Alexander Bowen: Time to free higher education from the grip of ‘lemon socialism’

Alexander Bowen is an MPP-MIA student at SciencesPo Paris and St Gallen specialising in public health, and a policy fellow at a British think tank.

Do an undergraduate economics course and in week three or four of the first year, one paper will come up. Akerlof’s Market for Lemons – with 48,000 citations it’s just about the foundational paper in the discipline in part because its message is quite simple.

In a market where only one party can accurately assess the quality of what’s being sold, the party with that information will take advantage of the other, and, over time the abused party knowing it’s going to be taken advantage of, will cease to participate in the market at all.

Akerlof was writing about the used car market and how, like in the classic Matilda film, the beat-down broken cut-and-shut cars (the ‘lemons’) would dominate.

Nowadays we have largely fixed the used car issue – but there remains a market for lemons and it is in a field few expect though one the guardian has successfully identified.

There are 298 Guardian articles on the topic of markets in higher education – all broadly the same moaning with broadly the same complaints.

‘Neoliberalism’, or whatever buzzword the sociology department has provided on a given day, has destroyed the university. Students don’t care anymore. Staff are being mistreated. Not enough people are taking History or English degrees (for some reason something the Guardian’s journalists seem to care disproportionately about). They all argue then that a market has destroyed the sector and they’re all wrong.

The market isn’t the problem – the fact it’s designed to subsidise lemons is. What do I mean?

The classic problem of information asymmetries identified by Akerlof couldn’t be more present than in HE.

Universities know what they offer in terms of class size or contact time, universities know graduate market outcomes, and universities know more or less whether a graduate will ever get a net benefit from what has been purchased. An A-Level student though knows no such thing – they cannot assess in any meaningful way the quality of what they are purchasing before they have purchased it.

In markets there are meant to be trends towards quality, yet in the current HE model that cannot exist given nobody can actually judge what quality is. My friend who studied English Literature and had at one point 2 hours of contact time a week could never have reasonably been expected to know that she was paying to be left alone – and so long as that’s the case we have a non-functioning market.

That inability to assess quality has had a second-order effect of creating proxy assessment tools, particularly for employers, and ones that are ruinous too. Go on LinkedIn and look at graduate jobs and you will see exactly what proxies have been developed – Russell Group, STEM, 2;1 or above only. That is to say a collection of universities that are largely arbitrary (being ‘research intensive’ having zero effect on actual skills transmitted), a collection of subjects that whilst certainly useful often bear little relevance to the role being advertised, and a degree classification that automatically makes the bottom third of graduates surplus-labour. When informed decisions can’t be made, rationalisations are, and those rationalisations can be destructive.

Worst of all there’s zero incentive for anyone to seek to inform their rationalisations.

Neither the seller (the university), the buyer (the student), or the repurchaser (the employer), bear any risk. It’s all held by the financier (the government). A university whose output is trash will still reap their £9,535 a year, a student whose degree is trash will never repay anything, and the employer can simply not participate.

There is an incentive system then with zero positive incentives where if anything, given subsidies follow bad choices, and the worse the choice the more money follows it, the incentives that do exist are negative. Pick Event Management, repay nothing, pick Law or Economics and subsidise everyone.

A market where the government picks up the tab whenever something goes wrong isn’t a market – it’s lemon socialism.

What the sector needs then is the same thing Eastern Europeans needed to liberate themselves from their own socialisms – shock therapy or more diplomatically ‘market completion’. What does that look like?

To start with it means fixing a financing regime that insulates everyone but the payer and that means a whole lot less government. A template for what this looks like already exists – the Income Share Agreement. Put simply it means universities setting their own fees, and universities not taxpayers borrowing the money that is lent to students, and students repaying based on individualised terms. Pick a degree with a low return on investment and you’ll pay back the principal just like anyone else, no subsidies for ‘unsuccess’. It means tying university finances into the success of their students too – if your degrees don’t add value, you’ll experience a funding freeze. It means the market, not the state-butcher culling mickey mouse.

Alongside fixing the finances, a dozen other corrective mechanisms ought to be put in place.

French style VAEs (the Validation des Acquis de l’Expérience) where degrees can be granted based on validating work experience not just passing an open book exam would be a good starting point. Liberating the information universities already have would be even better – not just mandatory disclosure buried away in a website but displayed on every pamphlet and every web-page.

Henry Hill’s suggestion for a graduate tax paid for by employers remains a good one too – where degrees are about signalling and skills then the people benefitting from the signalling (the arbitrary competence proxy) and the skills should pay for it. Charging employers say 1.25pp per year of higher education required could help remove the most arbitrary work requirements whilst co-financing education. Tying it into a degree-apprenticeship program where businesses could get that tax waived if they create said apprenticeships would be a great way to build on the success of the existing apprenticeship levy.

There’s even one market mechanism you could introduce that the 298 Guardian columnists might just like – breaking up the cartel driving down the wages of academics.

The Universities & Colleges Employers Association that works to harmonise pay across the sector – and punish universities that deviate from their effort to set national pay scales – ought to be treated for what it is. A cartel suppressing their employee’s wages that in any other sector would be illegal, and in the brave new world of higher education just being any other sector that rule should apply here.

Whilst they might not like it, more market might just be their saviour.