutions and study programmes: is the information reliable, precise, sufficient and adequate? If the answer is negative, then the students cannot freely choose and the possibility of being induced to take a certain option and not another increases (see section 2.2.3). 2.2.2. Freedom to Choose the Product It is reasonable to assume that, whatever the type of market, the degree to which consumers are free to specify the product or service they want is rather limited. In fact, due to economic and pedagogic (coherence and disciplinary coverage) reasons, higher education institutions cannot offer very individualised programmes to their students, even if there is some room to choose specific configurations, specialisations, support (e.g. ICT) facilities and individualised options in terms of combining learning, working and caring for a family. One possibility of implementing this condition for the existence of a market would be to give money to the students so they could buy their degrees themselves, allowing them the freedom to select the subjects they wished to study and the higher education institution they wanted to attend. Would this be a reasonable idea? We hardly think so, essentially because it does not seem plausible that students would move from one place to another buying bits and pieces of a degree. In Portugal, students do not have very much room to manoeuvre in freely choosing their ‘product’. On the one hand, the system of numerus clausus only allows them to choose those combinations of ‘study programme/institution’ where their qualifications (marks) allow them to win a place in the national competition for vacancies. In many areas this is becoming a minor problem, as there are now more vacancies than candidates. However, there are still areas such as medicine or architecture where demand is excessive and there is strong competition to win a vacancy. On the other hand, higher education institutions’ curricula are almost completely ‘standardised’ and students can only select the programme and not the content. In terms of length there are minor differences (one year) between institutions. In terms of programme structure there are also some small variations, but the general pattern is one of homogeneity. There are study programmes that offer students some room to define their ‘product’ by selecting optional courses from other disciplines (although these are in most cases taught by professors from the same department or faculty responsible for the study programme) which are in general a minor part of the complete programme. There is one example of a department of a public university which is trying to follow the American model of major and minor subjects by making available to

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students of other departments of the same university a certain number of disciplines. However, this experience is just starting and one has to see whether it will be successful and emulated by other institutions. In some institutions there is also the possibility of students obtaining credit by attending other departments’ classes, though this seems to correspond more to the need of the institution to rationalise resources, rather than to enlarge the choice of its students. In certain areas, pressure to homogenise syllabus and methodologies is more significant than in others, but overall the small dimension of the country’s network of higher education institutions means that there is scarce room for market niches or institutions focusing on a diverse theoretical or methodological approach. The establishment of a national system of quality assessment and the increasing role of professional associations in accreditation of higher education programmes do not contribute to increased flexibility. In this respect, the Bologna Agreement is likely to contribute to reduce diversity even further, with several institutions moving their five-year BA programmes to a four-year structure. And the recent results of the Twinning Project funded by the Commission and aimed at defining the European core curricula do not prophesise a bright future for innovation and change in European higher education. 2.2.3. Adequate Information on Prices and Quality The proper operation of markets is based upon the sum of a large number of individual rational choices, in the sense that individual consumers will try to get the best bargain for the money they spend. However, to make the best choice each consumer needs to have precise and reliable information about the quality and price of the different available services or products. In the context of higher education, this condition of sufficient information is hardly ever met (see Dill and Soo in this volume).14 In the Portuguese case there is an almost complete lack of adequate information about the quality of available study programmes, both in public and private higher education institutions, as well as about the prices paid at private institutions. And even when some information exists (for instance, the quality assessment reports of study programmes evaluated under the national quality evaluation system are public), it is not clear for students how to access it. Recently, attempts have been made to improve this situation by making information more readily available. For example, online information is provided by the National Access Commission on: (1) the evaluation reports of study programmes; (2) access conditions to each programme (number of vacancies, minimum grade and examinations required); and (3) access conditions to those areas where there is a professional accreditation body (programmes accredited and conditions of access to the profession). However, the main sources of information are still unsatisfactory. The evaluation reports are in general remarkably vague and carefully drafted in order to avoid rankings, and as such are of little help to students trying to make an informed choice of study programmes and institutions. This, coupled with the lack of information on the financial costs associated with a degree, suggests that prospective students are making choices based on inadequate information – important instruments that could

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help them select a programme based on the value of future benefits and costs seem to be missing. Given a lack of a generalised system of loans endorsed by the government, the limited access to means-tested scholarships and to the financial market may lead to an under-investment in higher education (due to liquidity constraints) and limit the capacity of students using the available information to their best advantage. Accordingly, it is worth exploring in future research the economic rationality of the decline in recent years in the demand for higher education (post1995) since all the studies available indicate that for the period 1977–95 the returns to higher education have not only been consistently high but also moderately rising since the late seventies (Pereira and Martins 1999). It is to be seen if this behaviour is explained by a recent reversal in rates of return to higher education degrees or to a change in demand due to other factors associate with insufficient information. 2.2.4. Direct and Cost-covering Prices Paid This last condition is one of the hardest to be met in a public higher education system, where fees are always considerably lower than the real costs of education (the cost difference being borne by the state budget). This means that neither students make necessarily optimal choices (since they do not experience the real costs of education) nor providers pay proper attention to their more relevant clients, as they only contribute a minor percentage to the institutions’ budgets (Jongbloed 2003; Lindsay and Rodgers 1998). Full cost-covering prices are normally the case in private institutions that do not receive public financial support, though even in this case we have to distinguish between for-profit and not-for-profit institutions.15 In Portugal, as in many other countries, fees paid by graduate students enrolled in the public higher education system are much below the real cost of education. Until 1992, the level of tuition fees in public institutions remained very low (ca €6 per year), as its value was frozen since its establishment in 1944. In 1992, a new payment framework was established,16 bringing the fees up-to-date in agreement with the overall inflation rate since 1944 (ca €300).17 This change was met with resistance from students who raised significant political disturbance, which led to the resignation of two ministers of education and contributed to the loss of the next general elections by the ruling political party. In spite of this resistance, the changes were implemented. As the new government came into office in late 1995, this discussion gained momentum again, as students reminded the new Prime Minister of his promise to suspend the law on fees if he came to power. Indeed, the new government suspended the law of 1992, with the promise of preparing a new law on the funding of public higher education. Students became convinced that fees would remain at the 1944 level. However, by mid-1997, a new law was approved (Law 113/97), reestablishing tuition fees at a level similar to that set prior to the suspension of the law.18 In spite of some resistance by the students, the Ministry managed to succeed in re-introducing higher fees, which were declared by the law as revenues of the higher education institutions. Despite this increased participation of students and their families in the costs of higher education, their contribution remained small and probably will continue as

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such, representing less than 10% of the current budget allocated by government to public higher education institutions. Things are somewhat different in respect to postgraduate study programmes offered by higher education institutions. In this case, even public institutions establish fees that are much more in accordance with the real cost of the education provided (as mentioned earlier in section 2.1.4). The situation of undergraduate students enrolled in private higher education institutions is completely different. In this case, students pay the real cost of their education. In fact, even if they are not-for-profit organisations, student fees are their main source of financing and need to cover most, or even all, instructional costs. This view is confirmed by the analysis of the structure of private costs of higher education. Tuition fees seem to be on average 12 times more costly than those paid in the public sector. This contributes significantly to making the average private cost of being enrolled in a private institution almost double that of being enrolled in a public one. 2.3. Portuguese Higher Education and Market Regulation Despite some signs of strengthening market trends due to a number of factors, Portugal has yet to fully embrace a higher education market. First and foremost, and since economists regard a market as a means of organising the exchange of goods and services on the basis of a price mechanism that coordinates supply and demand, the fact that prices are clearly dissociated from costs for a large majority of students (those enrolled in public institutions) undermines the notion of a real market in higher education. The very limited direct contribution of students and their families to the costs of their education in the case of public institutions distorts significantly the determinants of the demand for education. Moreover, the fact that tuition fees to be paid in public institutions are fixed by the state, and are equal for every academic programme, is a clear statement of the rejection of the price mechanism as a major instrument of regulation of the demand of higher education. Second, another important missing element is contestability, that is, the capacity of new providers to enter the market, create new and diverse approaches and place useful competitive pressures on the existing institutional producers (Marginson 1998). It is noteworthy that Portugal presents an unusually large private sector in higher education, and various governments have allowed it to expand without significant restrictions. However, at least in legal terms, private institutions’ autonomy seems to be more limited than public institutions’. Moreover, the fact that until the present public institutions had almost automatic funding for each additional academic programme, with limited control from public authorities, suggests that the supply of higher education was also clearly dissociated from market regulation mechanisms. Surely, commonsense would suggest which new degrees would have higher probabilities of attracting new students and of offering good prospects in terms of the graduate labour market. However, public higher education institutions are not really exposed to these constraints, at least not in the way a firm normally faces a market for any other type of commodity, in which case a wrong decision will

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decrease profits and result in a fall in the value of shares, and may even lead to bankruptcy. Third, there is the issue of information insufficiencies that are normally labelled as a market failure, and are particularly relevant in the case of higher education. The limited information about the quality of institutions and/or programmes hinders the capacity that customers (e.g. students, families) have to choose what they believe is the most suitable institution for their needs (see Dill 1997). In particular, what is lacking is a comprehensive measure of the value added by each specific academic qualification and programme.19 Although some advances were made in terms of evaluation of institutions and the publication of the evaluation reports, as mentioned earlier, the wider public seems to be largely unaware of this, let alone the information produced. 3. INSTITUTIONAL AUTONOMY AND STATE REGULATION – LESSONS FROM SOUTH AFRICA The University Autonomy Act, passed in 1988, and the Statute and Autonomy of Polytechnic Higher Education Institutions Act, passed in 1990, have conferred a considerable degree of autonomy on both kinds of public higher education institutions. Neave and Van Vught (1994) have explained the increase of institutional autonomy taking place in many countries as a movement from a model of state control20 to a model of state supervision. This new model of relationship between higher education institutions and the state is part of the redefinition of the relationship between government and civil society, and Kraak (2001: 29) considers that for this change to be successful it “requires leadership by the government, the only actor with powers of political coordination in society”. It is fascinating to see how some developments taking place in South Africa after the demise of apartheid and the implementation of a democratic system are replicas of developments initiated in Portugal after the 1974 Revolution. In one of its policy papers, the National Commission on Higher Education of South Africa (NCHE) describes the implementation of ‘cooperative’ governance (a local variety of state supervision): Government is increasingly becoming a partner, albeit a very powerful one, which, through regulation arrangements, involves a range of other institutions, bodies and agencies in governing. This shift, from government from the centre to government becoming a powerful partner in a multitude of governing arrangements, is part of a movement from government to governance, a process of redefining and reconfiguring the state (NCHE 1996: 57).

The NCHE had a clear vision of the essential ingredients for success and suggested that, for the state to be able to play this leadership role in relation to higher education, four central capabilities were absolutely necessary: … organisational capacity (a corps of competent ‘planning’ civil servants); a long-term growth orientation (the development of a coherent socio-economic and human resource development plan); autonomy and independence from powerful private social interests; and being the honest broker in co-operative relations across public and private domains.

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Co-operative governance can succeed, only to the extent that the state acquires these capabilities (NCHE 1996: 59).

None of these capabilities were available at the time the Portuguese Autonomy Acts were passed. The Ministry of Education had no technical capacity for dealing with this new situation and the transition was not easy. Instead of assuming a “shift away from the traditional opposition between state and civil society to negotiated co-operation arrangements” (NCHE 1996: 59), the services of the Ministry assumed a position as the last stronghold of traditional state bureaucracy. The idea of a coherent socio-economic and human resource development plan sounds ludicrous when one realises the traditional difficulties of the Portuguese state to plan any medium- to long-term policy. The independence from powerful private social interests hides lots of hypocrisy as the strong lobbying capacity of the private sector has been evident over the years and, despite some difficulties, private higher education institutions have been able to obtain official recognition without severe scrutiny of the legal demands or the quality of teaching. And it is true that the national practice of avoiding conflicts and harsh decisions has many times resulted in the late approval of proposals, with the Ministry ignoring legal deadlines, thus opening the way for private institutions to illegally initiate study programmes without the necessary governmental permission, “being later absolved of any sin by retroactive governmental decisions that legalise the situation when problems might become serious” (Amaral and Teixeira 2000). Finally, the role of “the honest broker in co-operative relations across public and private domains” does not fit the traditional posture of the government, which has oscillated between a cheeky favouring of the private sector to “developing in the public opinion a generalised feeling of mistrust on the private higher education subsystem” (APESP 1998). Overall, the government could not find the right balance in its relationship with the rapidly growing reality of a private higher education sector. The private sector was allowed to develop without control and in areas that were not a national priority (see Amaral and Teixeira 2000), little attention was paid to quality, no planning of human resources was available, and the government was unable to foresee that due to demographic conditions the number of candidates in higher education would decrease for more than a decade. Today, higher education institutions are beginning to compete fiercely for students which affects mainly the private sector and some public polytechnics and some universities located inland, making it possible that some private institutions will go bankrupt. This is hardly a balance to be proud of.. 4. PORTUGUESE HIGHER EDUCATION – TOWARDS A MODEL OF ‘STATE INTERFERENCE’? One interesting challenge is to understand if the Portuguese higher education system is moving towards or away from a market model. After the last general elections that the Social Democratic Party (united with the smaller and more conservative Christian Democratic Party) won against the Socialist Party, which had governed the country for almost six years, the political discourse shifted to the right and some neo-liberal features became apparent. The general idea that the public sector was

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inefficient, the need to reduce public expenditure, the obvious superiority of private modes of management over public ones became popular in the public statements of the politicians in power. At the level of primary and secondary education, the praise of the ‘best’ students, the promotion of individual competition, the publication of official rankings of schools and the promotion of the values of freedom of individual choice have assumed an unusual prominence in the political jargon. At the level of higher education, some neo-liberal attitudes have also emerged. Traditional modes of collective decision making, and the participation of students in governance, have been under attack for being inefficient, corporative and contrary to the needs of society and the economy. The replacement of collective decision making by individual decision makers who can be blamed for the problems of higher education and the increased participation of the outside community in institutional governance are being discussed. The private sector has raised the question of the replacement of traditional funding mechanisms with a voucher system, though this change has been discarded for the time being because it would significantly increase the need for public funding. But is the relationship between the state and higher education institutions in Portugal moving towards more prevalent market-like mechanisms? There are signs that the state, instead of shifting “from being overstaffed and bureaucratic to that of being lean and smart” (Kraak 2001: 30) is instead moving to what may be called ‘a model of state interference’.21 Being unable to properly steer the system, the state resorts sporadically to extraordinary measures that attempt to force reality to conform to its wishes when the institutional framework model does not produce the results desired by the political actors. In Portugal, there are signs that can be seen as elements of state interference: x

x

x

In 2002 the government, facing a difficult economic situation and the need to contain the public deficit as determined by Brussels, arbitrarily froze public higher education institutions’ reserves accumulated from the surpluses of previous economic years. The legal framework was recently changed by Law 1/2003, passed in January 2003, which determines (chapter II, article 13) the general principles that regulate the establishment of new higher education institutions and defines (article 14) the general requirements for the establishment and operation of higher education institutions. Accordingly, the launching of a new higher education institution depends on the accreditation by the Ministry of Science and Higher Education after consulting the recently established Higher Education Council. This same procedure will apply to the creation of new departments or faculties in already existing higher education institutions. The authorisation should be based on criteria of the expected quality of teaching, social relevance and financial viability. Instead of answering the complaints from public polytechnics and private higher education institutions by improving their autonomy to the level of that conferred on public universities, the former Socialist government passed Law 26/2000 of 26 August, which reduces the

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x

x

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pedagogical autonomy of public universities to the level of the autonomy of polytechnics and the private sector. The new government in office since March 2002 has revoked that law, only to pass Law 1/2003, which maintains similar provisions regarding the loss of pedagogical autonomy of public universities. The new Law 1/2003 establishes a system of ‘academic accreditation’ to be implemented by the same agencies responsible for the quality evaluation system. This same law also predicts, under specific circumstances, the possibility of establishing the basic curricula of the different study programmes offered at the national level (article 39). The Minister has decided to cut the numerus clausus of some programmes in order to protect public institutions located in less accessible parts of the country, and to penalise the study programmes in low demand.

