Economic Facts and Fallacies

Colleges and universities operate under different incentives and different constraints from those of businesses which must earn enough from the sale of their goods and services to sustain themselves and provide a return on the investments made by those whose money created them and enables them to continue functioning.

Only a fraction of the income that sustains academic institutions comes from the tuition that they charge students. Less than one-third of the revenues received by private, non-profit four-year degree-granting American institutions came from students’ tuition in 2003–04. Of approximately $134 billion in revenues, approximately $38 billion came from students’ tuition. Among state and federal degree-granting institutions, student tuition supplied just 16 percent of their revenues.² Since even private colleges and universities receive money from the federal government, and state colleges and universities often get most of their money from sources other than the state government,^f the distinction between private academic institutions and state institutions is not as sharp as it once was. Institutions of higher education supporting themselves primarily from the tuition of their students, such as the University of Phoenix, are a recent and very exceptional profit-based phenomenon in a field where most colleges and universities are non-profit enterprises. The Chronicle of Higher Education reported that 77 percent of the revenues received by the five largest companies based on profit-making colleges come from student financial aid provided by government.³

American universities are usually ranked among the best in the world, based primarily on having some of the best scholars in the world on their faculties—even if many of these top scholars are from other countries. “The US has 11 of the top 20 universities in the world,” according to the British publication The Times Higher Education Supplement.⁴ Another British publication, The Economist, said, “many American universities have big endowments” which “allow them to lure the world’s best academics.” While Oxford and Cambridge are Britain’s best endowed universities, their endowments are exceeded by six American institutions, with Yale having more than twice as large an endowment as Oxford or Cambridge, and Harvard having more than three times as large an endowment. The net result: “Leading British academics earn around half of what their counterparts in America get. Their teaching loads are heavier and their administrative tasks more arduous.”⁵

Differences in the way that institutions function and differences in the conditions for their financial survival create differences in the incentives that influence their behavior. Many people think of non-profit organizations as being free of selfish motives and therefore dedicated to the well-being of others, including society at large. However, that assumption is seldom subjected to empirical tests. Nor does it survive such tests very well when it is. Back in the eighteenth century, Adam Smith—himself a professor—pointed out how the faculty of endowed academic institutions are enabled to indulge themselves⁶ in ways that they would not be able to in an enterprise dependent on its performance for its economic survival. Having an endowment means that an institution does not have to earn its way by the sale of goods or services to a satisfied clientele at cost-covering prices.

A former dean of Harvard College observed that governing boards in general “do not know what is going on” on college campuses and that members of Harvard’s Board of Overseers “learn of important changes at Harvard by reading about them in the papers.”⁸ Nor is this a new phenomenon or one confined to large universities. A long-time president of Lawrence College during the first half of the twentieth century likewise observed, “most trustees had only the vaguest knowledge of the business of the college.”⁹ In short, most trustees have neither the time nor the personal experience to either monitor or evaluate campus activities closely. Because of tenure, trustees cannot hire and fire the faculty but must deal with them as a fact of life. Given these circumstances, it is not surprising that, over the years, boards of trustees have usually been increasingly guided by what the faculty want. It is the path of least resistance and there are few countervailing incentives to do otherwise.

College and university faculty are both labor and management. They both work for the academic institution and determine most of its policies regarding curriculum, hiring, and campus rules. When General Dwight D. Eisenhower became president of Columbia University after World War II, he once referred to the faculty as “employees” of the university—whereupon a professor rose to inform Eisenhower: “We are Columbia University.”¹⁰ Few academic presidents can survive in office if most of the faculty are opposed to him or her.

The high levels of expertise required in many academic fields mean that the only people competent to make fundamental decisions in those fields are the professors of those subjects. No university president or dean could possibly be competent to decide what courses or course contents should be taught in chemistry, mathematics, economics, physics, and many other fields. Nor could any given academic administrator know how to evaluate the knowledge of people being considered to be hired to teach in each of the wide range of disciplines at even a small college, much less at a large university.

The principle of faculty self-governance is therefore central to the operation of an academic institution. Moreover, that principle has been extended over the years to apply to many things outside the areas in which professors can claim special expertise, so that faculty opinion influences or controls institutional policies on things ranging from whether or not students will be allowed to enroll in R.O.T.C. to who can be invited to give commencement addresses. In these areas outside their expertise, including areas in which there is no such thing as expertise, professors can simply indulge their personal notions at no cost to themselves.

Thus the provost of Stanford University reported faculty members urging the university to refuse to accept donations from oil companies or other businesses or government agencies that particular professors dislike.¹¹ Moreover, the Stanford medical school—like medical schools at Yale and the University of Pennsylvania—has forbidden its professors from accepting free samples of medications from pharmaceutical companies,¹² which are unpopular like oil companies, even though these free medications would be passed along to patients, who would save money while finding out if a new pharmaceutical drug could help them. This ban is one of a number of symbolic decisions made at no cost by academics with no stake in the consequences. In a similar vein, the Harvard Law School decided to waive the third-year tuition for those of its students who go to work after graduation in government agencies or non-profit organizations—subsidizing the professors’ predilections at the cost of several million dollars a year to the law school but at no cost to the professors. In 2009, however, Harvard’s own financial difficulties led to the suspension of this program, though the subsidizing of summer jobs in organizations that law professors defined as “public interest” continued.

For Harvard to insist that its professors teach such courses would be to risk an exodus of its top faculty to Yale, Stanford, and other leading universities that would be happy to welcome these professors and the millions of dollars in research grants they would bring. “They could all get jobs elsewhere at the drop of a hat,” as a former Harvard dean put it. He also summed up the net result: “The old ideal of a liberal education lives on in name only.”¹⁴

Harvard’s high ranking as a research university is often confused with a high ranking as a place for a college education, such confusion being promoted by the ranking system used, for example, by U.S. News & World Report magazine in its annual publication, America’s Best Colleges. Moreover, research remains as much of a faculty priority on flagship state university campuses, such as those at Berkeley or Ann Arbor, as at Ivy League institutions.

Finally, there are many public and private colleges and universities—perhaps most—whose quantity and quality of research may not be sufficient to justify neglect of undergraduate education or the high costs of the kinds of light teaching loads common at leading research universities. Such considerations led the president of Fort Hays University in Kansas to increase the teaching loads of its professors, enabling the institution to have a tuition level moderate enough to attract more students, though angering the faculty. However, as a study pointed out, “serious cutting-edge research has never been present to a high degree at schools like Fort Hays, and arguably all that Dr. Hammond has done is sharply reduce the school year leisure time of the instructional staff.”¹⁵

Grade inflation is another practice that serves the convenience of the professors rather than the interests of the students. While those students who do not wish to study hard may enjoy grade inflation, it has been found that students who take lower-level courses from professors who give easy grades do not do as well in upper-level courses as students who took their preparatory courses from professors with stricter grading standards.¹⁶ In short, the long-run interests of students as a whole are sacrificed by grade inflation. However, grade inflation makes life easier for professors who need not face time-consuming complaints from students about low or failing grades nor put up with the unpleasantness that can accompany such complaints. Moreover, the unpopularity of professors who give low grades can also be reflected in negative student evaluations at the end of a course, which in turn can negatively affect career advancement, especially for young faculty who have not yet achieved tenure.

Educational Quality

In ordinary commercial transactions, for the seller’s interests to completely over-ride the buyer’s interests would be to risk losing customers to someone else. But, in academia, almost by definition, the student does not fully understand the nature of the product being sold. If a student already understood the content of a course, there would be no point taking that course. What a student can judge is how well the professor conveyed the information in the course—how clearly the material was presented and how interesting it seemed—but what the student is not equipped to judge is what contrary information and conflicting analysis was left out or how well the same subject was taught somewhere else. Depending on the subject, misconceptions or even errors may be wonderfully taught to students who are in no position to detect either at the time, even if they discover in later life the falsity of what they were taught.

While consumers of commercial products may often be similarly unable to determine directly and immediately the quality of the merchandise they buy, most of the things they buy are bought more than once and experience can guide future purchases. But most people go through college only once and seldom take the same course more than once. Moreover, there are innumerable organizations capable of testing commercial products and reporting on them to the public. These include not only organizations which test and publicize their findings on a wide range of products, such as Consumer Reports and Good Housekeeping magazines, but also specialized organizations and publications that evaluate stereo equipment, automobiles, cameras, hotels, cruise ships, and innumerable other products and services.

