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OCR for page 105
4
Higher Education, the Emerging Market,
and the Public Good
Brian Passers
If a nation expects to be ignorant and free, in a state of civilization,
it expects what never was and never will be.
Thomas Jefferson to Col. Charles Yancey, January 6, 1816
INTRODUCTION
One of the more remarkable aspects of contemporary research
and analysis of higher education is the repeated invocation of the
emergence of a market for postsecondary education and training (Ruch,
2001; Collis, 2001; Duderstadt, 1999, 2000; Munitz, 1998; Goldstein,
1999; Marchese, 1998~. These accounts generally suggest that increased
market competition is the inevitable result of economic and techno-
logical changes that are transforming higher education from "cottage
monopoly to competitive industry" (Munitz, 2000, p. 12~. They fur-
ther suggest that under the market model, colleges and universities
will be increasingly consumer driven (Ruch, 2001), operated like
firms (Blustain, Goldstein, and Lozier, 1999; Garber, 1996), challenged
by unprecedented competition (Newman and Couterier, 2001), and
find their traditional forms of pedagogy and credentialing transformed
by technological innovations (Newman and Scurry, 2001; Adelman,
2000~.
The inherent assumptions in the presentation of an emerging market
for higher education are even more striking than the ubiquity of market
metaphors themselves, yet it is not clear that those assumptions are
Brian Fusser is assistant professor in the Center for the Study of Higher Educa-
tion at the Curry School of Education of the University of Virginia.
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valid. This paper turns attention to three fundamental assumptions
that shape predictions of an emerging competitive marketplace for
higher education. The first is that higher education institutions operate
in an environment and under conditions that can accurately be described
as market competition. The second assumption is that a lack of institutional
efficiency and productivity has generated demands for market solutions
and that market-like behaviors on the part of postsecondary institu-
tions will increase efficiency and productivity in higher education.
Finally, there is the assumption that market approaches to the provi-
sion of higher education will produce at least the same quantity and
distribution of public and private goods as are generated by the present
system. While each of these assumptions has been debated in con-
temporary research on higher education, the argument over the case
for higher education as a public good has moved to the fore over the
past decade (Levine, 2001~. It is a conflict that is central to contests
over access, finance, and accountability in the postsecondary realm.
The notion that market provision of higher education will preserve
the role of higher education as a public good challenges a number of
traditional beliefs about the nature of education itself. John McMurtry
(1991) put it this way:
The defining principles of education and of the market-place are
fundamentally contradictory in: (1) their goals; (2) their motivations;
(3) their methods; and (4) their standards of excellence. It follows,
therefore, that to understand the one in terms of the principles of the
other, as has increasingly occurred in the application of the market
model to the public educational process, is absurd. (p. 216)
The three assumptions also engender a strong sense of inevitability
in arguments for the market provision of higher education. While
researchers may differ on whether a market approach is a positive
development, the underlying question in contemporary accounts is
not whether higher education institutions should adopt market-like
behaviors, but whether they will be able to do so rapidly enough to
remain competitive. As Newman and Couterier (2001) put it, "Whether
policy makers and academic leaders are capable of addressing these
issues in the months and years ahead or not, higher education will
continue its inexorable evolution toward a market economy" (p. 9~.
That sense of inevitability in turn fosters demands for further adapta-
tion of higher education systems in the United States and around the
world (Clark, 1998; Tooley, 1999~. It is the argument here that market
approaches to higher education are less inevitable than they are ahistorical.
Contemporary literature on the need to adapt to changing demands
through market solutions does not sufficiently account for the evolution
of the nonprofit institution as the dominant form for the provision of
postsecondary education in the United States. Nor does contemporary
research sufficiently explore the relative inability of market-based,
consumer-driven systems to produce opportunities for universal access,
leadership training, or the redress of social inequalities. In order to
understand the continuing importance of nonmarket delivery of higher
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HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
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education in the service of the public good, we need to begin with an
overview of the changing demands on the higher education system.
THE CHANGING ENVIRONMENT
Contemporary research on the contextual changes shaping higher
education has focused on a number of issues, including labor market
demands (Adelman, 2000; Marchese, 1998~; the new demographics
of postsecondary students and constituents (Carnevale and Fry, 2001;
Kohl and LaPidus, 2000~; the rising cost of higher education (Ehrenberg,
2000~; globalization (Levin, 2001~; new technologies (Mendenhall,
200 1; Graves, 1 999) ; and competition as a driver of change in
postsecondary structures and processes (Levine, 2001; Marginson and
Considine, 2000~.
Perhaps the most influential analyses have been those focused on
changes in the finance of higher education over the past two decades
(Heller, 2001; McKeown-Moak, 2000; Goldstein, 1999; Kane, 1999;
McPherson and Schapiro, 1998~. During that period increases in enroll-
ments have coincided with a retrenchment from state block grant
support for higher education (Winston, Carbone, and Lewis, 1998~.
