The Cost Disease Problem in Higher Education and the Winner-take-all Solution

Here’s a very nice article on the financial problems faced by Higher Education.

Reports of Higher Education’s Death Have Been Moderately Exaggerated
by Michael Feldstein

His analysis covers a lot of ground, but he doesn’t factor in the use of Open Educational Resources such as publicly funded open textbooks and/or online courses. His analysis also does not cover the Sanders/Warren idea that public HE should be tuition free.

He does frame his analysis initially as an evaluation of two extreme predictions of what will happen to HE (i.e. either everything is going to change or nothing is going to change). Further, his own assessment takes the middle ground between these two extremes (i.e. some things will change and others will stay the same) – a very reasonable, albeit predictable, position to take.

Moreover, he comes to the conclusion that existing institutions of HE will have to find their own solutions if they are to survive. This is also rather obvious, but he does give administrators and faculty at these institutions a lot of good analysis and insight as to their situation and their options. In general, despite being predictable on some points, it’s a very good article.

What I have to add to Michael’s analysis is a recommendation for the creation of a public mega-university in the US and, perhaps more importantly, in developing countries and China. Personally, I think it would work to the benefit of students, but it may result in the automation of academic work, which will not be popular with many who work within academia.

Essentially, I’m saying that HE’s biggest problem is the “Cost Disease” problem identified by two economists: William Baumol and William G. Bowen. Essentially, the problem Baumol and Bowen identify is that labor intensive organizations (e.g. Colleges and Universities) are not able to hold their costs down relative to capital intensive organizations that have automated and introduced economies of scale. [1]

One non-HE example of an industry with a cost disease problem is live Opera. The cost of the orchestra and singers is fairly high and it is a very labor intensive industry.

The main solution to the cost disease problem is the “winner-take-all” economy (e.g. in HE, this would mean a big increase in the economy of scale in developing and delivering online courses). The economics of a winner-take-all society has been discussed by many economists starting with Robert Frank and Philip J. Cook in their book: The Winner-Take-All Society. More recently, it’s been covered by two tech oriented economists, Erik Brynjolfsson and Andrew McAfee, in their book The Second Machine Age. The mega-university is what you get when you apply winner-take-all thinking to Higher Education. For more on this idea, see: Mega-universities and Knowledge Media by John S. Daniel.

Returning to Opera, there are two ways to reduce the cost of live Opera:

  1. broadcast the Opera to a mass audience and
  2. make a recording of the Opera and distribute it over the internet or on some other form of media (e.g. on a CD).

In either case, the income of famous Opera stars would go up, since they are the “winners” who take all, but the size of the market for live Opera may shrink.

Although my mega-university proposal (which includes the idea that it be tuition-free) may get some traction in countries such as China, I doubt that it will get much traction within existing institutions of HE in the United States. This is partly because some members of the US Senate and House of Representatives depend on support from faculty in existing institutions of Higher Education in the US.

So, to start with the OER idea, here’s some recent news on that front.

The US Dept of Edu is putting up $6 million to develop college textbooks [2]. Since the taxpayer is paying to develop these resources, it looks like they will be released with a Creative Commons license.

It’s a pilot program, so it’s not clear that there will be further funding available to pay to keep said textbooks updated.

Also, although the RFP says that grantees should have some plan to encourage faculty to use these textbooks, there’s no guarantee that this will happen.

Further, if the textbook content does not get updated on a fairly regular basis, then faculty will select other textbooks if/when the open textbooks from this program go out of date.

Nevertheless, the DOE may have to take baby steps to get the ball rolling.

Now for the US mega-university idea.

As I’ve pointed out many times before [3], we have a very good model of how the government could develop and maintain a large number of online courses (which would all have online textbooks as a component).

It’s a publicly funded mega-university called the British Open University. It’s not some hypothetical idea. They’ve been in business ever since 1969. So, their business model is well known and well tested.