But there are other signs that can be interpreted within a rationale of new public management and a movement towards the market: x

x

x

x

x

A new financing law has recently been approved establishing that, besides the number of students, other factors must be taken into consideration in the calculation of each higher education institution’s annual budget, namely, the quality of each degree programme and the quality of the institution itself. The same legislation allows each institution to set the value of tuition fees, between a minimum and a maximum level established by the Ministry of Science and Higher Education, though the difference between the minimum and the maximum value is only 30%. There are indications that the Ministry would be willing to allow Portuguese institutions to pay additional salaries to reward scientific excellence and to attract prestigious scientists from abroad. The Ministry seems to be willing to let the universities be responsible for setting up the process leading to the selection of their own students, allowing them to establish differentiated criteria of access.22 A proposal for a new autonomy act has been forwarded to parliament which allows for the replacement of collective decision making by forms of individual responsibility, and it reduces participation of students in governance and opens the possibility of electing rectors from outside the university.

In this context we may consider that, despite some indicators that point to options close to new public management and a reinforced role for market-type competition mechanisms, these signs are obscured by a decisive movement towards a model of state interference that denounces a weak state and its lack of sophistication which precludes efficient steering by the state.

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5. FINAL REMARKS Summing up, one can say that, despite the manifestation of the presence of market mechanisms in several of the dimensions analysed, the Portuguese system of higher education is still a far cry from a market. In many aspects, Portugal is not very different from many other countries, though the private sector creates a context of some competition that to a limited extent strengthens the role of the market. However, the fact that this competition is very limited means that most public institutions remain largely insulated from those competitive pressures, except when directly and actively promoted by the government (e.g. some of the research funding programmes). And even when the government intervenes, higher education institutions may dodge their intended objects. Recent measures taken by the government to change higher education’s legal framework apparently support a movement towards a model of state interference that will further reduce the role of market mechanisms. NOTES 1

Although there is limited information available, it can be safely said that these funds represent a minor part of the private higher education institutions’ budget. 2 A new law about the financing of public higher education institutions has recently been published (August 2003) establishing that the financing of each institution will not only be based on student numbers, but also on quality. It remains to be seen how and if this will be implemented. 3 The General Directorate for Higher Education of the Ministry of Science and Higher Education is responsible for the registration of all teaching programmes of public universities and for the preparation of all the demands for the establishment, modification or closure of courses of public polytechnics. As well, the General Directorate is responsible for the preparation of the legal procedures of the demands for recognition and authorisation of courses of public polytechnics and private higher education institutions. 4 Thus far the budget allocated by the funding formula is proportional to student enrolments. Only in the case of the creation of a new study programme in law by the Universidade do Minho did the Ministry decide not to include the students in the financing formula. However, after two years, this decision was reversed. 5 Major associations representing private higher education institutions have complained publicly and to the Ministry of Education about the lack of autonomy of private higher education institutions, namely regarding the creation and modification of study programmes (APESP 1998). 6 For a more detailed analysis of this perception in terms of strategic planning see Machado, Farhangmehr and Taylor (2003). 7 However, the fact that the overall proportion of their budget is attached to personnel costs prevents the use of most of the potential financial flexibility, notably in terms of cross-subsidisation of certain activities. 8 The former cabinet had a structure with a Ministry of Education and a Ministry for Science and Technology. The new cabinet installed in 2002 has a different structure with a Ministry of Education and a Ministry for Science and Higher Education. 9 Other funding sources available to Portuguese universities include projects developed for public institutions (ministries, administration, etc.), and private sources (such as consultancy activities). Nevertheless, the data available indicate that these sources do not represent a significant amount of money, especially with respect to private sources. 10 Some doubts have been raised about the empirical validity of this proposition (Dill 2003). Although this effect can in fact be considerable in certain highly selective US colleges and universities where special and rich ‘on-campus’ opportunities for student exchange are available, in large and/or nonresidential institutions it can be minimal or even non-existent.

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11 Accordingly, and based on the few surveys available, student preferences suggest that around 70% choose public universities as their first option, and the rest divides almost equally between public polytechnics and private institutions as their first choice (see Balsa 1997: 86–88). This means that the percentage of students saying that they are enrolled in the institution corresponding to their first choice is 80% for public universities and 38.5% for private ones (Cabrito 2002: 126). 12 In fact, when analysing the structure of private costs associated with the frequency of higher education one finds that average expenditure with accommodation for those in private higher education institutions is half that in public higher education institutions (Cabrito 2002: 180–181). This confirms the low proportion of displaced students in private higher education institutions. 13 At present, private institutions do not get funds from the public budget. Back-of-envelope calculations suggest that a generalised voucher system would mean that the state should pay the cost of an additional one-third of the total number of students (just half of the total number of students enrolled in public institutions) which could increase the total budget by as much as 50%. The increase would be initially lower, because so far private institutions concentrate most students in low cost study programmes and because fees from both sectors could be made to converge over a period of several years. 14 Even when reliable information exists and is available, it may happen that many potential students do not know how to access it, or how to interpret it in order to make the best choice. This is what many authors designate the problem of the ‘immature consumer’ (see Dill 1997). The set of factors underpinning student choice seems to be wide, going beyond a cost-benefit analysis of the investment in a higher education degree and including important consumption elements, notably the personal experience when contacting prospective institutions. 15 In the first case, institutions try to settle prices that will maximise their profit. In the private not-forprofit sector, price maximisation is not the only or even the main goal. In some countries (e.g. Brazil) the law explicitly forbids not-for-profit institutions from sharing profits among the owners or the members of cooperatives owning higher education institutions. 16 Several reasons explain this change in terms of fees, such as the growing conviction that the benefits of higher education are mainly private, and the growing inequality in terms of the cost of education for families arising from the emergence of the private sector. 17 As the Portuguese Constitution states that higher education should progressively become free of charge, many people considered that any increase in the value of tuition fees would be unconstitutional. However, the Constitutional Court ruled that updating the value of fees within the limits of inflation would be just that, that is, updating and not increasing. 18 The main difference was that the level of tuition, in the 1997 version, was equal for all students of public institutions (in the 1992 law the level of tuition fees was means tested). The new (annual) value was linked to the value of a (monthly) minimum wage in order to minimise student criticism that this was only a first step to a progressive transfer of costs from the state to the students and their families. 19 We are still very far from having this kind of awareness of quality (El-Khawas 1993), Brazil being probably the one country where attempts are being made to collect this kind of evidence (Amaral and Polidori 1999). 20 That is, the traditional model in force at the time of the advent of the modern university, associated with the role of the university as a tool for the reinforcement of public administration and of national culture characteristic of a period of reinforcement of the nation-state. 21 Kraak (2001) coined the term ‘state interference’ to designate a model of relationship between higher education institutions and the state based on control of higher education that is neither ‘systematic’ (Model One) nor ‘regulation through steering’ (Model Two) but which is based on arbitrary forms of crisis intervention. These interventions are “either sporadic, or they become an attempt to control through a fairly narrow and rather crude set of measures aimed at establishing quiescence” (Cloete, Moja and Muller 1996). 22 In fact, in the early 1990s, public higher education institutions had the capacity to add specific (additional) requirements for each applicant. This consisted normally of some national exams which were coordinated between public institutions in order to avoid students having to go through multiple and similar exams. The same exam would be valid for all institutions requiring that type of exam. A return to this type of situation would not be surprising.

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REFERENCES Amaral, A. and M. Polidori. “Quality Evaluation in Brazil: A Competency Based Approach?” Higher Education Policy 12.2 (1999): 177–199. Amaral, A. and M. Rosa. “Accreditation in the Framework of Evaluation Activities: A Comparative Study in the European Higher Education Area. Country Report – Portugal.” Report presented to the EIE-GEW Forum, Berlin, April 2003. Amaral, A. and P. Teixeira. “The Rise and Fall of the Private Sector in Portuguese Higher Education?” Higher Education Policy 13.3 (2000): 245–266. APESP, Letter to the Minister of Education. 26 November, 1998. Balsa, Casimiro. O Perfil Sócio-económico dos Estudantes do Ensino Superior. Lisboa: CNASES and CEOS, 1997. Cabrito, Belmiro. O Financiamento do Ensino Superior. Lisboa: Educa, 2002. Cloete, N., T. Moja and J. Muller. “Towards New Forms of Regulation in Higher Education: The Case of South Africa.” Higher Education 32.2 (1996): 129–155. Dill, D. “Higher Education Markets and Public Policy.” Higher Education Policy 10.3/4 (1997): 167– 185. Dill, D. “Allowing the Market to Rule: The Case of the United States.” Higher Education Quarterly 57.2 (2003): 136–157. El-Khawas, E. “Accreditation and Evaluation: Reciprocity and Exchange.” Paper prepared for the Conference on Frameworks for European Quality Assessment of Higher Education, Copenhagen, May, 1993. Jongbloed, B. “Marketisation in Higher Education, Clark’s Triangle and the Essential Ingredients of Markets.” Higher Education Quarterly 57.2 (2003): 110–135. Kraak, A. “Policy Ambiguity and Slippage: Higher Education Under the New State, 1994–2001.” CHET Commissioned Paper, 30 December, 2001, http://www.chet.org.za/papers.asp. Lindsay, G. and T. Rodgers. “Market Orientation in the UK Higher Education Sector: The Influence of the Education Reform Process 1979–1993.” Quality in Higher Education 4.2 (1998): 159–171. Machado, Maria de Lourdes, Minoo Farhangmehr and James S. Taylor. “The Status of Strategic Planning in Portuguese Higher Education Institutions: Trappings versus Substance.” Paper presented at the 16th CHER Annual Conference, Porto, 4–6 September, 2003. Marginson, Simon. “Competition and Diversity in the Reformed Australian Higher Education System.” In Meek, V. Lynn and Fiona Q. Wood (eds). Managing Higher Education Diversity in a Climate of Public Sector Reform. Higher Education Division. Canberra: Department of Employment, Education, Training and Youth Affairs, 1998, 81–96. NCHE (National Commission on Higher Education). A Framework for Transformation. Pretoria, July, 1996. Neave, G. and F. van Vught. “Conclusion.” In Neave, G. and F. van Vught (eds). Government and Higher Education Relationships Across Three Continents: The Winds of Change. London: Pergamon, 1994, 269–271. Pereira, Pedro Telhado and Pedro Silva Martins. “Returns to Education in Portugal: A Meta-Analysis.” Working Paper, Faculdade de Economia, Universidade Nova de Lisboa, 1999. Rothschild, M. and L.J. White. “The Analysis of Pricing in Higher Education and Other Services in Which Customers are Inputs.” Journal of Political Economy 103.3 (1995): 573–586.

THIERRY CHEVAILLIER

HIGHER EDUCATION AND MARKETS IN FRANCE

1. INTRODUCTION France is known for its long tradition of centralisation and state control over education. Despite changes in recent decades, the French higher education system remains basically controlled by the state. Recent years have witnessed a puzzling contradiction between the public status that higher education has largely retained and the growing protests against the ‘open’ or ‘creeping privatisation’ of the sector, the ‘dismantling of the public service’ and the intrusion of ‘the market’ in its operation. This contradiction may have its roots in the perception by the French people of education as an essential part of the public services. This belief is grounded on the role education has played in the construction of the nation. In a French society obsessed by the fear of ‘civil war’, of segmentation, of centrifugal explosion, the forming of the individual is not supposed to be directly for his or her benefit but for that of the national community … It is the economic and social system, the nation, which needs variously qualified economic agents, stable social forces and citizens adhering to collective norms (Ballion 1996: 189).

Over two centuries the country has developed a singular notion of public services based on equal access for all citizens and a reliance on the state to provide them. This peculiar mixture of egalitarian philosophy and administrative centralisation is a legacy of the revolutionary period. In recent years, this notion has increasingly come into conflict with pressure both internal and external for a more diversified and flexible public administration. In education, central control by the state is still very strong. It is criticised by many for not achieving its main goal, equality of access, and is felt by a growing number of people as a limitation of the freedom of parents to choose their children’s education. Under such circumstances, one would expect the public debate on education to focus on markets and private provision. As Neave (1990: 110) points out “the ideological concept of ‘market forces’ is erected in opposition both to the notion of a planned economy and, by extension, to the agencies whose planning serves to restrict individual initiative”. In higher education, the public good argument in favour of state provision is less convincing than for compulsory schooling. Institutional autonomy could lead to competitive behaviour and more market-like patterns of coordination. There is a private sector of higher education in France but it is rather small, largely limited to specific fields of study, and narrowly regulated. One cannot deny that there is competition among private institutions and between public and private 311 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 311–326 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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institutions in such fields of study as business administration or engineering but it is not obvious that such competition produces the effects that the economic theory assigns to the operation of markets. In the public sector of higher education, elements of markets can be found. But it is not clear whether they have been consciously introduced in order to create quasimarkets or whether they are unwanted disturbances that cannot be eliminated. The weight of political pressure groups supporting a systematic extension of the role of markets is too limited in the country to be a real concern in the education sector. Nevertheless, the growing dissatisfaction with the results of the system brings the issue of coordination into the policy arena, even if it is not frequently addressed, especially in the parliament. In recent decades, many reforms, ambitious or limited, have been dropped after student protests, often with the support of the population. The memories of the riots of 1968, still on the mind of every politician, partly explain this state of affairs. After a brief historical overview of the relationship between the state and higher education, we will depict the recent evolution of French policy and make an inventory of the elements of markets that can be found in the public and private sectors of higher education. We will then try to draw from this analysis some conclusions on the viability of the balance of market and bureaucratic coordination instruments achieved and the possible evolution in a context of European integration and global competition. 2. A LONG TRADITION OF STATE CONTROL 2.1. A Brief History of French Higher Education At the time of the foundation of the first universities from the end of the 12th century, a French model of university developed in Europe as a community of masters and students (Renaut 1999). The efforts of the early universities to free themselves from the control of the church did not lead them in France to independence and self-government. They fell increasingly under the authority of the kings during the long process of the construction of the nation state between the 15th and 18th centuries. Even before the French Revolution, universities, secular since the banning of the Jesuits in 1764, were organised in a system of higher education, controlled by the state. The revolutionary regime abolished them in 1793 and did not replace them, creating only a few specialised institutions necessary to train a qualified elite for the army and the administration of the state. The construction of a national system of higher education was one of the main achievements of Napoleon I. By creating the ‘Université impériale’ in 1806, he opted for a highly centralised organisation. Branches of the Imperial University (covering both what we would call today secondary and tertiary education) were distributed across the national territory. The map of higher education remained almost unchanged until the second half of the 20th century, despite an attempt to modernise the structures in 1896 by federating local faculties into regional universities. The objective was to emulate the successful German model of the

