Education as a business – destructive policy, based on bad economics 


New Zealand could learn a lot from the mistakes of the United States, where the cost of a university education has soared, says Dr Damian Ruth.


By Dr Damian Ruth

The Tertiary Education Union has come out strongly against the Government’s proposed changes to the Education Act, which would allow private tertiary education providers equal access to Government funding. And there is a wealth of evidence to support its position.

New Zealand is not the first country to debate whether public funding of for-profit education can be justified. The UK’s Higher Education Bill has been criticised by the Financial Times’ chief economics commentator Martin Wolf. He points out in several FT columns why a market model for higher education is defective.

Education is an experience – purchasers don’t know what they are getting until after they have consumed it. Employers don’t know in advance the capabilities of graduates so they must rely on the reputation of provider. Given the major determinant of graduate capability is the quality of the students, it sets up a reinforcing spiral in which better gets better, poor can’t get to the top, and genuine competition is virtually impossible.

Higher performing providers charge more because they can, and poorer performing providers charge more because they have to use price as a quality signal, irrespective of actual quality. When institutions fail it is catastrophic – and the funding loss is carried by the taxpayer.

Markets are simply no good at creating human capital. The benefits of public funding for private education go one way (towards the profit-seeking enterprise). And the risks go the other (towards the taxpayer). This creates huge opportunities for irresponsible and corrupt providers. 

Dr Damian Ruth.


Lessons from America

The United States is already living with this reality. University of Rochester graduate Kevin Connell’s research into the crippling costs of higher education led to the publication of his book Degrees of Deception: America’s For-Profit Higher Education Fraud. His research has been described as uncovering “a politically dark corner of private enterprise” where “victims suffered dreams broken by greed”, “a compelling expose of scandal” and “a picture shockingly shabby” of “injustice and corruption”.

Since the 1990s, education in the United States has been in the ‘Wall Street era’, with corporate providers of higher education such as the Apollo Group, owners of the University of Phoenix, achieving high visibility. Connell demolishes the arguments of the system’s apologists with hard data.

We learn of misleading information and aggressive, abusive, exploitative and predatory recruitment practices. We learn how these institutions do not deliver what they promise. We also learn of deception about programme accreditation and job placement rates.

His work details how the for-profit sector fails to deliver tangible benefits and is consistently more expensive than the non-profit sector. This involves strategic misrepresentation of costs followed by predatory lending to students. Withdrawal rates in the for-profit sector are staggering. While students end up in debt for nothing, the sector enjoys massive profits.

Not surprisingly, there is conspiracy at Congressional level to keep the gravy boat afloat. It’s a big gravy boat – $6.3 billion of taxpayers’ money transferred directly as profit to holding companies overseeing for-profit colleges. This goes along with obscene levels of compensation for chief executives – Apollo Group’s chairman made more than $8.6 million  in 2009.

Lawrence Gerber, a historian of higher education in the United States has detailed how funding cuts to public education, along with calls for greater efficiencies and competition from for-profit institutions, have combined to undermine “the twin pillars of shared governance and academic freedom” - precisely the features that made the late 20th century American higher education system “the finest academic system in the world”. Turning academics into managerial employees and education into a business further marginalises the already marginalised. This affects women more than men.

Education is a social endeavor, not a business

The following view is held by many: “We are not developing education, we are destroying it and replacing it with an industry. Furthermore this industry is badly designed and bound to fail. Like all such systems it will fail in and of itself, and ultimately it will fail all of us, even those of us who appear in the short term to gain.” You would expect such commentary from a liberal in the arts and humanities. But Robert Frosch is a theoretical physicist and engineer, former NASA administrator and vice-president of General Motors, and he is lamenting the state of science education in the United States.

Education is a social endeavour, not a business. Wolf writes of the “wider social, political and cultural purposes of higher education” and points out that profit-seeking institutions have no incentive to pursue such aims. It is the fact that a university does not serve pure market objectives that makes it a university. The point is made and supported by research over and over again, throughout the world.

The research of Jean Dreze and Amartya Sen in India has shown that achievements in education and health are very poorly correlated with economic growth. Put simply: education for economic growth is, in the long run, self-defeating for a society.

The truth is, education based on market principles is fundamentally incoherent and cannot deliver. New Zealand is not so special that when we do what others countries have done we will get different results. When other countries have used bad economic theory and faulty social policy it has resulted in disaster; when we in New Zealand do it, we should expect the same. 

Dr Damian Ruth is a senior lecturer in Massey University’s School of Management.

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