If the US decides to emulate the British Open University, my suggestion is that the putative US Open University should put all of its content in the public domain. Furthermore, I suggest that the USOU be tuition free. Note that this would be far less expensive than trying to make all public institutions of higher education tuition free (i.e. the Sanders/Warren plan). A USOU would also be in a good position to make sure its content does get selected by the teaching faculty working out of its teaching centers.

Moreover, since it would be a “green field” project, those who design the USOU would not have to fight the decades (centuries, in some cases) of tradition that has built up in traditional institutions of higher education. This would allow the USOU to institute teaching methodologies that are well suited for remote teaching and learning. (There is good reason to believe that traditional institutions will face significant opposition if they try to do this. Those that benefit from the status quo will fight to maintain the status quo.)


[1] Can online learning be a partial Rx for Higher Education’s Cost Disease?
by Fred M Beshears

[2] Fund for the Improvement of Postsecondary Education
Open Textbooks Pilot Program
by the US Dept of Education

[3] How to Create a Tuition Free, Public, Online University to Produce Free Online Textbooks and Courses
by Fred M Beshears


Bates, Tony

Tony Bates on the Lone Ranger Model of Courseware Development

FMB Comment:
This blog post discusses the traditional method of developing and maintaining content. It’s what you find at most traditional colleges and universities. IMO, most traditional colleges and universities do NOT see themselves as really being in the business of developing and maintaining course content. For the most part, faculty at these institutions are academically free to develop textbooks, or not. Also, if they do develop content, they assert that they own it. Therefore, they are free to sell their content to textbook publishers. Their employer – i.e. the college or university – really has no say in the matter.

So, I would argue that in these cases (which are most cases) the college or university in question really isn’t in the business of developing and maintaining course content. Of course, this creates serious problems if the school does want to go into the business of offering online courses. What is their business model for developing and maintaining said content if faculty are academically free to walk away from maintaining the content?

The Lone Ranger approach can be contrasted with the Professional Development Team approach discussed by David L. Kirp. (See his entry on the British Open University in this reference section.)

Bok, Derek

Underlying the efforts of government officials and accrediting organizations to bring about reform is a quiet war between two different cultures. The first culture, shared by reformers, is an evidence-based approach to education. It is rooted in the belief that one can best advance teaching and learning by measuring student progress and testing experimental efforts to increase it. The second culture rests on a conviction that effective teaching is an art which one can improve over time through personal experience and intuition without any need for data-driven reforms imposed from above. This has long been the prevailing belief among most faculty members. Their instinctive response to the reformer brandishing tests and empirical studies is to retreat into silence and withhold cooperation.
Derek Bok, Higher Education in America, p. 214

FMB Comment-1: This is why the founders of the British Open University decided to start from scratch instead of trying to reform existing institutions. Note that the British Open University was created by a Labor government way back in 1969. In my opinion, the founders of the OU were right. Trying to make fundamental changes from within an institution with many decades (or centuries, in some cases) of deeply entrenched traditions is a fool’s errand. It’s much wiser to go around said institutions and start from scratch.

FMB Comment-2 My take on reforming HE from within is that many, if not most, faculty equate their autonomy and job security with the inability to measure learning in any generally agreed upon, objective way. In other words, they believe that their autonomy and authority depend on learning being a desiderata forever shrouded in mystery.

Kirp, David L.

David L. Kirp on the British Open University

FMB Comment:
This blog post discusses the professional development team approach to developing and maintaining content. It’s what you find at the British Open University and other institutions that see themselves as really being in the business of developing and maintaining content.

The professional development team approach can be contrasted with the Lone Ranger approach to content development, which is discussed by Tony Bates (see his entry in this reference section).

In the discussion section, I include transcripts of an extended debate about this blog post on the Open Educational Resources forum.


There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.

Maloney, Edward J.

How Technology Is Not Changing the Future of Higher Education
What The New York Times misses about how colleges and universities are changing.

Edward J. Maloney and Joshua Kim
February 26, 2020

FMB Comment:
In his comment in this reference section, Derek Bok mentions two cultures: 1) a culture based on experimental evidence from educational psychology and 2) an opposing culture, which rests on a conviction that effective teaching is an art “which one can improve over time through personal experience and intuition without any need for data-driven reforms imposed from above.”