In response, institutions have rapidly increased tuition, and students
and parents have taken on a significantly larger portion of the finance
of higher education (Callan, 2001; Breneman, 2000~. This shift in
the burden of paying for higher education has revived a longstanding
debate, one that encompasses considerably more than resource allo-
cation, as it calls for rethinking the organization and delivery of higher
education. In the United States and elsewhere around the world, that
broader debate has recently centered on the role of market competition
in the transformation of higher education and on the effect of market
competition on the contributions of higher education to the public
good (Altbach, 2001; Currie and Newson, 1999; Marginson and Considine,
2000; Pusser, 2000; Pusser and Doane, 2001; Tooley, 1999~.
HIGHER EDUCATION AND THE PUBLIC GOOD
One of the few areas of agreement with regard to the public good
is that it is a problematic concept. Even the phrase "the public good"
shares space in our discourse with "the common good" and "the public
interest." There are also many references to a different concept,
"public goods," in concert with the ascendance of market models and
economic approaches to public life. The nature of public goods is
also contested, though they are commonly identified by two charac-
teristics, nonrivalry and nonexcludability (Samuelson, 1954~. Public
goods are presumed to be underproduced in markets, as those two
fundamental characteristics prevent individual producers from gener-
ating sufficient profit (Marginson, 1997~.
Mansbridge (1998) argues that the idea of the public good is a
fundamentally unsettled, contested concept, one that is at the center
BRIAN PUSSER
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of broader conflicts over public action. Similarly, Calhoun (1998)
suggests that the public good is a dynamic and indeterminate social
and cultural construct. Reese (2000) characterizes "the elusive search
for the common good" as the struggle to find common social and
political understandings in a pluralistic nation. Given that we grant
the concept of the public good an indeterminate status at the limit,
there are a number of outcomes of education that are widely agreed
upon as contributing to the public good. These include the role of
education in citizenship development, building common values, and
democratic participation for the national good (Cuban and Shipps,
2000), in stimulating economic growth and the diffusion of technol-
ogy, as well as increases in social cohesion (Wolfe, 1995; Brighouse,
2000~. Breneman (2001) notes that our ability to empirically measure
the noneconomic contributions of higher education is weak and that
consensus around the role of higher education in service of the public
good will more likely be achieved though political and policy debate.
Acknowledgment of a public good emerging from the provision of
higher education does not settle the question of how best to define or
generate that public good. Since Plato pursued the meaning of "the
good" and Aristotle the degree of materialism inherent in a "common
good," philosophers and social theorists have contested these questions
(Mansbridge, 1998~. As he moved away from a medieval philosophy
that set public good and private good as opposing forces, Adam Smith
turned attention to the possibility that self-interest, in the aggregate,
could most efficiently provide the common good. Smith's "invisible
hand" has formed the foundation of contemporary neoliberal defini-
tions of the public good as nothing more than the aggregate of Private
goods (Marginson, 1997~.
A distinction also needs to be made between the degree to which
different educational sectors contribute to the public good. There is a
stronger consensus around the contributions to the public good made
through the elementary-secondary system than there is for postsecondary
education (Brighouse, 2000~. Nonetheless, in the United States we
have at various historical moments demonstrated a significant degree
of consensus around creating elaborate and often costly postsecondary
projects and policies in the service of the public good. The creation
and expansion of higher education has been a key locus of collective
commitment to the production of both public and private goods in the
service of the public good. The land grant college movement, the
expansion of the community college system after World War II, and
the rapid increase in science and technology research programs in
universities in the wake of Sputnik are oft-cited examples of promot-
ing the public good through public investments in higher education.
Over the same time frame, the nonprofit degree-granting institution in
the United States has become dominant, in large measure to protect
against moral hazard and underinvestment, but also to ensure that the
contributions of higher education to the public good will be widely
disseminated (fusser, 2000~. Market production is generally under-
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HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
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stood as for-profit production, though Hansmann (1980), Weisbrod
(1998), and others offer useful models of market-like competition
between organizations.
Market competition also entails production closely following demand,
if that demand leads to profit. Under market production, there is
little if any provision for production in the absence of demand, and
the market producer is indifferent to public goods (Marginson, 1997~.
These latter two cases, we shall see, form a key distinction between
market production and public production in general and in higher
education in particular. Public nonprofit production has long been
the dominant model in higher education because, unlike market production,
it is oriented to public goods and the common good, as well as to
private goods. Public nonprofit production is also the only vehicle
for ensuring the production of educational products and services that
would not justify for-profit production. Public nonprofit production,
in the contemporary policy environment, is challenged by the growth
of for-profit production. There are limits to public subsidies and
public support for education, and those subsidies will be distributed
going forward in a political economic competition between market
advocates and those who argue for public provision of higher educa-
tion (fusser, 2000~.
MOVING AWAY FROM COLLECTIVE SUPPORT FOR
HIGHER EDUCATION
Along with rising interest in market approaches for university
adaptation, a related shift is taking place in public policy and planning
from the public supply to the public subsidy of higher education.