The closest analogues for evaluating the quality of academic education are the annual rankings of colleges and universities by U.S. News & World Report but these rankings have not only been widely and severely criticized, growing numbers of colleges are refusing to supply the data used in such rankings, which itself undermines the validity of the rankings, regardless of the merits of the criticisms.¹⁷

Moreover, while most rankings of goods and services are based on assessments of the end products, rankings of academic institutions are almost invariably rankings of the inputs used, rather than rankings of the educational output. As The Economist magazine reported:

At the moment, just two institutions make annual attempts to compare universities round the world. Shanghai’s Jiao Tong University has been doing it since 2003, and the Times Higher Education Supplement, a British weekly, started a similar exercise in 2004. But both these indices, which are closely watched by participants in a fickle and fast-expanding global education market... reflect “inputs” such as the number and quality of staff, as well as how many prizes they win and how many articles they publish.¹⁸

The intellectual achievements of professors in the United States or dons in Britain do not automatically translate into better education for students. As The Economist also notes, “dons may be so busy writing and researching that they spend little or no time teaching—a big weakness at America’s famous universities.” Moreover, the rankings of academic institutions depend crucially upon what weights are arbitrarily assigned to the various factors that produce these rankings, so that “changes in methodology can bring startling shifts”:

The high-flying London School of Economics, for example, tumbled from 17th to 59th in the British rankings published last week, primarily because it got less credit than in previous years for the impressive number of foreign students it had managed to attract.¹⁹

One of the few attempts to measure educational outputs, rather than inputs, by a think tank in Washington, brought similarly large changes in rankings from those of U.S. News & World Report. When the Center for College Affordability and Productivity ranked academic institutions by their students’ achievements in later life and by those students’ own ratings of their professors, Whitman College rose from 37th to 9th among liberal arts colleges, Wabash from 52nd to 10th and Barnard from 30th to 8th.²⁰

A more official evaluation, with consequences that include eligibility or ineligibility for receipt of government money in the United States, is provided by the various accrediting agencies that approve or disapprove the colleges and universities they visit across the country. However, these agencies too measure inputs rather than outputs, since they have neither the time nor the resources to do in-depth studies of what happens in the classrooms of thousands of academic institutions or what kinds of educational outcomes they produce. Yet few institutions could afford to engage in the kind of open criticism of these accrediting agencies, or a flat refusal to cooperate with their endeavors, as growing numbers do with the U.S. News & World Report rankings.

Accrediting agencies must rely on broad-brush indicators of campus resources, such as the number of books in campus libraries and student:faculty ratios—in short, the same kinds of input criteria, rather than measures of educational output, for which U.S. News & World Report has been criticized. Far from providing reliable indicators of educational quality or efficiency, the use of such indicators can become a barrier against newer and lower-cost ways of educating students that could be reflected in lower tuitions.

For example, reading materials available on-line or on DVDs can replace books and bound volumes of academic journals and other periodicals that would be far more costly for a college or university to buy, and which would require more expensive storage space on library shelves. But if the accrediting agency uses the number of books in a college or university library as a criterion for accreditation, then it negates the cost advantages of lower-cost newcomers who could otherwise compete more effectively against existing traditional colleges by offering students and their families more affordable tuition.

There are also ways of economizing on the number of faculty members but, here too, accrediting criteria can protect existing high-cost institutions from the competition of lower-cost newcomers. If student:faculty ratios are among the criteria for accreditation, then a university with many professors engaging primarily in research, with these professors’ graduate students doing most of the teaching of introductory courses, has a better chance of getting accredited than a new institution set up specifically for teaching, whose professors have heavier teaching loads and are not expected to spend much time doing research. Thus an institution where the crucial introductory courses are taught by professors, rather than by graduate students, will look worse in terms of student:faculty ratios, since their professors have heavier teaching loads, even if class sizes are no larger than at institutions with lower student:faculty ratios.

The correlation between student:faculty ratios and class size is very tenuous. Texas A & M University, for example, has a lower student:faculty ratio (20:1) than Miami Dade College (26:1) but 32 percent of the classes at Miami Dade have fewer than 20 students, while only 21 percent of the classes at Texas A & M are that small. At the other end of the scale, only one percent of the classes at Miami Dade have 50 or more students, while 24 percent of the classes at Texas A & M are that large.²¹ Class sizes could be inferred from student:faculty ratios only if all the faculty were present and were teaching. But the proportion of professors who are present and teaching can vary considerably between a teaching-oriented college and a research-oriented university. Not only are professors at research universities more likely to take time off from teaching to do research on campus, they are also more likely to go on leave to do research or other things elsewhere.^g

There are various innovative ways of economizing on the use of faculty which can lower costs but which also can lower the prospects of an institution’s being accredited. Some law schools, for example, hire many practicing attorneys and judges to teach part-time in their respective specialties, such as estate law or anti-trust law, while having a relatively small number of full-time, tenured professors who teach such broader and more fundamental courses as Constitutional law. Some judges and lawyers are willing to teach an evening course in their particular specialties for modest pay, and may be quite knowledgeable and up to date within those specialties, without being the kind of academic scholars who publish in law journals and become professors at prestigious law schools. Inexpensive faculty and modest campus physical facilities enable some law schools to charge far lower tuition than more traditional law schools charge.

The American Bar Association, however, has refused to accredit a number of law schools run this way, even when most of these law schools’ graduates are able to pass the bar examination on the first try. The existing accreditation of the University of Colorado’s law school was threatened, despite the fact that 92 percent of its graduates passed the bar exam on the first try—which is not only higher than the national average, but higher than the percentage of graduates from prestigious law schools at Harvard and Yale who pass on the first try.²² According to the Denver Post:

An accrediting association for law schools has renewed its concerns over the University of Colorado’s inability to construct a new law building in the absence of state funding.

The Chicago-based American Bar Association is requiring CU president Betsy Hoffman and incoming law dean David Getches to appear before its accreditation committee in January to show why the law school shouldn’t be placed on probation or removed from the list of approved law schools...

The ABA also is asking CU to explain a lack of minority and female faculty, and says it is concerned about the number of courses taught by adjunct professors (lawyers teaching part time), according to a letter sent by the bar association to CU. . .

In addition, CU ranks low for annual expenditures on law library materials—its $1.7 million is $1 million less than the average, according to the ABA.²³

As is common with accrediting organizations, all the things cited as factors in the American Bar Association’s accreditation concerns were inputs into the educational process, rather than the output of qualified graduates. But efficiency consists precisely in turning given inputs into more or better output. In the case of a law school, there is an external and objective measure of output quality, the ability of its graduates to pass the bar exam. While this is not the only possible measure of quality, it is a crucial measure because, without passing the bar exam, students cannot become lawyers. Students who aspire to more scholarly, more prestigious, or more policy-oriented goals have a variety of law schools to choose from, but students whose budgets limit their ability to pay high tuition for law school can afford only those law schools which keep tuition affordable by spending less for faculty, libraries, and buildings.

In the case of the University of Colorado’s law school, complying with the ABA’s demands involved spending more than $40 million for a new building, and this and other cost increases led to a rise in annual law school tuition from $6,700 to $16,738 for Colorado residents and to $30,814 for non-residents. This more than doubling of tuition in just a few years undoubtedly put the University of Colorado’s law school beyond the financial reach of some students. It also protected high-cost law schools from the competition of the University of Colorado law school’s previous low tuition, and made it more difficult for other low-cost law schools to arise to compete with high-cost law schools. In short, the ABA’s accreditation standards and practices served much the same role as a protective tariff, insulating high-cost producers from the competition of low-cost producers.

Few law schools could risk operating without accreditation, as the Nashville School of Law has done, depending on its low tuition to attract students and depending on its graduates’ ability to pass the state bar exam to maintain the institution’s reputation. While graduates of the Nashville School of Law who have passed the state bar exam can practice law in Tennessee, and many have gone on to successful careers there, their law degrees from an unaccredited institution may not be accepted everywhere else.

While law schools are unusual in that there is an independent, objective, and career-relevant test of their graduates’ education—and therefore a check on the relevance of the accrediting agency’s criteria—other accrediting agencies for colleges and universities tend to have input criteria much like those of the ABA, with little or no regard to output quality, and with similar indulgences of the preconceptions of members of the accrediting agency.

Such practices reinforce the barriers against less expensive forms of higher education. Thus traditional academic institutions, which have inherited large costs from the past, such as tenure for many professors or large libraries with expensive upkeep, are protected from the competition of lower-cost newcomers who can avoid the costs of such practices through the use of electronically available books and journals and a high proportion of non-tenured faculty. The net result is that there are fewer competitive pressures to reduce tuition or even to inhibit continuing rises in tuition.

