Thinking Like an Economist

If you have studied economics, you may be familiar with Frederic Bastiat’s famous essay on “the broken window fallacy.” In it, Bastiat (a Frenchman who lived from 1801 to 1850) explains that a good economist takes account of not only the seen, but also the unseen. That is, a good economist thinks about not only the immediate and readily apparent results of action, but also about its long-run, unplanned, and (often) undesired results.

James Stanfield is executive secretary of the E. G. West Centre, housed at Newcastle University, which bills itself as the only research institution in the United Kingdom dedicated to “understanding the role of choice, competition, and entrepreneurship” in education. He has recently written a compact, accessible book The Broken University. Applying Bastiat’s admonition to contemplate the unseen, Stanfield concludes that higher education in Britain is a bad bargain for society. Its costs are higher and its benefits are lower than people usually believe.

As I read the book, I found it impossible not to see strong parallels between higher education in Britain and higher education in America.

First, there’s the ubiquitous, glowing rhetoric about the importance of the higher education establishment. Stanfield quotes from a British report on the impact of universities. They’re said to “unlock the talents of students; promote shared values; extend opportunities to an increasingly wide range of people; drive local and national economic growth; provide a highly skilled workforce; create innovate, world beating produces and services; create jobs; and support communities.”

That sounds exactly like the pitch that is made on behalf of colleges and universities in the U.S. Stanfield shows that the claims are overwrought.

Consider the argument that universities are a vital part of the economy because the money they spend economically supports their communities. It’s unquestionably true that in Britain (as here and everywhere else) universities create many jobs and pump lots of money into their localities. That supposedly makes them a key “investment” and one of the most valuable sectors of the economy.

Stanfield retorts that such thinking is an instance of ignoring the unseen. All the higher ed spending merely transfers resources; money has been taxed away from some people (taxpaying individuals and firms) and devoted by politicians to higher education. It’s foolish to look only at the benefits of that spending without considering the loss of value to those who were taxed and the benefits that would have accrued if they had been able to spend the money on their own purposes.

University research is another example showing the similarities between the sales pitch for higher ed in Britain and America. On both sides of the Atlantic, proponents of heavy spending on universities for research activities like to say that the societal benefits are huge. If it weren’t for governmental support, there would be much less research and therefore much less innovation and progress.  Allegedly, the business community would under-fund research on its own, so the government needs to step in.

That’s more bad economic thinking, Stanfield says. If it weren’t for the taxes they have to pay to support public universities, business firms would have much more money with which they could conduct research (or do other things regarded as more beneficial). Furthermore, the sort of research done by professors is often of little or no benefit to anyone.

He gives a humorous example of a research study on management consulting firms. “Successful management consultancy companies are being taxed to help fund university-based academics carry out research, the sole purpose of which is to find out if any further academic research is required to help management consultancy companies improve how they manage their business—a subject in which management consultancies themselves are supposed to excel!”

All right, there is some university research that is useless, defenders may say, but what about deep, scientific research? We need government support for that, don’t we?

No, we don’t, Stanfield maintains. He cites Professor Terence Kealey’s book The Economic Laws of Scientific Research (which I reviewed here) to argue that there is no “market failure” when it comes to scientific research. At best, subsidizing university research efforts  substitutes for private funding for such research. At worst, it wastes money because professors are apt to put their efforts into work that is personally satisfying and financially rewarding (think of “global warming” research) rather than work that most needs to be done.

Another good illustration of the need to think beyond the immediate and obvious is the question of student tuition. In Britain, low tuition for students is even a more heated issue than in the U.S. The Labour Party absolutely demonizes anyone who favors making students pay more for college; the Tories and Liberal Democrats are very timorous about suggesting tuition increases. What is seen here is the fact that increasing tuition could price some students out of going to college.

What is not seen is the impact of drawing in students with a heavily subsidized product. Low tuition will get large numbers to enroll, but it lowers their engagement with their academic work. As with other things in life, if you don’t have much at stake in an activity, you’re apt to put in minimal effort. If students and their families paid more of the cost of college, there would no doubt be less of the “beer and circus” atmosphere that pervades many campuses.

Stanfield is also right on target with his argument that credential inflation (“qualification inflation” is his term) is a large but mostly unseen cost of the crusade to process the greatest number of young people through college. In a passage that perfectly describes our experience in the U.S., he writes,

(C)ompanies began to use the degree as a crude screening device and would eliminate all candidates applying for a job without a degree in order to narrow the field and save on recruitment costs. As the number of graduates grew, companies began to advertise an increasing number of jobs as ‘graduate only,’ including jobs previously open to non-graduates. Again, this provided further incentive to take advantage of the free or highly-subsidized university education, as a degree was now promoted as a passport to future employment.

The Broken University is loaded with excellent insights into the many ways government intervention in the market for education has degraded and distorted postsecondary education.

A final note about Bastiat. He briefly attended college at age 17, but soon dropped out, never earning a degree. Somehow he managed to develop his superb thinking and writing abilities without one.