Free market business reform

In Chapter 13 of Machinery of Freedom, David Friedman writes about Adam Smith U. He begins with a quote from the man himself on the incentives facing teachers, here are some key parts of the section (V.1.135):

In every profession, the exertion of the greater part of those who exercise it is always in proportion to the necessity they are under of making that exertion. This necessity is greatest with those to whom the emoluments of their profession are the only source from which they expect their fortune, or even their ordinary revenue and subsistence. In order to acquire this fortune, or even to get this subsistence, they must, in the course of a year,*111 execute a certain quantity of work of a known value; and, where the competition is free, the rivalship of competitors, who are all endeavouring to justle one another out of employment, obliges every man to endeavour to execute his work with a certain degree of exactness...

The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers. Their subsistence, so far as it arises from their salaries, is evidently derived from a fund altogether independent of their success and reputation in their particular professions.

In some universities the salary makes but a part, and frequently but a small part, of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils. The necessity of application, though always more or less diminished, is not in this case entirely taken away...

In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it. It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit.

It is for this reason, for example, that I have a strict policy against donating to any college or university fund, despite my great affection for my alma mater. A large fund acts as a fixed resource that draws rent-seekers who fight over access to it, rather than working to make the institution great so as to draw more income from student tuition. As DDF says, a tuition-driven institution would serve its customers better:

If the subsidies were abolished or converted into scholarships awarded to students, so that the university got its money from tuition, it would be in the position of a merchant selling his goods at their market price and thus constrained to sell what his customers most want to buy. That is the situation of market schools, such as Berlitz and the various correspondence schools, and that is how they act.

Yet even when tuition is the main source of income, the fact that it goes to the school as a whole, and not to the particular teachers based on the quality or quantity or attractiveness of their classes, renders the institution inefficient. As an alternative, DDF proposes:

A university of the present sort, even if financed entirely from tuition, would still be a centralized, bureaucratic organization. In a free-market university, on the other hand, the present corporate structure would be replaced by a number of separate organizations, cooperating in their mutual interst thorugh the normal processes of the marketplace. These presumably would include one or more business renting out the use of classrooms, and a large number of teachers, each paying for the use of a classroom and charing the students who wished to take his course whatever price was mutually agreeable. The system thus would be ultimately supported by the students, each choosing his courses according to what he watned to study, the reputation of the teacher, and his price....

The essential characteristic of this scheme is that, like any market system, it produces what the consumer wants.

The key idea I want to convey here is not this specific example of how increasing market feedback would result in a better institution. The idea is that its not just large *government* institutions which are inefficient and lacking feedback. Big businesses can have the same problem too. Some of the problems of universities stem from the fact that they are heavily subsidized, but some of them stem from the structure of the institution, from its voluntarily given endowment, and from its all-you-can-eat fee structure.

The insights we blog about here, laissez-faire capitalism, public choice theory, and polycentrism, are all about incentives, and those incentives apply in many places. This knowledge tells us that it is not only bureaucrats who focus on political infighting rather than serving their supposed constitutents, but that institutions whose power comes from any fixed resource, like a billion-dollar endowment that just sits there and generates tens of millions in income every year, will have some of the same characteristics. The academic world, as any academic can tell you, has a strong element of political infighting, and far less entrepreneurial drive to create great products than other businesses.

As a follow-up, I'll talk about how applying this same insight to one aspect of the health-care industry: nurses. For discussion: Besides schools and hospitals, what other institutions can you think of where market feedback is indirect, and so the institution functions poorly?

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Time will tell, but I am

Time will tell, but I am definitely concerned about the long-term performance of Olin College, because of its endowment. In the beginning, it was presumably staffed by dedicated enthusiasts like Herr Doktor Moody. And the high salaries and low tuition, as you say, attract good teachers and students.

The problem is that as time goes on, and the enthusiasts wear down, the fact that the school does not need to "work for a living" may begin to come into play. Its like being a trust fund kid. Its not that trust fund kids don't ever get jobs, and its not that a huge endowment makes for a terrible school. But less pressure means, on average, less performance.

And while I doubt that Olin will do much worse than schools with smaller funds, I suspect that Adam Smith U. would have much better classes than current colleges.

Donating one dollar per year

Donating one dollar per year to HMC buys you much more than one dollar in benefits. An alarmingly large part of the US News and other college ranking schemes depend on the percentage of graduates that give back, but not how much they give. An increase in ranking helps name recognition and recruiting, which is what ultimately shapes how your degree will be viewed.

