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Thursday, November 12, 2009

Productivity and the Business of Colleges and Universities

Before the modern era, increases in individual (and national) wealth were generally the result of conquest (or colonization which was much the same thing) with its resulting theft and pillage. Only occasionally - usually at millennial intervals or greater - did some form of productivity increase result in a major increase in wealth. Examples include the invention of agriculture, the wheel, and the domestication of animals capable of providing transportation and augmenting or replacing human muscle power in the performance of useful work.

Expectations, however, have changed since the beginning of the industrial age. Now, we believe that our standard of living should increase every year. That means that our incomes must increase faster than the cost of the goods and services that we consume. When it does not, we are disappointed and disgruntled.

War is now so destructive that little or no net gain can be expected. Theft is a career option for only a few - and not often profitable given the actual and opportunity costs of spending time in a prison cell. That leaves productivity improvements as the only way forward to increased national and individual wealth.

Not all sectors of the economy are equal when it comes to improvements in productivity. In general, manufacturing productivity (in terms of reductions in cost and improvements in quality) has improved at a more than respectable rate. Productivity in many service industries has barely changed.

College education is one of those service industries where productivity, measured in output per labor hour of input, is no better than it was fifty years ago. In fact, given the deterioration in the college's raw material - because so many freshmen are ill prepared - as well as the outright waste when students flunk out or drop out and fail to complete their courses of study, together with the time spent, usually by social "scientists" researching (and students learning about) matters of supreme triviality, it can reasonably be argued that educational productivity has actually declined since the end of World War II when, with the GI Bill, the era of mass college education began.

College professors, and all of the other support staff employed by Universities and Colleges, however, expect that their money incomes will increase every year by more than does the cost of the goods and services that they purchase.

The cost of a university education, as with all goods and services, increases at a rate that is expressed by the formula:

Rate of Increase in Education Cost = Rate of General Inflation - Increase in Productivity.

When productivity increases are suffiiently high, prices drop. That is why the laptop computer (four year old Lenovo ThinkPad running Windows XP with MS Office) on which this blog is being written cost about $1,000 in 2005. Its equivalent in 1982 (Osborne 1 running CPM with two 182K floppy disk drives using WordStar and SuperCalc) cost $2,000 which, after adjusting for inflation, is about $4,000 at 2005 prices. Far more capable machines are now being advertised for $500 or so.

So, given negative productivity, it can be no surprise that college costs are increasing at a significantly higher rate than inflation.

Colleges and Universities, then, if they are not to be priced out of business, must recognize that radical changes to their business model are needed. There are currently three streams of college education and only two of them, accounting for a minority of the students who are not undergoing remedial classes, require full time attendance at the place of learning:
  • The hard sciences - although not necessarily computer science - require extensive laboratory facilities as well as access to great minds.
  • The humanities also require a community of scholars.

Most of the rest of what passes for college level education is either remedial basics (Math, English language and writing), the white collar equivalent of a trade or technical school or a self indulgent wallowing in trivia.

With respect to this third last group, most of the teaching, and a great many of the examinations can be delivered remotely with no loss of quality but with the potential for great improvements in productivity and reductions in cost.

The 'what' and the 'how' are important but ultimately trivial.

The 'why' is critical. The community of scholars involved in history, philosophy, the arts, and the hard sciences (Physics, Chemistry, Geology, Astronomy, Biology and Neuroscience among others) will get us closer (with apologies to the late Douglas Adams - author of The Hitchhiker's Guide to the Galaxy) to an answer to life, the universe, and everything that may be more comprehensive and understandable than 42.

In summary, if the cost of attending Colleges and Universities is not to become so great that the customers (students) can no longer afford to buy buy the service, they will need to separate their business.

The first, and most important, business is discovery. While the benefits of discovery are real, they are often diffuse and sometimes realized far in the future. As a result, that part of the business will have to be funded by endowments, charities, and governments.

The second business is the creation of a population with the skills needed to prosper - or at least survive - in the modern economic and technological environment. Whether that should funded by business, the students, or government (on behalf of society in general) and in what proportion remains an open question. All of those groups gain benefits from an educated population.

Whatever Colleges and Universities chose to do, and nothing is not a viable option, they would be well advised to be aware of this still valid criticism made by Adam Smith over two hundred years ago:

The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or more properly speaking, for the ease of masters.

That is definitely a recipe for low productivity!

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