It should also be noted that the people who make the decisions on which accreditation is based are mostly people whose full-time careers are on the staffs of existing academic institutions. For example, more than four-fifths of the people on the board of the Middle States Commission on Higher Education work for the academic institutions that this organization accredits.²⁴ This built-in conflict of interest is common with other academic accrediting agencies that have the power to reject institutions which operate differently, and at lower costs, than the existing institutions they work for. In 2007, for example, the various regional accrediting associations had more than 3,500 professors and administrators as volunteers, compared to fewer than 150 full-time staff members.²⁵

The limited time and resources available to the accrediting agencies virtually dictate that these agencies focus on readily measurable criteria, rather than attempt to assess the intellectual quality of college and university graduates. As the president of Rice University put it, “the accreditors are not interested in what or how the students learn, but how many square feet of classroom space we have per student.”²⁶

The requirement of accreditation in order to receive federal money puts enormous leverage in the hands of the accreditation agencies, especially since federal aid grew more than sixty-fold from academic year 1963–64 to academic year 2008–2009,²⁷ enabling the accrediting agencies to impose their own arbitrary preconceptions on the institutions they evaluate, including demographic “representation” of various groups among students and faculty. The accreditors of the American Bar Association have specified the number of square feet required for each law professor’s office.²⁸

Despite misuses of the accreditation process, some standards of quality control are obviously required. Many diploma mills set up essentially to bring in federal dollars in student aid were shut down when they failed to meet accreditation standards. Moreover, no one should assume that either profit-seeking or non-profit institutions automatically live up to quality standards, or even standards of honesty. A number of lawsuits claim that unaccredited, for-profit institutions have misled students into believing that their credits would be automatically transferable to other institutions and their degrees recognized, when in fact neither claim was true. The ways in which non-profit academic institutions also mislead students have been the subject of many books and articles, and Nobel laureate George J. Stigler observed, “the typical college catalogue would never stop Diogenes in his search for an honest man.”²⁹

Academic Careers

The particular job security policies in American colleges and universities have their own peculiar consequences, often quite different from the goals of these policies. Academics who have been employed a given number of years at a given college or university must either be promoted to a position with permanent tenure or let go. This is called the “up or out” system. It means more job security for those who go up but less job security for those who are forced out—less not only compared to their more fortunate academic colleagues, but less compared to people of similar ages in other sectors of the economy without such job security systems.

Because academic job security systems leave colleges and universities with long-term commitments that can easily cost millions of dollars for each tenured faculty member, this can lead to more stringent requirements for continued employment than if no such commitment were implied. Untenured faculty members (usually assistant professors) whose current work is considered to be perfectly satisfactory will nevertheless often be let go—not have their contracts renewed—when time comes for the “up or out” decision, when there is not yet sufficient evidence to be confident that they will in future years progress to the higher performance levels expected of senior faculty members, notably in scholarly research.

Nor is there any reason to believe that the next crop of assistant professors will be any better than those dismissed, even though turnover has costs to the institution as well as to the individuals concerned. The reason for the turnover is to comply with the standards of the American Association of University Professors without getting stuck permanently with costs of millions of dollars per faculty member.

At the highest-rated universities, it is common for most assistant professors to be terminated before time for them to become associate professors, since there has seldom been enough time for them to have produced the high levels of research quantity and quality required for senior positions at such institutions. In short, the goal of a policy—in this case, greater job security—turns out to have little to do with the actual end result of that policy, which is less job security than most people of similar ages have in other sectors of the economy where there are no such policies as those surrounding academic tenure.

This academic promotions system also helps explain a common but paradoxical phenomenon at many universities—the outstanding young teacher who is terminated, often to the consternation of his students, who may even mount organized protests, usually in vain. A former dean at Harvard noted “the widely held undergraduate opinion that their favorite teachers are systematically denied tenure.”³⁰ It is even common on some campuses to hear the “teacher of the year” award referred to as “the kiss of death” for young faculty members. That is because outstanding teaching is very time-consuming, in terms of creating high-quality courses and preparing outstanding lectures in these courses, as well as giving individual attention to students who may be having trouble understanding the material. This often leaves insufficient time for a junior faculty member to do the amount and quality of research required for getting tenure at a top university. Such institutions often fill their senior positions by hiring those people who have already produced the requisite quantity and quality of publications somewhere else.

The top-level universities in prestige—based primarily on research—are usually top-level in faculty salaries as well. The salaries of full professors at Stanford and Princeton averaged more than $180,000 per year in academic year 2008–2009, and full professors at Harvard averaged more than $190,000. Meanwhile, full professors at four-year colleges in general averaged under $90,000, though full professors at the elite of the four-year colleges—Amherst and Swarthmore, for example—averaged more than $120,000.³¹ Faculty salaries, like an institution’s prestige, do not indicate where a student is likely to get the best undergraduate education. In many fields, such as mathematics or economics, getting a solid grounding in the introductory course is a prerequisite for mastering the higher level courses that build on that foundation. Is a high-priced professor who is one of the top scholars in the world likely to be better at teaching introductory courses—or even likely to agree to teach at such an elementary level at all?

Often the choice for students contemplating which kind of academic institution to attend may be between being taught such courses by competent professors at a small liberal arts college or being taught by transient junior faculty members, or even by graduate students, at a large and prestigious research university. The transience of both junior faculty members and graduate students means that they must be preparing, usually through research, to enhance their prospects of getting a desirable job somewhere else, in addition to spending time canvassing the job market and traveling to interviews.

Whether all the students they are teaching in introductory courses really master partial derivatives in mathematics or the elasticity of demand in economics may not be as high a priority to them as to some professor who is already established at a liberal arts college, and who is at such an institution precisely because of the professor’s preference for teaching over research. A study of how faculty members divide their time between teaching and research found that the various duties involved in teaching took up less than half the working time of the faculty at research universities and nearly two-thirds of the working time of faculty at liberal arts colleges.³²

Choices Among Colleges

Since a college’s academic prestige, and especially that of a university, depends primarily on its professors’ research and publications, students will not necessarily get a better education at the more prestigious institutions with the higher paid faculty. Various studies have shown students at small liberal arts colleges doing as well as, or even better than, students from prestigious research universities on tests such as those for medical schools, and a higher percentage of the liberal arts college students going on to receive Ph.D.s.³⁵ The four institutions with the highest percentage of their graduates going on to receive Ph.D.s are all small colleges with fewer than 2,000 undergraduates each: Cal Tech, Harvey Mudd, Swarthmore, and Reed. Cal Tech and Harvey Mudd have fewer than a thousand undergraduates each. Small colleges in fact dominate the top ten. Grinnell College has a higher percentage of its graduates go on to receive Ph.D.s than does either Harvard or Yale.³⁶

One of the biggest fallacies about academic institutions is that attendance at big-name colleges and universities is virtually essential for reaching the top in later life. But, of the chief executive officers of the 50 largest American corporations surveyed in 2006, only four had Ivy League degrees and just over half graduated from state colleges, city colleges, or a community college.³⁷ Some did not graduate at all, including Michael Dell of Dell computers and Bill Gates of Microsoft.

How much colleges in general add to economic or other success in later life is not easy to determine, and the methods often used can easily overstate the effect of college, and especially the effect of the more prestigious colleges. These methods would be valid if the people attending prestigious and non-prestigious institutions were comparable to begin with, so that their later differences in incomes and occupations after graduation could be attributed to what happened in college. But the students cannot be assumed to be comparable.

If students who enter Harvard, for example, have higher qualifications than the students who enter Podunk State, then later differences between the graduates of the two institutions cannot be arbitrarily attributed to differences in the education received in these two places. If Harvard graduates are more likely to continue on to medical school, law school, or other postgraduate study, then their later incomes are likely to be raised still further above those of the graduates of Podunk State. Ideally, the comparison should be made between people who went to Harvard and people who were admitted to Harvard but chose instead to go to Podunk State. Unfortunately, this is likely to produce samples too small for statistical analysis, and those who make such choices may not be typical of the students at either institution.

Studies have been made of people with comparable test scores who attended prestigious and non-prestigious colleges and universities, in order to try to determine the “value added” by the institutions themselves. Some such studies indicate that the more prestigious institutions do add value and others indicate that they do not. But seldom, if ever, do these studies indicate that the value added is as great as the raw statistics might suggest, without making allowances for the differences among the students themselves.

