Volkswagen or Rolls Royce? Both do the same thing...

The Chronicle of Higher Education reported that rising college costs are negatively affecting public opinion of American higher education.  These concerns are likely to be exacerbated by the volatile fluctuations of world securities and stock exchanges that rippled around the globe this past week.  Parents and students are likely to question the value of a baccalaureate or graduate degree where the costs of attaining these qualifications are high and the markets do not seem to have settled at all since 2008.  As costs continue to rise and families face uncertain economic times it is reasonable to ask whether colleges and universities can do more to reduce costs while improving learning outcomes and degree productivity.  This weeks entry examines the college cost disease theory and asks whether anything can be done to promote broader and deeper student learning with greater access.

A pair of Bills (Baumol and Bowen) authored the theory of cost disease in an attempt to understand why certain industries are unable to achieve lower costs relative to other sectors of the economy.  Baumol, Blackman, and Wolff (1985) found that technological innovations reduce production costs and consumer price points, but only insofar as the human element of production is either absent or held to a minimum.  New technologies tend to have large upfront costs, but these costs also decrease over time.  Thus, the savings from new technologies accrue over time as costs decrease relative to increased revenues.  Think Henry Ford and the assembly line innovation.  However, these cost savings can disappear over time and the activity becomes stagnant as human labor components hold steady or increase.  "As the stagnant component must come to dominate the activity's budget, its output cost and price must approach those of its stagnant component, and therefore have to rise, succumbing to the cost disease, " explains Baumol, Blackman, and Wolff (p. 808).

In other words, technological advances that promote efficient use of resources are limited to the productivity of other components.  For higher education a primary limiting factor is the very structure of instruction itself.  Faculty are the primary "producers" of postsecondary instruction.  Classrooms are temples wherein faculty impart their esoteric knowledge to students via lecture, powerpoint, research papers, and examinations.  Faculty salaries are fixed costs.  That is, you have to pay your faculty or you'll no longer be in business as a school.  Thus, faculty are crucial to the formal activity of teaching at postsecondary institutions.   The cost disease of higher education arises from 1) dependence upon faculty to produce instruction; and 2) the lack of technological innovations for producing equal or greater measures of instruction.  According to Baumol (1993), "The services that have been infected by the cost disease are precisely those in which the human touch is crucial" (p. 19).

Part of the problem for higher education is that change occurs slowly in service industries.  In production industries like automotive manufacturing, processes that can be automated have been automated.  Except for a small handful of luxury automakers like Ferrari and Rolls Royce all mass producers have automated as many segments of their production lines for which technology provides an answer.  The result of such automation is a mass produced product available for a lower price than the handmade luxury product.  The problem for higher education is that world wide demand has skyrocketed since the 1970s, but the production techniques have changed very little.  Baumol (1993) speculated that were "the pupil-teacher ratio [to remain] constant, so that crude productivity growth per teacher-hour is zero, then a 3 percent rise in nominal teacher salaries (or any growth at all in those salaries, for that matter) will lead to a commensurate rise in cost per pupil" (p. 21). This model suggests that as faculty salaries rise to adjust cost-of-living increases so to must the numbers of students in any given classroom.  So, the cost disease of higher education arises from the human production component.

Combatting the cost disease requires institutions of higher education to meet product demands at a sustainable price point.  Technological advances have long been touted as sources of efficiency for instruction and learning.  Massy and Zemsky offer an optimistic outlook on how the internet and network computer technology can be harnessed to foster new levels of academic productivity at lower costs.  Their assessment was recently echoed by Kamenetz (2010) who argues that the internet has unbundled learning from instruction by making information broadly available at fraction of the cost.  As I argued last week, we need to change our assumptions of value in higher education.  The scarcity of seats at a school is the current metric, but it is failing.  We need to shift from an exchange value to a use value.  Thus, leaner institutions will produce graduates that can do what the bigger, more expensive elite schools can do, but in larger numbers.  Part of the strategy for public and smaller, less-selective private schools will be to increase the numbers of programs and courses offered online while also adapting current pedagogies or creating novel ones altogether.

Meyer's (2005) model for planning for cost-efficient online programs identifies three elements (development, delivery, administration) and seven factors (students, faculty, other staff, course design, content, infrastructure, and policy).  The gist of Meyer's model is to get schools to design online programs that are efficient and produce learning consistent with a given educational mission.  Meyer concedes that whatever efficiencies accrue from promoting online education hinges upon "all of the decisions an institution makes in each cell of the framework"  (p. 29).  In other words, schools will need to decide whether they want to make Volkswagens or Roll Royces.  Reluctance to accept that change is necessary will be met with increased costs that students and their families will have to pay for.  Online programs can be designed to facilitate student learning at less cost than brick-and-mortar.  Does everyone need a Rolls Royce when a Volkswagen will do the job?

Baumol, W. J., Blackman, S. A. B., & Wolff, E. N. (1983).  Unbalanced growth revisited: Asymptotic stagnancy and new evidence.  The American Economic Review, 75(4), 806-817.

Baumol, W. J. (1993).  Health care, education, and the cost disease: A looming crisis for public choice.  Public Choice, 77(1), 17-28.

Kamenetz, A. (2010). DIY U: Edupunks, edupreneurs, and the coming transformation of higher education.  White River Junction, VI: Chelsea Green Publishing. 

Meyer, K. A. (2005).  Planning for cost-efficiencies in online learning.  Planning for Higher Education,       33(3), 19-30.


Learners first, students always!