Opinion & Commentary
Set our unis free
It takes some imagination to describe Australia’s universities as showing ‘clear indications of market failure’, but academics Len Bahnisch and Iean Russell do so in their recent article (7/11) advocating more central ‘co-ordination’.
Perhaps they feel some pressure in recruiting overseas or postgraduate students, but apart from those niches Australian higher education has more central ‘co-ordination’ than just about any other industry: 75% of student places are allocated by quota, and price signals are forbidden for those places. If the consequences of this are ‘market failure’ then it is only in the sense that markets fail to exist.
Admittedly, an industry with high rates of return but low rates of investment looks like a case of market failure. Money should be flowing to take advantage of high returns.
Economists, including free market economists like Milton Friedman, believe that there are market failures in higher education, due to banks’ reluctance to lend with only human capital as security. In Australia, though, we’ve worked out how to fix this problem – have the Commonwealth lend the money, and recover it via an income-contingent loan.
What’s gone wrong is that while policy fixed the capital market problem, it created another one by lending money not to pay fees that benefit the university, but taxes that benefit the government. The universities have to make do with whatever government gives them. As governments, and for that matter oppositions, are preoccupied with the short to medium term budgetary position, universities are chronically under-funded.
In lending for taxes rather than fees we have a significant government failure, not a market failure.
Bahnisch and Russell seem to believe that higher education markets can’t work because of informational problems. For example, the product of the university is complex and so it is liable to be misrepresented.
It is true that there are information problems in higher education, partly because students don’t know beforehand exactly what their course is going to be like, and also because university education produces different reactions in different individuals. A course that is great for one person can be disastrous for another.
The important point is that these information problems exist irrespective of whether we use markets or central co-ordination. The question is which system deals with them best. It seems obvious that students and universities between them have far more relevant knowledge than can a central co-ordinating Department or agency, which is at best second-guessing the other two parties. We may as well dispense with a middle man that can only lose information.
Banhisch and Russell worry that marketing ‘could well be more about image than substance’. Indeed it might. That’s why alternative information sources are important, such as the Good Universities Guide, the performance data published on the web by the Commonwealth, and informed careers advice in schools. Educational brokers operate with success in the vocational training market, and there is no reason why they could not do so in higher education as well.
Bahnisch and Russell’s solution to possibly dodgy marketing appears to be not to provide alternative sources of advice, but to deprive students of choice, so there is no need to advertise. Trust the government and the universities!
In fact, that would produce just the kind of indifference to undergraduate needs so starkly revealed by the results of the Course Experience Questionnaire. You don’t need to be an economist to work out that buyers in a sellers’ market usually get a bad deal. What’s surprising is that an academic economist – Russell – can apparently believe otherwise.
The only area where a central co-ordinator may know more than universities or students is about long-term national needs in particular disciplines. This may justify selective intervention, encouraging students and universities through various inducements to fulfil these needs.
What it can’t possibly justify is the current practice of ignoring knowledge about student preferences that goes on via the quota system, where universities receive much the same number of places each year, regardless of demand as expressed through student applications.
This leads to inefficiencies, with many students enrolled in courses or universities other than those they want dropping out or switching courses later on.
I’m not claiming that higher education can ever be a textbook perfect market. My pro-market claim is more modest – not perfection, but better information flows and incentive structures than exist under our current dysfunctional system of central co-ordination.
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About the Author:
Andrew Norton is a Research Fellow at The Centre for Independent Studies and a former adviser to Dr David Kemp.