This shift is accompanied by a move from collective finance to indi-
vidual finance and has significant implications for higher education
as a public good (fusser, 2000~. Both shifts are consistent with
market approaches to the provision of higher education. An intrigu-
ing aspect of the policy debate is that the primary rationale for these
changes is not the one advanced by neoclassical economists such as
Gary Becker (1976), who argue that education is an investment in
individual human capital and as such an appropriate investment for
the individual to finance. Nor does the argument follow Howard
Bowen's (1977) contention that since public subsidies have gone dis-
proportionately to those who could matriculate without them, policy
makers might appropriately shift the burden to those beneficiaries.
Recent findings confirm Bowen's, as significant public subsidies continue
to be available to students in middle- and upper-income brackets
(Winston, 1999) and financial aid continues to shift from need-based
to merit-based provision (Ehrenberg, 2000~. The primary rationale
supporting the shift in resource allocation strategies is that market
competition driven by consumer choice is the appropriate driver of
reform in higher education (Schmidt, 2001; Marginson and Considine,
2000~. As a prime example, a report commissioned as part of the
BRIAN PUSSER
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National Governors Association's initiative Influencing the Future of
Higher Education (2001) predicted that
Savvy states in the twenty-first century will focus on postsecondary
customers: the learner, the employer, and the public who supports
educational opportunities. In competitive states, resources will in-
creasingly flow to the learner, and state regulatory policies will ease
to encourage institutional flexibility (p. 3~.
This approach traces its lineage less to Becker or Bowen, although
their findings are certainly influential, than to Milton Friedman. Friedman's
Capitalism and Freedom (1962) emphasized the private benefits of
higher education and called for a public retrenchment from funding.
To the extent that government had a role, Friedman suggested subsidies
should go to individuals, not institutions, and that competition should
be increased throughout the system through the portability of financing
instruments.
Despite the historical and contemporary references to the potential
role of the market in postsecondary education, to date, empirical, discipline-
based and theoretical research that addresses the nature or impact of
market models for higher education has received less attention than a
quite different literature. The most visible accounts of the emerging
market, new competitors, entrepreneurial forms of finance, and the
like come from the popular press, and more specifically, those peri-
odicals that cover business and the business of higher education. In
part this imbalance is due to an apparent preference in the press for
reporting on economic, market-based, or profit-.generatin.g topics rather
than academic ones.
~ _ _ ~
Add to the mix the rise of attention-garnering,
publicly traded companies like the University of Phoenix, DeVry, and
Strayer, and the recent partnerships between universities like Cornell
and New York University with private venture capital funds, and an
irresistible journalistic soup begins to emerge. Stir in a dollop of the
dot-coin revolution through virtual delivery of degrees and linkages
between for-profit portal providers and higher education institutions,
then add some business superstars like Glenn Jones (Jones Interna-
tional University) and Michael Milkin (UNEXT) as the pot begins to
boil. Add a growing chorus of protests over the rising costs of higher
education, with a pinch of critiques of the higher education bureau-
cracy reminiscent of those leveled earlier at the elementary-secondary
system by Chubb and Moe (1990), and familiar aromas will fill the
metaphorical kitchen. Stoke the fire with research provided by groups
relatively new to higher education: stock analysts (Block and Dobell,
1999; Soffen, 1998) and the presidents and administrative leaders of
for-profit universities (Ruch, 2001; Sperling, 1989, 2000), and there
may soon be considerably more heat than light shed on the subject.
THE APPEAL OF THE MARKET
It is not difficult to understand the appeal of market discourse and
ideology. One can safely hypothesize that rapid changes are taking
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HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
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place and that higher education institutions may not be able to respond
with business as usual. One could also confidently postulate that
policy makers and many others believe that much of public higher
education is priced too high, that it requires too much direct state
funding, and that its fundamental organization is inefficient. It is
also safe to say that the idea of putting the free market to work has
considerable appeal to policy makers and legislators (Marginson and
Considine, 2000~. Faith in the market and its potential role in reforming
the provision of higher education is based in a fundamental tenet of
market ideology, that competition creates efficiencies, productivity
gains, and cost savings. The problems appear to be precisely the
ones that the market purports to remedy (Marginson, 1997~.
This is, however, a tricky terrain for researchers to navigate. Even
the premise that higher education is too expensive is difficult to address
without an agreed-upon metric for comparison (Ehrenberg, 2000~.
Too expensive compared to 30 years ago? One can't begin to make
that comparison without a way to control for the vast changes in the
product over that time. In which institutions is higher education too
costly? The most expensive institutions, both public and private, are
in many cases facing annual demand that considerably exceeds supply,
a situation that in most market models would lead to further price
increases (Breneman, 2001; Winston, 1997~. Yet the political and
popular appeal of a commonly held perspective on a phenomenon is
not to be lightly dismissed. One of the contentions of this paper is
that the belief in market effectiveness, market efficiencies, and market
gains drives the current policy fascination with markets and market
competition in higher education, despite the paucity of empirical tests.