For the opposite of your final question, I prefer to shop at stores like Best Buy where the salespeople are not on commission than somewhere like Fry's where they keep trying to sell me power conditioners or more expensive crap I don't need because their commission is higher on those goods.

Lastly, the brand new Olin College began with a huge endowment from the Olin foundation, and was able to offer almost twice the going rate for professors as well as no tuition for the first ten years or so. This way they were able to attract quality students, and steal great professors from other schools (like Mudd's head of the math department).

One very old problem in

One very old problem in academia is the fact that academic advancement is tied to publishing papers. This in turn brings both money in the form of grants, and academic accolades and status (You might say academic capital as opposed to money.) to the university. This has no direct bearing on teaching. Of course you are right that if tuition were the only source of money, teaching would be more important. Unfortunately some of the best students are hungry and poor and can’t afford high tuition. Is the moneyed elite is the only group to get good education under your model? How is this problem addressed?

DDF's idea is to have

DDF's idea is to have students directly reward individual teachers, i.e. to have teachers price, market, and sell their teaching services directly rather than being aggregated through the University. Surely the same ends could be achieved simply by eliminating tenure. With tenure abolished, the University would be able to hire, fire, and offer higher or lower salaries to teachers as it thought best. To maximize their profit, Universities would hire teachers that they though most attracted and satisfied students, would continually evaluate teachers for their performance at delivering customer satisfaction, and would reward them appropriately. Competition would compell the Universities to become good at determining what kinds of policies attracted and retained students, and what kind of teachers were non-productive drains on the University's resources.

The agency issue of the University is not the problem - the nature of tenure is.

Even endowments don't create a problem. Endowments give a school more money, but they don't remove the incentive for the school to be as profitable as possible (and thus as judicious as possible in their selection and compensation of teachers). Would the quality of, say, Dell's products and services decline if some wealthy and somewhat peculiar octogenarian left them $100 million in her will? Of course not - Dell would treat the gift as capital and try to put it to profitable use, further improving their wares.

The root cause of inefficiencies in the educational systems, I think, is that most Universities have no profit-seeking owners. They don't raise capital by selling stock to shareholders expecting a return on their investment. Thus, they have no incentive to be profitable, and thus no incentive to efficiently provide educational services that students desire.

You are correct that even profit-driven businesses, once they become giant bureaucratic organizations, can suffer from all kinds of dead-weight loss. But organizations without the profit motive will suffer from that disease much worse, and will never be put out of our misery by competition, as cancer-stricken businesses eventually are.

Dave, With market forces

Dave,

With market forces unleashed ala Adam Smith U, I imagine you'd see greater differentiation between teaching colleges and research colleges for precisely the reasons you touched on- some schools will gain wealth by being research factories and some students will choose that over the teaching quality (they'll put up with absent minded or cranky professors in order to bask in the other advantages of top research), while some schools will specialize (and focus on) teaching and service to the students.

This isn't to say that there is necessarily a tension between research and teaching (though in my experience in grad school, the professors certainly saw teaching as a horrid chore to be borne with clenched teeth, and the lectures generally reflected it), but that I'm sure there will be niches for different kinds of researchers, teachers, and students that would be exploited under a more "entrepreneurial" model.

Unfortunately some of the

Unfortunately some of the best students are hungry and poor and can’t afford high tuition. Is the moneyed elite is the only group to get good education under your model? How is this problem addressed?

Dave - thanks for the softball question! Nothing in this argument says we shouldn't give scholarships. College scholarships, not tied to schools, like the National Merit scholarships, NAACP scholarships, and government sponsored grants, all serve to help the poor get education, without violating efficiency.

The state can easily subsidize higher education this way, without spoiling the schools by giving them a source of funds which does not require successfully competing via quality. See any argument for school vouchers at lower levels for more reasoning.

Give money to scholarship programs for your favorite types of people all you want - just don't give it directly to schools.

eddie - I disagree that its

eddie - I disagree that its about tenure not endowment. Consider a university where there is no tenure and no tuition, and all funds come from an endowment (like Olin). Sure the university *could* hire/fire who it wanted. But why would it do so well? It is like a business that offers a product for free, and makes its money from a trust fund. The business could improve the product, and perhaps, if it seems like fun, or if it makes those in charge feel good, it will. But don't you agree that the business has vastly less incentive, and is vastly less likely, to improve its product than one whose main source of funds comes from selling that product?

Competition would compell the Universities to become good at determining what kinds of policies attracted and retained students, and what kind of teachers were non-productive drains on the University’s resources.

