DL: Achilles Heel of the Education Cartel

The Coming Breakdown of the Academic Cartel
by Gary North
Higher education in the United States is a cartel. It is rarely discussed in these terms, but that is what it has been throughout most of the 20th century.

A cartel is an association of producers that jointly establishes certain output criteria for membership. The goal of the cartel is for all of its members to obtain net revenues above what would be possible if there were open competition, especially price competition. Members restrict output in order to gain high revenues per unit sold. The cartel's members raise their prices.

A cartel faces competition from members who cheat and from non-members who enter the market. This is why cartels that do not obtain protection from the State in restricting entry into a market eventually break down. Without State intervention, newcomers attract consumers by offering lower prices. Also, some cartel members cheat by secretly increasing their output, lowering prices, or both. The cartels' other members must then cut prices to retain customers. The cartel breaks down.

Whenever you find a cartel that has existed for several decades, begin a search for State intervention: civil sanctions placed on non-members who seek to enter the market through price competition. In the field of higher education, look for laws against the unaccredited use of certain words: college, university, B.A., M.A., Ph.D.

I have yet to see a history of the collegiate academic accreditation system in the United States. It would make a great Ph.D. dissertation topic for some free market economist. (Perhaps it has been written, and I have missed it.)

There is a Web site that lists the various collegiate accrediting associations: the Council for Higher Education Accreditation. The site also has a revealing page on Government Relations. The organization favors "voluntary enforcement," meaning self-policing by existing members, without additional regulations imposed by the U.S. Department of Education.

Economists might say that "voluntary enforcement" really means "government enforcement of existing regulations, especially against non-member interlopers, but with no new rules imposed on existing cartel members." (Except when analyzing the Federal Reserve System, economists say things like this.)

Recall that the chief goal of a cartel is to keep out price-competitive interlopers. In a document titled, HEA 98 – Summary of Accreditation Provisions, we read the following:

Quote:The President today signed into law the Higher Education Amendments of 1998 (HEA 98), as Public Law 105-244. The new law reauthorizes for five years the Higher Education Act, the basic framework for federal policies in higher education that includes the massive federal programs of student financial assistance. The new law retains current programs, provides some modest new initiatives, lowers borrowing costs to our students and authorizes small improvements in program funding.

With Federal money comes Federal regulation. This is nothing new. In every industry, those producers who are on the receiving end of this money can and do invoke a defense of cartel-defined standards in order to restrict entry by interlopers who might otherwise sell services to the public at lower prices. Restriction of entry through industry-policed "voluntary" standards, backed up by the threat of new civil laws if members do not obey the existing laws, is justified by the cartel's members in the name of both standards and the proper use of government money.

In higher education, government-enforced accreditation restricts the spread of new ideas, new methodologies, and above all, new technologies that enable producers to lower prices. This is how higher education has become uniformly secular, liberal, and mediocre: raising the cost of entry.

In this same report, there is a reference to something called "distance education."

Distance education programs will be assessed in accreditation under the same quality assurance criteria as other programs, and will not be subject to new and separate criteria. The new distance education demonstration program recognizes the role of voluntary accreditation.

What is distance education? Distance education is the Achilles heel of the education cartel's maintenance of control over higher education. It will be the battleground of higher education over the next two decades.

If the cartel loses this battle, it will lose control over the content and pricing of higher education.

The cartel is going to lose it. The reason: price competition beyond anything ever seen in higher education. A technological revolution is almost upon us.

Plastic Disks and Fiber Optics
Today, it is possible to put 50 hours of video lectures (small image), without compression technology, on a conventional CD-ROM. Use the new DVD technology, and you can put 400 hours of lectures on the disk without compression. A DVD player now costs under $200.

The typical student's college year involves about 450 lectures, 45 minutes each: 10 courses, 15 weeks, three lectures per week. Core academic courses are mandatory for all students, so a college can put one year's worth of freshman core courses onto a DVD disk that costs $2.50 to produce and mail to the student. That's with no compression. With today's low-cost compression technology, any department (history, biology, etc.) can put all of its courses on one disk.

With compression technology due out later this year, the typical college could put its entire curriculum on one disk – twenty or thirty different majors. The student's only expense then is textbooks, and a growing number of lower-division textbooks can be downloaded free of charge from the Web.

Say that you are a college professor. You write your textbook, put it on your college's CD-ROM, and get paid, say, $5 per sale as a royalty. The college gets $1. Is that a good deal for you? No printing costs, no inventory costs, no nothing. Just cash your checks. Trust me: it's a good deal. The student pays $6 per textbook that he "unlocks" on the disk. Cost saving for the student: about $45 per textbook, and maybe more.