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Humboltian university, thought at that time to be the reason for Germany’s economic and military power that yielded the humiliating defeat of France in the 1870 war. These reforms were largely ineffective and it is only after the student riots of 1968 that another attempt was made at reorganising the system. The Faure Act of 1968 created autonomous universities by amalgamating the hitherto separate faculties while, at the same time, splitting the largest institutions into smaller and more manageable units. Institutional autonomy was further increased in 1984 by a new Higher Education Act which gave new internal governance structures to institutions and simplified the various statutes of non-university institutions. 2.2. Higher Education as a Public Service The French constitution provides for a right for all to education. The state must ensure equal access and equal provision of all levels of education to academically qualified people. The baccalauréat, the standard qualification for access to higher education, is formally the first university degree and the final diploma of upper secondary education. At present, after the baccalauréat has been extended to technological and vocational education, about 65% of an age class pass the ‘Bac’ and are therefore entitled to some kind of higher education. The concept of higher education is very broad, including short vocational programmes accessible to baccalauréat holders. Parts of the higher education system (the grandes écoles but also short programmes in the university institutes of technology) are more or less selective and are allowed to choose their students. The traditional university sector is open, at least for newly enrolled students. With the expansion of access, new types of institutions and programmes were introduced and developed in order to accommodate all without giving up the training of an elite. Most of these newly created programmes are selective, but, as long as there remains an open sector large enough to accommodate all qualified applicants to higher education, the principle of a ‘right to higher education’ is preserved. This subtle dialectics between free access considered to be the basis of ‘democratisation of higher education’ and strong selectivity, thought to be the condition for producing the economic and administrative elite of the country, is at the centre of most of the public debate on higher education. 2.2.1. The French Notion of Public Service Continuity and equal access, which are the main characteristics of public services, are generally considered to imply that the state must be the provider of such services as, for example, electricity, education and justice. Private providers are disqualified for not being able to guarantee continuity of service since they might become bankrupt. Equality of access demands that all citizens be treated in exactly the same way. This explains why even local government is not trusted as a public service provider since the plurality of local authorities is likely to result in different treatment of the citizens from one area to another. Treating public services as state provided services also implies that the jurisdictional privilege of the state public administration extends to the providers of

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all services deemed public. Different regulations enforced by different courts apply to private and public affairs. Conflicts arising between a citizen and a public administration or a public service are dealt with by ‘administrative courts’ in charge of enforcing a specific body of legislation (droit public). Private organisation may take part in the public service, sometimes on the basis of a contractual arrangement with state officials but more often on statutory conditions that cannot be discussed. This is the situation that prevails for private schools at the primary and secondary education level. 2.3. State Control of Higher Education 2.3.1. The Building of the Regulatory Framework The medieval universities struggled for independence from the church and political power. The building of the nation-state witnessed an extension of the King’s control over the academic estate. There was a brief spell of complete deregulation during the early years of the Revolution after the abolition of the universities in 1793. For most of the 19th century, higher education was submitted to strict state monopoly established by Napoleon I. Only members of the Imperial University could run institutions and teach in them. They were appointed by the ‘Grand Master of the University’, as the education minister was then called. This long period (covering the first empire, the restoration, the second republic and the second empire) ended in 1875 when the Act on Freedom of Higher Education was passed. Freedom to establish higher education courses or institutions was (and still is) only limited by general rules regarding public order. The curriculum should not include elements likely to threaten public order. Heads of institutions should have a clear criminal and civil record. Only for specific subjects, like medicine, were special qualifications required by founders and managers of private higher education institutions. A few years later (1880), new legislation took back a large part of this freedom by returning to the state the monopoly of awarding degrees and prohibiting private institutions to be named universities. The public sector of higher education remained centrally controlled until the end of the 1960s, despite some reforms and a slow evolution that transferred a part of the control to the academic profession. Christine Musselin (2001) analyses in depth the causes of the failure to reinstate at the end of the 19th century autonomous universities on the model of German institutions and the persistence of the ‘faculty’ system introduced with the Imperial University. 2.3.2. The Instruments of State Control Over Higher Education The state, through the Ministry of Education, but also other ministries controlling institutions in their own sector (agriculture, culture, defence) holds extensive regulatory powers over education in general and higher education in particular. Only the state, or institutions accredited by it, can award national diplomas, degrees and titles. Accreditation of programmes is linked with the delegation to public (and recently private) institutions of this right to award degrees ‘guaranteed’ by the state.

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All higher education institutions are free to create their own diplomas but only the state can formally authorise them to grant ‘national diplomas’ that confer degrees and titles. In this way, it ensures its control over content, traditionally defining the curriculum in a rather detailed manner. Such standardisation does not exist for private higher education. The state, however, oversees the content and method of instruction when asked to formally recognise diplomas or approve institutions or programmes, which is the case in the majority of private institutions. Another powerful tool of the state is the control of recruitment of the workforce especially of academic staff. The oddities of the academic profession in France are largely linked with the civil servant status and the central control over careers (recruitment, promotion, definition of service). Although this power of the state is, at best, shared with the profession through several national consultative bodies and with teachers’ unions, it is considered as one of the essential responsibilities of the state that cannot be given up lest the ‘national system’ will explode. These controls, ‘ancestors’ of the quality assurance schemes, proved not to work properly when faced with diversification and professionalisation of higher education programmes. They are nevertheless still relied upon as the main tools for keeping the ‘public service’ together and maintaining quality. As such, they are strongly supported by the academic staff unions and a large part of the student body. Finally, funding provides an indirect but nevertheless very powerful instrument for controlling institutions. The central government provides nearly four-fifths of the funding of higher education as a whole, through multiple and sometimes uncoordinated channels. Here again, part of such control has proved illusory: the more detailed the prescription, the less effective the command. The shift from line item budgeting to block grants, proposed by the 2003 Bill on Autonomy of Universities, is nevertheless seen by the proponents of the ‘public service of higher education’ as a relinquishment of the state’s duties. 2.3.3. State and Guilds: Indirect Controls It is common to equate the academic organisation to the guilds that were the prevailing economic structure of the middle ages. As the liberal ideas of the age of enlightenment pointed to the guilds as the main hindrance to economic freedom and the development of the market, the French revolutionaries saw the universities as a stronghold of conservatism and abolished them in 1793. Napoleon organised the academic profession like a religious order, with a very strong hierarchical structure. The ‘Grand Master of the University’ appointed deans of faculties and heads of higher schools. The organisation of the academic profession was codified in details, careers, honours and costume and the whole empire was systematically and uniformly equipped with secondary schools (lycées) and higher education ‘establishments’ (facultés and grandes écoles). Being members of the same administration, teaching staff could easily be moved from secondary schools to faculties, from one region to the other, or from teaching to administrative positions in different stages of a more or less successful career. Step by step, during the 19th and 20th centuries, elements of collegial control were introduced in this organisation without destroying the principle of centralised

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administration. Careers and curriculum were increasingly left to the profession, on a national basis and along disciplinary lines. As the professors of the same discipline were largely left to themselves to decide on careers (recruitment, promotion) and shape the curriculum in their own field, a new sort of guild power emerged, quite different from that of the medieval universities and from collegial structures in universities of other European countries. This ‘national-collegial’ structure in a way balanced the strong central administration of the Ministry. It is, in a way, an expression of a form of coordination that is re-emerging from time to time in French history as witnessed by the Vichy régime and its corporatist programme of public administration. This was the prevailing situation of higher education in France until the early 1990s, characterised by both strong central control and an equally strong individual and collective independence of academics and referred to as ‘la république des facultés’ by Christine Musselin (2001: 42). 3. A CHANGING HIGHER EDUCATION POLICY FOR THE PUBLIC SECTOR The real turn in contemporary higher education policy took place at the end of the 1980s, largely as an answer to the tremendous expansion of the previous three decades and to the increasing inability of central administration to run a system that was growing more diversified and differentiated. It was also an attempt to implement the principles of a ‘new public administration’ introduced to the country in the early 1980s. 3.1. Growth and Diversification French universities, earlier than their European counterparts, had experienced a rapid transition from elite to mass higher education (see table 1). Table 1. Number of universities, teaching staff and students 1960–95

Universities Teaching staff Students

1960

1970

1980

23 8,000 214,700

63 28,000 661,000

73 37,000 852,000

1990

1995

81 44,000 1,172,000

87 62,000 1,463,000

The student protests of 1968 initiated structural changes that slowly led to a fairly different landscape: x x

A large number of institutions, distributed more evenly across the national territory linked with local business and local authorities. A much larger proportion of young people educated and trained for different types of jobs; students and other stakeholders in higher education putting increased pressure on universities to diversify and create new teaching programmes.

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The period witnessed in fact many different types of diversification (Meek and Wood 1998: 19): x

x

Systemic diversification, with the creation of new institutions (instituts universitaire de technologie in the 1970s, instituts universitaire professionnalisé in the early 1990s and instituts universitaire de formation des maîtres in the 1980s) and the development of programmes similar to grandes écoles inside universities, bridging the gap between the two parts of the traditionally dual French higher education system. Programmatic diversification, with the rapid growth of postgraduate programmes, and the introduction of new subjects in university studies (business administration, applied languages, social and economic administration, arts, communication).

Universities grew to become distinctly different from each other, making irrelevant the application of general rules and ready-made solutions. The need for differential administrative treatment of institutions, combined with the political desire to maintain the unity of the public system, urged the Ministry of Education to design an alternative to the traditional central command that had prevailed for more than a century in the administration of the system. 3.2. A New Framework for Higher Education Policy: Accountability and Contracts 3.2.1. Context of the New Policy The political class was not ready to drop the coordinating role of the state that had been so successful for 30 years. Central steering of the economy was then made to evolve towards a nexus of medium-term contracts (called ‘planning contracts’, contrats de Plan) between the central government and various public institutions (local authorities, public enterprises, autonomous public agencies). Some decentralisation to local authorities had been achieved in 1983, with the transfer of responsibility for funding secondary education. The salaries of education personnel were still paid by the central government from the state budget but with a broad decentralisation of staff management to the local state education officials. It is in this context that contracts were first experimented with in higher education, first for the limited domain of university research funding. At the end of the 1980s, with the arrival of a new administration at the Ministry, the experiment was extended to recurrent funding of teaching. 3.2.2. Contractual Definition of the Operation of Public Services In the legal framework of the public sector (called the ‘public law’), the state and all agencies created and controlled by it are able to unilaterally force decisions on private actors, be they private persons or firms. In its relationships with other public bodies, the state holds the ultimate authority and whatever power local authorities and public agencies may have is delegated to them by the state. In this context, the

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idea that contracts could be signed between the state and public agencies or authorities is very odd and difficult to accept for a central administration staffed with people trained in public law. The blatant asymmetry of power in these agreements led some analysts to call them ‘negotiated public rules’ rather than ‘contracts’. Nevertheless, the term contract had a lot of appeal and gained widespread use. In the field of higher education, the first contracts were signed in 1991 (see Chevaillier 1998 for a discussion of the contract policy). The contracts are based on a university strategic plan (Projet d’établissement), in which each institution attempts to formulate its strategy and related needs in terms of recurrent funding, equipment and new staff or staff retraining. The negotiation with the Ministry sets, on the one hand, the definition of the portfolio of programmes for which the university was accredited and for which it would receive recurrent financial support from the state. On the other hand, it results in a pledge by the Ministry to fund specific activities and provide resources in terms of staff and new buildings during the four years of the contract. This so-called ‘contract policy’ is not a mere funding method. The institutional plan includes the portfolio of programmes the university wishes to offer. The contract finalised with the Ministry is the accreditation instrument for the programmes leading to ‘national degrees’1 which the state is responsible for funding. The share of the contractual component in recurrent funding (excluding salaries paid by the state) is currently around 7%, a minute amount but enough to generate a substantial differentiation in the policies of the various institutions. At a later stage, research activities, previously funded on a separate basis, were included in a single contract between institutions and the Ministry. In 1996, the national research agencies (especially the Centre National de la Recherche Scientifique) were associated with the negotiation of these ‘contracts’ which acquired a comprehensive scope by including external funding of research laboratories operating inside universities. Although responsibility for higher education as such had been retained by central government, the regional councils began to finance the development of universities and higher schools, funding equipment, new buildings and also current expenditure related to selected programmes, usually designed to meet the needs of local industry. 3.2.3. The Outcomes of the Contract Policy Negotiations between universities and the Ministry revealed how limited was the real autonomy of the institutions: academic freedom, conceived as individual freedom of academics, has long been mistaken for autonomy. This is detrimental to the autonomy of the institution: for a French don, allegiance is felt more to his/her discipline on a national basis than to the individual institution in which he/she happens to work. The change in the relationship between ministry officials and the heads of universities translated into new internal relationships and governance of the institutions. A new generation of university presidents emerged and the role of deans of faculties and heads of departments was significantly altered.

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Some universities were more efficient in the preparation of their development plans and in negotiations with the Ministry. Fostered by the Ministry, reflection on and training in managerial techniques developed among university administrators. Until then, universities had accounting and information systems that were ill-suited as tools for monitoring and decision making. They had originally been conceived as instruments of state control. Financial and accounting computer systems, for example, provided no information about costs and were mainly structured to check compliance with the regulations of public finance. Universities, as long as they only had to conform with orders from the centre, had neither resources nor incentive to develop their own databases. The contractual approach has introduced a strong incentive to evaluate internally. Universities, with the financial help of the Ministry, are in the process of changing the whole of their information systems (accounting, finance, personnel management, student management etc.). Contrary to what was commonly feared in the government, the new policy did not translate into loss of control by the state: the central administration did not abandon its control over the higher education system. In fact, it can be said that overall control of the Ministry has increased when focus shifted from detailed administration to strategic management of the higher education system (Berrivin and Musselin 1996: 591). 3.3. The Bologna Process A third distinctive influence can be identified, that of the entrance of a European policy for higher education in a field that had been until recently the preserve of the nation states. The Sorbonne Declaration of 1998 by the education ministers of the four larger countries of the EU, did not come out of the blue. It coincided with the publication of the Attali Report entitled ‘For a European Model of Higher Education’. A committee chaired by Jacques Attali, former personal adviser to François Mitterrand, had been commissioned to make proposals to modernise the French system and to bring closer the two parts of it, the écoles and the universities. Attali came up with an answer that was not immediately understood: the reform of French higher education was to be achieved through a process of European harmonisation. Obviously, the countries that entered this process of building a European Higher Education Area, four at first in the Sorbonne, then 15 the following year in Bologna, found it convenient to use it for achieving different internal objectives. In the case of France, the main drive was to unify its higher education system and to clarify (‘to make more readable’) the various programmes and their respective levels. The complexity of the degree structure had grown to a level that confused students from both home and abroad. The peculiar structure of study in the grandes écoles (two years of broad preparation in secondary schools without any intermediary diploma and three years of narrowly specialised studies in a small institution) prevented programmes of student exchange. The piling up of intermediary diplomas in universities (where one could get up to a diploma a year in a five-year period of

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study) although quite efficient in terms of reorientation of the students made it very hard for employers to assess competencies acquired by graduates. It was decided that the proposed three-level degree structure, bachelors, masters and doctorate, would replace the existing plurality of diplomas in the whole of the higher education system. The legislation on degrees was altered in 2001 and the new programmes and degrees were phased in over a period of five years and implemented through the four-year institutional contracts the Ministry signs every year with one subgroup of the universities. In relation to private institutions, the main effect of this reform was to extend to them a genuine process of accreditation developed for all higher education programmes which would eventually enable them to award national diplomas, thus narrowing the gap that kept them separate from public institutions. 4. THE LIMITED SCOPE OF THE PRIVATE SECTOR IN FRENCH HIGHER EDUCATION Since the Revolution, in the whole education sector, the existence of a private sector, mostly catholic, has been one of the great political issues between the right and left from the parliament down to the village council. It is only very recently that peace has been achieved between the opponents: “… The ‘secularists’ preferred a compromise on the official existence of subsidised private education rather than run the risk of progressive unification which might introduce pluralism into the very bosom of the state school” (Prost 1996: 356). Since the 1875 Act on Freedom of Higher Education, legislation was periodically altered in opposite directions. The pendulum seems to have come to a standstill at the moment. 4.1. Private Higher Education The private sector of higher education reproduces the dual structure of the public sector. It comprises three types. ‘Free institutions’. Called Facultés libres or Instituts catholiques, these institutions are not allowed to be called universities but they are similar to public universities in that they offer a variety of programmes in different academic fields. They cannot award national diplomas. Either they award their own diplomas or they sign agreements with public universities which provide recognition and equivalence or control of curriculum and examinations. They may sign agreements with public universities to allow their students to sit examinations leading to national diplomas. Private technical higher education institutions. These institutions are found in the fields of business and engineering, but also communication, architecture and journalism. They cannot award national diplomas but they can apply for official approval of their diplomas by the Ministry in charge of higher education (diplôme visé). Official recognition and approval of diplomas of private business schools are decided upon by the Ministry on the advice of a special consultative committee, the

