The Coming Breakdown of the Academic Cartel

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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.

Accreditation

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:

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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