What competition? If the university is not mainly funded by tuition money, it is not in the busines of competing for students. It is in the business of competing over access to its rents.

Would the quality of, say, Dell’s products and services decline if some wealthy and somewhat peculiar octogenarian left them $100 million in her will? Of course not - Dell would treat the gift as capital and try to put it to profitable use, further improving their wares.

I think there is an important difference here between two scenarios. In one scenario, Dell invests in $100M of capital, to try to improve their bottom line, because they believe their internal rate of return is higher than the market rate of return. Then, you are absolutely right that their quality would not decline.

In the other scenario, they don't know what to do with the money, so they invest it at a safe 7%. If it was a private company, with profits much smaller than that $7M/year, then I think that the company would turn to fighting over access to the money, rather than increasing their meager profits from business.

In a public company, this can be prevented, because the shareholders would just demand the money be distributed as dividends. Or they could fire management who are not trying to make more money.

But a university cannot distribute dividends, as it has no shareholders. And it does not invest its money in a product, as capital, in order to increase its flow of income. Instead, it sits on the money and spends the profits, and controlling how that money is spent is done by internal politics.

The root cause of inefficiencies in the educational systems, I think, is that most Universities have no profit-seeking owners. They don’t raise capital by selling stock to shareholders expecting a return on their investment. Thus, they have no incentive to be profitable, and thus no incentive to efficiently provide educational services that students desire.

I totally agree with you on this. I don't think I (or DDF) was claiming to be identifying the root cause. Merely suggesting a way that a profit-seeking university could structure itself so as to function better.

But organizations without the profit motive will suffer from that disease much worse, and will never be put out of our misery by competition, as cancer-stricken businesses eventually are.

Right, no school ever dissolved itself because it wasn't spending its endowment effectively.

There are also loans. I see

There are also loans. I see charging students less than the full cost of their educations as a bug, not a feature. Because they're not paying full price, they can afford to be less concerned with returns, which is why we get so many people majoring in subjects for which there's no market demand. If a student can't justify the full price of his education with increased earning potential, then why should anyone else pay for it?

There may be certain important but undervalued (in terms of salary) fields to which the argument doesn't apply, but I think this is an issue best solved by giving scholarships to the most promising students in these fields, not by subsidizing mediocre students as they waste ten percent of their productive lives and tens of thousands of dollars of other people's money.

In a public company, this

In a public company, this can be prevented, because the shareholders would just demand the money be distributed as dividends.

Major tangent: Why do corporations ever distribute dividends? Doesn't a share buyback increase shareholder value by the same amount, with preferable tax implications?

For discussion: Besides

For discussion: Besides schools and hospitals, what other institutions can you think of where market feedback is indirect, and so the institution functions poorly

I imagine that may charitable institutions suffer from this, since many of them live on donations given for reasons that have nothing to do with their performance.

nmg

Patri - My bad, I forgot the

Patri - My bad, I forgot the distinction between a _gift_ and an _endowment_; thanks for the reminder. A profit-seeking business would use a gift as capital. But an endowment can't be used as capital; it's being tied up as someone else's capital, the return from which is being given as a gift. A profitable company would rather take the entire endowment and use it as capital themselves.

I'll agree with you that you shouldn't support a non-profit school by funding its endowment. But you shouldn't feel bad for donating money directly to a school rather than to individual students, *if* the school is a profit-seeking business. It will go right to their bottom line, allowing them to reduce their prices, or expand their capital outlay, or some combination thereof... and thus helping students.

I think that's where my quibble with you/DDF lies. If a school is relying on tuition rather than endowments, giving tuition payments (or subsidies) to the school as a whole rather than directly to teachers won't matter. Competition will force the school to spend their tuition revenue wisely to provide quality education and attract students. Competition is ensured, because a school relying on tuition rather than endowments has to attract students to survive.

Eddie - sounds like we're

Eddie - sounds like we're mostly in agreement.

I think that’s where my quibble with you/DDF lies. If a school is relying on tuition rather than endowments, giving tuition payments (or subsidies) to the school as a whole rather than directly to teachers won’t matter. Competition will force the school to spend their tuition revenue wisely to provide quality education and attract students. Competition is ensured, because a school relying on tuition rather than endowments has to attract students to survive.

Well, you can look at my position as being a suggestion for how school businesses could choose pricing so as to be more competitive. But you have an excellent point that the root of the problem is that these are not profit-seeking institutions. The other structural problems all stem from there.

On the other hand, as you can see in my second post, the general problem of designing systems with poor market feedback also appears in profit-seeking enterprises like hospitals. I guess the interesting question is: Why do such poor pricing and resource allocation strategies persist?

