The Evolving Economic Structure of Higher Education

[أحمد أبو زنط]

The Evolving Economic Structure of Higher Education



Henry Hansmann




INTRODUCTION
As an industry, higher education shows some striking anomalies.
It is the only important industry in the United States that has been
increasingly socialized in recent decades: the market share of public
institutions grew, roughly, from 50 percent to 80 percent over the last
half of the twentieth century.1 Now the industry is suddenly heading
down a very different path, with the market share of proprietary
institutions—which was negligible thirty-five years ago—presently in
excess of 10 percent.2 Such contradictory developments bring into
question the future economic organization of higher education and
the forms of financing and regulation that might be appropriate to it.
I’ll offer here some speculation in that direction, focusing just on
several of the main structural features of the industry and, of
necessity, addressing them at a very general level. And I’ll compare
the evolution of higher education with the evolution of health care,
seeking the reasons for both similarities and differences. The general
conclusion I offer, perhaps unsurprising in the current political and
economic climate, is that market forces are likely to play a much
larger role in higher education in the future than they have in the
past, and a larger role than they play in health care as well.
† Oscar M. Ruebhausen Professor of Law, Yale Law School.
Prepared for the Understanding Education in the United States: Its Legal and Social
Implications Symposium held at the University of Chicago Law School on June 17 and 18,
2011. I am grateful to participants in that conference for helpful comments and to Gabrielle
Holburt, Alice Hwang, Yuan Ji, Christine Ku, Jimmy Li, and Julie Wang for research
assistance. I am also grateful to the University of Chicago Law Review for excellent editorial
assistance.
1 Compare US Census Bureau, Statistical Abstract of the United States: 2004–2005 169,
online at http://www.census.gov/prod/2004pubs/04statab/educ.pdf (visited Oct 25, 2011), with
US Census Bureau, Statistical Abstract of the United States: 1953 125, online at
http://www2.census.gov/prod2/statcomp/documents/1953-02.pdf (visited Oct 25, 2011).
2 See Kelly Field, For-Profit Colleges Win Major Concessions in Final ‘Gainful Employment’
Rule, Chron Higher Ed (June 2, 2011), online at http://chronicle.com/article/For-Profit-Colleges-
Win-Major/127744/ (visited Oct 25, 2011).
162 The University of Chicago Law Review [79:161
I. WHAT KIND OF A GOOD IS HIGHER EDUCATION?
It is often said—particularly in support of public subsidies—that
higher education is a public good that benefits society as a whole.3
This seems a difficult conclusion to support, however. The
overwhelming bulk of the returns to an education surely accrue to
the individual who receives it, whether we look at its consumptiongood
aspects (such as learning for its own pleasures, socializing, or
playing sports) or its production-good aspects (such as acquiring
skills and contacts that will increase one’s expected earning power).
While there are surely some external benefits when an individual
gets a good education, the ratio of social to private benefits is
arguably not much different than when an individual builds a house
or buys a truck.
There is another respect, however, in which education—and
higher education in particular—is rather different from most
ordinary goods and services. It is—particularly at the higher end of
the market—an “associative good,” in the sense that the value that a
customer derives from patronizing a given producer is highly
dependent upon the personal qualities of the producer’s other
customers.4 The attraction of attending Harvard College, for
example, derives not just—or perhaps even principally—from the
quality of the teaching that Harvard offers but also in important
measure from the intelligence, motivation, prior education, athletic
ability, family, and social connections of Harvard’s other students. In
substantial part, Harvard is selling its students to each other.
Markets for associative goods behave differently from other
markets. For one thing, they tend to be selective with regard to their
customers and to stratify, with the highest-quality tranche of
customers patronizing one producer, the second-highest-quality
tranche patronizing a second producer, and so on down the scale of
quality.5 For another, producers of associative goods have an
incentive to be smaller in scale than they would be absent the
associative character of their goods, and to respond to increased
demand by increasing the minimum quality they require of their
customers rather than increasing the quantity they produce.6
3 See, for example, Jonathan D. Glater, The Other Big Test: Why Congress Should
Allow College Students to Borrow More through Federal Aid Programs, 14 NYU J Leg & Pub
Pol 11, 13 (2011).