A widely repeated claim that going to college adds more than a million dollars to one’s lifetime income is based on lumping all kinds of colleges and universities together. A finer breakdown showed that the gross lifetime income difference between a high school graduate and a college graduate ranged from just over half a million dollars at a private open admissions college to more than two million dollars for graduates of the most selective private institutions. However, the net lifetime income difference—taking into account tuition and lost earnings while in college—fell to about $150,000 for those graduating from private open-admissions colleges to about half a million dollars for graduates of the most selective private institutions. Dividing these sums by a 50-year career would lead to $3,000 a year for graduating from the former, which must be further discounted for the delay in receiving this amount.

A finer breakdown by specific institutions found the net pay-off from graduating from the University of Georgia was far higher than the net pay-off from graduating from Harvard, and the University of Delaware had a better pay-off than any Ivy League college. None of this takes into account the field in which one receives a degree. Ten years after graduation, those whose degrees were in business or engineering earned twice as much as those whose degrees were in education.³⁸

Not only may the students themselves differ, so may the families they come from. If affluent or wealthy people are more likely to send their children to prestigious colleges and universities, then the incomes of those students in later life may reflect their greater career opportunities as a result of their family connections, a greater likelihood of being able to afford to go on to postgraduate study, or their greater income from the earnings of inherited assets, rather than their earnings from what they may have learned at the more prestigious colleges or universities.^h

“Value Added” by College

Similar problems arise when trying to determine the value of going to college at all, as compared to going to work after finishing high school—or not finishing high school. It is common to compare the incomes of college graduates with the incomes of high school graduates, high school dropouts, or others, and then attribute the much higher incomes of the college graduates to the education received in college. But people whose education stops before college cannot be assumed to be the same in orientation, values, priorities, or ability as people who go on to college. Therefore income differences between them cannot be automatically attributed to what was taught in college. Another way of looking at this is that a given individual, with given ability, given preferences, etc., cannot assume that the difference between going to one institution rather than another will be as great as statistics on other people attending different institutions.

A further complication is that many—if not most—people who drop out of high school later resume some form of education, whether in academic institutions or by studying a trade or acquiring certification from courses given by Microsoft, Oracle, Adobe, or other computer companies. Is the income of dropouts who later resumed their education elsewhere to be counted in the statistics on the incomes of dropouts? Are the incomes of dropouts who later go on to earn a Ph.D. without ever getting a high school diploma (such as the author of this book) to be included in the statistics on the incomes of dropouts? Or is the term “dropout” to be reserved solely for those who never resume any further education?

As a practical guide to those considering when to discontinue their academic education, at least temporarily, it makes a big difference whether particular statistics make such distinctions. Given the greater difficulty and higher costs of following particular individuals over time, it is very doubtful if most statistics—or perhaps any—make such distinctions. This means that the incomes of people who dropped out of high school and later received an academic degree without bothering to go back and get a high school diploma are very unlikely to be counted in statistics on the incomes of high school dropouts.

The Admissions Process

The college admissions process, like other decision-making processes within the academic institutions, reflects not only the non-profit nature of colleges and universities, but also the particular incentives facing those who make particular decisions. The most fundamental fact about the college admissions process is the high rate of rejection of applicants by big-name institutions. As of 2008, Harvard rejected 93 out of every 100 applicants, Yale rejected 92 percent and Columbia rejected 91 percent. More than 80 percent of applicants were rejected by Bowdoin, Georgetown, Dartmouth and Brown.³⁹ In light of this, it might seem strange that prestigious colleges, with several times as many applicants as places available for them, would spend vast sums of money recruiting students across the country and even overseas. Yet high school seniors who may never have thought of applying to Harvard or Stanford can find themselves receiving unsolicited mail from these and other well-known academic institutions, urging them to consider applying. As one dean of admissions described the process:

For a high school student unaccustomed to getting stacks of letters, there can be a feeling of instant popularity. How many students have been contacted by a Stanford or an Oberlin and have concluded, “They must want me!”⁴⁰

In reality, one of the incentives for recruiting so many students is precisely to be able to reject the great majority of them—thereby preserving the prestige of the college as “selective” in the rankings by U.S. News & World Report and publishers of various other college guides, since selectivity is measured by how small a percentage of applicants are admitted. Another incentive is to satisfy faculty demands for brighter students by providing a larger pool, from which more students with high academic qualifications can be skimmed.

High rejection rates by many well-known colleges and universities mean that many students find it necessary to apply to a number of academic institutions, in hopes of getting admitted to at least one. The institutions that they apply to often include at least one that they have no intention of attending, unless they are unable to get into any of their preferred colleges or universities. In short, the uncertainties that academic institutions create because of their high rejection rates lead students to make multiple applications that have costs in both money and time. Moreover, these multiple applications create uncertainties in college admissions offices as to how many of those admitted will actually show up to enroll.

These uncertainties create costs in money and time to both students and colleges. Because Vanderbilt University, for example, built a dormitory to house 1,550 freshmen, that was the number that the admissions office was charged with putting into that dormitory, leaving no empty rooms—meaning no missing tuition money, no missing dormitory rent money and, at the same time, no freshman unable to be housed in that dormitory among other freshmen. “My margin for error,” said a Vanderbilt admissions official, “was literally not one student.”⁴¹ Since Vanderbilt and other institutions are uncertain about how many of the students they admit will in fact choose to accept their offers, this leads to various strategies involving waiting lists, early decisions and other means of trying to get just the right number of enrolled freshmen.

None of these strategies is foolproof or without costs. Some years ago, when Dickinson College found that not enough of the students it admitted actually enrolled, it sent admissions offers to students on its waiting list—but not enough of them enrolled to fill the freshman class. As a result, Dickinson in later years increased the proportion of applicants that it admitted, despite risking an adverse effect of this on the college’s “selectivity” rating in the college guides. As an admissions official at Dickinson put it, “I’m more willing to sacrifice our acceptance rate up front than to come in low.”⁴²

While students or their parents may think that getting admitted to a particular college or university is a matter of meeting or not meeting their academic standards, that is by no means necessarily so. Because of highly subjective criteria used by college admissions officials, no given student can feel assured of being admitted to any given college or university, regardless of that student’s academic record or test scores.

More than half of the applicants for Amherst’s class of 2011 who scored between 750 and 800 on the math SAT were rejected, while 20 students who scored below 550 were accepted.⁴³ At Brown University, even students with a perfect 800 math score were accepted for the class of 2012 only 26 percent of the time, while more than two dozen students with math scores below 500 were accepted.⁴⁴ Similar patterns are common at other selective colleges and universities, where many rejected students may have better academic qualifications than other students who were accepted, because of the admissions committees’ highly subjective judgments.

Nevertheless, rejected students may feel that some inadequacies of theirs were responsible for their rejection, and take it personally, as an admissions dean observed:

Recipients of rejection letters, no matter how unrealistic their prospects may have seemed to objective observers, are often stunned. Just ask anyone who has been a high school guidance counselor during the month of April. I have been there. As a counselor, I felt the pain. As an admission dean, I have caused the pain.⁴⁵

The actual selection process reflects the priorities and interests of an internal constituency within the college or university—namely, the admissions office staff—since there is no external constituency, such as stockholders or prospective stockholders in a corporation, to react adversely to an inefficient use of resources. Far-flung recruiting efforts, including visits to high schools across the country and the maintenance of on-going relationships with particular high school counselors, require far larger admissions office staffs and far larger budgets than would be required otherwise, if colleges simply waited for students to apply and selected those with the best academic records or test scores. The Chronicle of Higher Education reported, for example, that Northern Michigan University “has 14 admissions-staff members, who have visited a total of 1,500 high schools and fairs this year.”⁴⁶ Even at a small liberal arts college like Ohio Wesleyan, officials referred to “the thousands of high school counselors with whom we are in some contact.”⁴⁷

Admissions criteria and practices reflect not only a rationale for a far larger staff than would be required if objective criteria were considered sufficient for selecting among applicants, these criteria and practices can also create a sense of importance among admissions office staffers who see themselves as applying deep insights about such subjective things as “leadership potential” and “commitment” among the applicants, and the dispensing of rewards for such things as having overcome adversity or having engaged in activities arbitrarily defined as “community service.”

Since ethnic “diversity” is one of the prevailing notions among admissions committees, these committees are able to create whatever demographic mix they like, as yet another decision made possible by being in a non-profit organization, where there are no stockholders or other external monitors to be concerned about the economic or educational costs of such admissions committee decisions. Among the results of such unchecked decisions is that, because Asian and Asian American students tend to be “over-represented” in colleges, especially the highest-ranked colleges, admission committees seeking to create demographic “diversity” have fewer incentives to admit such individuals and perhaps incentives to limit the number of students of Asian origin who are admitted, as some colleges in times past limited the number of Jewish students admitted, even when they were academically better qualified than non-Jewish students who were admitted.