It is also the case that the policy community does not necessarily wait
for research results before taking action. A number of key policy
actors are currently proposing significant shifts in the funding and
production of higher education using market rhetoric and market models
in their justifications (NGA, 2001; Burd, 2001~. In the most dramatic
example, Governor Rick Perry of Texas in 2001 suggested transform-
ing the majority of state block grant appropriations for institutions
into scholarship funds sent directly to students (Schmidt, 2001~.
It has been suggested in prior research that using market models
or market discourse to develop policy, where the conditions are
inappropriate for market analysis, may lead to flawed assumptions
and misguided policies (Leslie and Johnson, 1974~. To fully under-
stand the changes taking place in higher education today, and to
formulate appropriate policies based on those changes, requires an
evaluation of whether the contemporary context is appropriately defined
as an emerging market environment and whether the market model is
useful in this case.
Markets and Higher Education
The history of theorizing on markets and market influences on
higher education goes at least as far back as Adam Smith, who specu-
BRIAN PUSSER
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lated in the 18th century on efficiencies that might be generated by
linking faculty salaries to productivity (Ortmann, 1997~. In a more
contemporary realm, Milton Friedman's work on choice and educa-
tion (1962, 1980) and Paul Samuelson's (1954) perspectives on public
and private goods have done much to shape how we think about the
potential for free market competition in higher education. Despite
that long history, there are still a number of reasons to pause before
applying a market model to an arena where some of the following
conditions prevail: (1) the product is sold in the vast majority of cases
for considerably less than it costs to produce; (2) some 90 percent of
those seeking degrees are enrolled in nonprofit institutions; (3) of
those enrollments, over 75 percent are in institutions that are non-
profit and public; (4) there are significant barriers to entry by new
providers in many sectors; and (5) there are significant constraints on
exit by the vast majority of providers. Before turning to these challenges
in greater detail, it is also worth noting that the American higher
education system is, as a production story, arguably the finest in the
world (Kerr, 2001~.
Changes to the Market Mode}
For at least three decades, economists have pointed to difficulties
in attempting to apply market models to higher education (Winston,
1997; Bowen, 1977; Leslie and Johnson, 1974~. One fundamental question
concerns whether collective goods, like the benefits of increased levels
of public education, are better generated by market or government
production. Salamon (1995) suggests that collective goods are goods
and services that, once produced, can be enjoyed by all, independent
of whether the consumer helped pay for or produce the goods. This
condition makes market production problematic, as few will pay for
benefits they can enjoy without contribution (the "free rider" problem)
and production will sink below optimal levels. Government, on the
other hand, can use taxation as a way to ensure broader contribution
to the cost of the collective good, but government production has its
own shortcomings. Foremost of these is that government action is
largely limited to the production of collective goods that a majority
will agree merit production. Consequently, many collective goods
desired by a minority of the polls will not be produced unless private
nonprofit organizations are organized to produce those goods (Salamon,
1995~. In innovative work produced shortly after the passage of the
Higher Education Act (MEA) of 1972, Leslie and Johnson (1974)
concluded:
Upon considering collectively the major aspects of the higher education
market, it becomes evident that while higher education can be generally
and broadly discussed within the context of certain market terminology,
the various market-related characteristics of higher education in no
way approximate the sufficient conditions of the perfectly competi-
tive market model. (p. 14)
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HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
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It is no coincidence that the authors were theorizing about the
nature of a market model for higher education on the heels of the
passage of HEA. With provisions for portable financing through
guaranteed student loans and BEOG (now Fell) grants, HEA seemed
to provide the foundation of a higher education market as envisioned
by Friedman. Yet what Leslie and Johnson surmised some 25 years
ago, and what Gordon Winston and others have found quite recently,
is that many characteristics of the production and consumption of
higher education make developing a market model problematic. Those
characteristics may also complicate predictions about the production
of public and private goods through competitive markets in higher
education.
Gordon Winston (1997) found six key factors that limit the utility
of conceptualizing the contemporary provision of higher education in
a free market. The first three factors, as Henry Hansmann (1980)
initially pointed out, result from the fact that the higher education
arena has long been dominated by nonprofit production. Nor is that
dominance an anomaly or historical accident. Nonprofit institutions
have held a disproportionate share of enrollments and degrees pro-
duced throughout the 20th century (Clark, 1983; Goldin and Katz,
1998~.
Hansmann's three conditions also help to explain the success of
First, the production of higher education is
characterized by information asymmetries. That is, higher education
is a difficult commodity to assess in advance and often takes consid-
erable time to consume and evaluate. Further, producers of higher
education generally have more information about the product than do
the consumers. Given that the time required for a consumer to discover
and redress the shortcomings of a poorly or fraudulently delivered
education might be measured in years, that consumer is at considerable
risk of exploitation. Second, the nondistribution constraint inherent
in the nonprofit form protects the consumer from potential conse-
quences of information asymmetry and other moral hazards, as it
removes the possibility of profit serving as an incentive for producers
to exploit their customers. Winston also suggests that since they
operate under the nondistribution constraint, managers of nonprofits
have alternative, generally more altruistic goals than managers of for-
profits. Further, higher education provides benefits to society beyond
the gains to the individual student. Given that it is socially useful to
cultivate the maximum social benefit from higher education, the non-
distribution constraint allows any public investment to go directly to
production of social benefits and not to profit. When public invest-
ment is combined with direct public provision, in the case of public
nonprofit production, the public has the greatest control and influ-
ence over the production of social benefits through higher education
(fusser, 2000; Goldin and Katz, 1998~.