4 See Henry Hansmann, The Ownership of Enterprise 185–94 (Belknap 1996).
5 See Henry Hansmann, A Theory of Status Organizations, 2 J L, Econ, & Org 119, 120,
122–23, 129 (1986).
6 See Hansmann, The Ownership of Enterprise at 185–90 (cited in note 4). See also
Hansmann, 2 J L, Econ, & Org at 120, 123–25, 129 (cited in note 5).
2012] Evolving Economic Structure of Higher Education 163

II. FINANCING AND OWNERSHIP
Whether pursued as an aid to consumption or to production,
higher education requires a substantial investment at the beginning
of one’s adult life, in the form of both direct expense and forgone
earnings, while the returns from that investment are likely to be
spread out over many subsequent decades. Students who don’t come
from wealthy families therefore need third-party financing to cover
the initial cost. But it is difficult for students to bond themselves
credibly to repay educational loans, since human capital provides
poor security. Higher education is also an investment with much
higher personal risk than social risk, since its return to any particular
individual is hard to predict. For both these reasons, unsubsidized
loans obtained on the private market are commonly insufficient to
finance an efficient level of higher education. Much of the evolution
in the institutions providing American higher education since the
colonial days can be seen as an effort to arrange other sources of
financing.7
A. Supply-Side Private Donations
Many private colleges and universities were, of course, founded
or sustained in their early years by gifts from otherwise unrelated
benefactors, such as the eponymous Harvard and Yale.
Philanthropic contributions from third parties such as these have
continued, but today are substantially overshadowed by donations
from the institutions’ own graduates, which are frequently an
important source of revenue.8
Why do graduates give to their alma mater—rather than, for
example, giving to other colleges and universities that might have
greater need for the funds? From an economic point of view, the
arrangement has much of the character of an implicit loan program.
Colleges charge many or all of their students less than the full cost of
their education, with the understanding that the tuition discount
represents, in effect, a loan from the college that the student is
expected to repay by making donations proportionate to their
subsequent financial fortune in life. This arrangement has important
efficiencies, not only in supplying credit where it would otherwise be
unavailable but also in providing an important element of risk
sharing.
7 See generally Daniel A. Wren, American Business Philanthropy and Higher Education
in the Nineteenth Century, 57 Bus Hist Rev 321 (1983).
8 See James Monks, Patterns of Giving to One’s Alma Mater among Young Graduates
from Selective Institutions, 22 Econ Educ Rev 121, 121 (2003).
164 The University of Chicago Law Review [79:161
A norms-based implicit loan program of this sort works quite
effectively for many well-established elite institutions such as
Harvard, Yale, and Princeton. But this form of financing is clearly
inadequate for newer or less prestigious institutions, which
frequently lack a large cadre of grateful graduates. Efforts to make
such contingent loan programs explicitly contractual rather than
merely implicit, which were tried out with high expectations several
decades ago, have collapsed owing to adverse selection.9
Whether private donations come from third-party benefactors
or from an institution’s own graduates, any private college or
university that relies upon them must, as a practical matter, be
organized as a nonprofit entity. The nondistribution constraint that
characterizes a nonprofit provides an important degree of assurance
to donors that the benefit of their contributions will be passed
through to the institution’s students, rather than simply being
appropriated by those who control the organization. This surely goes
far in explaining the large role historically played by nonprofit
institutions in higher education in the United States.10
B. Supply-Side Governmental Subsidies
As the demand for higher education has expanded, private
philanthropy has become increasingly inadequate as a solution to the
problem of financing a college education, and it has been even less
successful in financing graduate education in the arts and sciences.
