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.

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. Nevertheless, I mention it for four reasons: 1) I’m not trying to win over a US HE audience, 2) I’m not looking for consulting gigs with existing institutions of HE in the United States, 3) I’m not running for election in the US, and 4) I am interested in HE outside of the US, especially in developing countries and China.

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 [1]. 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 [2], 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] Fund for the Improvement of Postsecondary Education
Open Textbooks Pilot Program
by the US Dept of Education

[2] How to Create a Tuition Free, Public, Online University to Produce Free Online Textbooks and Courses

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