This article by Edward Malony is from the perspective of the effective-teaching-as-an-art culture. For an example of an article from the evidence-based culture, see the article by Jon Marcus in this reference section.

Marcus, Jon

How Technology Is Changing the Future of Higher Education
Labs test artificial intelligence, virtual reality and other innovations that could improve learning and lower costs for Generation Z and beyond.
By Jon Marcus
Published Feb. 20, 2020

FMB Comment:
In his comment in this reference section, Derek Bok mentions two cultures: 1) a culture based on experimental evidence from educational psychology and 2) an opposing culture, which rests on a conviction that effective teaching is an art.

Here’s an example of the evidence-based approach to education. According to Derek Bok: “It is rooted in the belief that one can best advance teaching and learning by measuring student progress and testing experimental efforts to increase it.”

For an example of an article from the effective-teaching-as-art, see the article by Edward J. Maloney in this reference section.

Newfield, Christopher

Does Online Reinforce the Color Line?

Online education is an engine of racial inequality, argue Christopher Newfield and Cameron Sublett, and no good higher ed policy can be created ignoring that fact.

By Christopher Newfield and Cameron Sublett
March 20, 2018

In January [of 2018], Governor Jerry Brown proposed giving the California State University and the University of California even less than the inadequate 4 percent the systems thought they were getting — a nominal 3 percent, 2.1 percent after subtracting one-time money. Nor did the governor propose a tuition increase to compensate for a state allocation that barely meets consumer price inflation. The two university systems have 33 campuses between them, and Brown’s budget insures the continuation of structural problems and everyday squeezes at all 33.

Why do the governor and most of the Democratic establishment think UC and CSU can do more with less, and that state cuts don’t hurt quality? In a press conference following the release of his 2018-19 budget, Brown offered a kind of explanation.

FMB Comment: In my opinion, Jerry Brown is on a fool’s errand; he’s trying to use technology reform existing institutions of Higher Education, and he’s facing fierce push back from faculty who work at these institutions. Those who founded the British Open University had a better idea: start from scratch. When you start from scratch, you stand a better chance of having faculty on-board who support what you’re trying to do.

Rogoff, Kenneth

When Will Tech Disrupt Higher Education?
Feb 5, 2018
by Kenneth Rogoff

Universities pride themselves on producing creative ideas that disrupt the rest of society, yet higher-education teaching techniques continue to evolve at a glacial pace. Given education’s centrality to raising productivity, shouldn’t efforts to reinvigorate today’s sclerotic Western economies focus on how to reinvent higher education?

Will Universities Learn from Lockdowns?
Kenneth Rogoff
Jul 6, 2020

The COVID-19 crisis is likely to bring about further rapid and far-reaching shifts in the economic ground beneath us. But we need not view these changes with dread if the pandemic also propels a transition to better and more universal higher education.

CAMBRIDGE – Will COVID-19 finally trigger a long-overdue technological disruption of higher education? Throughout the world, sudden mid-semester lockdowns aimed at combating the pandemic forced universities to switch to distance learning almost overnight. But while this rapid transition has been tough for faculty and students alike, some good might yet come of it.

San Jose State University – Philosophy Department

An Open Letter
to Professor Michael Sandel
from the Philosophy Department at San Jose State University

April 29, 2013

FMB Comment: The SJSU Philosophy Department is not happy with Professor Sandel. He created a Massive Open Online Course (MOOC) based on his class at Harvard University. The SJSU Philosophy faculty essentially are saying that this is a winner-take-all approach to instruction. Their letter puts up a spirited set of arguments as to why they think this is a bad idea.

Straub, Richard

Managing in an Age of Winner-Take-All
by Richard Straub
April 07, 2015


Baumol’s Cost Disease

Winner-take-all market

4 thoughts on “The Cost Disease Problem in Higher Education and the Winner-take-all Solution

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