The result has been an increasing resort to government as a source of
financing.11
Historically, much of that financing has been on the supply side,
as state and local governments have built large systems of
government-owned-and-operated institutions of higher education,
ranging from local community colleges to major research
universities, and have then charged local citizens low or no tuition to
enroll. From the first Morrill Act of 1862,12 a significant component
9 See Alan B. Kruger and William G. Bowen, Income-Contingent College Loans, 7 J
Econ Persp 193, 195–96 (1993); Marc Nerlove, Some Problems in the Use of Income-Contingent
Loans for the Finance of Higher Education, 83 J Polit Econ 157, 165, 180 (1975). Yale’s Tuition
Postponement Option, in effect from 1972 to 1978, was the most prominent effort. See Still
Paying after All These Years, 62 Yale Alumni Mag (Feb 1999), online at
http://www.yalealumnimagazine.com/issues/99_02/l_v.html (visited Oct 25, 2011) (discussing
the drawbacks of Yale’s Tuition Postponement Option plan, which required students to make
tuition payments based on their income after graduation).
10 See Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 Yale L J 835, 859–62
(1980).
11 See US Census Bureau, Statistical Abstract of the United States: 2012 186, online at
http://www.census.gov/compendia/statab/2012edition.html (visited Oct 25, 2011).
12 Pub L No 37-108, 12 Stat 503 (1862), codified at 7 USC § 301 et seq.
2012] Evolving Economic Structure of Higher Education 165

of the funds for these institutions has come from the federal
government, but the bulk of the governmental funds has been
provided by the states.13 While the land-grant colleges of the late
nineteenth century substantially expanded the role of public
education, an even larger expansion came a century later, following
the Second World War. As Table 1 shows, in 1949 roughly half of all
postsecondary students were enrolled in private nonprofit
institutions, and the other half in public institutions—a ratio that had
remained essentially constant at least since 1920.14 Twenty-five years
later, in 1974, that ratio had changed dramatically, with public
institutions holding nearly four times the market share of nonprofit
institutions15—a ratio between the two ownership forms that has
since remained roughly constant.16
This great expansion of public colleges and universities in the
third quarter of the twentieth century was a response to rapidly
growing demand. As Table 1 shows, total enrollment in institutions
of higher education was more than four times larger in 1974 than it
was in 1949, spurred by large numbers of returning soldiers, the
postwar baby boom, greater prosperity, demand for a more highly
skilled workforce, and substantial increases in government funding.
Rather than seeking to induce the nonprofit sector to expand
sufficiently to accommodate most or all of the expanded enrollment,
state and local governments simply built and operated the necessary
facilities themselves, expanding old campuses and establishing new
ones.17
This was probably the only feasible route. Nonprofit institutions
were unlikely to meet the rapidly swelling demand regardless of the
kind or quantity of subsidies offered them. Nonprofit institutions in
general exhibit sluggish supply response, expanding only slowly
when demand increases.18 One reason is that nonprofits generally
13 See Wren, 57 Bus Hist Rev at 321–23 (cited in note 7).
14 See Henry Hansmann, The Changing Roles of Public, Private, and Nonprofit
Enterprise in Education, Health Care, and Other Human Services, in Victor R. Fuchs, ed,
Individual and Social Responsibility: Child Care, Education, Medical Care, and Long-Term
Care in America 245, 267 table 9.2 (Chicago 1996).
15 National Center for Education Statistics, Total Fall Enrollment in Degree-Granting
Institutions, by Attendance Status, Sex of Student, and Control of Institution: Selected Years,
1947 through 2008 (2009), online at http://nces.ed.gov/programs/digest/d09/tables/dt09_189.asp
(visited Oct 20, 2011).
16 Id.
17 Alice M. Rivlin and June O’Neill, Growth and Change in Higher Education, 30 Proc
Acad Pol Sci 66, 69 (1970).
18 See Henry Hansmann, The Effect of Tax Exemption and Other Factors on the Market
Share of Nonprofit versus For-Profit Firms, 40 Natl Tax J 71, 77–78 (1987); Bruce Steinwald
and Duncan Neuhauser, The Role of the Proprietary Hospital, 35 L & Contemp Probs 817,
829–30 (1970). See also Henry Hansmann, Daniel Kessler, and Mark McClellan, Ownership
166 The University of Chicago Law Review [79:161
have poor access to capital, being barred from equity financing and
limited in their ability to borrow—particularly in the start-up phase.19
Moreover, established nonprofits commonly react to increased
demand by increasing the quality rather than the quantity of the
services they offer—a phenomenon that’s easy to observe among
elite colleges. One reason for this, presumably, is that personal pride
and satisfaction from providing high-quality services are important
incentives for nonprofit managers.20 Another likely reason—at least
among the more selective colleges—is that the associative aspect of
higher education pushes in the same direction.21
A third alternative for meeting the large postwar increase in
demand for higher education was to induce entry by proprietary
institutions. Only tentative efforts in this direction were made in the
first twenty-five years after the Second World War.22 More recently,
however, subsidizing expansion of for-profit higher education has
become a major component of federal aid programs.23 The evolution
of demand-side subsidies, particularly from the federal government,
is at the center of these developments.
