Why Does College Cost So Much?

The title of today’s entry sums up the question I’ve been trying to answer during Monday postings over the last several months. But it is also the title of one of the most intriguing books on the subject of the price of college: Robert B. Archibald and David H. Feldman’s Why Does College Cost So Much?

One set of answers to this question, summed up in last weeks’ review of the film Ivory Tower, place blame on colleges themselves which are spending wildly in order to compete with one another for top slots in school rankings, a competition which includes “investing” in not just the best (i.e., most expensive) professors and research facilities, but also in the fanciest and most luxurious living facilities. The need to raise funds and manage such expansion has caused an explosion in the size of costly administrations. And because the state has stepped back from earlier commitments to fund education, an astronomical rise in the price of college affects the Ivy League and state colleges and universities alike.

The notion that schools (or, more specifically, schools spending wastefully on things not needed to deliver a quality education) are behind the astronomical rise in college costs was also implied or explicitly stated in other books reviewed on this site, including The Faculty Lounges and My Freshman Year. And I expect to hear it repeated in many of the other books I’ll be reading over the summer since these notions seem to have hardened into conventional wisdom amongst the public and professionals alike.

Which makes Achibald and Feldman’s Why Does College Cost So Much? such an intriguing read since, according the economic theories they propose, the skyrocketing price for a year of tuition is the result of general economic principles – not incompetent administrators, greedy and lazy professors, irrational customers (students and families) willing to pay whatever schools charge, or any of the usual villains populating the conventional narrative.

The model the authors propose derives from an observation that while the cost of college has risen dramatically when compared to almost every other good and service sold in the US, the tuition price curve is strikingly similar to ones found in other industries such as dentistry and legal services. The near identical cost curves for these three industries (all of which rose gradually from the 40s through the 70s, flattened out in the 70s, then began their steep ascent in the 1980s) would imply that something similar about these fields (which are all services vs. products, delivered by highly-trained professionals to individuals or small groups) is behind their common pricing behavior.

A comparison between the cost of college and the cost of goods (like food and clothing – which has generally gone down during this same period), and the cost of services delivered by unskilled labor (such as haircuts, which have gone up but not nearly as steeply as have college and dentistry) provide important evidence that colleges belong in a certain category when analyzing cost and pricing behavior.

But if higher education (like dentistry) are craft services where the efficiencies we’ve seen in factory production over the last century are not easily applied, what can explain the rapid rise in costs of these boutique industries since the 1980s?

The answer the authors provide is technology, notably the computer technology that has revolutionized every field since the 80s. For while digital technology focused on manufacturing (in the form or robotics or the automated processes required for just-in-time manufacturing) tend to drive down the cost of producing goods, technologies specific to fields like medicine and education tends to increase, rather than reduce costs.

“Cost disease” is the term the authors use to describe the lag in efficiency between product- and service-based industries generally. In fields like medicine, for example, the invention of a new and expensive treatment or device that can detect or cure a disease is likely to be made part of a doctor’s offering, regardless of cost. In fact, a medical professional would be hugely irresponsible if he or she did not make such an expensive device, test or treatment available to their clients (i.e., patients). Similarly, new technologies tend to drive up the cost of higher education by adding new teaching techniques and research capabilities that schools use to expand their offerings and improve their service – not increase the efficiency of the teaching process.

An exception to their model – financial services – provides an interesting illustration of what technology-based efficiency improvements to higher education might look like. For financial services are also provided by highly skilled professionals (which should make them subject to “cost disease”). But unlike dentistry and higher ed, technology has remade the offerings of this industry, replacing one-on-one relationships with brokers and financial advisors with robust (and efficient with regard to the number of professionals required per customer) online-trading services.

For education to experience these same efficiencies, we would need to create new models that would similarly replace one-to-one or one-to-few relationships you see in classrooms with one-to-many relationships one sees in things like MOOCs. But as the authors point out in their pre-MOOC manifesto (anticipating the general reaction to MOOCs among educators), current online experiences designed to increase efficiency tend to decrease quality. And until that changes (assuming it ever does or can), technology will continue to be a driver of increased, vs. decreased, cost in higher education.

Once they have established their model, Archibald and Feldman don’t chicken out by proposing lame or half-hearted measures, but instead call for a dramatic overhaul of how the federal government funds education (effectively turning it into a common entitlement vs. a needs-based granting system), and replacing appropriations to state colleges and universities with funds provided directly to students – thus breaking the direct financial link between schools and legislatures.

These proposals have an elegance and simplicity to them, even if they assume that college costs are destined to rise (unless we experience another extended economic downturn, like we had in the 70s – a cure that would be worth than the cost-disease). That said, other economic theories make it difficult to immediately embrace the author’s foundational ideas, regardless of how compelling I found them.

To begin with, the application of Daniel Kahnaman and Amos Tversky’s theories of cognition to economic decision making shows that the rational actors that are at the basis of most economic theories are not all that rational. This is not just because emotion (in the form of competitiveness or greed) overwhelms reason, but because our cognitive wiring is not as sound as we might think it to be. Which means that those making decisions to spend more and more (admittedly to bring more and more) to college campuses might not be reasoning as rationally as they think they are (even if they can explain their decisions as purely reasonable choices).

And what about Clayton Christensen’s Disruption Theory which shows how established industries (such as computer manufacturers and educators) make completely reasonable decisions as they grow to meet the needs of existing customers, even if those decisions add up to overshooting what those customers ultimately need (and in the process creating un-served niches where competitors who can ultimately overwhelm them can gain a footing).

But even these objections don’t return us to a conventional wisdom that says if we just stop building new campus structures, rip out the rock walls, and return dining quality to the same level it was when I went to college in the 1980s, that costs can drop-back down to earlier levels of affordability. Why Does College Cost So Much? does establish the fact that the experience most of us had when we went to school is likely to continue to get more expensive in the future. But a trajectory leading to an $800,000 undergraduate degree still seems unsustainable, regardless of how economically logical it might be.