A study of Asian applicants to the University of Michigan, for example, found that those accepted averaged 50 points higher than accepted white students on combined SAT scores, 140 points higher than Hispanic students accepted there and 240 points higher than the black students who were accepted. In 2006, an Asian American student with perfect SAT test scores and near-perfect scores on physics, chemistry and calculus tests was turned down by Stanford, M.I.T. and three Ivy League universities, even though he was admitted to Yale and Harvard.⁴⁸ Nor was his case unique. Being highly subjective, admissions criteria are unlikely to be consistent from one college to another, so that a particular student being turned down at one institution while being accepted at a higher-ranked institution is by no means unheard of.

Subjective criteria give members of admissions committees bigger budgets, more power and more sense of importance than if objective criteria were predominant. Again, in this as in many other things, the non-profit nature of academic institutions enables internal constituencies to serve their own interests with fewer constraints than in institutions more dependent for their survival on simultaneously satisfying customers and investors.

It is not a matter of conjecture that admissions office staffs could be much smaller. For most of the history of academic institutions, they were in fact far smaller. Right after the Second World War, for example, the admissions staff at Harvard consisted of one admissions officer and a part-time secretary.⁴⁹ Today, even a small college can have a dozen or more full-time admissions officers plus a substantial clerical staff to deal with all the paperwork generated by the admissions office’s activities across the country. As more and more money became available for higher education over the years, including government subsidies for even private institutions, the expansion of bureaucratic empires followed.

Unlike private, profit-seeking enterprises, where there are rewards for accomplishing a given task with a minimum number of people and resources, incentives for officials in a non-profit organization are often just the opposite—to use as many people and as large a budget as higher officials can be persuaded to authorize, since the responsibilities of managing a larger staff and a more substantial budget become reasons to expect higher pay and more importance within the institution. As a former dean of admissions at Stanford said, “If we only admitted students based on SAT scores, I wouldn’t have a job.”⁵⁰ She would certainly not have had as large a staff or budget. Whether deliberately or not, college admissions officials have every incentive to turn the applicant selection process into something esoteric and highly subjective, requiring large numbers of people working long hours and traveling thousands of miles a year to confer with high school counselors and students across the nation.

Any academic administrator who sought to test the validity of the criteria used by the admissions office—by, for example, admitting half the entering class by objective criteria and the other half by the decisions of the admissions office, and then seeing how the two halves compared later, at graduation time—would stir up a hornet’s nest of opposition that would do his or her own career little good and perhaps much harm. Given the incentives and constraints, the path of least resistance for an academic administrator is to let sleeping dogs lie—here as in many other aspects of academic governance—since there are few offsetting personal benefits from greater institutional efficiency, whether in money terms or in terms of meeting the proclaimed educational goals of the institution.

The Cost of College

The cost of going to college can easily be under-estimated or over-estimated. Tuition is often over-estimated when tuition at expensive private colleges and universities is repeatedly cited in the media, even though 56 percent of students in 2008–09 were enrolled in four-year institutions whose tuitions were less than $9,000 per year.⁵¹ Although tuition is more than $30,000 at some well-known colleges that are often mentioned in the media, these tuitions are not only atypical, but are often not actually paid by even half the students who attend, because so many students receive discounts known as “financial aid.”

Even in an era of high and rising college tuitions, the biggest cost of going to a college will in many cases not consist of the tuition being paid but the cost of foregoing opportunities to earn income from a full-time job. The average tuition at state colleges and universities is often less than the annual income from an entry-level job, and the tuition at community colleges is almost invariably less. The cost of attending college also includes the growing costs of books but does not include the full costs of room and board, since students would have to be housed and fed whether they went to college or not. Only to the extent that these costs are higher on campus can they be considered part of the cost of a college education. In short, money outlays do not measure the total costs of going to college, which can be higher or lower, depending on the institution and the circumstances.

Many lament that the costs of going to college can leave graduates with substantial debts to pay off in later years—and that these debts can be especially burdensome for those who go into occupations with modest pay. Politicians are likely to be responsive to such laments, especially in election years. However, many or most of the discussions of such issues ignore the role of costs and prices in the economy, and proceed as if anyone whose desires are constrained by economics should have those constraints removed by government—which is to say, by shifting those costs to the taxpayers.

Despite what The Chronicle of Higher Education has called “high-pitched campaigns” depicting student debt as “a national crisis,” about one third of all college students graduate with no debt at all and the average debt among the others is about $20,000—“just below the starting price of a 2009 Ford Escape.”⁵² No one thinks that the debt incurred in buying an automobile is so crushing that taxpayers must subsidize the purchase of cars. Moreover, the debt from a college education is repaid just once, while most Americans buy more than one automobile in a lifetime. Finally, it is by no means certain that the average taxpayer makes more money than the average college graduate, so the case for forcing taxpayers to subsidize people with better economic prospects than themselves cannot invoke the usual arguments about helping the less fortunate.

As for the argument that the burden of debt is heavier for those who enter lower paying occupations, this ignores the whole role of prices in allocating scarce resources, including expensively educated human beings. It would be an exercise in futility to print money if people’s decisions were not to be influenced by it. After all, the money itself is not wealth—otherwise the government could make us all rich just by printing more of it. Money is simply an artificial device to provide incentives for economic behavior affecting the production of real wealth. If people are automatically to be enabled to make their choices independent of monetary considerations, then there has been an enormous waste of paper and ink in printing money.

Seldom is the argument made that nobody should have to take rates of pay into account when choosing among occupations. More usually, there is an assumption that some especially prescient third parties can determine which special occupations “really” meet society’s “needs” and therefore should be subsidized through compulsory exactions from the taxpayers. Such arbitrary choices, made by third parties who pay no price for being wrong, are considered to be either economically or morally superior to choices made by people who pay their own money for what they want and thereby determine which products, industries, and occupations will be remunerated to what extent.

As a former dean of Harvard put it, “A single year’s bill at most private universities, not just the top-tier ones, is now about the same as the median U.S. household income.”⁵³ Tuition of more than $30,000 a year is charged not only by all eight Ivy League institutions and by such comparable institutions as Stanford, M.I.T. and the University of Chicago, but also by George Washington University, Hampshire College, Chapman University, and Occidental College, among other less celebrated places.⁵⁴ This does not of course include food, housing, and other college expenses.

Although “cost” is a short and apparently simple word, it conceals a wide variety of complications, whether in an academic or a non-academic context. Costs refer to the expenses incurred to produce goods and services; prices are what the consumers of those goods and services are charged. Price control laws, for example, can reduce prices without having the slightest effect on costs—which is one of the reasons for the adverse effects of such laws.ⁱ Even when we are clear that what we want to consider are costs of production, there may be no such thing as “the” cost of producing a given good or service. Mass production brings down the cost per unit of many goods, so the cost per unit of producing many things depends on how many units are produced.

In economics, “costs” usually refer to the inherent or lowest cost of producing a given quantity and quality of goods and services. Otherwise, any outlays of money, whether caused by inefficiency, irresponsibility, or corruption, would be counted as production costs. But, as already noted, there are academic policies and practices which inflate the actual financial outlays of colleges and universities well beyond these inherent costs, whether these policies and practices originate within academic institutions or are imposed from the outside by accrediting agencies, the American Association of University Professors, or others.

Costs of Educating Students

Anything colleges and universities choose to spend money on is called a “cost” by them—and can then be used to justify raising tuition and calling upon the government and other donors to help cover “rising costs.” These “costs” have included the building of a high-tech center six miles away from the campus of the University of Texas at Austin, creation of overseas campuses by the University of Evansville in England and by the University of Dallas in Rome, as well as the creation of overseas student centers in Europe and South America by Stanford. The Economist magazine reported that Ohio University has a student center “which contains a 250-seat theatre, a food court and a five-storey atrium.” At a cost of more than $130 million, Princeton established a new residence complex for 500 students, in which each student’s room “has triple-glazed mahogany casement windows made of leaded glass” and the “dining hall boasts a 35-foot ceiling gabled in oak,” according to BusinessWeek magazine.⁵⁵

Even when a university expenditure is for a genuine academic purpose, that does not necessarily represent a benefit to college students. New science laboratories being added on many university campuses are an example:

Even many undergraduates studying science will have limited access to the benefits of the new campus labs, which are there mostly for the benefit of faculty members and their graduate students.⁵⁶

When increased voluntary spending is called “rising costs,” and becomes a basis for raising tuition, seeking more taxpayer money, or even dipping into the principal of endowments, then the kinds of economic constraints faced by competing business enterprises are clearly not operating in the academic world.

