ROB TOUTKOUSHIAN Introduction One of the most interesting and unique features of the field of higher education to me is that it brings together academics with a wide diversity of interests, backgrounds, and talents. It is not unusual to find professors in departments of higher education who have been trained in fields outside of higher education, such as sociology, history, and political science. I believe that this diversity of perspectives is needed in higher education to address the complex problems that arise in our field. For example, if one is interested in how to improve access to higher education, then one must draw from theories and perspectives in sociology, economics, history, and political science, in order to fully understand the topic. Although enriching, this diversity also brings with it the challenge of how to effectively communicate with each other about the unique perspectives from our fields of study. Each academic discipline has its own set of knowledge, methods, and theories that tend to be understood by most within that discipline. What may be considered general knowledge among historians, however, is probably foreign to higher education professors who were trained in fields such as political science. In my case, I was trained as an economist, having received a Ph.D. in economics from Indiana University in 1991. Since that time, I have devoted my career to exploring the many ways in which economic theories, models, and concepts can be used to help understand issues in higher education. Much of my work in higher education, for example, has focused on measuring the level of pay disparity between male and female faculty. In order to do this, I rely on models from the field of labor economics to specify how personal and organizational factors should influence faculty compensation. I have also explored questions about how states provide funding for K-12 and higher education, how expenditures are influenced by production decisions at colleges, and how students form their demand for higher education. Each time, I employed economic models and reasoning to help frame my research. I am currently writing a book (together with Michael Paulsen from the University of Iowa) on the economics and finance of higher education (to be published by Springer). Our hope is that the book will help narrow the language barrier that often exists between economists and higher education faculty. The textbook is an extension of the volume that we edited for the series New Directions in Institutional Research on ways to apply economics to problems in institutional research (Toutkoushian & Paulsen, 2006). During my time in academia, I have noted that there is a considerable amount of misunderstanding about economics, particularly among the education community. Concepts such as the benefit of competitive (“free”) markets to society — taken as a given among most economists — were not only misunderstood among some education researchers but also severely criticized. Often these misperceptions have been used as justification for the exclusion of economic reasoning from higher education research. For example, in the 2008 presidential address to the members of the Comparative and International Education Society (CIES), Stephen Klees not only criticized economic reasoning but argued that the use of economics in education has led to significant problems: “I believe that as a result of neoliberal shaped globalization (economics) we have had more than a quarter century of public policies and private actions that have contributed to the further marginalization of certain individuals, groups, and nations, while privileging others” (Klees, 2008, p.317-318). This speech touched off a lively debate within the CIES as to the value of economic reasoning to education research (see, for example, Shafiq, 2008; Heynemann, 2008; and Baker, 2008). My goal in this essay is not to revisit this debate per se, but to provide an overview of the approach that economists use to examine problems relating to education. I then turn to several of the most common critiques that have been leveled against the use of economics in higher education. These critiques can be summarized as follows: (1) “Students are not rational as is assumed by economists”; (2) “Colleges do not try to maximize profits as economists assumed for firms”; and (3) “College pricing does not correspond to economic models”. Overview of Economic Reasoning Although economics departments are often housed in schools of business, the field can best be thought of as a social science because it focuses on understanding how decision makers (individuals and organizations) make choices. Most economic models are based on two general premises. The first is that all decision makers want to make the best out of their own situation. For example, an economist might begin by assuming that in making a decision about going to college, a student seeks to maximize his or her happiness (called “utility” by economists). Similarly, when making hiring decisions at a college or university, a college is assumed to be trying to maximize its prestige or reputation. The role of the economist is not to say what the decision maker should try to maximize, but rather to take this as a given and then proceed from there. In this way, economics is very non-prescriptive about behavior: all it really says is that a decision maker has some goal in mind and that he or she wants to try to work towards that goal. The second premise behind most economic models is that all decision makers have constraints that limit their ability to reach their ultimate goal or objective. These constraints occur because there are limited amounts of resources that can be used to reach their goals. Although money/income is an often-cited constraint for individuals and organizations, Gary Becker (1965) showed that another equally if not more important constraint for most decision makers is time. Decision makers must choose how to use their time between alternatives in much the same way that they choose how to spend their money between alternatives. Becker’s work was particularly important because it opened the door for economic reasoning to be applied to a much wider and richer range of problems. To an economist, there are several reasons why the field of higher education is ripe for economic analysis. First, there are many different decision makers who take part in our higher education system in one way or another. Students have to make decisions about the amount of education that they want to obtain, where to go to college, what to study, and whether to stay at an institution or transfer to another institution. Parents are also decision makers in that they take part in the decision process for their children. In each case, the choices about postsecondary education are influenced by constraints such as income/wealth and time, and thus can be framed using economic reasoning. Viewed in this way, the economic problem for the student becomes how to best use his or her limited time and money to acquire education in an effort to reach his or her goal. Faculty members are also decision makers in that they have to decide how to allocate their time among competing demands in teaching, research, and service. Because time is a fixed resource, an