A third distinctive aspect of higher education production is that
both public and independent nonprofit institutions generate revenue
the nonprofit form.
BRIAN PUSSER
113
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from a variety of sources beyond what they charge directly for admis-
sion. Because higher education institutions receive commercial revenue,
tax revenue, and donations, they are appropriately characterized as
"donative commercial nonprofits" (Hansmann, 1980~. The mix of
subsidies allows nonprofit higher education in the United States to be
offered at a price far below its production cost (Winston, 1997, 1999~.
Winston estimated in 1996 that the average cost of a year of higher
education in all schools in the United States was approximately $12,000,
while the average price a student paid was just under $4,000. That
average subsidy of around $8,000 was dwarfed by the subsidies offered
at elite private institutions (Winston et al., 1998~. These subsidies
constitute a significant barrier to entry into the higher education arena.
A fourth limitation on conceptualizing the production of higher
education in a market model is related to the asymmetry problem, as it
has been noted that "the perfectly informed customer of economic
theory is nowhere to be seen" (Winston, 1997, p. 4~. Given the asymmetry
problems noted earlier, this suggests that reputation and institutional
history play a disproportionate role in consumer choice.
Two related factors also figure prominently here, the associative
goods condition and institutional heterogeneity. Winston suggests
that higher education is an associative good, and consequently one of
an institution's most powerful resources is its own student body. This
results in sharp competition between institutions for the most desir-
able students and between students wishing to attend those institu-
tions enrolling their most highly recruited peers. What this suggests
is that different institutions face quite different supply and demand
conditions, and the same is true for students with differing levels of
preparation and admissibility (Rothschild and White, 1993~.
Marginson and Considine (2000), Ehrenberg (2000), Oster (1997),
Slaughter and Leslie (1997), and others have built on the work of
Winston and Hansmann to conceptualize a competitive environment
of higher education composed of many different subcompetitions, based
on subsidy levels, selectivity, geography, mission, and the like. Similarly,
the internal allocation of resources in higher education institutions has
been shaped to a large degree by organizational history, culture, and
intent, as well as by competitive pressure (Marginson and Considine,
2000; Slaughter and Leslie, 1997~.
This array of factors points to the complexity of developing either
a production function or a theory of the firm for higher education
(Master, 1995; Winston, 1997~. However, over the past two decades
a quite useful body of research on the competitive responses of non-
profit institutions has emerged (Hansmann, 1980; Weisbrod, 1988;
James and Rose-Ackerman, 1986; Salamon, 1995) and is quite helpful
in understanding the contemporary higher education arena.
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HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
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The Nonprofit Form in Higher Education
For over 200 years, there have been publicly funded, publicly
regulated, degree-granting postsecondary institutions in the United
States. Perhaps more importantly, over the same period, there have
also been publicly incorporated institutions that have been publicly
funded and regulated, and they have become by far the dominant site
of postsecondary enrollment and the provision of postsecondary de-
grees. The public through the establishment of state nonprofit
public universities, the provision of public funds to nonprofit public
and independent institutions, and the establishment of accreditation
and oversight functions has long served as provider, subsidizer, and
regulator of American higher education.
Over time the provider role has been most significant, as at present
some 80 percent of those enrolled in de.gree-.grantin.g programs are
~ A, A, A, ~ A,
.. . . . .. .. . . . . , ~ . .. . ~ ~ ~ ~ ~
enrolled In public colleges and universities (golden and Katz, limb;
Hansmann, 1999~. Given that approximately 85 percent of postsecondary
enrollments are in public and independent nonprofit institutions, it is
clear that public and independent nonprofit provision is the defining
quality of the current system.
Public provision and finance of higher education, while not the
original model, has long been the norm. Expanding the capacity of
higher education has been a fundamental public project in the United
States for two centuries. While hardly a linear expansion, growth of
nonprofit higher education has been more steady than often suggested,
albeit punctuated by rapid expansion around the Morrill Act, the GI
Bill, and the Great Society reforms (Veysey, 1965; Hansen, 1991;
Kerr, 1994; Breneman, 1992; Cohen and Brawer, 1996~. The reasons
for the continued development of the nonprofit form in higher educa-
tion, despite the growth of market provision in many sectors of American
life over the past two centuries, goes well beyond the issues of infor-
mation asymmetry and nondistribution cited earlier. There are sig-
nificant advantages and public benefits that can arguably only be
generated by nonprofit provision. Powell and Clemens (1998) sug-
gest that as a unique model of association within the public sphere,
the nonprofit form itself is increasingly seen as a public good.