Against that background, it is possible to understand the proliferation of campus amenities such as bowling alleys and posh lounges, all counted as costs of education. Indiana University of Pennsylvania, for example, began spending $270 million for new dormitories described in The Chronicle of Higher Education as “swanky.”⁵⁷ College dormitories in general have been described by The Chronicle of Higher Education as “cushier” than in the past.⁵⁸ Other amenities have also grown more elaborate and costly:

Last year the Dallas Morning News reported that Baylor University increased the height of its planned rock-climbing wall from 41 to 52 feet after learning that Texas A&M University’s was 44 feet. Then the University of Houston built a climbing wall that was 53 feet high, and even that was later surpassed by the University of Texas at San Antonio.⁵⁹

Those atypical academic institutions which depend solely on making a profit for their survival seldom offer the kinds of amenities offered by non-profit colleges and universities. As one study put it:

For-profits operate in modest but comfortable buildings in many locations, rather than in one large, centralized campus. Enrollments are often measured in the hundreds or, at most, a few thousand, on any given campus. Almost all of their facilities are directly related to instruction or administration—there are few, if any, of the recreational facilities, art galleries, concert halls, research laboratories, or libraries that are features of the typical university campus.⁶⁰

The education offered by profit-seeking colleges and universities is not only more cost-conscious but also tends to be more focused on courses that create occupational skills, such as computer programming, business management, and other subjects that are valued in the job market, rather than courses on philosophy, anthropology and the like.⁶¹ In short, they tailor what they supply to what is in demand by paying customers, the same as other profit-based businesses do.

Given the inhibitions against price competition in academia created by accrediting agencies and the American Association of University Professors, as well as the availability of taxpayers’ money to meet “rising costs,” and the ability to tap endowment money as “needed,” non-profit colleges exhibit the kind of non-price competition through competing amenities once found in the airline industry (which often gave out toiletries kits or free glasses of wine, for example) back in the days when it was insulated from competition by government regulation. After deregulation, the entry of new and lower-cost airlines brought the disappearance of many airline amenities. But academic institutions are protected by, among other things, accrediting agencies which treat many amenities and perquisites as costs that newcomers must incur in order to get the accreditation needed to attract both students and government money.

Costs are especially elusive in the case of academic institutions because most are producing joint products, including teaching and research. There is no such thing as the average cost of a joint product. There is an average cost of raising a pig but there is no average cost of producing bacon, which is produced jointly with ham, pork chops, and pigskin. In the academic world, where the same professors, the same libraries, the same science labs, and the same computer facilities are all used for producing both teaching and research, any division of their costs between these two activities is arbitrary.

There is another sense in which determining the costs of teaching and research is difficult: When the average teaching load at many universities was reduced over the years from 12 semester hours to 6 semester hours, that required the hiring of twice as many faculty members to teach a given number of courses. Although the additional costs might be attributed to teaching in the institution’s accounting records, in fact a key reason for reduced teaching loads has been to provide more time for professors to do more research.

Academic institutions often make the argument that their costs for educating a student are greater than the price they charge as tuition, which some take as a sign of the altruism of a non-profit institution. But, since teaching is one of the joint products of an academic institution, along with research and other ancillary activities, the meaning of such a statement is elusive.

No one would take seriously a similar statement by the owners of the New York Yankees, if they said that fans who go to Yankee Stadium do not pay the full cost of running the baseball team, and left the inference that their organization was an altruistic institution. The joint products being sold by the club owners include live performances of baseball games at Yankee Stadium, televised broadcasts of those games, the selling of advertising space at the park and the renting out of Yankee Stadium for other entertainment when the baseball team is not in town and during the off-season. Given the multiple sources of revenue from all these activities, there is no reason at all why fans who buy tickets at the ball park should cover all the costs of running the organization that fields a baseball team at Yankee Stadium.^j

Similarly, there is no reason why students should pay all the costs of all the activities at a university. Yet people take seriously such statements as that by the provost of Stanford University that tuition covers only 58 percent of the cost of educating a student,⁶² even though there is no definitive way of determining how much of the expenditures of Stanford or any other multipurpose institution can be attributed to the teaching of students. The Chronicle of Higher Education calculated how much of the cost of educating a student was paid by the student by “dividing each institution’s total annual budget by its enrollment.” It then concluded that students at state research universities pay only 47 percent of the costs of such institutions⁶³—as if all these institution’s costs come from educating students.

If the argument is taken literally that colleges and universities lose money on every student, then it would be hard to explain why these institutions spend so much time and money recruiting students, and why the number of students admitted to a given institution tends to increase over time.^k But these things make sense when taking into account the fact that the incremental costs of adding students may be quite low. Once classrooms, dormitories, libraries, sports arenas, and other campus facilities have been built, the cost of having more students using them can be very modest. Put differently, when a college does not have enough of the students it admitted actually enroll to fill up the dormitories, the empty rooms are unlikely to reduce the cost of dormitory upkeep as much as the missing students’ missing tuitions and missing room rents reduce the college’s revenues. As The Chronicle of Higher Education once put it:

As competition for new students grows tougher, college presidents are treating admissions directors like football coaches,firing those who can’t put the numbers on the board.⁶⁴

This is not the kind of behavior to expect if colleges are in fact losing money on their students. Colleges are at least as anxious to recruit students as the New York Yankees are to get fans to come to Yankee Stadium, even though in both cases the price of admission does not cover all the costs of the organization. Price discounts known as “financial aid” in academia make economic sense in this situation. As a book co-authored by a college president and a university dean put it:

Just as airlines have come to learn that a seat filled at a deep discount is a better deal than an empty seat, so colleges have come to see that a student with a big institutional grant still brings more net revenue than an empty seat in a classroom or an unoccupied bed in a dormitory.⁶⁵

Among colleges with more applicants than they can admit, it would be possible to admit only students who can pay the full list price tuition but this would conflict with faculty desires, the institution’s public relations, and the prevailing ideas among people in college admissions offices, where even merit-based scholarships are often deplored as “buying students” with high qualifications, as distinct from awarding need-based scholarships to students whose academic qualifications may not be as high. Moreover, the fact that there are no owners or investors to monitor the effects of decisions on institutional income means that admissions offices are freer to indulge their own views. A common view in academia is that “merit aid constitutes another reward to students who have already garnered a greatly disproportionate share of the nation’s resources.”⁶⁶

This raises a fundamental question as to what admissions policies, as well as financial aid policies, are meant to accomplish—whether these policies are meant to allow admissions office personnel to dispense largesse, whether in money or in kind, in accordance with their own arbitrary social notions, or to invest the institution’s financial and academic resources where there will be “the most bang for the buck” in terms of the intellectual quality of graduates coming out of the institution. In the absence of any bottom-line criterion for measuring the success or failure of admissions and financial aid policies, those who staff these offices become another internal constituency able to indulge themselves, with little or no regard to external institutional purposes and little or no monitoring of their decisions by others with a vested interest in institutional efficiency.

The Costs of Faculties

One of the major costs to colleges and universities is faculty tenure. When combined with laws against “age discrimination,” tenure means virtually a lifetime guarantee of employment, even for those professors who do not keep up with the advances in their respective fields or who otherwise become less effective as teachers or scholars in their later years. They can usually be replaced only by paying them a substantial sum of money to retire. Short of replacing them, another alternative is to hire someone else to teach the same subjects taught by a professor who has not kept up with the latest developments in that professor’s field. Such duplication of courses is expensive but it may be the only way that a university with highly rated departments can maintain its high reputation, instead of sending less qualified students out into the world because they were taught by professors whose knowledge lags behind that of professional colleagues elsewhere.

While there is little that colleges and universities can do about existing tenured faculty members, nevertheless after these professors retire or die, the academic institutions that employed them have the option to hire replacements with tenure or to hire replacements who will not have tenure nor be appointed to the kinds of positions from which people are in line for tenure under the “up or out” system. These non-tenure-track positions can be as part-time faculty or adjunct instructors, or lecturers who may be full-time but who are hired with contracts creating no expectation of tenure.