Patri: Why do such poor

Patri:

Why do such poor pricing and resource allocation strategies persist?

An excellent question indeed. I'm tempted to shrug and say "Lots of reasons; we're all imperfect, but don't worry, because innovation and competition will squeeze these inefficiencies out in time." But that smacks of treating the market like a magic wand rather than helping to figure out how the magic works and make the magic better.

I'm also tempted to say "Maybe they're not as bad as you think", although that's basically what I said about your hospital post, so that's not all that helpful either.

I think there are some good points to be made about moving decisions and incentives closer to the relevant decision makers, and using market mechanisms to help that. Company-internal prediction markets, for example, or transparent incentives based on customer-centered or business-centered objectives. I do think you can take this too far; as I mentioned elsewhere, aggregation serves a valuable purpose. Clay Shirky famously points out that micropayments don't work because people don't like them, and a gas station owner that charged to use his bathroom wouldn't be contributing to the wealth of the nation even if he figured that there's no reason for his non-bathroom-using customers to be subsidizing the cost of him cleaning the toilets.

I think poor resource allocation strategies persist because they are so prevalent. People believe in the Free Lunch, like employer-provided health "insurance" and "free" public schools. People believe in broken windows and don't believe in David Ricardo. Economic truths are remarkably counterintuitive, and the fallacies are everywhere around us, so belief in the fallacies tends to be self-reinforcing. Maybe if we started teaching Smith and Bastiat in the ninth grade now, we might have a much more efficient society in twenty years.

Another reason might be inherent in large organizations. Complexity grows faster than size, and inefficiency naturally arises from complexity. Getting rid of inefficiency is hard; it finds niches in complex organizations where it sets in and grows roots. Ask your bosses how they manage it. Maybe Google can keep growing until everyone works there. :)

If you think about it, markets and prices are the ultimate in complexity management. I can choose to buy a pencil, or not, for a few pennies without worrying about the thousands of people it took to make it. But small groups manage efficient interactions without pricing mechanisms at all, and would probably suffer if they were introduced. Perhaps there's a fuzzy threshold number of interacting entities where markets become a better way to organize, recognizing that a set of entities can itself be a single entity interacting at another level with other sets.

Clay Shirky famously points

Clay Shirky famously points out that micropayments don’t work because people don’t like them, and a gas station owner that charged to use his bathroom wouldn’t be contributing to the wealth of the nation even if he figured that there’s no reason for his non-bathroom-using customers to be subsidizing the cost of him cleaning the toilets.

I think poor resource allocation strategies persist because they are so prevalent. People believe in the Free Lunch, like employer-provided health “insurance” and “free” public schools. People believe in broken windows and don’t believe in David Ricardo

Maybe I'm missing something here, but it seems like this business of criticizing people for "poor resource allocation" DOES imply that gas station owners should charge for use of their bathrooms; or are you suggesting people are irrational for wanting "free" bathrooms?

At what level(s) do you

At what level(s) do you suggest applying this model of tuition? My worry is that, at or near my level at least, the information flow is very poor. Fair teacher evaluation is a hard and largely unsolved problem even among experts. People with typical levels of knowledge frequently make grievous mistakes in evaluating teacher quality. Students make mistakes because they frequently prioritize qualities not relevant to learning outcomes -- they adore the history teacher because he's their coach, say, but they aren't actually learning much history, or he doesn't give clear assignments and prompt feedback. Students often do not realize which teachers actually made a substantial impact on their learning until years later (years after tuition would have been paid), and they're not necessarily the ones they thought at the time.

And if students, who have more direct observation of the teacher, have problems gauging teacher quality, the parents who would presumably be paying their salaries have it even worse. They have only anecdotal and intermittent information.

When I was a teachers' aide, I observed a number of teachers in the classroom and had a good sense of who was actually teaching stuff and who wasn't. The opinions of their colleagues on who the good teachers were -- colleagues who, like parents, had spent little to no time in these classrooms, and knew about the teachers' personalities and anecdotes -- were often amazingly wrong. The person who was easy to get along with in the faculty lounge was confused for a good teacher.

In an environment where information flow is so poor -- and perhaps necessarily poor, since few parents are in a position to sit in on their students' classes for days at a time, and few teachers would feel comfortable with this -- paying teachers individually seems certain to reward the wrong characteristics and result in less educated students.