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Committee for Evaluation of Programmes and Diplomas of Management (Commission d’évaluation des formations et diplômes de gestion) created in 2001. Engineering schools are required to be accredited in order to award their graduates the ‘title of engineer’ which is neither a national diploma nor a degree but a ‘title’. Accreditation is granted for a period of six years by a national committee named Commission du titre d’ingénieur. This committee, created in 1934, consists of representatives of academic staff, industrialists, practising engineers and employee unions. Higher education programmes in secondary schools. A large number of short higher education programmes are operated by private upper secondary schools. 4.2. The State and the Private Sector Since the Act of 1875, private institutions of higher education must fulfil a number of minimal conditions to be authorised (autorisé) by the state: qualifications of teaching staff and administrators, premises and facilities etc. They may also apply for formal recognition by the state (reconnaissance par l’état). Recognised schools of higher education may apply for public subsidies, employ faculty seconded from public sector higher education institutions and attract grants and bursaries for their students. Approval of their diplomas by the state confers on private institutions a status close to that of public institutions in exchange for a periodical review of programmes by the state and the obligation to have exam boards chaired by a professor of a public higher education institution. 4.3. Public Funding of Private Higher Education Most private institutions receive a good share of public funding. According to the National Higher Education Account, resources of private schools of business and engineering come from three roughly equivalent sources: one-third public funds, one-third business and one-third students. A large number of institutions owned by chambers of commerce are funded by them out of compulsory payments, similar to a tax, through which firms finance chambers of commerce. These funds are treated as public grants. Most institutions also receive sizeable funding from firms through a scheme called ‘apprenticeship tax’ by which firms that give money to education and training institutions of their choice receive a waiver of the payroll tax earmarked for training. Although this is a tax, that is, public money, it is treated as a private contribution of business to education. In fact, private institutions get nearly two-thirds of their resources from public funds. One can argue that the share of public funding is even higher since students are entitled to public grants and aid that cover part of tuition fees (provided institutions are ‘recognised’ by the state). The private secondary schools offering higher education programmes are, in their vast majority, funded by the state. About 20% of French secondary schools are private and nearly all of them are entitled to public funding when they have signed

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an ‘association contract’ with the state. Their staff, although not civil servants, are paid by the state on scales similar to those of the public sector. They get approximately the same recurrent funding as the public institutions, both from the Ministry of Education and from the regional councils, on the basis of enrolments. ‘Free institutions’ and ‘private technical higher education institutions’ are organised in federations which are the official bodies dealing with the state: FESIC (fédération d’écoles supérieure d’ingénieurs et de cadres), UDESCA (union des établissements supérieurs catholiques) and UGEI (union des grandes écoles indépendantes). These organisations receive grants from the budget of the Ministry of Education which they allocate among their member institutions. Tuition fees are freely set by institutions. The amount paid by students varies in size: in ‘free institutions’, fees are modest for ‘general programmes’ but can be higher for popular ‘professional programmes’ like interpreting and translation, applied psychology etc.; in engineering and business schools, there is also a surprising dispersion of the ‘price’ paid by students. The business schools charge the highest fee, in the range of 6000 to 10,000 euros per year. Student fees can get much higher at some private institutions that do not receive any public grant, either from local or central government. Such institutions are also financed by business contributions (essentially through the ‘apprenticeship tax’ scheme). However, when faced with competition from public institutions or publicly supported private institutions, they have to settle for levels of fees that hardly enable them to cover their costs. This explains why they constitute such a minute share of the higher education sector, with a ‘niche’ in the fields not covered by existing institutions. 5. MARKET ELEMENTS IN THE PUBLIC SECTOR OF HIGHER EDUCATION Among the several activities of public higher education institutions, teaching (‘initial education and training’ as it is usually called in France) is the most protected from market influence. Research and research-related services, being increasingly competitive and open to private funding, have acquired lately many of the features of a market. Continuing education is the only sector in which universities operate partly in a market, competing with private providers. Mature students with work experience make up a growing part of enrolments in many academic programmes. New programmes are often developed with a view to attracting such students. The borders between ‘initial’ and ‘continuing’ education are becoming more and more blurred. Funding schemes for in-service training are adapted in order to accommodate such new forms of skills or capacity building processes. Jongbloed (2002) has shown how this trend impacts on both curriculum and institutional organisation. Continuing education and training has long been a true market for training programmes offered to business firms. This market is not totally left to itself, however: the state sets a minimum amount of spending on vocational training, whether organised in the firm or by an external provider. As well, the apprenticeship

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tax, as mentioned earlier, can contribute to funding initial professional training. There is also a fair amount of state or regional funding for focused training programmes (unemployed youth, underprivileged groups etc.) which is allocated by tender. Private providers compete with public institutions for both segments of this market. Content is not regulated and prices are almost free with limited public control to ensure that public providers do not undercut their private competitors by cross-subsidising their programmes from public grants allocated for teaching. In the education sector (‘initial education and training’), the picture is quite different. Although some of the features of a market, or rather a quasi-market, can be found, they are not related with each other in a way that would allow ‘market forces’ to operate. Freedom of choice of programme is limited for students as well as freedom of the institutions to choose their students. As a rule, students have to register in the public institutions of their region, unless the programme they want to enrol in is not offered locally. This is both a right and a duty. If they are not accepted in one of the regional institutions, they can appeal to the ‘recteur’, the head of the education administration in the region, who will force an institution to enrol them. This is however not true for ‘selective’ programmes for which institutions have been allowed to choose their students. The selective sector of public higher education is fairly large and growing steadily, which reduces the scope of the ‘open’ sector where institutions are compelled to enrol students from their region who have the required qualification (mainly the baccalauréat). The ‘selective’ sector includes the grandes écoles but also the instituts universitaire de technologie and many professional programmes offered by universities, mainly at the postgraduate level but also at the undergraduate level. Such programmes select their students either through interview or through competitive examination, the famous French ‘concours’. Although similar institutions cooperate to organise common entrance examinations and allocate successful students among them, it is not uncommon for students to have to sit for several distinct concours, often organised independently at exactly the same period of the year. Fees do exist but they cannot be considered as true prices, since they cover a minute share of the costs. Uniform fees are set nationally by the Ministry and revised yearly for the programmes leading to national diplomas. Fees vary according to broad categories of programmes: the regular fee (about 150 euros) applies to most programmes, while professional programmes attract a higher fee (about 400 euros for engineering programmes both in universities and independent public schools). Fees are waived for all students receiving means-tested financial support from the state (including students who get a ‘zero rated grant’, specially introduced for this purpose). Institutions receive financial compensation from the Ministry for the loss of income entailed by this exemption. State funding is partly linked to student numbers on the basis of costs of different types of programmes: this is a feature of quasi-markets in which a third party buys places on behalf of the students. Institutions are free to set tuition fees for programmes not accredited (and not funded) by the state that they are allowed to create and for which they award their own diploma. These programmes are in fact similar to those of private institutions,

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and institutions compete with other providers in the market. They have to recover the full cost of such programmes from their students (often, fees are paid by employers out of their training budgets). Freedom of institutions to specify their own programmes does exist. But the socalled ‘university programmes’ as opposed to ‘national programmes’ represent only a minute share of the institutions’ offerings and are found only in highly specialised fields of professional training. When introduced outside the framework of vocational training, these programmes are generally experiments that universities test before applying for accreditation. Such experiments are sometimes funded by local authorities. This explains why such programmes do not develop except for short periods in very narrow ‘niches’. Information on what is offered to students is well organised (mainly by the state through a national agency and a network of guidance centres). Nevertheless, the principle of nationally identical programmes, in content as well as in quality, makes it taboo to mention differences between studies leading to ‘legally’ equal qualifications. When the state allocates exactly the same resources to various institutions to teach the same programmes to reputedly similar students, the result is bound to be the same and no one is allowed to doubt it. The whole population, and the student body in particular, profess a blind faith in the ‘equal value of diplomas’ across the whole national territory (including the Pacific, the West Indies and the Indian Ocean). There is an accepted hierarchy among different diplomas: a ‘title’ of engineer is unanimously recognised as ‘better’ than a masters degree in science. But all university degrees are ‘of the same value’, whether obtained in the large science universities of the nation’s capital or in a small science department of a small comprehensive university in the provinces. The state must treat all graduates equally when recruiting civil servants, and industrial collective agreements do not allow for wage discrimination for applicants with the ‘same’ qualification. Until recently, this collective attitude made it impossible to look at the quality of programmes and to publish assessments based on facts. This lack of information explains the reliance on ‘old boy’ networks, unfounded value judgments and arbitrary recruitment methods.2 The absence of evaluation of programmes based on standard indicators also plagues the private sector. The only ‘objective’ information students can get on the quality of private education is the seal of approval given by the state to programmes or diplomas. Until recently, the criteria on which such approval was based were not known and approval itself was granted for unspecified periods of time.3 This leaves room for advertising and marketing techniques, which do not help students in choosing their courses. Even privately published specialised magazines that aim at helping students can hardly be trusted because they rely on advertising income derived from private institutions. In both public and private sectors, competition for students has grown since 1995 when the overall number of students started to decline. Instead of fighting off applicants as they did in the 1980s, institutions now have to attract them. One of the ways to do this is to provide reliable information about their programmes. Finally, public institutions are not allowed to choose freely the resources they use. Staff for the most part are employed and paid by the state. As state civil servants, academics have permanent tenure from the day of their recruitment. They

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cannot be moved without their consent. If they wish to move, usually for promotion, they simply transfer from one institution to another. They are posted by the Ministry to one institution that has very little influence on their careers. Until recently, the Minister, who decides on appointments and promotions, acted on the advice of a national body, the Conseil National des Universités, made up of elected representatives of the disciplines and of members appointed by the Minister; institutions are now able to propose promotion of their staff and their role in the recruitment process has been increased (see Chevaillier 2001 for a discussion of academic careers in France). Buildings are not owned by institutions. They belong either to the state or to the local communities and are ‘allocated’ to universities or schools; they cannot be sold, rented or transformed without the consent of the owner. Plans for transferring to institutions more control of their staff and other resources have failed repeatedly for several reasons: for some time, the Ministry did not trust institutions and doubted their ability to manage their own resources. Often, the heads of institutions themselves were afraid of being given more management responsibilities because of the lack of qualified staff at the executive level. Finally, staff, both academic and administrative, and their unions preferred distant bureaucratic control to close management. A bill on institutional autonomy, drafted in the spring of 2003, was withdrawn by the government after protests from both student and staff unions. 6. CONCLUSION When looking at the place of the market in French higher education, one might be surprised by the distance between the opportunities offered by the legal framework and the actual behaviour of institutions and individuals. It is certainly partly due to a national culture that views education as a public service that needs to be provided through a centralised organisation. Despite the critics of the current evolution, the increased autonomy acquired by public institutions should not be mistaken for a withdrawal of the state that would leave an empty space for market forces to fill. Could it be that the state is becoming subtler in exercising its control, using, for example, controlled competition among its agencies to produce the information needed for tighter command? It might also be that our common analysis is based on a simplistic view of the modes of economic and social coordination. There are possibilities other than central control or the market. How to describe the behaviour of autonomous actors who sometimes compete and sometimes cooperate according to what they perceive to be their individual and their common interest. Higher education institutions are increasingly expected to enforce self-regulation in a broad framework set by the state, the role of which changes from control to supervision. It is too early to say whether such a pattern accurately depicts the French higher education system and will prove a stable form of organisation. There are however factors already at work that may change the picture in the future: lifelong learning, meaning the blurring of the border between a more

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vocational higher education and an expanding continuing education; the dilution of education in an unchartered ‘knowledge economy’; and the incapacity of Europe to build a common identity to replace the vanishing national cultures. NOTES 1 2 3

The accreditation process is currently undergoing significant changes in France (see Chevaillier forthcoming). France is one of the few countries where private firms use graphology extensively for recruitment. Process and method of approval are currently being reviewed together with the transformation of accreditation.

REFERENCES Ballion, R. “A Changing Focus of Power: From the All-Powerful State to the User-Customer.” In Corbett, A. and B. Moon (eds). Education in France: Continuity and Change in the Mitterrand Years, 1981–1995. London: Routledge, 1996, 189–198. Berrivin, R. and C. Musselin. “La politique de contractualisation entre centralisation et décentralisation: les cas de l’équipement et de l’enseignement supérieur.” Sociologie du Travail 38.4 (1996): 575–596. Chevaillier, T. “Moving Away From Central Planning: Using Contracts to Steer Higher Education in France.” European Journal of Education 33.1 (1998): 65–76. Chevaillier, T. “Professional Diversity in a Centralised System: Academic Staff in France.” In Enders, J. (ed.). Academic Staff in Europe: Changing Contexts and Conditions. London: Greenwood Press, 2001, 91–113. Chevaillier, T. “Accreditation and Evaluation in France.” In Schwarz, S. and D. Westerheijden (eds). Accreditation in the Framework of Evaluation Activities in the European Area. forthcoming. Jongbloed, B. “Lifelong Learning: Implication for Institutions.” Higher Education 44.3/4 (2002): 413– 431. Meek, V. Lynn and Fiona Q. Wood. Managing Higher Education Diversity in a Climate of Public Sector Reform. Higher Education Division. Canberra: Department of Employment, Education, Training and Youth Affairs, 1998. Musselin, C. La longue marche des universités Françaises. Paris: Presses Universitaires de France, 2001. Neave, G. “On Preparing for Markets: Trends in Higher Education in Western Europe 1988–1990.” European Journal of Education 25.2 (1990): 105–122. Prost, A. “The Education Maelstrom.” In Corbett, A. and B. Moon (eds). Education in France: Continuity and Change in the Mitterrand Years, 1981–1995. London: Routledge, 1996, 349–358. Renaut, A. European Studies for Democratic Citizenship: The Role of Universities in Developing a Democratic European Culture. Report commissioned by the EU, DECS/EDU/HE. Strasbourg: Directorate of Education, Culture and Sport.