increase in the time that a professor spends in one activity, such as research, means that less time can be spent in another activity, such as teaching. State legislators must make decisions about the level of financial support to provide public colleges and universities, given the constraints that they have on tax receipts. College administrators also are decision makers in that they have to choose how to use an institution’s resources (financial and human capital) to best achieve their goals and objectives. Even though the goals and the constraints change, the economists’ way of approaching each decision maker’s problem is the same. Economics is also useful for addressing the question of how goods and services are produced and distributed in society. The primary mechanism advocated by economists for doing this is through a free and competitive market. A competitive market to an economist is the ultimate form of democracy in that buyers in the market get to “vote” with their dollars as to what should be made and who should get the final products and services. In this way, all of the individual decisions about what to buy and what not to buy send signals to sellers about what is most desired by those in society. Furthermore, with firms and organizations acting in their best interest, and consumers acting in their best interest, economists argue that the market model not only lets decision makers make the best out of their situation, but also society benefits as well by having resources used in an efficient way. However, economists have also noted that exceptions may exist when the good or service is either something that is freely available to everyone (“public good”), or its production leads to benefits or losses to others who do not use the good or service (“externalities”). In fact, an economic argument can be made that governments financially support higher education because its teaching and service activities lead to positive externalities for society, and its research activities are needed to produce public goods. Without some form of government intervention, the concern is that not enough research, teaching, and service activities would be produced by colleges, if the production decision was left solely to the competitive market. Criticisms of Economics of Higher Education In this section, I turn to three commonly-voiced criticisms about economics and why some feel that economic models and theories should not be applied to problems in higher education. These criticisms can usually be traced back to a misunderstanding about economic reasoning and how it can be used. Criticism #1: “Students are irrational.” The first criticism follows from the assumption used by economists in their models of individual behavior that consumers are rational. It is not hard, however, to look at the behavior of students in today’s high schools and college campuses and question whether or not they are acting in a rational manner. For example, suppose that a high-ability student decides to skip college and instead become a waiter. Was the student’s decision rational? Likewise, suppose that a student decides to enroll in a certain institution because the student union looked “cool,” despite the fact that he was admitted to another institution where the quality of education was better. To non-economists, such examples are evidence that students do not always make rational choices, and if economic models are based on this assumption, then surely economics is not a useful framework for helping us understand the college choice process. The above criticism follows from the different way in which economists and non-economists think of rationality. To an economist, all that is really required for an action to be rational is that the decision maker has a set of preferences and that he or she acts in accordance with these preferences. These preferences can and usually do vary considerably across individuals, which means that what might be a rational decision for one student would be an irrational decision for another student. This also means that someone with unusual preferences, such as a student who gets more enjoyment out of working as a waiter than from going to college, might be rational in deciding to skip college and work as a waiter. All economists are saying when they use the phrase “rational behavior” is that a person is acting in their own best interest as they perceive it. What makes this concept particularly challenging is that because we cannot observe a person’s preferences, we cannot determine whether a given action was rational or not. The tendency of many people is to therefore use their own preferences as a rule for judging whether or not a decision was rational. This makes sense because perhaps the only preferences we can truly observe are our own! However, if the person observes someone else making a decision that is different from what they would have done, the person cannot tell if the difference is due to irrational behavior or different preferences. There is also the tendency for people to equate a rational decision with a correct decision. The student who decides to skip college so that he can work as a waiter may have made what an economist would call a rational decision given his preferences at the time, but the decision could have been based on faulty or incomplete information. In fact, this is often the case because virtually every choice that is made involves some level of uncertainty and set of information. Or to put it another way, to an economist an action can be both rational and wrong at the same time. Taken together, it can be seen that the concept of rational behavior as used by economists is fairly weak and does not impose significant constraints on what is presumed about a decision maker’s behavior. Together with Stephen DesJardins, I explored this notion of rationality in higher education in more depth in a 2006 publication (DesJardins and Toutkoushian, 2005). Criticism #2: “Colleges do not try to maximize profits.” A second critique that has been leveled against the application of economics to the field of higher education is that colleges and universities behave in ways that are somehow different from other organizations. The model used by economists to describe how firms in the private sector make pricing and production decisions typically assumes that their goal or objective is to maximize profits. Such an assumption does not apply to most of the colleges and universities in the United States. Public institutions are by definition not-for-profit organizations, and the same is true for the majority of private institutions. Therefore, the argument is made by some that economic models of the theory of the firm are not very helpful in explaining how colleges and universities operate. Nonetheless, I would argue that there is still a lot that can be learned by applying economic concepts to examine how colleges and universities behave. First, colleges and universities can be thought of as having goals and objectives, even if they are not profit maximization per se. Several economists have suggested, for example, that colleges seek to maximize their prestige or reputation. Because economics deals with how decision makers can best achieve their goals whatever they might be — subject