We are talking marketing revolution here.

Technologically speaking, as of today, a college education no longer requires classrooms, lawns, huge administration buildings, air conditioning, heating, dormitories, library buildings (rarely used by most students anyway), massive institutional debt, and all the rest of the barriers to entry in setting up a college.

This means that small groups with odd-ball views are now able to set up their own colleges. Only the government-imposed licensing monopoly for issuing degrees will delay this process, but it won't succeed. Here's why.

Existing degree-granting colleges have already begun to start cutting prices for "distance learning." The others will have to follow. I estimate that the lower limit for tuition is around $2,500 a year. It may be less. Education can be conducted by CD-ROM and e-mail. The technology for conducting discussion groups is here but not yet cheap enough. It will be cheap within five years. The cost barrier to starting a college is about to fall dramatically.

I know of an accredited 80-year-old private college that charges $10,000 a year in tuition, and pays its full-time faculty members a pathetic $24,000 a year to teach 8 classes. It costs $15,000 to send a student there – room, board, tuition, books.

With digital education, this college could charge $2,500 a year, and pay its faculty members $2,000 of this. Divided among 10 teachers (10 courses) per academic year, this is $200 per course. A teacher who teaches 8 classes (24 semester units) of 35 students each could earn $56,000 a year – more than twice what the school now pays. Most of today's tuition money is going for overhead. Cut the overhead, and the faculty wins.

Could a teacher teach this way? Figure it out. He spends, at most, less than two hours in reading one midterm exam (10 minutes) and a final exam (20 minutes), plus two term papers (20 minutes each). In fact, very few teachers assign term papers these days. True-false and multiple choice exams can be corrected, with answers provided for missed questions, by existing e-mail programs: 100% electronic and instantaneous.

Once the instructor records his lectures on video, and writes up his weekly digital-graded exams and answers (which most teachers do not give these days), all he has to do is answer students' questions by e-mail. He has 280 students (35 x 8), times 2 hours, or 560 hours of work per year – not 2,000, which is what most professionals work. He will make $100 an hour ($56,000 divided by 560). If he spends 2 hours in e-mail per student (he won't have to), he will still make $50 per hour – and he will not be working year-round. If he is willing to teach twice as many classes by adding summer school and extra classes during the year, he can make $110,000 a year.

At $2,500 a year tuition, working adults will be pulled back into college because they do not have to move to the college. To rewrite the old slogan, "If Muhammed cannot go to the mountain, the mountain had better go to Muhammed. Soon."

The possibilities for education through the Internet will change the way we learn. Any college that does not adjust to the Web, including discount pricing, will disappear. This will take less than two decades.

The Web is where the future of higher education is. The more expensive today's college education is, the more vulnerable an institution is to price competition. When students can stay home, keep their part-time jobs, and learn everything they need to know in the majors that 80% of students select (social sciences and humanities), why pay $50,000 to $100,000 for a college education? Why not pay $10,000, with the money used mainly to pay the faculty?

Setting the Precedent
Some rich entrepreneur is going to assemble a bunch of famous professors, record their videos, get their reading lists, and hire an army of Ph.D-holding teaching assistants at $15 per hour. He can hire retired big-name professors, pay them huge salaries, and play the big-name professor game better than the Ivy League.

He will own the finest university on earth, charge $7,000 a year, and make another fortune for himself. Will it get its accreditation? If it does, the precedent is set: 100% distance learning. If not, then the accrediting system will be seen as a cartel-operated sham. Besides, what student will care if it is accredited? Harvard University is not accredited and never has been. This Web-based university will have bigger names than Harvard.

Once someone does this, the precedent will have been set: no accreditation needed. The dominoes will begin to fall. The price of a college education will fall with it.

If the government blocks this inside the U.S., the entrepreneur has 180 (this week) other nations to choose from. Get accreditation there, if it is needed for marketing. If not, forget about it. Use the same faculty, the same textbooks, the same CD-ROM's, the same e-mail addresses. This is distance learning.

When you think of "distance learning," think of an Olympics limited to 45-year-old athletes ("Skilled! Experienced!"), who one day must face 19-year-olds. The distance between the cartel's runners and the newcomers will be measurable in yards, meters, and seconds. The cartel's members will learn at a very great distance.

This is where higher education is headed. The monopoly over higher education is going to be broken up, all over the world.

July 31, 2000

Gary North is the author of Crossed Fingers: How the Liberals Captured the Presbyterian Church, which is available free of charge as a downloaded text at www.freebooks.com.

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