The publication of the long delayed and much leaked cassells report on third level financing is both welcome and depressing. It is welcome in that finally there is a clear and unambigious analysis of the financial mess in which the sector finds itself. It outlines clearly the contribution to economy and society that can be made by a well functioning and well resourced third level sector, and is blunt in the analysis of the need for immediate and ongoing resources. It is depressing in that it took nanoseconds for the old habits of irish policymaking, ideological biases and selective analyses, to emerge. It is also somewhat depressing that the underlying economic analysis of the sector is incomplete. That said, the report is peerless in its analysis of the problems and the immediate and longterm finanial and resource needs. Where I take some issue is with a fundemental and indeed perhaps unknowing assumption.
Despite what a casual glance at the newspapers might suggest, the report did not come down in favor of a loans scheme. It is a masterpiece of objectivity in that regard, laying out the pros and cons of the various schemes – fully funded free at use, a loans scheme or a continued mix as we have now but with increased state contribution. The report is very very clear that increased spending is required if the irish third level system is to have any hope of regaining lost ground, not to mind improving. All that is for debate if that is accepted, and let us not kid ourselves that that proposition is universally accepted, is who will pay. There remains in public discourse, online and in mainstream media, an antiintellectual chorus that deems investment by the state in third level a prima facia waste of money. Some of the strongest cheerleaders of this simplicio approach have morphed into lobbiests, others have thankfully gone underground, some have gone into politics, but they have not gone away. The Ghost of Jackie Lavin lingers.
Leaving aside the shrill voices of those already up the ladder who seek to not so much pull it up behind them as to burn it to the ground, or those in power who seem to have little understanding of the problem (yes, Brian Hayes, thats you) we can critique the report in one fundamental way. It commences from a perhaps unconscious assumption that third level ´education is a homogenous good´, and as such can be priced as one. It is however nothing of the sort.
The third level system is one which produces a number of different goods at the same time and from the same base set of inputs. Different goods and different types of goods need to be priced in different ways. Modern macroeconomics has been harshly criticised for its reliance on overly homogenous agglomerations of sectors. It is perhaps ironic that Stephen Kinsella, the Chairman of the HEA, is one of the people who is making the greatest strides in building up macroeconomic models from sensible microeconomic foundations where individual agents act in a recognisably real world fashion. Receiving this report I imagine Stephen noted the homogenizing assumptions. A deeper look at the foundations of the third level might allow us to create even more sensible macro financing decisions.
Economists are good at goods. At the most general level they classify goods on two continua – the extent to which they are rivalrous and the extent to which they are excludable. Rivalry means whether my consumption of the good prevents you from consuming it, and excludable means the extent to which possession or enjoyment of the good is tied to having paid for it. Thus most private goods are RE – rivalrous and excludable. If I buy an apple you cannot , and if I eat it you cannot. At the other end of the scale are pure public goods, NRNE, such as radio broadcasts or human knowledge – my knowing the works of Kant does not prevent you from so knowing. Intermediate versions are goods that are common goods, which are rivalrous and nonexcludable, RNE, like fishing stocks. Within limits anyone can go fish, but once harvested the fish is gone. Finally we have club goods, NRE, non rivalrous but excludable. These might include satellite TV – my viewing of a netflix program is not at your expense but does depend on my having a subscription. These issues blur a little at the edges – broadband might be a club type good but it can become closer to a private good if congestion is an issue and my enjoyment and use starts to impinge on yours, as an example.
Crucially there are well accepted pricing implications for these goods. Private goods are usually best delivered by a private market, public goods by the state as there are enormous incentives to free ride and overconsume, club goods can be provided by monopoly suppliers to the point where rivalry impinges, and common goods require potentially complex regulatory intervention.
I have written before on the types of goods produced in the modern university. I noted
normal goods tend to be consumed less as they become more expensive. It was this that led to the very laudable aim of increasing the participation rate of lower socioeconomic classes by abolishing university fees. The problem was that goods are rarely consumed in isolation. In this case the effect seems have backfired as the costs foregone by parents of were then transferred to grind schools and other approaches to boost points in the leaving cert, resulting in no real change. We can however have the other effect. In some cases we have what are called Veblen or Snob goods – as their price rises their consumption increases. Elite education is in some ways a Veblen good. A key characteristic of a Veblen good is that the possession of it confers status. Thus not all MBAs for example are the same – an MBA from an Ivy League school or INSEAD confers more status than any MBA from any institution in Ireland. – Then we can think of how consumption of good changes as income changes. Inferior goods are those whose consumption rises as income falls. One might consider some forms of online education an inferior good; if you cannot afford to attend college you can go online. This is not to say that these goods are inferior in a quality sense – the term is a technical one.
