Universities Won't Go Bankrupt, But They Might Lose Money

Moneybox
A blog about business and economics.
Dec. 26 2012 9:50 AM

Universities Won't Go Bankrupt, But They Might Lose Money

Clayton Christensen thinks we'll see "wholesale bankruptcies" over the next decade among traditional universities as they face competition from online offerings. Bryan Caplan says no way because "higher education is largely a form of signaling, not skill acquisition - and one of the traits that students signal is sheer conformity."

My thoughts on this begin with Tyler Cowen's point that large-scale bankruptcies among institutions of higher education seem unlikely simply as a matter of finances and law. Most colleges and universities have healthy balance sheets (think of all that real estate) and thus could survive even a catastrophic drop in revenue without being forced into any sort of bankruptcy process.

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But here's what I think Caplan is right about—we should think of there being two separate tracks, one about the development of online learning tools and one about the business model of traditional colleges and these things have only a tenuous relationship to one another. It's long been possible to buy some textbooks and try to teach yourself some material. When I wanted to learn the basics of economics, that's exactly what I did—read intro textbooks. Supplementing those textbooks with audio or video recordings has been possible since at least the 1980s given the technologies of the US Postal Service, the Walkman, and the VCR. The Internet and modern digital technology obviously represents something of an advance over that previous paradigm, but it's not an earth-shattering leap. It was possible for a determined and intelligent individual to teach himself lots of stuff in 1992 and it's a bit easier and cheaper now in 2012 and should be even easier and cheaper in 2022.

And that's all great. The falling real cost of teaching yourself something even as the price of "education" rises is a big deal. When I graduated college I didn't know how to do something as simple as make a tomato sauce. This week, I was able to cook a Christmas Eve dinner—roast leg of lamb, haricots verts with shallots, puréed cauliflower—for my parents and my in-laws all thanks to things cooking skills I learned on the Internet. As the Web gets better at teaching skills to people who want to learn, life will get better and better.

The ability of colleges to secure revenue from people to derive revenue from offering a four-year residential edutainment service to people aged 18-25 seems to me like a completely different question. Sidwell Friends costs $34,000 a year in tuition not because anyone thinks the education it provides is so incredibly valuable, but simply because there are enough families in the area who can afford that much. Affluent people need to spend their money on something, and spending it on their kids' education is more reasonable than draping themselves in diamonds. Nobody wants to drive to a party in a Rolls Royce and explain to their friends that they have such a fancy car because they sent Billy upstairs to watch web videos rather than shelling out for Princeton. I'm not sure the signaling/learning controversy is even the relevant frame for this dynamic. The big economic pressure on colleges right now is that median household income has been falling. Obviously if people get poorer and poorer they can't keep paying more and more for college. But online education is irrelevant to that dynamic, and conversely I don't think it's even slightly necessary for online education to "disrupt" incumbent colleges to make a valuable contribution to the world. People learn things outside a formal education setting all the time, and it's great that it's getting easier and cheaper to do so.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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