Nonprofit Provision and Finance
An analysis of the implications of demands for increased compe-
tition and market-like forms in higher education turns attention to
earlier research on nonprofit competition (Hansmann, 1980, 1999;
James and Rose-Ackerman, 1986; Weisbrod, 1988, 1998; Oster, 1997~.
In research on the role of the state in European higher education,
Henry Hansmann (1999) has drawn a useful distinction between "public
subsidy" and "public supply" of higher education and between "supply
side" subsidies and "demand" subsidies for the support of higher
education (p. 4~. These distinctions are useful for understanding the
changing provision of contemporary higher education.
BRIAN PUSSER
115
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PUBLIC SUPPLY AND PUBLIC SUBSIDY
Public supply refers to the provision of higher education in public
nonprofit institutions. Public subsidy refers to the allocation of public funds
to public or private, for-profit or nonprofit institutions. Public subsidies
may either be provided by state or federal entities to an institution as
direct institutional grants (supply side subsidies) or to students in the
form of grants, loans, tax credits, and the like (demand side subsidies)
that the student may use at any accredited institution. Of course,
public subsidies are most often used by students at public institutions.
Hansmann (1999), Oster (1997), and James (1998) point to various
trade-offs between public supply and public subsidy.
Benefits of Public Supply
The fundamental arguments for public supply are that it offers the
most direct utilization of public subsidies and that it is the organiza-
tional type best suited to the rapid expansion of higher education
(fusser, 2000; Hansmann, ~ Ivy.
^^^^ The argument for the benefit of
public provision coupled with public subsidy is twofold. First, where
education is provided in public institutions with public funds, the
public has the greatest influence over the institution and its activities.
Given the nonprofit status of public institutions, there is no diversion
of the public subsidy to profit; hence, more of the subsidy goes to the
production of preferred goods. Second, public higher education insti-
tutions can be rapidly built or expanded with public capital, while
independent nonprofit institutions more often lack incentives and financing
for such expansion (Oster, 1997~. A salient example of public expansion
is found in the history of public community colleges. The number of
U.S. community colleges doubled from 1920 to 1950 and doubled
again from 1950 to 1980. From a total of 8 community colleges at the
turn of the 20th century, by 1998 there were nearly 1,600 community
colleges (Phillippe, 1999~. The funding, authorization, coordination,
and control of this capacity building all required collaborative public
effort (Cohen and Brawer, 1996~. Public supply also provides the
most direct mechanism for the production of public goods and benefits
that would not be produced if consumer demand were insufficient to
generate private nonprofit or for-profit provision or if private provision
led to an undersupply of those goods and benefits. An example of
this would be federal initiatives to integrate public higher education in
the 1960s. Many of those initiatives were implemented through direct
government intervention in public institutions where direct consumer
demand had long been insufficient to effect change (Gaston, 2001~.
Benefits of Public Subsidy
A primary argument for public subsidies to students for the pur-
chase of higher education is that such subsidies may reduce underinvestment
116
HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
OCR for page 117
by reducing market constraints that prevent individuals from obtain-
ing financing for higher education (Weisbrod, 1998; James, 1998~.
Public subsidies also serve to minimize the possibility that students
will underconsume those forms of higher education that, while they
might be socially desirable, entail uncertain individual returns (Hansmann,
1999~.
The primary policy appeal of public subsidy is the belief that the
portability of financial aid increases consumer choice and institu-
tional efficiency (Friedman, 1962; Moe, 1996~. Using portable public
subsidies, students as consumers may spend state and federal grant
and loan funds at a variety of locations, including public and independent
nonprofits, as well as for-profit institutions. While public subsidies
do Rive legislators and other funders leverage over institutions, subsidy
· , en , ~ ~. , ~ r , ~ · r. , ,
Is not as effective as direct supply for generating specific outputs.
Portability dates to the Serviceman's Readjustment Act (GI Bill),
which financed entrance into higher education for 2 million returning
World War II veterans (Bound and Turner, 1999~. GI Bill grants for
tuition and living expenses were awarded to individuals rather than
institutions and served as a forerunner to the subsequent creation of
Guaranteed Student Loans and portable Fell grants in the Higher
Education Act of 1965 and subsequent amendments. It is not often
noted in contemporary higher education literature on market models
and choice that portability of public subsidies originated some 60
years ago and was extended fairly universally nearly 40 years ago. It
is also worth noting that the contemporary degree of enrollment choice
and competition in American higher education is unprecedented in
global higher education (Aronowitz, 2000~. However, there is little
empirical research to indicate that the choice provided by public sub-
sidies has increased efficiency and productivity or led to lower costs
of production. Given the increasing shift away from public supply, it
is useful to also consider the implications of that shift for the creation
of public and private goods.
, .
THE PUBLIC INTEREST AND PUBLIC GOODS IN
HIGHER EDUCATION
Higher education produces both collective (public) goods and private
goods (Marginson, 1997; Bowen, 1977~. Since the founding of the
colleges in colonial times, the public has had an interest in, and
contributed to, the production of public and private goods and services
through higher education. The Institute for Higher Education Policy
has refined an effective framework for delineating the various forms
of public and private goods generated by increased levels of higher
education. That framework sorts the outputs of higher education into
four categories: public economic benefits, private economic benefits,
public social benefits, and private social benefits (Institute for Higher
Education Policy FIHEP], 1998~.