With the passing years, more and more institutions are hiring increasing numbers of faculty members who do not have tenure or an expectation of tenure. These include part-time faculty and also some full-time faculty members who are not in tenure-track positions. Over time, there has been a general trend toward having a higher proportion of the total faculty consist of people who are not eligible for tenure.⁶⁷ In 2010, the New York Times reported:

In 1960, 75 percent of college instructors were full-time tenured or tenure-track professors; today only 27 percent are. The rest are graduate students or adjunct and contingent faculty—instructors employed on a per-course or yearly contract basis, usually without benefits and earning a third or less of what their tenured colleagues make.⁶⁸

Part-time faculty are especially prevalent at lower-ranked colleges, community colleges and profit-based institutions. At the College of Dupage, for example, adjunct faculty outnumber full-time faculty by more than three to one. At a profit-based institution like the University of Phoenix, nearly all the faculty are part-time.

However, the widespread use of non-tenure-track faculty is not confined to the less prestigious institutions, by any means. There may also be a widespread use of non-tenure-track faculty at those elite institutions where many top scholars prefer not to teach undergraduates but to concentrate on more advanced work that is more rewarding for themselves, both intellectually and financially. A science professor at the University of Michigan once put the situation very bluntly when he said: “Every minute I spend in an undergraduate classroom is costing me money and prestige.”⁶⁹ What this means for students is that these students may be attracted to some big-name institutions whose prestige is generated by professors who are unlikely to teach them, especially in their freshman year, and who in some cases are not likely to teach them unless and until they reach graduate school.

To some extent, these overhead charges represent a recovery of investments made earlier in faculty members’ careers. According to The Chronicle of Higher Education, the University of Wisconsin at Madison spends an estimated “$1.2-million in start-up costs for each new professor.” The Chronicle of Higher Education adds:

It typically takes eight years for a professor to bring in enough research money to cover that cost. A professor who stays at Madison for 25 years after earning tenure brings in an average of about $13-million in research money. But the university loses many professors before they even pay off the initial investment.⁷¹

Government

Government subsidies for students whose families’ incomes are not high enough to make college “affordable” create an incentive for colleges to keep tuition high enough to be unaffordable for large numbers of students. When the government’s formula for awarding student aid subtracts a family’s “expected contribution” (based primarily on family income) to a student’s higher education from the prices charged by colleges, in order to determine how large the government subsidy will be, even a small college would forego millions of dollars in government money annually if it kept its tuition down within the range of what most families could afford. From the standpoint of the college’s financial interests, it makes more sense to keep tuition unaffordable for most of its students and use the additional money this brings in from the government to upgrade campus amenities, in order to compete with other colleges that way, instead of competing on the basis of tuition.

The fallacy that keeps this perpetual tuition escalation going is ignoring the fact that subsidizing existing “costs” provides incentives for those “costs” to rise. One study has found that “public four-year institutions tended to raise tuition by $50 for every $100 increase in federal student aid.”⁷³

Academic institutions lobby Congress for money to be spent both on higher education in general and for money to be earmarked for their own particular institution. Since money earmarked in legislation for particular institutions are a way of by-passing the peer-review process by which federal agencies weigh competing requests for money, such earmarked funds are especially sought by institutions with lesser chances of getting grants on their merits in competition with more prestigious institutions. As a study noted, “the vast majority of university lobbying, and virtually 100 percent of lobbying by universities that are not among the top research institutions, is devoted to the pursuit of earmarks.”⁷⁴ The lobbying process was described in the same study:

In January, a university’s administrators meet with its lobbyist to formulate lobbying strategy for the upcoming fiscal year. They prioritize potential earmark requests by the likelihood of success and identify elected officials to lobby. They will typically target the representative and/or senators from the university’s district and state. In March, the university begins to lobby the targeted representatives to include its request in the appropriations legislation. After the August recess, there is a push to get the request included in one of the 13 appropriations bills. The cycle ends in late autumn, as the appropriations bills are sent to the president.⁷⁵

Universities engaged in lobbying for federal money spend an average of more than $100,000 a year each on such lobbying and receive back in federal money more than a million dollars each. Universities located in the district or state of a Congressional Representative or Senator who is a member of the House or Senate appropriations committee receive back even higher rates of return on their lobbying investments than the eight-fold return received by other universities. Again, being a non-profit institution does not mean less hotly pursuing money than enterprises whose incomes are called profit.

Money from outside sources—government, industry, foundations, and individual donors—are crucial for the research that in turn is crucial for both individual and institutional prosperity and prestige. Even richly endowed universities like Harvard and Yale, receiving millions of dollars annually from the earnings of their endowments that are invested in the financial markets, do not finance most of their research from their own money but from money received from government and other outside sources. In fiscal year 2004, for example, Yale University spent more than ten times as much money from the government as from its own money to finance its research and development—and Harvard spent none of its own money for that purpose, while spending $399 million in government money.⁷⁶

Tuition and Financial Aid

While money from government exceeds tuition payments from students, revenue from tuition is not negligible. Although the official tuition is the same for everybody, in many of the more expensive colleges and universities, a majority of the students receive what is called “financial aid” in the form of discounts from those prices. In private industry, what is called tuition in academia would be called the list price, and giving different discounts according to income would be called “charging what the traffic will bear.”

What being non-profit does mean is that institutional policies can adjust to fashions and pressures inside and outside academia more readily than a profit-based enterprise can in a competitive market. Thus, when universities with large endowments were under pressure from Congress to spend more of those endowments to reduce the costs of students attending college, Harvard led the way by announcing that it would cover the college costs of all students whose family’s income did not exceed $60,000 a year. Private, profit-based enterprises could not afford to give away their goods or services like that. Whether that was the optimal use of Harvard’s endowment, either from an educational standpoint or a social standpoint, is a question that need not be faced by those making such decisions, since there are no owners or investors to react when their financial interests are sacrificed.

Intercollegiate Athletics

Intercollegiate sports—especially football and basketball—are another source of considerable revenue for some colleges and universities. A number of colleges with big-time sports programs have had multi-year media contracts from companies paying tens of millions of dollars to broadcast their games. In 2009, Ohio State University signed a ten-year contract guaranteeing them a total of $110 million for their media and marketing rights.⁷⁷ However, these revenues seldom contribute anything toward the educational activities of these institutions.

A former president of Yale University summed up the situation succinctly: “I have yet to see the laboratory or library or dormitory built with football or basketball revenues.”⁷⁸ On the contrary, these and other sports more commonly cost more money than they bring in, even though the top intercollegiate sports can bring in millions of dollars in gate receipts to a given college, and billions of dollars have been paid for the right to broadcast a college basketball tournament,⁷⁹ in addition to other money from other sources.

Although teaching and research are joint products, whose costs cannot be determined separately, most of the costs involved with intercollegiate sports are not costs incurred jointly with other academic activities. A stadium is seldom a site for research or the teaching of academic subjects. Even the academic coaching and advising of college athletes, in order to maintain their grades at a level that enables them to remain eligible to play, is often conducted by a separate staff and even in separate buildings from those used for the academic coaching and advising of other students.

In 2006, Ohio State University became the first academic institution to spend more than $100 million a year on its many athletic programs. However, with a top-ranked football team playing a bowl game, its $101.8 million in expenses was covered by $104.7 million in revenue that year.⁸⁰ At most colleges and universities, however, financial losses are the rule for athletic programs. Moreover, even those few colleges and universities whose sports programs cover their costs in a given year need not continue to do so. The Chronicle of Higher Education reported on the University of Oregon sports programs in 2007:

Oregon proudly proclaims that it has recently joined the small handful of universities with self-supporting athletics departments. But university officials acknowledge that shrinking proceeds from a few bad seasons of football would be enough to put the department back in the red.⁸¹

Despite some “creative” accounting used to conceal how much some intercollegiate sports are costing, the head of the National Collegiate Athletic Association (NCAA) “acknowledged that, when properly accounted, fewer than 10 of the more than 1,000 college athletic departments run a surplus,” according to the New York Times.⁸² College baseball is the biggest money-losing intercollegiate sport, perhaps because there is little demand for the televising of college baseball games, in contrast to the demand for televising college football games, which can offset some of its costs. The median loss on college baseball programs in 2004–2006 was nearly $700,000 a year.⁸³

The NCAA is a nationwide cartel, whose guiding principle is that none of the vast sums of money involved in intercollegiate sports shall be paid to the student athletes who play the games at the risk of their bodies. Meanwhile, those who direct these athletic contests from the sideline can be handsomely rewarded. More than a hundred years ago, when Harvard hired its first paid football coach, his salary “was 30 percent more than the best-paid Harvard professor received and was comparable to Eliot’s salary after his almost forty years as president.”⁸⁴ Such patterns remain common today, except that it is now more common for football coaches to be paid more than the presidents of their respective universities.⁸⁵

Even a college’s top recruiters of high school football players can earn more than $200,000 a year, which is more than the average salary of a full professor at Harvard.⁸⁶ In 2007, 21 Division I institutions spent more than a million dollars each on recruiting athletes, with the University of Tennessee at Knoxville spending more than $2 million. Even most Ivy League universities, which are not part of high-stakes Division I athletics, spent between three-quarters of a million and one million dollars each recruiting athletes.⁸⁷

It might seem strange, if not irrational, for a college or university to be paying huge salaries to those who are directing an activity that is usually losing money on net balance. But, again, it is necessary to distinguish what is beneficial from the standpoint of the institution as a whole from what is beneficial from the standpoint of those particular individuals in charge of making particular decisions within that institution. Moreover, short-run economics differs from long-run economics.