to their constraints, economic reasoning is still a useful framework to use to look at college behavior even if the goal of colleges and universities is not to maximize profits. Second, not-for- profit institutions such as public colleges still need to pay attention to their finances and operate in such a way that they raise sufficient revenues to cover their costs. Colleges typically engage in cost-cutting efforts and strategies to raise additional revenues that are similar to what is seen in the for-profit world. Third, colleges have customers in much the same way that for-profit enterprises have customers, and thus have to be concerned with the prices that they charge, the quality of their services, and how they compare relative to other suppliers of higher education services. Criticism #3: “College pricing doesn’t fit into economic models”. The final misperception that I will discuss here relates to university pricing. At first glance, the way in which prices for higher education are set in the marketplace does not make much sense to the typical consumer. Tuition and fees are, for the most part, very high: at some of the more selective private institutions in the United States can easily exceed $40,000 per year. Although public institutions charge substantially less per year in tuition and fees, they can still take up a significant amount of disposable income for families and require students to go into debt to pay for college. Even within public institutions, confusion exists about pricing because state residents are often charged one- third of the tuition and fees that non-resident students face, despite the fact that all students within the institution can take the same classes and benefit equally from the services that they receive. Imagine the outrage that would exist if Kohl’s charged non-state residents three times the price charged to state residents for a shirt! Adding even more to the confusion over pricing is that, across both public and private institutions, many students receive price discounts in the form of financial aid. Students and their families often have poor information about the true (net) price that they would have to pay if they were to attend a given institution. Economists are quick to point out, however, that the pricing of higher education may not be as mysterious as is thought at first glance. Some of the confusion is due to the fact that a substantial portion of the price of attending college is subsidized by various entities. The pricing relationship in higher education was described by Gordon Winston (1997) as follows: Price = Cost – Subsidy where Price = amount paid by students for their education, Cost = per-student expenditures that are needed to provide higher education services, and Subsidy = portion of per- student expenditures that is covered by entities such as federal and state governments, private donations, and endowment earnings. As noted earlier, economists might justify these subsidies as being necessary to help produce positive externalities and public goods for society. This pricing formula reveals a couple of important features about higher education. First, the price that is paid by students at even the most expensive colleges and universities in the United States is only a fraction of the per- student cost of providing their education. Admittedly, this may be of little comfort to parents when they write large checks for tuition to their children’s institutions! Second, the formula shows that rising tuition rates could be due to either rising costs of providing education, falling subsidies, or some combination of the two. The fact that prices in academia have been rising faster than inflation might therefore reflect rising costs and possible inefficiency, but could also be due to subsidies not keeping pace with costs. This is important because higher education critics often point to rising tuition as proof that colleges are inefficient, and yet such conclusions should also take into account what has happened with subsidies. Finally, economists have used cost-benefit analysis to show that the prices charged for higher education typically pale in comparison to the financial benefits that students experience from college. There is a sizable literature on the “return on education” in which economists seek to quantify the financial benefits to a student from investing his or her income (and time) in going to college. Summary I hope that this essay has provided some insight into the way in which economists think about the world in general, and higher education in particular. The field of higher education is a big tent, and there should be room for economists, sociologists, political scientists, and academics from many other disciplines to work together to address the many important problems that we are facing. Rather than find arguments for dismissing bodies of work that are different from our own, we should strive to see the value in alternative philosophies and approaches to research, and how to work together. This will require that we take the time to learn from each other, as well as conduct research along our traditional disciplinary lines, but (in economic lingo) I believe that the benefit of doing so will greatly exceed the cost. References Becker, G. (1965). A theory of the allocation of time. The Economic Journal, 75, 493-517. DesJardins, S., & Toutkoushian, R. (2005). Are students really rational? The development of rational thought and its application to student choice. In J. Smart (Ed.), Higher education: Handbook of theory and research, XX (pp.191-240). Great Britain: Springer. Heyneman, S. (2008). A Luta Continua: The Presidential Address of Steve Klees. Comparative & International Education Society Newsletter, Number 147. Klees, R. (2008). Reflections on theory, method, and practice in comparative and international education. Comparative Education Review, 52, 301-328. Toutkoushian, R. & Paulsen. M. (eds.) (2006). Applying Economics to Institutional Research. New Directions for Institutional Research, no. 132. San Francisco: Jossey-Bass. Shafiq, N. (2008). An Economist’s Response to Steven Klees’ 2008 CIES Presidential Address. Comparative & International Education Society Newsletter, Number 147. Winston, G. (1997). Why can’t a college be more like a firm? Change, September/October, 33-38. Robert Toutkoushian specializes in the application of economic theories and methods to problems in higher education. He has a Ph.D. in economics from Indiana University, and prior to joining the faculty at Indiana University, he worked as a research analyst at the University of Minnesota and as executive director of the Office of Policy Analysis at the University System of New Hampshire. Professor Toutkoushian has published nearly thirty studies in peer-reviewed journals on topics including faculty compensation, student demand for higher education, finance, and policy analysis. Finally, he served as president of AIR for 2009-10. He served as editor of the journal New Directions for Institutional Research from 2005 to 2010, is now the associate editor of the series Higher Education: Handbook of Theory and Research, and will become the new editor of Research in Higher Education beginning in January 2011. Type of News/Audience: 2010 IHE Report