BRIAN PUSSER
117
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A number of public economic benefits are generated as individuals
acquire higher levels of education. These include greater levels of
productivity, higher rates of consumer spending, increased tax revenues,
enhanced workforce preparation, and decreased public expenditures
for social services.
The list of private economic benefits that accrue to those with
higher levels of educational attainment includes generally higher rates
of employment and wages, increased levels of savings, increased labor
market mobility, and enhanced working conditions.
The public social benefits generated by increased education are
manifest in greater civic engagement, higher rates of voting, increased
charitable giving and community involvement, and lower public health
care costs. Bowen and Bok (1998) cite the production of a diverse
cohort of leaders as a key public social benefit, while Howard Bowen
points to the contributions of university basic research and public
service, the preservation of the cultural heritage of society, and the
reduction of inequality as central public benefits. He notes, "Education
has an advantage over other avenues toward equality such as graduated
taxes and public assistance because it can reduce the inequality of
what people are and what they can contribute, not merely of what they
get" (Bower, 1978, p. 12~.
Private social benefits that accrue to those with greater levels of
education include better health and greater longevity, increased leisure
time, and personal status, as well as access to better information for
personal decision making (IHEP, 1998~.
There are also significant interactions among these four categories.
Higher individual income is a private benefit that also creates a public
benefit higher tax revenues. A higher level of civic engagement, a
public benefit, in turn generates private benefits, as it enables indi-
viduals to live in more collegial communities.
Labaree has characterized the aggregate quality of public and private
benefits on the basis of three defining goals: democratic equality,
social efficiency, and social mobility. These three goals are readily
apparent in the contemporary higher education system. In the pursuit
of cultivating democratic equality, the higher education system con-
tributes to the production of such public social benefits as citizenship
development and increased equality. Social efficiency suggests that
collective investment is the way to reduce underinvestment in higher
education and produce a workforce appropriate for the contemporary
labor market. Labaree's third goal, social mobility, is the fundamental
driver of the production of private economic benefits. It suggests that
education is a private good that enables individuals to succeed in
social and economic competition. Labaree suggests that all three goals
are political goals and that production of public and private benefits is
mediated by political processes. In public policy discussions and
institutional analyses, it is increasingly the case that all three of these
goals are subsumed under the overarching mission of "economic devel-
opment." While higher education institutions have contributed to economic
118
HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
OCR for page 119
production to some degree since the founding of the colonial colleges,
today nearly all aspects of university mission are in some way linked
to local, state, and federal economic development (Marginson and
Considine, 2000; Slaughter and Leslie, 1997; University of California,
Office of the President [UCOP], 1996~.
The Market, Choice, and the Public Good
As evidenced by the quote from Thomas Jefferson at the begin-
ning of this chapter, the public good and the public benefits of higher
education have been discussed from nearly the founding of the country.
As policy makers face pressure to increase competition and adopt
market models for the organization and finance of higher education,
the emerging question is quite basic: What is the public role, and
what are the potential impacts of market approaches, on the contributions
of higher education to the public good? Given the current organization
of the higher education system, attention must also be directed to the
future of the nonprofit form in higher education in the United States.
The gains to higher education that market advocates foresee are
attributed to increased efficiency, driven by wider consumer choice.
Yet 30 years of consumer choice supported by the portability of financial
aid has done little to contain costs or limit tuition prices in higher
education. Nor is it clear that the intention of postwar public policy
has been to contain prices; rather, the effort seems to have been to
increase capacity and choice and preserve quality. Further reductions
in state block grant allocations will likely result in significant tuition
increases (Callan, 2001~. Although this may to some degree "level
the playing field" between public, independent, and for-profit institu-
tions, it may well also level up the price structure (Ehrenberg, 2000~.
While tuition at nonprofit independent institutions varies widely, for-
profit institutions on average are significantly more expensive than
public nonprofit institutions.
A number of researchers have predicted that increases in net cost
will reduce access to higher education by lower income and tradition-
ally underserved populations, as will a continuing shift from student
grants to student loans (Callan, 2001; McPherson and Schapiro, 1998~.
Price sensitivity and loan sensitivity are a dual-edged sword that we
do not yet have an effective grip on (Heller, 2001; Winston, Carbone,
and Lewis, 1998~. To the extent that market competition reduces
public subsidies and levels prices, that competition may well increase
stratification in the higher education system. The attention to the
market also obscures the importance of the retreat from existing sub-
sidies. While much has been written about the competition for public
resources and the inevitability of state funding declines, there has
been little speculation about what sort of education can be provided
without the subsidies.
As state direct support declines, remedial education and other
programs targeted to underprepared students may need to be funded
BRIAN PUSSER
119
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from tuition increases, essentially a tax on better prepared students.
