University as Business, Students as Customers
‘Modernity comes with a price’


by Richard A. Posner

A number of colleges and universities have announced steep tuition increases for next year—much steeper than the current, very low, rate of inflation. They say the increases are needed because of a loss in value of university endowments heavily invested in common stock.

I am skeptical. A business firm chooses the price that maximizes its net revenues, irrespective of fluctuations in income; and increasingly the outlook of universities in the United States is indistinguishable from that of business. The rise in tuitions may reflect the fact that economic uncertainty increases the demand for education. The biggest cost of being in school is forgoing income from a job (a factor in graduate- and professional-school tuition); the poorer one’s job prospects, the more sense it makes to reallocate time from the job market to education, in order to make oneself more marketable.

The close economic similarities between the business and university sectors are often obscured by the fact that university faculties are dense with critics of capitalism. Further, enterprises that operate in the not-for-profit form are supposed to have motivations fundamentally different from those of for-profit enterprises, to justify their tax exemptions. But how realistic is that?

The American university sector is distinctive in being largely private in support and even more so in behavior; in contrast, almost all foreign universities are public. Even our state universities compete vigorously with one another and with private universities; they are, increasingly, only quasi-public. The University of Illinois at Urbana-Champaign—Illinois’s flagship public university—receives only 30 percent of its funding from the state.

What “not for profit” means in the world of higher education is simply that a university’s surplus of revenue over expenses does not go to shareholders but is added instead to endowment or invested in new projects—much as a surplus is used at a for-profit firm, especially one that doesn’t pay dividends.

Not-for-profit enterprises often compete as fiercely as
their business counterparts. Consider the universities’ competition for students. It might seem that a profit-maximizing university simply would charge the highest tuition the market would bear and then admit anyone willing to pay it. But this, in fact, would not maximize profits. For students, the market value of higher education depends significantly on the quality of their peers—as a signal of worth to potential employers and because students learn from one another and make valuable contacts for the future.

To increase the perceived quality of the education and the prestige of the institution (things valued by alumni and other potential donors and by those who grant research contracts), universities compete to attract professorial stars. The result is a great variance in faculty salaries, both among and within universities—and departments.

One thing stars negotiate for is a reduced teaching load. The slack is picked up by poorly paid graduate students and by non-tenure-track adjuncts with low salaries and no benefits. Some of the stars teach very little, and some do little research as well, instead moonlighting as commentators on events of the day in the popular media. One might think the university would fear damage to its trademark, but most of them treasure their celebrity academics. They advertise the university. The celebrity professor is an entertainer—though purists may question the appropriate ness of tax exemptions for universities that double as entertainment companies.

Ways in which universities make themselves attractive to students include soft majors, student evaluations of teachers, governance roles for students, elimination of required courses. Sky-high tuitions have caused universities to regard their students as customers rather than as kids requiring an intellectual challenge. Just as business firms sometimes collude to lessen the rigors of competition, universities collude to minimize the cost of athletes whom they recruit in order to stimulate alumni donations—so the best athletes often bypass higher education in order to take advantage of professional sports offers. And until they were stopped by the antitrust authorities, the Ivy League schools colluded to limit competition for the best students, by agreeing not to award scholarships on the basis of merit rather than of need—much as if business firms agreed not to give discounts to their best customers.

Major universities have become hundred-million-dollar enterprises, and they behave accordingly and are managed accordingly. Gone are the days when a university president was a retired scholar of note. Now presidents are former provosts (those that are not former Secretaries of the Treasury) and provosts are former deans, climbing the promotion ladder of academic bureaucracy.

The professionalization of the university is part of a broader trend, first identified by the German sociologist Max Weber, toward bringing an ever-greater range of human activities under the direction of rational principles. Almost everything nowadays is “rationalized”: businesslike, rule-bound, disenchanted. The loss of enchantment—of idealistic, romantic, charismatic, or otherwise “primitive” or unrealistic methods of coordinating human endeavor—is the source of incessant diatribes against the university’s loss of soul.

The loss is real, but we should not overlook the gains, which include wider access to higher education, the dismantling of many discriminatory and archaic practices, and increased breadth and sophistication in many fields of research. The university sector has modernized; but modernity comes with a price.

Richard A. Posner is a judge of the U.S. Court of Appeals for the Seventh Circuit and a senior lecturer at the University of Chicago Law School. His most recent book is Public Intellectuals: A Study of Decline (2001).

August 13, 2002

University as Business, Students as Customers
An article by Richard Posner on the increasing corporate posture of colleges and universities.

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