I quite like the model I am in now, where parents pay my institution, and my institution has oversight and fairly broad hiring and firing powers. (I'd like it better if there were merit pay, though that gets into the evaluation problem again, and requires both a much more nuanced evaluation system than most schools have now and a much different teacher culture...) My administrators, who are by and large former or even current teachers, understand a lot about what good and bad teaching are, and are in a much better position to evaluate me with limited contact than parents would be. (And we are, however slowly, putting some kind of evaluation system in place, making it less ad hoc...) What we have is a system where the parents select schools they trust, and the schools are in a reasonable position to merit that trust by internal policing. (And, believe me, the competition in my market segment is bloody; people are continually aware of the need to maintain the institution's financial survival through reputable teaching.)

At the university level it might be different, since students of that age are in a far better position to correctly judge the quality of the teaching they are receiving (though, from what I have heard from professors after they've read their evaluation forms, students seldom *do*...I have moderate faith, though, that in a culture where evaluation was common and significant more people would take it seriously and develop those skills.) Mind you the financing issue and the callous disregard which many people in this thread seem to have for the financial situation of most people vis-a-vis paying for college, and the enormous psychological barrier presented by high tuition prices even when scholarships are available, horrifies me.

Patri Friedman: I suspect

Patri Friedman: I suspect that Adam Smith U. would have much better classes than current colleges.

Why the hypothetical? Aren't U of Phoenix, DeVry, and ITT Tech actual Adam Smith Universities?

Brian Doss: With market forces unleashed ala Adam Smith U, I imagine you’d see greater differentiation between teaching colleges and research colleges

Indeed. As far as I know the for-profit schools mentioned above are teaching-only.

Mike, U of Phoenix, ITT, and

Mike,

U of Phoenix, ITT, and DeVry are for-profit but I don't think you pay any of the teachers directly for their services.

Brian, I see. There's still

Brian, I see. There's still no need for a hypothetical. Many types of classes are offered directly by instructors as well as at state, non-profit, and for-profit institutions. Most obviously, language, music, and athletic/martial training. If private tutoring can be counted as classes offered directly by instructors, then every type of class.

Surely someone has attempted to quantify teacher productivity across these arrangements.

Mike/Brian - my experience

Mike/Brian - my experience with private teaching institutions has been overwhelmingly positive. Learning the handgun at Front Sight, and learning wilderness medicine from WMI/NOLS, each premier in their field, were incredible learning experiences. The average teaching ability of an instructor was far above the average teaching ability of a college professor at HMC or Stanford, the two top-tier schools I have degrees from.

The whole research thing is such bullshit. Scientists are welcome to do research, but why should my tuition pay for it? I don't want to learn from scientists - they are awkward fellows who communicate poorly. I want to learn from teachers, whose brains may not be quite as big, but who excel at the job I am paying them to do.

I guess that brings up the

I guess that brings up the question of how research would be funded in a free society, like for example medical research into new drugs, or engineering research into new technology. Would the teachers do this on a contract basis for companies, or would small "researcher's cooperatives" form, or what?

Fair teacher evaluation is a

Fair teacher evaluation is a hard and largely unsolved problem even among experts. People with typical levels of knowledge frequently make grievous mistakes in evaluating teacher quality. Students make mistakes because they frequently prioritize qualities not relevant to learning outcomes -- they adore the history teacher because he's their coach, say, but they aren't actually learning much history, or he doesn't give clear assignments and prompt feedback. Students often do not realize which teachers actually made a substantial impact on their learning until years later (years after tuition would have been paid), and they're not necessarily the ones they thought at the time.

Fair Automobile evaluation is a hard and largely unsolved problem, even among experts. People with typical levels of knowledge frequently make grievous mistakes in evaluating automobile quality. Drivers make mistakes because they frequently prioritize qualities not relevant to driving outcomes -- they adore the SUV because it looks safe, say, but it actually isn't because it rolls more easily. Drivers often don't realize what cars have substantial safety benefits until years later (years after the car would have been bought), and they're not necessarily the ones they thought at the time.

Point made? Evaluating the quality of any good or service you buy is difficult. But in the vast majority of cases, letting the buyer be the one who makes the evaluation works better than letting some institution do it. Especially when the institution sells a big bundle of services, of which each class is but one small part.

Really, the main thing a college/university sells is the prestige of its degree. The quality of teaching is one component of that - but do you really think its a big component? The rational administrator will spend more time on marketing and trying to raise funds from alumni than on teacher quality - because in the current incentive system, that's the best use of their time.

President Riggs was considered an extremely successful president of Harvey Mudd - for being a great fundraiser. Not for anything having to do with directly improving the student experience or the desirability of the college.