C. Demand-Side Governmental Subsidies
The GI Bill of 194424 gave veterans extensive demand-side
subsidies for higher education and made those subsidies tenable at
proprietary as well as nonprofit and governmental schools.25 The
succeeding five years saw the creation of more than five thousand
proprietary schools, many of which were thought to be vastly
overcharging for the education they offered.26 Congress responded
Form and Trapped Capital in the Hospital Industry, in Edward L. Glaeser, ed, The Governance
of Not-for-Profit Organizations 45, 57–68 (Chicago 2003) (providing empirical evidence of the
relative slowness of nonprofits in exiting an industry with falling demand). See also generally
Darius Lakdawalla and Tomas Philipson, Nonprofit Production and Competition (NBER
Working Paper No 6377, Jan 1998), online at http://www.nber.org/papers/w6377.pdf (visited
Oct 26, 2011) (listing other factors limiting expansion of nonprofit firms).
19 See Hansmann, 89 Yale L J at 877 (cited in note 10).
20 See id. See also Edward L. Glaeser and Andrei Shleifer, Not-for-Profit Entrepreneurs,
81 J Pub Econ 99, 107–08 (2001) (asserting that reputational concerns help to increase quality
of nonprofit services).
21 See Hansmann, 2 J L, Econ, & Org at 119–20 (cited in note 5).
22 See Nicholas R. Johnson, Phoenix Rising: Default Rates at Proprietary Institutions of
Higher Education and What Can Be Done to Reduce Them, 40 J L & Educ 225, 228–29 (2011).
23 See id at 231–38.
24 Servicemen’s Readjustment Act of 1944 (GI Bill), Pub L No 78-346, 58 Stat 284.
25 GI Bill § 400, 58 Stat at 290.
26 Daniel Golden, Veterans Failing Shows Hazards of For-Profit Schools in GI Bill,
Bloomberg (Sept 23, 2010), online at http://www.bloomberg.com/news/2010-09-23/veteransfailing-
to-learn-show-hazards-of-for-profit-schools-under-gi-bill.html (visited Oct 26, 2011).
2012] Evolving Economic Structure of Higher Education 167

with a provision in the Veterans’ Readjustment Assistance Act of 195227
requiring that proprietary schools receiving that federally subsidized
tuition have a student body in which at least 15 percent of the
students were paying tuition without the aid of the GI Bill, hence
exposing the schools to a limited market test.28 Congress went even
further when it passed the Higher Education Act of 1965,29 Title IV
of which became and has remained the principal source of federal
student aid for higher education.30 That Act expressly confined
financial assistance to students who attended public or nonprofit
institutions,31 cutting out proprietary institutions completely.
Perhaps owing to changes in national politics, demand-side
subsidies were again made widely available to proprietary schools
with the enactment of the 1972 amendments32 to the Higher
Education Act of 1965, which eliminated the restriction of Title IV
aid to students at governmental and nonprofit schools.33 Subsequent
amendments to the Act in 197934 and 198635 further broadened access
to for-profit schools while also increasing the amount of loan funds
available.
The result was a repetition of the experience with the first GI
Bill. The grants and the subsidized and guaranteed loan funds
provided under this legislation fueled a rapid rise in the market share
of proprietary schools that began in the 1970s.36 As Table 1 shows,
that market share doubled between 1974 and 1979, and by 2009 was
thirty times larger than it had been in 1974. Indeed, by 2009, private
institutions were serving one-third of all students enrolled in private
(nongovernmental) institutions of higher education. Many of these
institutions are large. As of 2010, fourteen of the companies
27 Pub L No 82-550, 66 Stat 663, codified at 38 USC § 991 et seq, repealed by the
Veterans’ Readjustment Benefits Act of 1966, Pub L No 89-358, 80 Stat 12.