Many other programs that are currently covered by state funds will
also need to be funded through tuition increases. This sort of redistri-
bution is increasingly unpopular at the state and federal levels, and
there is little reason to assume it will be any more appealing in the
long run at the institutional level. The decline in state support, the
increasing use of tax credits as part of federal support for higher
education, and the tilt from need-based to merit-based aid (Breneman,
2001) will likely further the divide in college-going between those
from higher and lower income strata.
There is also a great deal of uncertainty over how competition
affects educational quality. While there is a growing literature on the
educational outputs of contemporary degree-granting, for-profit insti-
tutions (Ruch, 2001; Raphael and Tobias, 1997), these institutions
constitute a very small fraction of the enrollments in postsecondary
education and many have focused on adult enrollment. The success
stories in this arena, the University of Phoenix and DeVry, offer fewer
majors and courses of study than many public four-year colleges and
universities. As one of the fastest growing institutional sectors in
postsecondary education, the for-profits' targeted approach may have
significant implications for public institutions attempting to compete
in an era of declining state support. Over time, the range of curricular
. · . . . -
cholces may well decrease, as prices increase.
A decline in access and affordability is also likely to reduce the
production of public and private social and economic benefits from
higher education. Reduced levels of overall college attainment will
lead to decreased civic engagement, charitable giving, and community
service. It predicts for increased rates of unemployment, incarceration,
and public health costs. While those who attain more years of postsecondary
education and those who attend more prestigious institutions will enjoy
greater social benefits and increased personal status, they may also be
required to navigate an increasingly polarized and problematic society,
as reduction in state support reduces social benefits and increases
social costs.
The Future of Nonprofit Postsecondary Education
Calls for market approaches to higher education do not necessarily
portend the end of the nonprofit form of provision. It is possible to
imagine, at the very least, the elite nonprofit institutions continuing as
a dominant form. In an environment of relatively equal funding for
nonprofit and for-profit providers, it is conceivable that the nondistribution
constraint may lead to higher quality education in the nonprofits and
continued demand for nonprofit institutions. It is also the case that
the divide between nonprofit and for-profit structure and process in
higher education is narrowing. Such entrepreneurial commercial activities
in nonprofit institutions as the provision of courses and degrees through
continuing education, the growth of auxiliary enterprises, and the creation
120
HIGHER EDUCATION, THE EMERGING MARKET, AND THE PUBLIC GOOD
OCR for page 121
of partnerships with corporations and venture capitalists are increas-
ing in every sector of the nonprofit education arena (fusser, 2000~.
A number of researchers in higher education have suggested potential
negative consequences to the growth in commercial enterprises (Slaughter
and Leslie, 1997; Marginson and Considine, 2000~. As one example,
it has been speculated that an increase in commercial enterprises may
draw organizational attention away from core mission activities and
require a "commercialization" of the managerial cohort. This in turn
may decrease expertise in the nonprofits' core mission functions (Oster,
1997; Weisbrod, 1998~.
Another significant issue is what the educational and social implications
might be of an expansion of the for-profit form. Is there anything
unique about the 21st century that has reduced the information asymmetries
and moral hazards that have historically constrained for-profit expansion?
It may be that better access to information through emerging tech-
nologies will increase consumer protection against exploitation in
both nonprofit and for-profit institutions, but those who are most
vulnerable to that exploitation also have the least access to informa-
tion technology (Gladieux and Swail, 1999~.
Preserving Higher Education's Contributions to the
Public Good
Perhaps the most salient question is how higher education's con-
tributions to the public good can be ensured if nonprofit public pro-
duction gives way to a for-profit market. The fundamental mission
of for-profit market production is to create private benefits for the
producers and their customers. The historical mission of nonprofit
production has been to create both public and private benefits. Public
and private nonprofit higher education institutions have been key
sites of access to leadership positions and greater civic involvement
for their graduates (Bowen and Bok, 1998~.
Nonprofit institutions
have been centers of public social and political efforts to achieve
integration and the equalization of access to education. It is not at all
clear that those goals can be realized through for-profit production.
Public goals for the creation of public goods have been most effec-
tively realized through direct public production of those goods.
The challenge before state, federal, and institutional leaders in
higher education is to respond to a turbulent political economic envi-
ronment while preserving the role of nonprofit and nonmarket provi-
sion of higher education in the service of the public good. The niche
market success of the new wave of for-profit providers and the shifts
to increasingly private funding of social welfare functions offer a
tempting course of action: increase market competition in higher edu-
cation. It may also be tempting to assume that competitive success at
the periphery offers a guide to transforming the core, particularly in
light of the plethora of calls urging that strategy. It isn't clear whether
market approaches will induce effective transformations in higher
A,
~ . .
A,
BRIAN PUSSER
121
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education, but they are likely to be popular. The adoption of market
initiatives may also produce expectations of greater choice, competi-
tion, and an increase in the public benefits from higher education. On
the basis of existing research and the historical record, those expecta-
tions may well be for a state of grace that, as Mr. Jefferson suggested,
never was and never will be.
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Representative terms from entire chapter:
nonprofit institutions