I agree that its difficult for undergraduates and their parents to figure out what teachers are best. But at least they have a better reason to than college administrators. I would love to see them helped by studies of the varying success of students who had various teachers in the past, or other metrics of long-term teacher performance. And I am much more confident that those ratings and metrics would evolve in an unbundled school than that they would be used in the current setup.

I mean, come on, where do you think professors will do a better job of teaching: In a system where they get paid based on how many students take their classes and how much they are willing to pay, or a system where once they get tenure, they get paid no matter how boring they are?

Patri, I'm inclined to agree

Patri,

I'm inclined to agree with you that Adam Smith U. would provide classes that _students_ regard as much better than those that they receive today at most universities. Certainly directly paying professors would provide incentives to perform. My worry, though, concerns what exactly would count as "good" performance at Adam Smith U.

Students will of course say that they really value Professors who make them work hard, challenge them intellectually, and force them to live up to their potential. In practice, though, the most popular professors on any campus tend to be those who are funny, entertaining, physically attractive, or easy graders. Anyone who can manage all four at once need never worry about a bad student evaluation, and at Adam Smith U, such professors would be guaranteed a very nice income.

Now contrast that person with the professor who holds the line on grade inflation, insisting that C really does mean 'average'. The professor who assigns a lot of very difficult reading and then tests students on that same reading. The one who believes that learning is serious business and that attending class probably ought to be both more difficult and less entertaining than watching _American Idol_. That professor, though arguably a better teacher than the funny/cute/easy sort, will likely make far less money at Adam Smith U.

In short, my worry is that your university will reward exactly the sorts of things that the average undergraduate wants in a university professor. But, at the risk of sounding elitist, what undergraduates want is often not what they _ought_ to want. There is already considerable literature on the connection between increased focus on student evaluations and grade inflation. Adam Smith U merely formalizes those incentives.

Indeed, I think it likely that there will be a gigantic collective action problem at ASU. It will be in my interest to have my university well known for its academic rigor and for its grading integrity. But it will also be in my interest to then take classes from those who will give me very high grades. Of course, that'll be true for _every_ student, so the result will be no rigor, grade inflation through the roof, and a degree that is essentially worthless.

I guess, then, that I'm not at all sure that Adam Smith U will be a successful university. It will efficiently produce students who are satisfied with their classes and with their grades. It's not clear to me that it will more efficiently produce the thing that universities are supposed to produce, namely, highly educated adults. In other words, providing incentives for producing the best education will look very different from providing incentives for producing customers who are maximally satisfied with the piece of paper they have hanging on their wall.

(Full disclosure: I'm an academic and thus perhaps somewhat biased. But lest you think that this is the typical professor bemoaning his silly undergraduates who just don't appreciate his competence, I'll note that I'm generally regarded as being more-difficult-than-average at my institution. I also receive better-than-average evaluations. So there.)

Joe, Patri: I think some of

Joe, Patri: I think some of the disconnect in the arguments here revolves around the fact that universities are not merely providing education. In fact, I suggest they provide four distinct services to their customers:

1) Education
2) Entertainment
3) Certification
4) Status

High school seniors choose a college in part looking for a good place to live for the next four years, so they choose those with good "campus life" reputations. That's the entertainment part.

Certification is not provided by the teachers, but by the school. The diploma certifies that the recipient has ostensibly received an education in certain subjects and demonstrated mastery of those subjects.

For prestigous schools, the diploma ostensibly certifies that the recipient's education and subject mastery is better than everyone else's, but I question the reality of that. Instead, I think that a prestigous diploma is a status good, required for certain kinds of signalling.

Entertainment, certification, and status are perfectly legitimate desires, and students would be willing to pay for them. But they can't buy them from individual teachers. Instead, at Adam Smith U, they'd have to contract independently with, say, housing providers, social clubs, and certification agencies (with certain houses, clubs, and agencies also providing a certain degree of status through their criteria for acceptance).

I think both Joe's and Patri's concerns arise from recognizing misalignment of incentives. In Patri's case, he'd like to see students receive an education, but the typical current system relies on endowments rather than tuition, ensuring that fundraising is prioritized over education. In Joe's case, he'd also like to see students receive an education (as would their parents, presumably), but most students are actually more interested in entertainment, certification, and status.

Students may give the

Students may give the highest evaluations to funny, good looking teachers, but the critical thing is not who they give high ratings to, but who they patronize.

Where direct payment is now common (eg music, language, athetic/martial arts, tutoring), what qualities attract paying customers?