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1. INTRODUCTION Competitive markets have long been a feature of higher education. As Williams (chapter 10) notes, students have always competed with each other on the basis of their demonstrated academic skill for access to scarce university slots and professors have long competed with each other for academic distinction on the basis of their published research and scholarship.1 While this competition has not always met the contemporary definition of a market as a process for allocating goods and services based upon price, the advantages accruing to those students and professors who succeeded in this historical competition could certainly be understood in economic terms.2 What distinguishes the current debate about markets in higher education therefore is not the emergence in academic life of a new form of social organisation, but the active experimentation with market-oriented policies by states intent on maximising the social benefits of national higher education systems. These experiments are reshaping the institutional framework within which academic work is conducted around the world. Important questions remain about this application of market-based policies to higher education. For example, are these experiments theoretically sound, are they justified by the current performance of higher education systems, and are they having a positive influence on student learning, research and scholarship, as well as on the other contributions that higher education makes to the larger society? We have examined these issues in this volume, first through a series of more theoretical essays exploring the nature of competitive markets in higher education, and second through a series of country case studies of recent reforms in the higher education systems of representative mature economies: Australia, Canada, France, Portugal, the Netherlands, the UK and the US. A popular joke about the limitations of contemporary economics begins with a policy maker outlining a particularly effective new policy, to which an academic economist retorts, “Well that may work in practice, but will it work in theory?” Many critics have attacked the appropriateness of applying economic theory to the reform of higher education around the world. They have questioned both its relevance as well as its possibly distorting effects on higher education. The contentious nature of this debate sometimes leads to analyses that are imprecise in their use of economic ideas. We therefore begin by further refining some of the basic economic terms and critical concepts about markets that were first outlined in the introduction to this volume and applied in the chapters that follow. We then turn 327 P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds), Markets in Higher Education: Rhetoric or Reality, 327–352 © 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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to the implications of economic theory, exploring what appear to be some of the most significant issues for higher education markets based upon points from the theoretical chapters. Important insights include clarification of the traditional market failures rationale for government intervention (i.e. public goods, positive externalities, monopoly power and imperfect information), the nature of crosssubsidies and peer effects in higher education, redistributional grounds for government intervention and generic policy instruments appropriate to experiments with market forces. We then contrast these theoretical issues with the issues emerging in practice as noted in the country case studies. Key insights here include the nature of the multiple markets in higher education, the interconnected issues of ‘managerialism’ and deregulation, the types of market failures that can be deduced from the country analyses, and the differing perspectives on ‘efficiency’ evident among the theory and practice chapters. Finally we offer some concluding observations on the types of policies that will be needed to address the contemporary challenges posed by market forces. Throughout we offer suggestions about the nature of research and research topics that would help advance the contemporary debate about markets in higher education. 2. SOME RECONCEPTUALISATION EFFORTS A great deal of recent literature has been written about market forces in higher education, some of it by non-economists.3 Economists of course have no monopoly on knowledge relevant to policy reform in higher education, but our collective understanding of the nature and impacts of market-based policies can sometimes be retarded by an imprecise use of economic language and concepts. Several of the chapters in this volume underline this need to elaborate further our concept of market, especially when applying it to higher education. We therefore begin by attempting to contribute to the clarification of some key terms drawing upon the chapters written for this volume. One of the issues requiring discussion is the one of government regulation and its role in a market. Individuals often speak easily about ‘free’ markets as those exchanges between buyers and sellers that occur without government intervention. This seems to imply that efficient market exchange requires the elimination of all government regulation. As a number of the chapters argue (Jongbloed; Marginson; Massy), however, the supposed social benefits of markets cannot in fact be realised without the basic institutional framework of laws that provides the boundaries for market transactions. Government regulations set the rules for the effective operation of markets, defining property rights and monitoring as well as enforcing contracts. The irony of economists’ claims for the benefits of ‘perfectly competitive markets’ is that such markets are essentially public goods and would be underprovided if left wholly to the private sector. Arguably the only ‘free’ markets, in the sense that they are unregulated by government, are ‘black’ or illegal markets, but, since they by definition operate outside the law, they are also in fact subject to government regulation. The critical issue for higher education therefore is not the dispute between advocates of complete deregulation and advocates of a protected status for

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universities, but rather the debate regarding which government regulations will maximise the social benefits of higher education systems increasingly subject to market forces.4 This distinction is usefully illustrated by Jongbloed’s comparison (chapter 4, figure 1) of the signalled crossing with the roundabout. Governments in many of the mature economies traditionally relied upon centralised command and control systems similar to traffic signals to coordinate their higher education systems. The adoption of market-based policies in many countries represents the application of a less directive or ‘steering’ form of regulation. That is, a roundabout does not eliminate government influence on traffic behaviour, but provides a different framework for traffic flow intrinsic in its physical structure and its rules for conduct (i.e. the direction of travel and norms of right of way). As in market-based higher education policies, one of the most significant changes wrought by a roundabout design is the delegation of decision-making authority (Massy). Drivers in a roundabout are awarded greater discretion (and more immediate forms of accountability!) than when traffic is controlled centrally by signals. This coordination by ‘mutual adjustment’ supposedly increases the efficiency of the traffic flow. The challenge confronting those experimenting with market-based policies in higher education therefore is to discover the institutional framework of rules and incentives that produces welfare maximising competition among (mainly) publicly subsidised, but autonomous, academic institutions. Another point of clarification is the definition of a ‘market’ itself. The economic concept of a market assumes the free exchange of comparable goods and services based upon price. The concept of ‘comparable goods and services’ immediately suggests that there is not a single market in higher education but many. Therefore, effectively assessing the design and impacts of market-based reforms requires analysts to be precise about exactly which market they are evaluating. For example, most of the chapters in this volume focus on the market for first-level academic degree programmes. This market can be possibly further subdivided into ‘bands’, supposedly representing different levels of academic quality, similar to the quality bands in the automobile market (see e.g. the US and Australian cases). To the extent that these bands actually exist they represent differentiated products with different markets whose producers and consumers do not directly compete with one another. Similarly, the development of distance learning first-level degree programmes arguably represents still a further differentiation in the higher education market. Some suggest that this latter type of market differentiation in academic quality and modes of instruction may not be in the public interest, while many economists might argue that this differentiation of product quality and forms of delivery is a good example of the way in which market forms of coordination more efficiently serve the public interest (Dill and Teixeira 2000). At the heart of this disagreement is the economist’s definition of the concept of ‘efficiency’, a point to which we will return below. The nature of the markets for higher education, however, is much more complex than these examples of the differentiated first-level degree programme market suggest. Higher education institutions not only produce first-level degree programmes, but also research doctoral programmes, professional masters

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programmes and in-service training programmes. Universities also produce knowledge-related goods and services including professional consulting, research and scholarship. Each of these goods and services potentially represents a different market. These respective markets also vary in terms of their degree of competition and government regulation. For example, a number of the case studies suggest that the adoption by many countries of a common degree framework (e.g. the Bologna Declaration) redefining the nature and content of academic programmes is transforming what were once state monopolies over academic degrees into competitive international markets. The country studies also reveal that, while some of the mentioned higher education goods and services produced by universities continue to be organised as state monopolies (e.g. research funding), other goods or services created by the same institutions are produced in competitive markets (e.g. consulting or in-service training). This variation in the degree of competition among the different markets for university goods and services has implications for the overall efficiency of higher education systems. Academic labour markets for example have become increasingly competitive and global. A frequent response by governments to this market competition is to permit publicly subsidised universities to charge or increase ‘tuition fees’ for academic programmes so that the institutions can generate the financial resources necessary to compete for increasingly expensive academic talent (e.g. DfES 2003; Williams in this volume). Many academics decry this as an example of the ‘marketisation’ of higher education and call for limits on tuition fee increases and/or greater state funding. But few such critics would support comparable regulation of the academic labour market in the form for example of internationally negotiated limits on faculty pay and benefits. The increasing competitiveness of the global academic labour market, however, may contribute to distortions in the less competitive academic markets mentioned above, most especially as will be discussed in the markets for academic programmes and research. How will governments react to the distorting consequences of academic labour markets? Will they turn to increased central command and control, greater reliance on voluntary self-regulation, or attempt to ‘fine tune’ competition in less competitive markets through further experiments with market forces in higher education? The country case studies in this volume suggest a trend toward the latter course of action, although the remedy of government command and control policies always remains as a last resort and governments will sometimes resort to this more interventive style if more autonomous systems fail to deliver what governments want (Teixeira, Rosa and Amaral). For this reason, we believe it is unlikely that the ‘genie’ of academic markets in higher education can be stuffed back in the bottle. Rather we will need to discover more effective means of steering the genie toward serving the public interest. Some would also argue that the peculiar nature of higher education markets limits the relevance of economic assumptions about ‘perfect competition’. They suggest that, because university prices do not reflect true costs (due to government subsidies, private endowments or cross-subsidies), the traditional economic framework of ‘market failures’ may be inappropriate for assessing the performance of higher education. The absence of full-cost pricing, however, like the presence of

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government regulation, does not lessen the relevance of economic theory for evaluating whether existing mechanisms of coordination in higher education maximise social welfare. Several markets (e.g. agricultural markets) are also characterised by government subsidies and explicit government regulations, and, nonetheless, economic analyses of the relative efficiency of these markets continue to be useful in shaping government policy. A related argument is that higher education markets differ from traditional markets in that they are publicly funded ‘quasi-markets’, introduced into existing state systems of higher education to increase efficiency and responsiveness (Le Grand and Bartlett 1993). These internal or quasi-markets create competition among monopoly state providers by decentralising demand and supply (adapted from Barr 1998: 314): x x x

On the supply side they introduce competition, but the suppliers are neither necessarily private nor necessarily profit maximising. On the demand side, students’ purchasing power is expressed as an earmarked budget (e.g. performance-based funding). Students may make their own choice of university or choice may be made for them by a government agency.

The concept of quasi-markets is a useful means for categorising some of the more popular reforms for introducing market forces into existing publicly financed systems of higher education. But this conception does not describe all of the higher education markets noted above, some of which, such as the global academic labour market or the market for academic consulting, are better understood as competitive rather than ‘quasi-markets’. Furthermore, the introduction of quasi-markets does not alter the underlying realities of economic behaviour. Quasi-markets may suffer from inefficiencies introduced by a single buyer (monopsony) including the difficulty central government decision makers encounter in accurately assessing costs and judging what mix of higher education goods and services best maximises social welfare. Therefore, the social benefits of quasi-market reforms can still be evaluated utilising the traditional economic concepts of allocative efficiency, perfectly competitive markets and market failures. In sum, we would suggest that markets as understood by economists have long existed in higher education, although possibly with a less visible role than the one that has been consolidating in recent years, and are increasingly being facilitated by government reforms intended to improve the efficiency of state systems. Economic analysis can be helpful in assessing government policies related to market forces, even in those cases where public policy may be designed to ameliorate the effects of market competition. In the next section we review the findings relevant to the design of efficient markets in higher education that were gleaned from the theoretical chapters in the first section of this book.

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3. “WILL IT WORK IN THEORY?” What insights can economic theory provide to the design of market-oriented policy instruments in higher education? Each of the relevant authors has generally applied the conventional wisdom of contemporary micro-economics to the behaviour of market forces in higher education. These include some core assumptions about allocative efficiency and its implications for public policy that may be worth briefly reviewing. First, the chapters generally assume that a widely shared social value in public policy is to maximise allocative efficiency.5 That is, public policy should always attempt to achieve the greatest social benefit for the least social cost, because of the opportunity costs of inefficiency, which include valued alternative public investments or lower taxes. While there are arguments among economists as to the degree to which higher education provides social benefits to society, all countries effectively assume such social benefits exist and would be underprovided if higher education were left exclusively to the market. Therefore subsidies for the provision of higher education are a common policy instrument around the globe.6 Potentially these government subsidies could be allocated to public institutions (i.e. public agencies) that would produce the services directly, to private not-for-profit providers, to profit-making providers, or to any combination of these providers.7 This decision along with the nature of the subsidies and any regulations affecting production or consumption of higher education represent the critical parameters for the design of public policy. A necessary criterion for judging the efficacy of any policy design is the aforementioned value of allocative efficiency. From an economic perspective ‘competitive markets’ are assumed to be more allocatively efficient, all things being equal, than coordination by government command and control or by shared norms (e.g. through voluntary or self-regulation). Thus, in theory, provision of higher education through an institutional framework employing competitive market forces should be more efficient for society. The key variable in this assumption is the degree of competition that can be achieved in the market, which depends upon a number of standard assumptions about ‘perfectly competitive markets’, that, if not met, may lead to ‘market failures’ (Johnes; Jongbloed). These assumptions include that the goods and services will be provided by the market (i.e. they are ‘private’, not ‘public’ goods), that there is ease of entry to and exit from the market (e.g. no firms possess monopoly power), that there are no externalities, and that consumers and firms have sufficient information (i.e. rational choice requires that economic agents are well informed about both price and quality). It is important to note further that a perceived market failure in higher education does not in and of itself warrant government intervention. The state would also need to assess evidence as to the seriousness of the market failure, whether the market itself may solve the problem over time, and whether any proposed government intervention will be more efficient for society.8 The theoretical chapters explore the extent to which these four standard assumptions of perfectly competitive markets apply to higher education in mature economies.

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3.1. Public Goods Many individuals argue that the application of market forces to higher education is inappropriate because higher education is a ‘public good’. Moreover, in many (European) countries this is used to condemn both private provision of higher education and the participation of students and their families in the direct costs of higher education (see Chevaillier). Common usage of this term, however, often obscures the contribution that an economic perspective can make to higher education policy. Economists traditionally use the term ‘public good’ more narrowly to denote those goods that are non-excludable (e.g. encouraging non-paying ‘free riders’) as well as non-rivalrous in consumption. Goods or services with these characteristics are unlikely to be supplied by the private sector, since private providers cannot earn a profit on their production. ‘Pure’ public goods therefore need to be both publicly financed and publicly supplied, by which is meant the state owns the capital inputs and employs the necessary labour. Clearly the goods and services provided by higher education do not meet the criterion of a pure public good in that all of the measurable outputs of higher education – graduates, research and scholarship, consulting, in-service education, public service, etc. – are currently produced through markets. The issue is not whether markets will finance and produce higher education for those who wish to purchase it, but whether the amount and types of goods and services thus produced will be efficient for society. In other words, because universities provide non-priced social benefits in addition to private benefits for which individuals or organisations will pay, it is in the interest of the state to subsidise higher education to maximise social welfare. This of course is a rationale based upon the market failure of positive externalities, thus considering higher education as a merit rather than a public good (see below). 3.2. Positive Externalities The distinction between the public goods and positive externalities rationales for state intervention in higher education markets is important for two reasons. First, the logic of positive externalities in which government may subsidise but not produce higher education provides a rationale for the public financing of legally autonomous, not-for-profit universities such as those in Australia, Canada and the UK (Johnes; Jones and Young; Marginson; and Williams). Second, the logic of positive externalities assumes that both private and social benefits are derived from higher education. This provides a rationale for beneficiary (user) pays (Johnes) or costsharing policies (Johnstone) that seek to find the socially efficient balance between priceable private benefits (i.e. to students and commercial consumers of research) and unpriced social benefits (i.e. to society). Identifying the appropriate balance between private and social benefits becomes more important as nations move from elite to mass university systems, because this expansion dramatically increases public expenditures for higher education. Therefore, if the relationship between the public’s share of university costs and predicted social benefits were difficult to justify in elite systems, questions as to the

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efficiency of such expenditures only rise with massification. This reality helps explain the politically divisive debate about cost-sharing and tuition fees now occurring in most mature economies. Economists generally concur that policies of low or free tuition are inefficient (as well as ‘unfair’) for mature economies, because the required public subsidies disproportionately benefit children of the wealthy who have the capacity to pay for the private benefits they receive, while all tax-paying citizens bear the cost (Johnstone; Jongbloed). Johnes’ analysis (chapter 5) suggests that under certain circumstances this conventional economic wisdom can be questioned. If social welfare is influenced by attitudes toward the distribution of income, a high public subsidy/low private cost system for academic programmes such as those in several Nordic countries might better maximise social welfare, a hypothesis deserving of research. The positive externalities argument also provides an efficiency rationale for public financial assistance targeted at low income students. If educated graduates generate social benefits, then the higher education market may fail to maximise social welfare because low income students lack the financial means to attend university. Some public subsidy in the form of grants and appropriate loan schemes for academically prepared low income students can therefore be justified by the market failures framework. As Johnstone (chapter 2) notes, the design of such loan schemes should also meet the test of efficiency (see below). 3.3. Monopoly Power The third cause of market failure is the existence of monopoly power, which may limit competition in a manner that is inefficient for the larger society. Perfect competition requires a market with many buyers and sellers. A market with a single buyer (i.e. a monopsony), such as a government that purchases higher education programmes on the behalf of supposedly immature consumers or is the primary purchaser of basic research, may suffer from inefficiencies as much as a market with a monopolistic supplier (Dill and Soo; Jongbloed). In both education programmes and research, there is reason to question whether a government monopsony is more efficient for society than an institutional framework that promotes greater market competition on the consumer side. In the case of educational programmes, a potentially more efficient alternative would be to encourage rivalry by charging tuition fees that better accord with private benefits and subsidising student consumers with vouchers or tax credits (Jongbloed). As Johnstone (chapter 2) notes, a beneficiary (user) pays policy also may contribute to efficiency by creating incentives for student consumers to invest greater academic effort as well as to be more demanding of institutional quality. In the case of research, market competition can be simulated by distributing state subsidies through competitive grants allocated by multiple research councils rather than by direct institutional support. There is also the possibility that an oligopoly of elite universities possesses market power that produces inefficiencies for the larger society. Massy (chapter 1)

