The State of Higher Education: Part 2

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Introduction

In my last post on education, I talked about some of my frustrations with the state of American universities. In essence, I’ve come to believe that the university system is utterly, and potentially irreparably, broken. In the past thirty years, the cost of tuition has increased at a faster rate than any other good or service in the US, including health care. Student debt currently exceeds one trillion dollars, more than both credit card debt and auto loan debt. Yet, despite the massive increases in cost, the returns on a college education have never been more in question. After all, as I mentioned in my previous post, if information is free and widely available on the internet, then what are students really paying for?

A Shifting Economy

My conclusion is that students (or their parents more specifically) are primarily paying for the brand name that gets stamped on their resume. By having the word “Harvard” on your resume, you are signaling to employers that you are exceptional because you were one of the lucky few that passed through Harvard’s rigorous applications process.

This process makes sense when the market is dominated by jobs that primarily require only general intelligence. If a student can get into Harvard and do relatively well there among his or her peers, it’s usually safe to conclude that the student is generally smart and at least relatively hard-working. For a job that requires general intelligence, like a management consultant, the candidate is a safe bet.

However, in a skill-based economy, this structure makes very little sense. Imagine, for instance, that you had two candidates to be an auto mechanic. One candidate studied Economics at Harvard and the other candidate spent the last four years studying how to be a car mechanic and could show you the specific cars he had worked on. In this case, the right choice seems obvious.

This is important because we are in the midst of transitioning into a skill-based economy. The best example of this is the enormous demand for software engineers, data scientists, and UI/UX designers. All three of these professions require more than just general intelligence, they require you to develop a skill over time.

So what does this have to do with American higher education?

This is significant because suddenly having a reputable school at the top of your resume is dramatically less important for employers. As this Economist article shows, “what you study matters far more than where you study it”.

Incentives

This poses a fundamental problem for universities because they haven’t had much of an incentive to actually provide the highest caliber education to their students. Instead, the highest ranking university officials are incentivized to improve their school’s reputation, primarily by competing in the annual rankings for best American universities.

The metrics that these ratings systems use, however, have little or nothing to do with learning. Instead, they use criteria like academic reputation, employer reputation, student-to-faculty ratio, and citations per faculty. These criteria are, at best, only tangentially related to student learning. In fact, some of these criteria may even be detrimental to it. (I would argue that this is likely the case specifically for citations per faculty, which will be explored in a moment). These arbitrary criteria also incentivize increased spending and gaming the system.

This is where we start to understand the fundamental misalignment of incentives between universities and their students. Instead of being motivating to invest in new technology and hire the best teachers, universities are motivated to improve their brand by decreasing acceptance rates, increasing prices to signal their “prestige”, and building luxurious campuses.

This also creates a misalignment of incentives between the professors and their students. This makes sense once you consider the fact that universities are ranked based on the academic output of their professors. To spur this output, universities primarily promote and give tenure to professors based on their academic work, not on their ability to teach their students. For this reason, it makes sense that professors would prioritize their research over preparing more thoroughly for their next lecture or spending more time with their students. (Note: I’m not suggesting this applies to all professors, I’m merely acknowledging their external incentives.)

Conclusion

I will finish this piece in the same manner as my last post on education: by considering a growing alternative to higher education — private education tech companies. These companies suffer from non of these misaligned incentives that have been discussed above. Instead, they are in competition with one another to create the best quality content, hire the best teachers, and provide it at the lowest cost. For this reason, they are directly incentivized to provide the highest caliber education possible to their students.

In my next post, I will consider some exciting predictions for the future of higher education.

1 Claudio Munoz. “The Attack of the MOOCSs.” Illustration. July 20, 2013. From The Economist. http://www.economist.com/news/business/21582001-army-new-online-courses-scaring-wits-out-traditional-universities-can-they (accessed September 17, 2014).

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