In the short run, a sports stadium and other athletic facilities have already been built, so the only costs that matter are the incremental costs of maintaining and operating these facilities, which may be a small fraction of the total costs that include the cost of building such facilities. The revenues that a successful sports program can bring in—whether in gate receipts, television rights, bowl game money, etc.—may easily exceed the incremental costs of keeping the athletic program alive and successful. On the other hand, if the football or basketball team is a chronic loser in its games, all these sources of revenue may fall drastically, and fail to cover even the incremental costs of running an athletic program.

Obviously, for every unbeaten team there must be several teams that they have beaten, and total wins and losses must always be the same for college teams as a whole, leaving few teams with the kinds of impressive records that keep stadiums filled and television rights for their games in demand. Given these incentives and constraints, hiring a coach who is likely to produce a winning season may be worth paying a very large salary.

In the long run, however, the stadium and other athletic facilities will need costly renovation or rebuilding. From a purely economic standpoint, the college or university might be better off at that point to discontinue intercollegiate athletic programs that are costing more money than they are bringing in. However, from the standpoint of a college or university president, is it worth stirring up a hornet’s nest of outrage from students, alumni and perhaps even some faculty members, by discontinuing a football or basketball program that the president has been repeatedly authorizing for years? A college or university president has few incentives to think in long-run terms beyond the president’s own term in office. Moreover, the president’s term in office can be cut short precisely by outraging various constituencies of the institution.

When even a small, academically oriented liberal arts college like Birmingham-Southern dropped out of Division I athletic competition down to Division III, where they would compete against other small, academically oriented liberal arts colleges, there were student protests and local newspapers criticized the decision, even though the athletic budget of $6.5 million was 15 percent of the college’s total budget.⁸⁸ If an uproar could be created at an institution not known historically as a football or basketball powerhouse, for merely dropping down into a less prominent athletic division, it can be imagined what the reaction could be from abandoning intercollegiate sports altogether.

Since universities participating in intercollegiate athletics are non-profit organizations, there are no stockholders to complain about the inefficiency of subsidizing money-losing activities, much less mount a campaign to get rid of a chief executive who is reducing the return on their investment. In a profit-based enterprise, any money-losing operation is a threat to the institution’s long-run economic position—and that long-run threat is reflected immediately in its stock price, in a lowered rating of its bonds, and in a growing reluctance of banks or other financial institutions to lend them money. It is significant that the relatively few academic institutions that are run for profit, including the University of Phoenix, which has more students than any non-profit university, do not have football teams or stadiums.^l

At the heart of these and many other institutional decisions in the academic world is the fact that few, if any, individuals have a direct personal interest in the long-run economic or educational consequences of decisions made by officials of most colleges and universities. Students are passing through in a few years, professors move easily from one institution to another, and few college or university presidents today stay at the same institution for decades, as Charles Eliot once did at Harvard or as Nicholas Murray Butler did at Columbia and Robert Hutchins did at the University of Chicago.

Presidents of lower-ranked colleges or universities may aspire to become presidents of higher-ranked institutions, and presidents of the latter may aspire to high positions in the political or foundations worlds. But seldom is there a long-term commitment to a given institution today that would provide incentives for students, faculty, or administrators to take a long-term view of the consequences for the institution of the decisions currently being made, whether in intercollegiate athletics or in other aspects of decision-making in higher education.

It should also be noted that, although spokesmen for the National Collegiate Athletic Association depict intercollegiate athletes as students first and athletes second, Division I football players spend an average of 44.8 hours per week on athletics, and even participants in intercollegiate golf average 40.8 hours a week on this sport.⁸⁹ Tighter academic standards for college athletes have led many colleges and universities to establish expensive programs of academic advisers exclusively for their athletes. According to The Chronicle of Higher Education:

Since 1997, the budgets for academic services for athletes at more than half of the 73 biggest athletics programs in the country have more than doubled, on average, to more than $1-million a year. One program spent almost $3-million in 2007—an average of more than $6,000 per athlete.⁹⁰

These tutoring facilities exclusively for college athletes had annual budgets ranging up to nearly $3 million at the University of Oklahoma in academic year 2007–08 and have been housed in buildings ranging in size up to more than 20,000 square feet in at least a dozen institutions and more than 50,000 square feet at the University of Alabama at Tuscaloosa and at Louisiana State University at Baton Rouge.⁹¹

Among the biggest beneficiaries of intercollegiate athletics are professional football and basketball leagues, for whom college athletics has been aptly characterized as “a cost-free minor league.” It has been estimated that, if colleges were economically based operations, they could charge professional football and basketball leagues more than $100 million for serving as the source of their players.⁹²

Other Sources of Revenue

Among the other sources of revenue for academic institutions are the earnings from their endowments and proceeds from the sale of their bonds. The most richly endowed get from 20 to 40 percent of their operating revenue from the earnings on their endowment and/or from spending some of the principal. In some years, Princeton has gotten nearly half its budget from its endowment. The typical college, however, gets only about 5 percent of its operating revenues from its endowment, the Wall Street Journal reported in 2009. Bond sales also bring in money to meet current cash flow requirements, though this money is not revenue but simply a loan that will have to be repaid. During the economic downturn, Princeton received a billion dollars this way and Harvard a billion and a half.⁹³

Government subsidies are a factor in this continued overproduction of degrees, in disregard of the limits of demand, because these subsidies relieve universities of many of the huge costs of training graduate students especially, and relieve these graduate students of having to face the question of whether there is enough demand in the job market for the kinds of skills they are studying to acquire. Government research grants support many graduate students, both while they are working toward their doctorates and afterwards, because postdoctoral grants continue to support them at the universities after they complete their degrees and cannot find employment.

While this problem has long been especially acute in the humanities, it also exists in the sciences. “In physics nearly 70 percent of newly minted Ph.D.’s go into temporary postdoctoral positions,” The Chronicle of Higher Education reported in 2007.⁹⁵ In other words, government subsidies reduce incentives for the universities to supply fewer doctorates when there is less demand in the fields in which these degrees are awarded.

In general, the way that higher education is financed—including the non-profit status of most academic institutions—gives decision-makers in academia far greater latitude in deciding what to do than is the case in enterprises whose survival depends on accommodating both those who receive their goods and services and those who supply the money which makes the production of those goods and services possible. It is therefore not very surprising that many of the decisions made in the academic world serve the interests of those who make those decisions more so than the interests of the institutions that employ them, much less the interests of the larger society from which academics draw their resources.

Even in times of financial stringency, academic priorities are revealed by what things are cut and what things are not. One college president satirically analogized what happens in a time of academic financial crisis on campus to what happens on a sinking ship, where the college president is in the role of the captain, the faculty are the crew, and students are the passengers:

All in all, it was akin to a ship hitting an iceberg, and the captain announcing as the boat sinks that his highest priority is to save the crew. The next priority is to avoid any inconvenience as the ship goes down by continuing all activities—the midnight buffet, the bingo game, and the shuffleboard tournament. The third priority is to repair the ship. And the fourth and final priority, should time permit, is to save the passengers.⁹⁶

ACADEMIC GOVERNANCE

THE FACULTY

Teaching

Educational Quality

Academic Careers

THE STUDENTS

Choices Among Colleges

“Value Added” by College

The Admissions Process

The Cost of College

ACADEMIC COSTS

Costs of Educating Students

The Costs of Faculties

ACADEMIC REVENUES

Government

Tuition and Financial Aid

Intercollegiate Athletics

Other Sources of Revenue

SUMMARY AND CONCLUSIONS