Mike, I worry that the

Mike,

I worry that the difficulty with your comparison is that students who sign up for private music/sports/language tutoring actually want to learn a specific set of skills. I would submit that most students who go to college, however, don't really care about acquiring skills, but are rather looking for entertainment/certification/status. That, indeed, was rather the point of my post (though eddie put it better than I did). Adam Smith U would work out nicely _if students actually wanted an education_. But most students don't want to be educated. They want to be certified as competent for certain kinds of jobs and they want to be entertained while they receive that certification.

Joe, I wonder: if you asked

Joe,
I wonder: if you asked your students what it means to be educated and how being in college relates to it, what do you think they would say? You're probably right about the way the average undergrad views professors, but I don't think the problem is specifically market incentives. Rather, it's how we think about the question of how people become competent to decide "I'm going to do X and pursue Y because it makes me highly educated." I was having a discussion with some other students once about the fact that our program has a structured curriculum, with required courses for all students. We were wondering if this is really the best way to have master's and doctoral level students learn, rather than having each student choose their curriculum in consultation with their advisor. Under such a system, some people might choose poorly (undergrads might very well choose easy classes or easy graders). But under the current system, where along the way do you learn how to decide for yourself what you need to know? Somewhere along the way, do you gain the ability to decide what shape your education will take? Or is it something that always needs to be done to you, in a sense, with someone else telling you what you need to do and how you need to do it to achieve this goal of being highly educated? If it's the latter, than you may be right that Adam Smith U works on a bad set of incentives. But I think that has a lot to do with the fact that we're sending students to college without ever having gotten them to think about what makes you educated and how you get there. Do what the college has laid out and you emerge "educated." If I understand correctly, you're worried that a market would fail to create incentives for people to get something that they don't really value in the first place. That they don't value it is unfortunate, but I think it requires a fundamental shift in the way we think about education and why we want it. In essence, we want to create a demand for education, rather than demand for a degree. How would you do that in a open market?

Ok, you might have just

Ok, you might have just answered my question while I was putting all that deep thought into that really long post.

Joe, if what you say is true

Joe, if what you say is true college should be abolished as a source of certification and people should go to Adam Smith U when they actually want to learn.

Joe, I'm not sure the ASU

Joe,

I'm not sure the ASU approach would necessarily fail for the cert-only schools (offering prestige and networking, say).

Assuming that things go as you describe- where the kids not looking for an education instead put their money towards "fun" profs who don't teach them anything (or challenge them, etc)- it is hard to imagine how this school, in the aggregate, will produce graduates that will reflect well on the institution. That is, if an institution's raison d'etre is to be a certification factory (ala MBA schools) then its interest is to do what it takes to maintain its certification value- like Ivy League schools who maintain cachet via sky-high tuition to keep out the riffraff, and preselection for high-performance students who will likely also succeed after college, preserving their rep.

Presuming, too, that the cert school's reputation tanks because tough profs are run off by market forces and all you have are the professorial equivalents of Dr. Nick Riviera. Its hard to imagine (a) that kids would pay much for those kinds of profs, since they would seem to be a dime a dozen and (b) people looking for a good cert would go elsewhere.

So there would seem to be countervailing effects that would end up in some sort of equilibrium where the profs are tough enough to maintain a decent cert rep but easy enough to attract enough students. Surely, too, there will be a continuum of self-selection based on student/parent negotiation about what tradeoff there will be between rigor and fun (and what kind of cert is desired). I can't imagine that there would be some sort of general collapse in an ASU-world, since a multitude of disparate desires are intersecting in college (including those students who, miracle of miracles, want an education and want to be challenged).

I believe, also, that the

I believe, also, that the marketplace in general will determine what certifications are useful/desired vs. which are not, and for various reasons.

An Ivy League diploma means a built in social network and a strong presumption that you are: (a) from a rich/wealthy background, and thus good for connections, (b) a strong academic type, likely to be smart and thus easily trained to do the real work, or (c) both. And thus because employers will readily hire Ivy Leaguers, people will pay top dollar to get into them, and the Ivy League can be very selective in admissions (to allow only rich scions, top notch academics, or both). A 'virtuous' circle, at least for corporations where all that matters is pre-screening for good candidates for training, and not any real mastery of a subject (most white collar jobs).

And as an ivy league diploma is somewhat meaningless for someone who's trying to get either a top notch engineering position or become a master welder (i.e. professions that demand actual skills and mastery), you have other schools that make sure they produce highly skilled masters (i.e. Dubya, Gore, and Kerry types need not apply), etc.