Third level produces at least the following goods. It produces education, increases in the stock of human intellectual prowess and ability, a better educated populace. This is a pure public good. It’s hard to exclude someone from the stock of knowledge and it’s not at all rivalrous. It produces certification, a statement that X knows Y or has the ability to do Z. This is perhaps a club good, as it is non rivalrous but is excludable – if you didnt go to college and pass exams you cannot avail of the certification. It produces integration or networking, whereby individuals can form long lasting bonds for future professional advancement, a club type good. It produces initiation, whereby a person is confirmed and initiated as being in a group from which will be drawn those that will earn more, a private good.. I have previously noted
a better-educated society is non-excludable; I can enjoy the benefits of the vast increase in human knowledge without paying for it. And it’s mostly non – rivalous. My enjoyment of the increase in knowledge doesn’t prevent you from so enjoying also. A well-educated society, which is one outcome of more university education, is a good which is somewhere between a common pool good and a public good. And herein lies the problem. Common pool goods tend to be over consumed and under produced. Think of overfishing or overgrazing on communal land. Public goods are generally overused also and are particularly subject to free riding. University based production of knowledge, which is then appropriated, and IP bound by private corporations is one example. This is usually quite legal, due to blurred legal lines in relation to ownership of such IP. If you think this is a trivial problem read this, and note the affiliations of the authors…
Recall that here we are talking about a mix of public, common and private goods produced by third level.We then have the issue that the goods produced by the third level do not conclude when one grgraduates. For the individual and for society they are experience and search and credence issues.. Experience goods are those whose real value becomes apparent ex post, only after they are purchased or consumed. Swimming lessons, or the purchase of insurance are examples here. This is in contrast to the regular type of good which is called a search good, and whose benefits can be fairly well known ex ante by diligent search. A new musical experience, a holiday in a resport, these can through crowd sourced reviews be fairly well pinned ex ante. But these also have of course experience elements. University education has elements of both of these types of goods. We can find out ex ante the job prospects for a degree class, we can seek out ex ante the average salaries of graduates, we can reflect on student experience surveys. But we can really only know how useful the degree is to us after we have taken it. That may take a lot of time. In fact it probably takes a lifetime. That there is a real issue is seen in the controversy around the comments by Paddy Cosgrove on TCD vs other degrees The question then is how to ‘price’ these goods. When we don’t have the full experience, we have a problem. The challenge for third level is that branding and full disclosure of relevant information on teaching quality, class contact, the human and developmental side of the education process that often remains opaque; this transforms a good from an experience to a search good. Search goods are inherently more subject to commercial pressure and to commoditization. This is exactly what elite universities don’t want, hence the perhaps unconscious efforts to keep much hidden from the potential consumer.
It may even be that the benefits of university education are so difficult to measure that the good moves from an experience to what is called a credence good. These are seen to be valuable because they are seen to be valuable. They are similar to the snob or Veblen good noted earlier. This arises because in the absence of any other information the only thing people have to go on is price. Credence goods are extremely hard to price. We become cynics, knowing the price of everything but the value of nothing. A high price is seen as information that this must be valuable and valued (by someone…somewhere). The experience of the fee deregulation in the UK universities sector holds a warning. Where there is a lack of effective regulation the cost to the consumer of these goods converges as between high and low quality. The producers of lower quality goods overcharge as first no consumer knows the true value, second there is lack of regulation to force information flow and third the good has the characteristic that price is the only signal. The existence of competitive pressures acts to cap the price charged by the high quality producer. Thus, every university in the UK, more or less, charges the same price for its undergraduate education.
The demand for experience goods tend to be less responsive to price changes than might be thought thus rewarding incumbents.. Some recent work suggests that market approaches to delivering credence goods may not give good outcomes, and in fact can result in a much more costly delivery. Fraud and misstatement of quality also increases under price driven competitive delivery of credence goods. Thus pushing to a greater degree of market and private involvement in university research and degree delivery may not be a good idea.
To summarize : the report is excellent in its analysis of the problems, and in its comparison of the main funding models. It is perhaps deficient in its probing into the nature of what is to be funded, with the implication that the three main models of fundiung are perforce presented as three equally possible alternatives. But that which is being produced is not a homogenous good and thus a single solution may well be impossible.
All of these different types of goods being produced require different approaches to pricing and to funding therefore. However, with the exception of the initiation element, there is no underlying economic reason to have this done by private individual market pricing, in fact the opposite. A student loan system is predicated on the basis that the student is a customer of a private investment good and as such it is a case of ensuring that they can seperate the funding from the investment decision. But in the case of the private good element private payment is already taken, graduates earning significantly more across the spectrum than non graduates and thus paying more tax. The common pool and public good elements , the credence-experience nature of the goods being produced , all these suggest great caution should be taken in any moves towards a more market orientation in pricing. The underlying economic logic of what third level produces is in fact more towards increased public provision via the free to use or upping existing state provision approaches. This leaves aside the major practical issues involved in a loans scheme, particularily in a mobile graduate population. In short, there is no logic other than ideological to a generalised student loans system.
A greatly expanded version of a column in the Irish Examiner, 18 July 2016.