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for example notes that the educational costs of US elite universities provide a ‘price umbrella’ for the rest of the system and present spending targets for less elite institutions that wish to compete by raising their prices. There is also symptomatic evidence (Dill and Soo; Massy) of ‘X-inefficiency’ (Leibenstein 1966) in US higher education that is consistent with the existence of market power, including mission drift among institutions, the reallocation of excess university revenues to activities that primarily benefit academic self-interest, and shirking of educational activities valued by the public.9 Market failure due to market power on the supply side can derive from two causes. The first is restrictions on entry to or exit from the market. Elite universities, for example, may have market power due to historical and difficult to overcome advantages in funding, research infrastructure and recognition. Market power may also be conferred on existing institutions by government policies that restrict access to the provision of academic degrees and to the title university, or by government subsidies to public universities that as noted above are larger than can be economically justified by the predicted social benefits (Johnes). As Massy (chapter 1) notes, a second factor affecting market power is the difficulty of accurately measuring academic quality or education value-added. Thus an ambiguous conception – ‘academic prestige’ – comes to represent educational quality in the public mind, which can lead to a price-quality association that undermines productive efficiency. As will be discussed, this latter cause of market failure is better understood as a market failure due to imperfect information. 3.4. Imperfect Information The fourth and final market failure is imperfect information. The theory chapters suggest that insufficient information for economic agents (i.e. government as a consumer of education and research and/or student consumers) on the quality of university goods and services may be a significant cause of market failure. This failure provides a strong rationale for government intervention to assure wellinformed consumers. While commercial publications clearly have an incentive to provide information to student consumers in the form of university league tables and guides, the demonstrable influence of academic prestige on behaviour in higher education and the cost and complexity of measuring academic quality validly and reliably suggest that the market may not adequately address the problem of imperfect information (Dill and Soo 2004). Dill and Soo (chapter 3) also suggest that universities themselves may be considered imperfectly informed economic agents. There is some evidence that US elite universities, despite the incentives of a competitive market for academic programmes, continue to avoid the types of internal policies and practices that could lead to improved educational quality (Dill and Soo; Massy). The chapters generally concur (Dill and Soo; Johnstone; Jongbloed; Massy) that the adoption of market forces as a steering mechanism for higher education is unlikely to engender the expected efficiency benefits for society unless a more effective regulatory framework can be developed to address the problem of

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imperfect information on the quality of teaching and student learning. While improved consumer information on academic quality would be an obvious regulatory recommendation in such circumstances, a number of the authors (Dill and Soo; Jongbloed; Massy) suggest that some form of ‘enforced self-regulation’ may be more effective for higher education. This would entail government incentives and sanctions designed to reform and strengthen institutional and professional mechanisms for assuring academic quality.10 3.5. Other Issues In addition to defining the circumstances that might justify government intervention to correct market failures, the theory chapters suggest a number of other points relevant to the design of a regulatory framework appropriate to the new world of market forces in higher education. Massy (chapter 1) for example notes that not-for-profit universities – characteristic of the discussed university systems in Australia, Canada, the UK and the US – utilise their market power to generate cross-subsidies to provide public goods (i.e. to carry out activities that they believe benefit the public interest, such as, funding socially beneficial disciplines in fields of low market demand or providing financial assistance to students from low income families). To the extent that their revenue margins are reduced by competitive market forces, he suggests that not-forprofit universities will inevitably be forced to act more like profit-making firms and will eliminate those previously subsidised activities that serve the public interest. This perspective is often the basis for academics’ attacks on market-based higher education policies that increase competition. At the same time a number of the chapters (Dill and Soo; Massy) cite evidence as noted above suggesting that not-forprofit universities also use cross-subsidies earned from teaching to fund activities that satisfy faculty self-interest, but may not maximise social welfare. Examples include lower teaching loads for professors, research-related expenditures and financial assistance for more academically able students rather than for those with demonstrated need. If the latter is true, it suggests that the normative choices in academic policies, programmes and services made by some not-for-profit universities are becoming less reliable proxies for the public interest and may warrant some type of corrective intervention by government. Such a circumstance could for example encourage the state to place greater reliance on government provision and command and control policies. Or the state could define more explicitly those academic goods and services that provide social benefits (i.e. are public goods) and provide appropriately targeted subsidies or contracts to higher education providers or offer related vouchers to students. The divergence of academic conceptions of the public good from those of the larger public as manifested in market demands and state policies underlies much of the current debate about higher education policy in the mature economies. The nature and extent to which the university’s conception of public goods reflects the public interest deserves more systematic research. Brewer, Gates and Goldman (2002), for example, conducted a qualitative study on a sample of US ‘public’, ‘not-

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for-profit’ and ‘profit-making’ universities that revealed the extent to which their strategic investments varied by institutional control and reflected the public interest. Weisbrod (1988) has developed a ‘collectiveness index’ that captures the degree to which an organisation produces public goods by measuring the proportion of its income received in the form of contributions, gifts and grants. Comparable research on universities in other countries could provide information useful to the design of regulations affecting the structure of higher education (Jongbloed). A number of the chapters also emphasised the emerging importance of ‘peer effects’ in economic research in higher education (Dill and Soo; Jongbloed). Research on the impacts of universities on students in the US has generally supported an association between the amount of academic interaction among student peers and measures of student learning (Pascarella and Terenzini 1991). Recent economic research has also suggested that the quality of one’s student peers, as measured by entering test scores, is influential on graduates’ lifetime earnings (Dill and Soo; Jongbloed).11 This research has focused public attention on the relationship between ‘student selectivity’ and academic quality and may be influencing the expensive competition among some US universities to recruit students with high test scores through ‘merit’ aid (Geiger). To the extent that knowledge about peer effects encourages universities to improve the learning environment for students, the concept could arguably improve productive efficiency.12 To the extent that knowledge about peer effects promotes an expensive competition for high achieving students (i.e. ‘cream skimming’) with little improvement in the quality of education, the concept may have negative effects on productive efficiency. More systematic research is needed to confirm the nature of peer effects in higher education, whether entering test scores are a valid proxy for peer effects in economic research, as well as the influence that beliefs about peer effects may be having on market behaviour in higher education. In addition to the market failures presented above, government intervention in the market for higher education is often justified on redistributional or ‘equity’ grounds (Johnes; Johnstone). As already noted in the section on positive externalities, some public financial assistance for low income students can be justified on the basis of the social benefits foregone if these students cannot attend university because of financial circumstances.13 Johnstone (chapter 2), however, outlines an alternative rationale for government intervention based upon the criterion ‘equal access’. Particular groups (e.g. disadvantaged minorities, women) may be given special financial incentives by the state to increase their participation in higher education, actions that cannot be justified on the traditional economic grounds of improving allocative efficiency but are pursued on the grounds of social justice. Johnstone (chapter 2) also notes that effectively designed loan programmes can be more efficient than other forms of financial assistance for low income or disadvantaged students. He suggests that the predicted advantages of income contingent loan programmes derive in large measure from their connection with government machinery for income tax withholding and pension contributions. He speculates that, if the same machinery were utilised for ‘conventional loans’, they might in fact be more efficient than income contingent loan schemes, a hypothesis that would be worth exploring through relevant research. He also notes that income

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contingent loan schemes are most likely to work effectively in mature economies with extensive mechanisms for monitoring and reporting income and where a culture of income tax compliance exists. Johnstone (chapter 2) poses the interesting question as to whether higher education financing schemes that place greater weight on student borrowing against future earnings (e.g. income contingent loans) might not lead parents to abandon the traditional obligation in many countries of contributing to the costs of their children’s higher education. If parental contributions were to decline, would this increase the social costs of higher education or simply redistribute private costs across generations? Might such redistribution actually be of assistance to lower income families by removing a financial obligation that they cannot afford, but many still sacrifice to assume? These challenging questions deserve more systematic research. In addition to the points about government policies discussed above in association with the market failures framework, Jongbloed’s (chapter 4) analysis of regulation in higher education makes a valuable distinction between the regulation of structure (e.g. eligibility for entry to the higher education market and/or for government financing), the regulation of conduct and the regulation of performance. Conduct regulation influences the extent to which providers can compete in the market and includes: academic matters, such as the nature of student selection, institutional mission and programmes; personnel and governance matters such as salaries and management policies; and financial matters such as the degree of budgetary flexibility, ownership of capital, access to capital markets and ability to set tuition fees (i.e. prices). Finally, states can also regulate the performance of higher education institutions through various accountability mechanisms. Jongbloed (chapter 4) hypothesises that the most efficient institutional framework for higher education will focus regulation on the structure of the system, particularly rules governing institutional entry and exit as well as eligibility for government financing, and regulations affecting performance, such as rules governing transparency, public accountability and quality assurance. He suggests that regulations affecting the conduct of higher education institutions are less likely to be efficient. That is if universities cannot control their factors of production and price their outputs, then it is less likely that market competition in higher education will maximise social welfare. Given these generalisations and hypotheses about the behaviour of markets in higher education derived from the theory chapters, we now turn to a review of the points revealed in the country case studies. Of particular interest will be identifying the extent to which observed practice accords with theory. 4. “WILL IT WORK IN PRACTICE?” 4.1. Multiple Markets As noted in the introductory comments, the country case studies confirm that there is not one but a number of different markets in higher education. These markets vary

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in their degree of competition and the extent to which they are subsidised and/or regulated by government. For example, the provision of vocational education and related public service activities (e.g. consulting and continuing education) is unregulated in a number of countries, which also permit public, ‘private’ and in many cases ‘for-profit’ providers to enter and compete for this market. States for the most part do not regulate fees in this market and in some countries (e.g. Canada, France and the UK) public funds subsidising vocational activities are provided on a competitive basis to both public and private providers or are provided to consumers (i.e. private employers) in the form of tax credits. In contrast, entry to the market for state sponsored research is more carefully circumscribed and with few exceptions (e.g. Australia and the US), eligibility for state funds is still often limited to ‘public’ institutions and further limited to institutions that meet the relevant legal definition of ‘university’. Competition in the research market is promoted by modifying the tradition of direct institutional funding of research with performance-based funding utilising measures of research accomplishment (see e.g. Australia, Canada and the UK chapters) and/or through competitive funding of research projects through multiple research councils or agencies (e.g. most countries including the US). The state also encourages greater market responsiveness in research activity by providing competitive research grants that require matching funds from business and industry. In a number of countries, the state is also beginning to allocate research doctoral student support, indirect costs and/or research infrastructure support on a competitive basis. Compared to the market for vocational education, the market for traditional academic programmes or degrees in most of the countries analysed appears to be both less competitive and/or more subject to state regulation on production and consumption. In countries other than the US, the state retains a monopoly on certain academic degrees, particularly those produced by ‘universities’, and entry to this market is carefully controlled by the state and/or is inaccessible to private or forprofit providers. Tuition fees for first-level, full-time academic degrees are regulated by the state in all countries including the US.14 However, tuition fees for other student categories or academic degree markets, including non-nationals or out-ofstate students, part-time students and second- and third-level professional degrees, are often exempted from price regulation. Quality assurance regulations mandated by the state are also most often focused on first-level degree programmes. Finally, in a number of the mature economies (e.g. France, the Netherlands and Portugal), consumer (student) choice of a university is regulated by the state thereby further constraining market competition. In states where student choice does exist (e.g. Australia, Canada, the UK and the US), state subsidies for ‘public’ higher education are substantial and as a consequence entrance to the market for academic degrees by private providers may be suppressed (Johnes).15 4.2. Managerial Changes An important divergence between the theory and practice chapters is the concern with ‘managerialism’ discussed in a number of the country case studies (e.g. Jones

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and Young; Marginson). The term ‘managerialism’ is applied in several different ways, including the appropriateness of introducing market demands and government performance measures into university systems that historically featured a high degree of institutional autonomy (e.g. Australia, Canada and the UK). While this perspective on managerialism raises important questions as to the proper balance of power in the external governance of higher education, our focus on market behaviour necessarily means that this orientation was not directly addressed in the theory chapters. A second perspective on managerialism that was explored in some of the country analyses addresses changes in the internal balance of power in university governance and management among administrators and professors. As Massy (chapter 1) noted, an important consequence of the adoption of market forces as a steering mechanism by government is the delegation of decision-making responsibility to producers. This shift in responsibility appears to have had substantial implications for institutional governance and management. Williams (chapter 10) for example argues that UK universities were by tradition independent economic agents that were able to appoint their own staff, select students, charge fees, own property, control financial surpluses and determine their academic processes and outputs. However, he suggests that, because UK universities were publicly funded monopolies with limited incentives to innovate in the public interest, they did not use this producer autonomy to maximise the social benefits of higher education. By sharply reducing financial support, Williams (chapter 10) suggests the UK government motivated the universities to better respond to market needs as well as to make needed reforms in institutional management and governance. A number of the country case studies illustrate the relationship between the introduction of market forces into higher education systems and changes in university decision making. The Canadian case (Jones and Young) suggests that the tradition of undifferentiated provincial block grants for teaching, research and service has meant that Canadian universities still have not developed effective means of understanding academic costs by function. The French analysis (Chevaillier) similarly notes how the financial and accounting systems of universities under the traditional state directed system were designed solely to report information to the government, not to support evaluation and decision making by the universities themselves. It was not until the French government implemented performance contracts with the universities that institutions had the incentive to develop more accountable forms of management including programme cost data, administrative training and more influential department heads, deans and presidents. In contrast, the British case (Williams) notes how the negative incentive of government funding reductions as well as the use of separate streams of competitive funding for teaching, research and service encouraged more proactive and strategic management on the part of the universities. This more entrepreneurial decision making was reflected in strengthened financial management utilising institutional Resource Allocation Models (RAM) that increased both the autonomy and accountability of academic departments and units. As Williams (chapter 10) describes it, the reforms in the internal management of British universities reflect the contemporary logic of government steering: setting institutional strategic goals

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centrally, delegating substantial authority and responsibility for programmes and resources to schools and departments, and holding academic units accountable for their performance. Finally, Marginson (chapter 9) outlines some of the problems encountered with the new entrepreneurial management in the Australian system. He suggests that the ability of Australian universities to earn surpluses on programmes for international students, coupled with cuts in state funding, has produced an internal governance system in which administrators and economic concerns dominate strategic academic decision making. From an economic perspective, the relevance of the debate over the internal balance of power in university management and governance is its effect on the productive efficiency of academic institutions. Certainly too great an emphasis on the bottom line, as noted by Massy (chapter 1), could distort or lessen the traditional social benefits contributed by academic institutions. Excessive institutional investment in administrative personnel or overhead could also be inefficient for society. The extent to which such administrative inefficiencies exist and their potential causes (e.g. inadequate financial accounting requirements) are both deserving of more systematic research. But an assumption of markets is that, with appropriate public subsidies and/or regulations to correct for market failures, competition over time should provide incentives for academic institutions to adopt the most efficient form of internal organisation. The governance processes of the most respected US public and private research universities, subject to market forces for a longer period of time than those in other mature economies, still reflect a strong degree of academic authority (Clark 1987) and have developed systematic mechanisms for involving faculty members in strategic decision making (Dill and Helm 1988). Therefore, some of the concerns about ‘managerialism’ in other mature economies may be a function of the necessary transition from management and governance structures developed when the institutions were state-funded monopolies to those more appropriate to the new competitive environment (Dill 1999). There is growing evidence outside the US that universities can adapt to a more entrepreneurial style of management and governance while sustaining their core academic functions and values (Clark 1998). 4.3. Deregulation A corollary to the development of new forms of institutional management and governance in response to market forces is the nature of state policies on ‘conduct’ in higher education (Jongbloed). If market competition is to lead to the expected efficiency benefits for society, then producers must have control over critical inputs and the processes of production. Regulations on university conduct that cannot be defended as solutions to demonstrated market failures may prevent academic institutions from responding to market demands in a manner that maximises social benefits. Following this logic, states experimenting with market forces in higher education have also experimented with the deregulation of conduct rules (McDaniel 1996). Frequently these changes have been made at the request of public universities