Otherwise you get the "UVA College of Engineering" horselaugh effect. UVA is excellent in a number of fields, but nobody is going to take a UVA engineer too seriously. Serious engineers go to MIT, GT, or VT. :)

Aw dude, as much as I'd like

Aw dude, as much as I'd like to agree with that last bit, Spoonie is a UVA engineer, and people take him plenty serious. Same with many other UVA engineers I know. :beatnik:

Oh, alright. Spoonie is

Oh, alright. Spoonie is cool.

Joe - you make some god

Joe - you make some god points. But I happen to think that the current system totally blows, so its OK if ASU has some major faults. I think that most time in college classes is wasted, and certainly worth far less than the cost. If the point is to get a broad education, go read some books. If the point is to train you to do a job, I doubt that 5% of any student's time in the classroom is on stuff relevant to their future job. I'd guess more like 1%. Its a joke.

Contrast this with the pay-per-class systems. I've paid to take handgun classes, to be certified as an EMT, and to learn how to sail, and they all did a fantastic job of teaching me exactly those things. I paid to get a degree, and most of what I got, besides a lot of sex, drugs, and rock and roll, was a degree. Not an education. My masters degree was better, because they didn't require all that breadth. I enjoyed the breadth - I like Shakespeare as much as the next guy - but I don't need to spend $25K a year to cuddle up with the bard. But the masters degree was still mostly useless.

Its fine to teach useless things, if people want to learn them. I just think it could be done a lot more cheaply, and that if there were tighter feedback, the quality would be higher.

As for the agency problem, I fully agree that students will do imperfectly at judging good professors. But right now, there is almost no judging done. Once a professor has tenure, where is his feedback? Do his reviews actually matter? There is some word on the street which help students pick good profs, but very often there is only one prof teaching a class you need to take, so you have no choice.

Indeed, I think it likely that there will be a gigantic collective action problem at ASU. It will be in my interest to have my university well known for its academic rigor and for its grading integrity. But it will also be in my interest to then take classes from those who will give me very high grades. Of course, that’ll be true for every student, so the result will be no rigor, grade inflation through the roof, and a degree that is essentially worthless.

Grade inflation is not an issue - that gets handled by the aggregators, the degree granters, who track all professors and students, figure out how the profs grade, and find accurate measures for student performance, because that's their job. That somewhat addresses the problem of a demanding versus an easy teacher. A top tier degree granter, like SDG - Stanford Degree Granters - is not going to give you a degree if you take gimme classes.

As I commented somewhere else the idea of a reputation for ASU misunderstands the whole system. ASU is an anarchic collective - there is no "it" to have a reputation. It merely coordinates teachers, classrooms, dorms, books, and degree granters. Teachers are welcome to grant high grades - they will not get students high degrees. Teachers are welcome to be non-rigorous. They will attract students who are going for low-quality degrees. And so forth.

Brandon - I have a whole

Brandon - I have a whole post brewing in my mind about how student loans should be rated, collateralized, and bundled like mortgages. And given when profitable.

nmg - Yep. There is a libertarian named Kevin Alexander who wants to found a country where all government is done via charitable trusts, funded by an extremely high inheritance tax (he doesn't like inheritance). He doesn't seem to realize that charitable trusts, with their constant rent that doesn't require work, will do a terrible job of serving customers, like the governments they were meant to replace.

eddie - I don't think its just about bad economic education, but homo sapiens' naturally bad economic intuition. But education can help develop intuition, to some degree.

And I totally agree with you about the variety of services shools provide. I'd like to see those services more unbundled so that, for example, you can choose your level of partying and education more independently. (You can do that somewhat by what dorm you live in, admittedly). And what really bothers me is that I see Certification as one of the main points of college. Yet I think college does a terrible job at actually creating a valid certificate. It seems like an incredibly wasteful and expensive signalling mechanism to me.

I'm a smart guy, and getting a masters at Stanford was easy. But it seems like a long, boring, expensive way to signal to employers that I'm a smart guy, and learn a smidgeon along the way. Look at all the people out there getting liberal arts degrees, and then going into completely different fields. Yeah, they had to have some brains to get those degrees - but isn't there a way to show you have brains that doesn't cost $100K?

Brian - exactly! That's an

Brian - exactly! That's an excellent description of the scam. Ivy League schools don't need good classes, they just sit on that prestigious name and extract rents from having been founded a long time ago.

Patri, Yeah, they had to

Patri,

Yeah, they had to have some brains to get those degrees - but isn’t there a way to show you have brains that doesn’t cost $100K?

Well, you could try Berkeley instead of Stanford? :juggle: