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Universities around the world are in trouble. So are healthcare sectors and legal services.[i] COVID-19 is a big enough problem, but they have a more insidious chronic ailment to deal with, often known as Baumol Cost Disease.[ii]

When Ludwig van Beethoven’s 14th string quartet was first performed in 1826 it required four musicians and it took 40 minutes to play. This year it will be played many times, and it will require…four musicians and 40 minutes! However, the real cost of musicians’ wages has risen by more than 23 times since 1826.

If one tries for productivity gains, for example by omitting one musician, speeding it up a bit or skipping a few bars, the audience will be very unhappy and look for alternatives or just stop listening. But to attract enough musicians someone has to pay them salaries that are commensurate with those of talented people in sectors which have been able to extract productivity gains, through scale or technology, sufficient to pay that level of remuneration. This is not a problem for so long as wealth is generated elsewhere in the economy and there are enough people who want to pay the ticket price of a live performance of Beethoven’s 14th string quartet.

The productivity problem

Universities have made some productivity gains in recent years, with higher staff/student ratios, larger classes, fewer small groups and restricted subject choice. These gains have not come close to offsetting the increase in real expenditure in higher education, however. In a recent OECD report, Resourcing Higher Education 2020: Challenges, Choices and Consequences,[iii] the authors selected 13 OECD countries and looked at average expenditure per student in real terms between 1995 and 2015. In those 13 countries, real expenditure per student doubled in two decades; yes, doubled in real terms. To be clear, this is not about expansion of their systems, it is cost per student.

Reality of real expenditure in higher education sector

Notes: Average value across 13 OECD countries with available data for all years (Chile, the Czech Republic, Finland, Israel, Italy, Mexico, the Netherlands, Norway, Portugal, the Slovak Republic, Spain, Sweden and the United States). Source: Adapted from OECD (2020), OECD Education Statistics (database), https://doi.org/10.1787/edu-data-en (accessed on 04 May 2020).

Nor is this about governments shifting cost to students and their families, although that has been a trend. It is about total expenditure, whoever paid for it. Something about what universities do seems inexorably to drive costs up.

The cause

These is nothing particularly unusual about these 13 countries and they are likely to be broadly representative of OECD countries generally, plus at least some non-OECD ones. Various culprits spring to mind as possible drivers of cost increase. Administrative bloat is a favourite. There is some of that, although greater regulation of universities is partially responsible.

Amenities competition is another one, or as Archibald and Feldman call it in their analysis of rising College costs in the US, "pitching amenities to the tastes of high income families".[iv] It seems plausible that as institutions seek to attract international students, or as neighbouring universities of similar status compete for the best domestic students, the campus and its facilities are used as quality indicators.

Research expenditure is included in total expenditure, and so a relative increase in research spending over teaching might distort the picture. A move from elite to mass participation in higher education may also have given rise to greater costs in supporting students less academically ready.

And in countries where students pay significant proportions of the cost, they may conceivably demand service that previous cohorts who were not paying fees had not. But these aren’t the major contributors. Higher education is a prime example of what Baumol and Bowen described in 1966 as Cost Disease.

Universities cannot increase productivity at the same rate as some other sectors but they do need to match salary expectations derived from sectors that can. If universities lower quality there comes a point when resistance sets in, and so within the current conception of how a university should operate there is a natural ceiling on productivity gains. The same is true for physicians, dentists and lawyers, it seems. In Archibald and Feldman's analysis of real cost rise in the US between 1947 and 2008, all four kinds of personal services rose by roughly the same percentage over that protracted period.[v]

Now back to Beethoven and whether this is a problem. Whereas there are still paying audiences for the 14th string quartet, even before the pandemic governments and families were less and less willing to keep increasing their contribution to universities. Various forces have been at work.

Governments need to allocate public funds for which there is fierce competition in ageing societies where the workforce and taxpayer population base is shrinking as a proportion of the whole. That is the case in almost all liberal democracies. Furthermore, in some of these countries there isn’t the productivity in other sectors to generate the wealth, especially if their economy is reliant on services which also have Baumol Cost Disease.

Shifting perceptions

Governments also pick up signals from employers who are less and less persuaded that current higher education prepares people sufficiently for today’s world of work and for tomorrow’s industrial revolution. They do not feel pressure from interest groups which previously supported the expansion and funding of universities. Students and their families still value a degree, but perceptions are changing there as well. Attainment rates of bachelor degrees in the young population are reaching 50 percent in some countries. One consequence is a decreasing earnings premium on a degree; even a negative premium in some instances. In the UK it is estimated that one-fifth of degrees are not worth the money in terms of future earnings; these students would have been financially better off if they had not gone to university.[vi] In a 2020 survey on attitudes to higher education in 11 countries, by Ipsos, the Fulbright Commission, the University of California and King’s College London, 61 percent of respondents said they felt a degree is less valuable than 10 years ago. In the UK, only 44 percent thought that the benefits of going to university outweighed the expense, although the 11-country average was 56 percent.[vii]

Baumol Cost Disease and higher education

This takes us to the reason why today’s universities are in trouble. Under their current operating model, they have to match comparable salaries elsewhere but the sources of revenue are less willing to fund the increase. And they have run out of productivity opportunities. They are becoming debilitated by Baumol Cost Disease, and now the pandemic has wiped out any GDP buffer they might have been relying on. The good news is that a vaccine is theoretically available. The bad news is that there will be a large number of anti-vaxxers.

Baumol Cost Disease is based on the notion that in services like higher education, there is limited scope for scale efficiencies. But this was before online learning could be glimpsed as an acceptable mode of delivery. It was before machine learning could be imagined as the engine of most research, and it was before other sectors such as financial services, the media, real estate and telecommunications engaged in digital transformation to recreate themselves and massively reduce their costs.

The cure

There is an alternative future for universities which preserves the essential idea but completely changes what they look and feel like. Robotic process automation and emerging smarter technologies could eliminate much university administration.

Good digital delivery of education is assumed to be no cheaper than good on-campus education (although the empirical evidence either way is surprisingly slight) but digital delivery offers scale potential. Learning analytics are already in the early stages of allowing personalised learning. The first ambitious university to crack high quality personalised learning at scale will leave the rest behind.

Machine learning, also in its infancy, will be able to conduct most of the process of research, leaving academics to design projects and translate the findings. More research will be possible with the same or less financial input. These technologies we now know are possible. What is missing at the moment is the alternative vision of what a university could look like. Reducing 10 faculties to 6 is not transformation. Telling faculty members to book their own travel online is not transformation. Wowing students with the Internet of Things on campus is not transformation.

Envisioning the university as an app and a platform could be, as we have seen in other industries like taxis and entertainment. But before one crosses uber that Rubicon, there are alternative possible visions of highly paid, secure academics and researchers delivering great education and research findings through technology, working for efficient, digitally transformed organisations, led by small, strategic management teams and governed by conscientious Councils and Senates.

It's just that many people in today’s universities will really not like the idea at all. They will continue to suffer from Baumol even when vaccination candidates are there: at least, until a Government gives up in despair and sends for the surgeon. Just as there are people who will pay to hear Beethoven played live, there will be people and governments willing to pay for the relentless rise in the costs of some universities. But these will be the minority with extraordinary brands. Most universities will need to transform through technology, generate efficiencies and reach scale. For them, it is Roll Over Beethoven.

Footnotes

[i] See E Helland and Alex Tabarrok, Why Are The Prices SO D*mn High?, Mercatus Center, George Mason University, 2019 and J Crouch, “We’ve got a bad case of Baumol’s cost disease, Legal Evolution, July 2020, https://www.legalevolution.org/2020/07/weve-got-a-bad-case-of-baumols-cost-disease-184/
[ii] William J Baumol and William G Bowen, Performing Arts: The Economic Dilemma, MIT Press, 1966.
[iii] OECD, Resourcing Higher Education: Challenges, Choices and Consequences, 2020, http://www.oecd.org/education/resourcing-higher-education-735e1f44-en.htm
[iv] Robert B Archibald and David H Feldman, Drivers of the Rising Price of a College Education, Midwestern Higher Education Compact, 2018, https://www.mhec.org/sites/default/files/resources/mhec_affordability_series7_20180730.pdf
[v] Robert B Archibald and David H Feldman, Why Does College Cost Much?, Oxford University Press, 2011.
[vi] Jack Britton, Lorraine Dearden, Laura van der Erve and Ben Waltmann, “The impact of undergraduate degrees on lifetime earnings”, 2020, https://www.ifs.org.uk/publications/14729
[vii] “Universities: perceptions, impacts and benefits” (June 2020), survey conducted in March-April 2020, with Ipsos interviewing 10,502 adults.

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