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themselves, whose new experience with market competition reveals the inefficiencies of traditional forms of state regulation. For universities in the ‘Westminster’ countries (i.e. Australia, Canada and the UK), deregulation has often been less of an issue because of the autonomy traditionally granted to these institutions. As legally autonomous, self-accrediting institutions, there were few state rules affecting their conduct. For universities on the continent and for state universities in the US, freedom from government regulations limiting management autonomy has become more of an issue as these institutions experience increasing amounts of competition (Dill 2001). A number of the case studies suggest a general pattern of deregulation or increased managerial flexibility, beginning most easily with the adoption of lump sum financing, then the elimination of state controls over contracting and access to capital markets, and finally the delegation of ownership of buildings and capital assets. The case studies suggest that state delegation of authority over personnel policies is a more controversial issue as illustrated by the recent adoption of a more flexible approach in the Netherlands compared to those in France and Portugal. With the exception of the US, most of the other sampled states regulate salaries in the academic labour market thereby suppressing competition. Regulations affecting the design and delivery of academic programmes have represented an important dividing line between mature economies in the past. Universities following the Westminster tradition (Australia, Canada and the UK) were treated as selfaccrediting institutions and were generally free of restrictive regulations on academic programmes except in critical professional fields such as medicine or teaching. Private and public universities in the US were subject to institutional accreditation, while public US universities as well as continental universities were subject to state regulation over academic programmes. As previously discussed, a number of states in the European Union currently limit the ability of their universities to select students, while comparable university conduct in Australia, Canada, the UK and the US (see relevant chapters) is not regulated.16 Finally, as already noted, all the analysed states have retained control over first-level degree tuition ‘pricing’ and, in an example of the previously mentioned distinction between deregulation and regulatory reform, most of the states have also implemented a variety of new regulatory policies designed to assure quality in teaching and research. The existing variation in conduct regulations among the states of the European Community offers an interesting opportunity to test economic assumptions about the relationship between managerial flexibility and institutional performance. One might predict for example that universities with greater managerial autonomy (e.g. Chalmers University in Sweden or UK universities in comparison to French universities) would have a comparative advantage in competing for able students, professors, research grants and private resources.

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4.4. Market and Government Failures The country case studies suggest a number of potential market failures in higher education that sharpen the insights provided in the theory chapters. For example, Chevaillier’s (chapter 13) discussion of the ‘public good’ rationale for market failure in France represents a departure from traditional economic conceptions of this argument. French policy makers apply the additional criteria of ‘continuity’ (i.e. the possibility that a private provider of socially beneficial goods or services may fail) and equality of access (i.e. all citizens need to be treated in the same way) in determining what goods should be publicly provided. This perspective comes close to the economic conception of ‘merit goods’ in which the social benefits of certain goods and services are so desirable that government essentially limits consumer choice to the public sector to ensure the goods are appropriately provided. The merit good argument with regard to higher education rests upon the assumption that public provision assures an equal, common standard of goods or services. This belief influences public regulation of higher education markets. For example, if universities provide a common standard of education, then there is no basis for charging differential fees based upon qualitative differences. Indeed, in France, it is against the law to provide public information that suggests there are differences in quality among university degrees (Chevaillier). But what if these beliefs in a common standard of academic quality are more symbolic than real? For example, the UK operated for decades under a similar belief in a common ‘gold standard’ of academic quality among its publicly funded traditional universities. Recent research on the private benefits received by UK university graduates (Chevalier and Conlon 2003), however, notes that universities have significantly different impacts upon the earnings of their graduates even after controlling for individual student characteristics, thereby raising questions as to the equity of the UK system. Thus an important question for public policy, particularly in those mature economies that provide higher education publicly as a means of assuring its quality, is whether students in different universities are in fact receiving equivalent value-added? Studies of the relationship between university characteristics and graduate earnings similar to those conducted in the US and UK (Brewer, Eide and Ehrenberg 1999; Chevalier and Conlon 2003) may therefore make an important contribution to confirming or challenging the equity beliefs that influence higher education policy in these countries. The Australian and US cases also provide specific illustrations of how competition for academic prestige in their respective higher education systems can contribute to market failure (Dill and Soo; Massy). Geiger (chapter 7) describes the increasingly costly competition among US universities to attract high achieving students through so-called ‘merit aid’. At the same time, these institutions are lessening their contribution to the public good by decreasing their expenditures to support financial aid for low income students. Marginson (chapter 9) similarly notes how market competition in Australia is encouraging universities to increase fees, control student access and reallocate revenues in a pursuit of prestige rather than an improvement of service. Both authors argue that the competition among universities

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in their respective countries is best characterised as a ‘positional market’ in which institutional resources and effort are invested in a ‘zero-sum’ contest to achieve high prestige (Brewer, Gates and Goldman 2002). In this academic arms race some institutions win, some lose, but the increasing social costs do not generate equivalent social benefits for society. There appear to be two contributors to this market failure. The first as in Australia is monopoly power derived in part from government restrictions over granting ‘university’ status (i.e. ‘government failure’). Institutions thereby focus their competitive effort on attaining this status rather than responding to genuine market needs. The second contributor, discussed in a number of the theory chapters, is the lack of valid information on academic quality, which causes many universities to adopt the proxy of academic prestige as the primary institutional goal. This information failure can distort academic behaviour, providing an incentive for institutions to focus on the recruitment of high achieving students (i.e. ‘cream skimming’), to over-invest in research at the expense of teaching, and to engage in grade inflation as a means of satisfying the demands of ambitious, fee-paying students. The overall effect of the reliance on academic prestige as the market signal of academic quality is a loss of efficiency in higher education. However, one should not think that government intervention is the answer to all these problems or that government intervention in higher education is flawless. In addition to market failure, it is possible to identify incidents of ‘government failure’ in which existing state policies contribute to inefficient and/or inequitable outcomes (Wolf 1993). Although government intervention is often justified on equity grounds, this intervention can and has created equity distortions. The regressive distributional nature of government subsidies in many countries is well documented and has persisted, despite the expansion of higher education and increasing student participation. This is true even in the case of countries where the financial participation of students and their families is minimal (e.g. France) or small (the UK, Portugal and the Netherlands). Yet, some type of government intervention is needed, if one wants to change the socio-economic composition of the undergraduate enrolment and to bring it closer to that of the overall population. This is a clear necessity on equity grounds, especially due to the persistent wage premium of university-educated workers, even in the context of rapid massive expansion of higher education systems (Teixeira, Rosa and Amaral). The policy challenge will be to identify government interventions to increase equity that at the same time maximise efficiency for the overall society (Johnstone). In several country cases the increasing financial participation of families and students has made an expansion of the system financially more viable. However, the increasing competition for public funds has shown that higher education is not a strong competitor against social needs such as health services and social security, and future societal trends (such as ageing populations) will weaken further higher education’s bargaining capacity. Although there remain important reasons for a major public contribution to higher education, and indeed public funding remains responsible for the overwhelming portion of higher education revenue in most of the countries analysed, it is difficult to diversify the funding structure. This will certainly be harder to accomplish in European systems, which have few private

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universities (the exception being Portugal, in the countries considered) and a low number of private donors, especially when compared with the North-American situation. The risks are significant that public higher education will become trapped in a high participation/low funding per capita relationship (Johnes). The changes in the funding structure in many countries, and the introduction of more pro-market behaviour, can also help correct some additional distortions that economists have identified in systems dominated by public provision. Disassociation of costs from benefits in publicly subsidised systems distorts the information being disseminated by the labour markets in terms of the needs of graduates, and tends often to lead to oversupply, at least of certain types of programmes and their graduates. Oddly enough, we seem far more eager to criticise oversupply created by market forces, and especially by private universities, as in the case of certain popular programmes with low costs, such as business (Teixeira and Amaral 2001), than that promoted by publicly dominated provision. Moreover, public supply seems to be as permeable to social pressures as private supply, although in the former case the lower cost hinders one of the main checks for preventing oversupply of certain types of graduates. Summing up, the introduction of market forces has contributed to a significant reduction in the cost per student in a number of the country cases, since growth in overall funding has not followed student expansion (Williams; Teixeira, Rosa and Amaral). Although this does not necessarily mean an improvement in terms of efficiency, there are strong indications that the pressure on universities for more market-like behaviour has had a positive impact in terms of cost per graduate and scientific productivity. Certainly, concerns have been raised about decreases in teaching standards and in the quality and depth of research. These concerns deserve to be investigated, but at the moment there is a lack of solid evidence. The increasing use of market mechanisms in higher education has also made important contributions to the way in which universities operate. Such mechanisms have definitely made higher education institutions more aware of their organisational needs and shortcomings. Although one can easily give examples of a naïve and simplistic use of business tools, the growing familiarity of universities with managerial instruments and practices has shown that these can make a valuable contribution to institutional development (Massy). There have been notable improvements in the level of knowledge about the institution, its positioning in the system, and the needs and demands of students and employers.17 There is also evidence (Salerno; Massy; Williams) that many universities have become far more flexible, resilient and responsive than some observers acknowledge. Certainly, these changes were not painless and governments need to be constantly vigilant about achieving the right balance between economic and non-economic motives of higher education. 4.5. Theory Versus Practice We have already noted some of the differences between the theory chapters and the country analyses such as the focus on managerialism in the latter. Another potential

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difference illustrated by the country analyses of market failures is the conception of ‘efficiency’. As noted earlier, economists generally define efficiency as allocative efficiency, which assumes the simultaneous existence of productive efficiency, efficiency in product mix and efficiency in consumption (Barr 1998). This definition has important implications for assessing the relative efficiency of a tertiary sector, because the higher education ‘product mix’ which is allocatively efficient for society may substantially differ from the product mix preferred by policy makers or by university professors. A first example of this is the relationship between research reputation and the educational quality of academic programmes. Many academics would assert that research and teaching are joint products and the quality of teaching is enhanced by research and scholarship. Therefore, the fact that university academic prestige is highly influenced by research reputation is not necessarily misleading to students. However, both research evidence and practical experience have raised doubts about the validity of the assertion linking research and teaching. Research on student learning suggests that the correlation between research productivity and first-level instruction is very small and that teaching and research appear to be more or less independent activities (Fox 1992; Terenzini and Pascarella 1994). In the US, which is arguably the most market oriented of the mature economies, over 50% of firstlevel academic degrees are awarded by institutions that do not offer research doctoral programmes (Carnegie Foundation for the Advancement of Teaching 2001). The US also has a well-established tradition of high quality education in liberal arts colleges committed almost exclusively to first-level degree instruction.18 This would suggest that in many mature economies public policies and/or market failures may be contributing to a ‘product mix’ of education and research that is inefficient for society. A second example is the definition of academic research. Marginson (chapter 9) notes that Australian policy on performance funding of research has led to a larger number of research citations, but to a lower relative ranking in citations among OECD countries. He suggests this represents a decline in research quality or impact. But does it represent a decline in allocative efficiency? States provide funding for university research in the expectation of positive externalities for society in the form of knowledge development, economic growth and cultural enrichment. Research citations are an intermediary measure of such societal impacts, not measures of actual outcomes. They are also an incomplete measure, ignoring for example patents, the contributions of the fine arts, and other scholarly and research outputs that may benefit society. It is possible that a larger and more diverse product mix of scholarship and research output may better benefit Australian society than a more refined stream of internationally cited research. A third example of the implications of efficiency in product mix is the role of profit-making institutions. Although the US has an extraordinarily large and diverse market-oriented system of higher education, the greatest growth is in newly developed private, for-profit institutions (Hentschke 2004). Many would argue that these institutions are ‘degree mills’, exploiting the informational weaknesses of the current higher education system (Dill and Soo), often at public expense. Recent studies of the profit-making sector (Brewer, Gates and Goldman 2002;

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Hentschke 2004; Ortmann 2001), however, suggest that many of these institutions have achieved traditional academic accreditation and are growing rapidly because they have better responded to student needs than traditional institutions. Ortmann’s (2001) survey of US security analysts discovered that for-profit institutions understand better than their not-for-profit competitors that education is a service industry, therefore for-profit institutions focus on students’ and their prospective employers’ satisfaction instead of faculty priorities such as research. The analysts noted this responsiveness was reflected in courses offered at convenient times and locations and in for-profit institutions’ greater attention to student retention, graduation and placement as well as in research on what prospective employers desire in their employees. As noted in a number of the analyses of the private sectors in other countries, US profit-making institutions have responded to the market demand for vocational or job-specific programmes (Hentschke 2004). Compared to public and not-for-profit universities, US profit-making institutions also disproportionately serve lower income, minority and adult students. Reasonably, one may question whether the product mix of higher education goods and services produced in any country is truly efficient for society. Or, perhaps more to the point, one may question whether a product mix determined by market demand is more efficient than the mix of higher education goods and services produced in countries whose institutional frameworks are more influenced by policy makers and/or academic professionals. However, we would argue that such evaluations cannot be made on the basis of a priori judgments on the current distribution of higher education goods and services, but require more rigorous analysis of the allocative efficiency of existing systems of higher education.19 5. CONCLUDING OBSERVATIONS Jongbloed (chapter 4) provided an introductory glimpse of the regulatory reforms that may be required in order to introduce market forces that improve allocative efficiency in higher education. These included: new financial instruments that facilitate consumer demand such as voucher-like subsidies and income contingent loans; a framework of basic laws addressing issues such as intellectual property rights and academic tenure; rules governing the structure of the industry including the existence of public, not-for-profit and profit-making institutions as well as eligibility for public funding; regulations affecting the degree of institutional autonomy in academic, governance, personnel and financial matters; and policies addressing institutional accountability including transparency, monitoring and reporting. The theory chapters in this volume have provided additional insights into the policy framework that would need to be designed if market forces are to contribute the expected benefits to society. In general terms, these insights can be outlined as follows. In order to promote appropriate competition and maximise socially valued diversity in higher education provision, entry to the higher education markets for educational programmes, research and public service should potentially be open to public, not-for-profit and profit-making institutions. Appropriate public subsidies for

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students as well as for academic programmes deemed of special benefit to society could then be allocated as vouchers to individuals or enrolment-related subsidies to eligible institutions. State support for research could be allocated to researchers on a competitive basis through multiple research councils as well as through tax credits for relevant industries, thus stimulating competition. State support for research overhead and infrastructure could be tied to individual research grants and/or awarded separately to those institutions that best succeed in the competitive market for research funds. Regulations governing university conduct – governance, academic policy and management – should be minimised to those rules most necessary to ensure academic integrity and protect student consumers. In contrast, regulations affecting performance are quite critical to effective competition in the higher education market. Necessary rules would include transparency and accountability in the expenditure of public funds, as well as relevant information on the performance and quality of academic programmes. In addition to this framework of financing and regulatory policies, which can be justified on the basis of allocative efficiency, additional subsidies and policies may be warranted in order to maximise higher education’s contributions to social justice. These may include government subsidised income contingent loan programmes that improve the efficiency of capital markets, appropriate grants to provide needed incentives to attend higher education for low income and other designated students, as well as institutional incentives to ensure that higher education addresses appropriate issues of social cohesion and justice. Within this general framework the theory chapters suggest that the most challenging policy issues are tuition pricing at the first degree level and academic quality assurance. No country, including the US, has thus far been able to implement a competitive higher education market that effectively restrains prices in the manner that economists would predict.20 We might assume that if, as suggested above, entry to the higher education market is eased and state resources are allocated so as to improve rivalry, the resulting higher education market would become sufficiently competitive to discipline prices without state controls on tuition fees. But this still assumes that effective policies for addressing the problems of academic quality information can be implemented. At a minimum this would require state regulations governing institutional provision of academic performance information and additionally may require state subsidies or incentives for valid league tables or guides to inform student consumers. As already noted, the particular nature of consumer markets in higher education suggests that valid consumer information on academic quality still might not be sufficient for correcting potential market failures. Therefore, state monitoring or incentives for institutional selfregulation may be needed to assure the quality of teaching and student learning. These generalisations, along with the points made in the accompanying theoretical chapters and country analyses, likely raise more questions about the nature of markets in higher education than they answer. As we noted at the outset, we believe that market forces are now intrinsic to the environment of higher education and, therefore, even if the perfectly competitive markets beloved of economic theory are not totally practicable in higher education, government policies will inevitably be needed to steer existing market behaviour in a manner that

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maximises social benefits. Throughout this conclusion we have offered suggestions for needed research that would help inform policy making related to market forces. Perhaps most needed are conceptually sound and empirically rigorous studies of the impact on allocative efficiency of different national and international higher education policies. These types of studies confront serious measurement problems in attempting to accurately assess the outcomes and social benefits of higher education (Barr 1998). But given the growing influence of university attendance on the life chances of our citizens and the rapidly increasing social costs of mass higher education systems, such research is badly needed. Overall, there are good reasons to believe that a dogmatic and ideologically rooted approach to markets is unwise. Markets are neither the magic potion that will solve all problems in higher education, nor the personification of evil. If market forces have created serious imbalances and tensions in the systems that wholeheartedly embraced them, attempts to avoid market competition have led several systems to something of a dead end. Markets are one important and viable instrument of steering higher education systems in the twenty-first century, especially in order to complement government’s function. The chapters in this volume have clearly indicated that both markets and governments have a contribution to make to higher education regulation and that both have costs and benefits. The appropriate balance between these two modes of conduct has to be continually reassessed, based on the purposes that society wishes higher education to fulfil. NOTES 1 2 3 4 5

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Note that in this chapter for ease of communication we use the term university as synonymous with institutions in both higher and tertiary education, although we recognise there are important differences in the characteristics of universities and other institutions in these sectors. Economists have regularly charted the private economic returns to graduates of universities and the Nobel Prize is but one illustration of the tangible economic benefits that have long accrued to those academics with an international scholarly reputation. See for example the special issues on markets in higher education: Higher Education Policy (1997, 10.3/4) and Higher Education Quarterly (2003, 57.2). As the Nobel economist Joseph Stiglitz (2003) noted with regard to the contemporary policy challenges of globalisation, the issue is not deregulation, but regulatory reform. Definitions of efficiency vary somewhat among the chapters. We define allocative efficiency as synonymous with Pareto efficiency, which requires that productive efficiency, efficiency in product mix, and efficiency in consumption exist simultaneously (for a more detailed discussion, see Barr 1998). We assume that such subsidies could range from 1–100% of full costs. We believe there is some utility in differentiating between the terms ‘non-profit’ and ‘not-for-profit’. Many contemporary ‘public’ and ‘non-profit’ universities actively seek to make surpluses (i.e. revenues in excess of expenditures) on a number of their goods and services, which they can then reallocate to other favoured purposes (Massy). The goal of such institutions, however, is not to allocate these ‘profits’ to owners or shareholders as would a traditional profit-making enterprise. These universities are therefore better described as ‘not-for-profit’ rather than ‘non-profit’ institutions. Note the related criteria for initiating government intervention outlined in the 1993 Higher Education and Scientific Research Act in the Netherlands (Salerno): 1) when institutional self-management is likely to have unacceptable results; 2) when imperfections in the system are revealed ex post; and 3) when the intervention is characterised by a minimum of detailed regulation.

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It has been argued that similar inefficiencies can occur when higher education is a state monopoly (Barr 1998) or in those systems where there is a strong academic oligarchy and a weak institutional level of authority. This does not mean that quality problems are exclusive to private or market-dominated systems. The high variations in retention and drop-out rates among many publicly dominated and highly regulated higher education systems in Europe illustrate this point. It is important to note that the nature and degree of this relationship are contested in the economic literature (see Dill 2003; Dill and Soo). As shown by the example of the creation of a residential college at the University of Utrecht (Salerno). However, the effectiveness of these public subsidies is sometimes poor in this respect, as illustrated by the persistent underrepresentation of low income students in publicly dominated and heavily subsidised systems, such as in many European countries. Hence, there persists a potential welfare loss due to an unknown number of potentially good students who do not enrol because of financial constraints. The US has no regulations governing fees for private or for-profit institutions, but most of the US states regulate first-level tuition fees for publicly supported colleges and universities, which enrol over 80% of students in higher education. There has been growing public concern about public and private college tuition fees over the last decade, because increases in these fees consistently surpass the growth in inflation and mean family income. The US Congress recently debated for the first time a proposal to cancel eligibility for federal financial aid funds for any institution (public or private) whose tuition fees exceeded the growth in inflation. Following hearings, the proposal was withdrawn. An important question for public policy is whether the amount of the subsidy for students in public institutions is efficient for society. Logically, the amount of subsidy should be related to the expected social benefits produced by the graduates of public higher education, but in most mature economies the amount of per student subsidy still far exceeds even the most generous estimates of such social benefits. Salerno (chapter 11) also notes that the Dutch government places numerus clausus on certain subject fields such as medicine, dentistry, veterinary science, architecture, therapy programmes, tourism and journalism. State controls on enrolments in expensive fields that are heavily subsidised by the state for reasons of social benefit (e.g. medicine) could be defended on the criterion of efficiency. But it is difficult to perceive what market failure motivates state limits on enrolments in fields such as architecture, journalism, therapy programmes and tourism. Likewise, Teixeira, Rosa and Amaral (chapter 12) point out that whereas in the past the existence of a numerus clausus was justified by a scarce supply of higher education, in recent years, the expansion of public institutions and the declining demographic trends have eliminated most of the justification for this widespread regulation of the supply of higher education. Moreover, it should be emphasised that though governments in the past had a lot of information available this did not mean they used it effectively. It can be argued that government policy is often more effective with less but more relevant information. Currently, over 12% of first-level academic degrees are produced in this sector (Carnegie Foundation for the Advancement of Teaching 2001). The most selective of these liberal arts colleges (e.g. Swarthmore, Oberlin and Pomona) compete against highly ranked universities for potential teaching staff and therefore subsidise time for faculty members to conduct research and scholarship. But even these most selective colleges focus on teaching and they collectively contribute less than .3% to US college and university R&D expenditures (Carnegie Foundation for the Advancement of Teaching 2001). Salerno (2003) provides a thoughtful review of the research on efficiency in higher education, as well as the primary methods used in such studies. Hoxby (2002) has argued, in a sophisticated analysis of the US first-level degree market, that the rapidly rising tuition fees in the US system are effectively offset by improvements in academic quality. Therefore, she asserts that the higher education system is in competitive equilibrium and does not require corrective government intervention. Her analysis, however, uses expenditures as a proxy for academic quality, makes debatable assumptions about the impacts of peer effects, and relies wholly on graduate lifetime earnings as a measure of benefit (Dill 2003). As in much economic analysis of higher education, she provides no estimates of the assumed social benefits of these increasing social costs.

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REFERENCES Barr, N. The Economics of the Welfare State. 3rd edn. Oxford: Oxford University Press, 1998. Brewer, D.J., E.R. Eide and R.G. Ehrenberg. “Does it Pay to Attend an Elite Private College? CrossCohort Evidence on the Effects of College Type on Earnings.” Journal of Human Resources 34.1 (1999): 104–123. Brewer, D.J., S.M. Gates and C.A. Goldman. In Pursuit of Prestige: Strategy and Competition in US Higher Education. New Brunswick, NJ: Transaction Press, 2002. Carnegie Foundation for the Advancement of Teaching. The Carnegie Classification of Institutions of Higher Education. 2000 edn. Menlo Park, CA: Carnegie Foundation for the Advancement of Teaching, 2001. Chevalier, A. and G. Conlon. Does it Pay to Attend a Prestigious University? London: Centre for Economics of Education, London School of Economics, 2003. Clark, B.R. The Academic Life: Small Worlds, Different Worlds. Princeton, NJ: Carnegie Foundation for the Advancement of Teaching, 1987. Clark, B.R. The Entrepreneurial University. Oxford: Pergamon Press, 1998. DfES (Department for Education and Skills). The Future of Higher Education (White Paper). London: HMSO, Cm 5735, 2003. Dill, D.D. “Academic Accountability and University Adaptation: The Architecture of an Academic Learning Organization.” Higher Education 38.2 (1999): 127–154. Dill, D.D. “The ‘Marketization’ of Higher Education: Changes in Academic Competition and Implications for University Autonomy and Accountability.” Higher Education Policy 14.1 (2001): 21–35. Dill, D.D. “Allowing the Market to Rule: The Case of the United States.” Higher Education Quarterly 57.2 (2003): 136–157. Dill, D.D. and K.P. Helm. “Faculty Participation in Strategic Policy Making.” In Smart, J.C. (ed.). Higher Education: Handbook of Theory and Research, vol. IV. New York: Agathon Press, 1988, 319–355. Dill, D.D. and M. Soo. “Is There a Global Definition of Academic Quality? A Cross-National Analysis of University Ranking Systems.” Chapel Hill, NC: Research Program on Public Policy for Academic Quality (PPAQ), 2004, http://www.unc.edu/ppaq/docs/LeagueTables2004.pdf. Dill, D.D. and P. Teixeira. “Program Diversity in Higher Education: An Economic Perspective.” Higher Education Policy 13.2 (2000): 99–117. Fox, M.F. “Research, Teaching, and Publication Productivity: Mutuality Versus Competition in Academia.” Sociology of Education 65.4 (1992): 293–305. Hentschke, G.C. “US For-Profit Postsecondary Institutions – Departure or Extension?” International Higher Education 35.2 (2004): 15–16. Hoxby, C.M. “The Effects of Geographic Integration and Increasing Competition on the Market for College Education.” Harvard University, Mimeo, 2002, http://post.economics.harvard.edu/faculty/hoxby/papers/exp_tuit.pdf. Le Grand, J. and W. Bartlett. Quasi-Markets and Social Policy. London: Macmillan Press, 1993. Leibenstein, H. “Allocative Efficiency and X-Efficiency.” American Economic Review 56.3 (1966): 392– 415. McDaniel, O.C. “The Paradigms of Governance in Higher Education Systems.” Higher Education Policy 9.2 (1996): 137–158. Ortmann, A. “Capital Romance: Why Wall Street Fell in Love with Higher Education.” Education Economics 9 (2001): 293–311. Pascarella, E.T. and P.T. Terenzini. How College Affects Students: Findings and Insights from Twenty Years of Research. San Francisco: Jossey-Bass, 1991. Salerno, C. What We Know About the Efficiency of Higher Education Institutions: The Best Evidence. Vol. 99 in series ‘Beleidsgerichte Studies Hoger Onderwijs en Wetenschappelijk Onderzoek’. The Hague: Ministry of Education, Culture and Science/SDU, 2003. Stiglitz, J.E. The Roaring Nineties: A New History of the World’s Most Prosperous Decade. New York: W.W. Norton, 2003. Teixeira, P. and A. Amaral. “Private Higher Education and Diversity: An Exploratory Survey.” Higher Education Quarterly 55.4 (2001): 359–395.

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Terenzini, P.T. and E.T. Pascarella. “Living with Myths: Undergraduate Education in America.” Change 26.1 (1994): 28–32. Weisbrod, B. The Nonprofit Economy. Cambridge, MA: Harvard University Press, 1988. Wolf, C. Markets or Governments: Choosing Between Imperfect Alternatives. Cambridge, MA: MIT Press, 1993.

GLOSSARY

Allocative or exchange efficiency

This term refers to a situation in which no reorganisation or exchange could raise the utility or satisfaction of one individual without lowering the utility or satisfaction of another individual. Under certain limited conditions, perfect competition leads to Pareto efficiency.

Command system

In this type of system, planning is used to allocate resources for the production and distribution of goods and services on the basis of some predetermined condition such as ‘need’ and by using criteria of authority (political, religious or other).

Deregulation policies

These policies stress the elimination of various barriers and regulations (including taxes and subsidies) hampering the equilibrium between demand and supply. Their goal is to increase the freedom of consumers (e.g. students) and suppliers (e.g. universities).

Externalities

One speaks of externalities in cases where activities affect others for better or worse, without those others paying or being compensated for the activity. Externalities exist when private costs or benefits do not equal social costs or benefits.

Free market

A free market is where such exchange occurs without interference from the government. Resources would be allocated according to consumers’ purchasing behaviour.

Imperfect competition

The threat of a monopoly (one seller, many buyers) or even oligopoly (few sellers, many buyers) may justify government intervention preventing too much market power on the side of the seller.

Information asymmetry

This is defined as a situation where the amount of information about the characteristics of a good/service (or a person/organisation involved in the transaction of the good/service) varies amongst the persons involved in the exchange of the good/service. The buyer and the seller in a market transaction for example may have different information about the attributes or quality of the good (and the associated externalities) being traded.

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GLOSSARY

Market

A market is a set of arrangements which allows buyers and sellers to communicate and thus arrange the production and exchange of goods, services or resources. Both buyers and sellers compete and their wishes articulate through adjustments on the quantity and/or price of the commodity exchanged.

Monopsony

This is a situation of one buyer and many sellers; it is another case of imperfect competition. Here, market power tilts too much towards the side of the buyer. This is expected to affect the efficiency of the system.

Perfect competition

Perfect competition refers to markets in which no supplier (firm, higher education provider) or consumer (buyer, client, student) is large enough to affect the market price (i.e. the outcome of balancing supply and demand). This situation arises where the number of sellers and buyers is very large, the market share of each seller is relatively small and the products (services) offered by sellers are homogeneous (or indistinguishable).

Perfectly competitive market

A perfectly competitive market is a market where there is a large number of buyers and sellers who can freely enter and exit the market. It also assumes full information and negligible search costs, and that the product is reasonably homogeneous and divisible.

Productive or technical efficiency

Productive or technical efficiency refers to a situation where the amounts provided are produced with the lowest possible usage of inputs per unit of output.

Public good

A public good is characterised by non-rivalry in consumption (one person’s consumption does not interfere with another’s) and non-excludability (excluding others from its consumption is not possible: the benefits are spread among the entire community).

Higher Education Dynamics 1.

J. Enders and O. Fulton (eds.): Higher Education in a Globalising World. 2002 ISBN Hb 1-4020-0863-5; Pb 1-4020-0864-3

2.

A. Amaral, G.A. Jones and B. Karseth (eds.): Governing Higher Education: National Perspectives on Institutional Governance. 2002 ISBN 1-4020-1078-8

3.

A. Amaral, V.L. Meek and I.M. Larsen (eds.): The Higher Education Managerial Revolution? 2003 ISBN Hb 1-4020-1575-5; Pb 1-4020-1586-0

4.

C.W. Barrow, S. Didou-Aupetit and J. Mallea: Globalisation, Trade Liberalisation, and Higher Education in North America. 2003 ISBN 1-4020-1791-X

5.

S. Schwarz and D.F. Westerheijden (eds.): Accreditation and Evaluation in the European Higher Education Area. 2004 ISBN 1-4020-2796-6

6.

P. Teixeira, B. Jongbloed, D. Dill and A. Amaral (eds.): Markets in Higher Education: Rhetoric or Reality? 2004 ISBN 1-4020-2815-6

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