28 Veterans’ Readjustment Assistance Act of 1952 § 226, 66 Stat at 667. See also
generally Golden, Veterans Failing Shows Hazards of For-Profit Schools in GI Bill (cited in
note 26); Robert Shireman, For Guidance on For-Profit Colleges, Look to the GI Bill (Campus
Progress May 11, 2011), online at http://www.campusprogress.org/articles/for_guidance_on_forprofit_
colleges_look_to_the_gi_bill/ (visited Oct 26, 2011).
29 Pub L No 89-329, 79 Stat 1219, codified as amended in various sections of Title 20.
30 William S. Howard, The Student Loan Crisis and the Race to Princeton Law School, 7 J
L, Econ, & Policy 485, 495 (2011).
31 Higher Education Act of 1965 § 435(a)(4), 79 Stat at 1247–48, 20 USC § 1001(a)(4).
32 Education Amendments of 1972, Pub L No 92-318, 86 Stat 235, codified as amended in
various sections of Title 20.
33 Education Amendments of 1972 § 131, 20 USC § 1002(a)(1)(A).
34 Higher Education Technical Amendments of 1979, Pub L No 96-49, 93 Stat 351,
amending various sections of Title 20.
35 Higher Education Amendments of 1986, Pub L No 99–498, 100 Stat 1268, codified at
20 USC § 1001 et seq.
36 See William Beaver, For-Profit Higher Education: A Social and Historical Analysis,
25 Sociological Viewpoints 53, 56–57 (Fall 2009).
168 The University of Chicago Law Review [79:161
providing postsecondary education were publicly traded, and the
largest of them, the University of Phoenix, enrolled 470,000
students.37
These proprietary institutions are extraordinarily dependent
upon federal subsidies. As of 2010, for example, the University of
Phoenix obtained 88 percent of its revenue from Title IV funds,38 and
this figure seems typical for the proprietary higher education sector
in general.39 In turn, proprietary institutions account for a
disproportionate share of Title IV funds: 19 percent as of 2009, as
compared with 48 percent for public schools and 33 percent for
private nonprofits.40
The rapid growth in proprietary schools over recent decades has
seemingly been accompanied by an equally rapid growth in
exploitation of both consumers and the federal government, echoing
the experience under the first GI Bill. The typical form of abuse is to
induce individuals to enroll, against their interest, in courses of
instruction that are unsuited for them, that they are unlikely to
complete, that teach skills for which there is no market, or that are
simply overpriced. Schools induce these individuals to pay for this
unproductive education not just with federal grants but also with
loans that are provided or guaranteed by the federal government,
but for which the students will remain personally liable. (Indeed,
current law generally prevents these loans from being discharged
even in bankruptcy.41) Congress and the Department of Education
have sought to control this abusive behavior in recent years through
a sequence of regulatory measures, with only modest results to date.42
We will return below to the prospects for ultimate success in this
regard.
37 Compare Apollo Group, Inc, 2010 Annual Report 14 (2010), online at
http://www.apollogrp.edu/Annual-Reports/Apollo2010AR.pdf (visited Oct 26, 2011), with
University of California, Statistical Summary of Students and Staff 1–27 (2009), online at
http://www.ucop.edu/ucophome/uwnews/stat/statsum/fall2009/statsumm2009.pdf (visited Oct
26, 2011).
38 Apollo Group, Inc, Form 10-K for the Fiscal Year Ended August 31, 2010 35, online at
http://www.sec.gov/Archives/edgar/data/929887/000095012310094652/p18193e10vk.htm#124
(visited Oct 26, 2011).
39 For example, the proportion was 82 percent in 2010 for Kaplan Higher Education, a
subsidiary of the Washington Post Company with ninety-seven thousand students enrolled. See
Washington Post Company, Form 10-K for the Fiscal Year Ended January 2, 2011 1–2, online at
http://sec.gov/Archives/edgar/data/104889/000119312511053497/d10k.htm (visited Oct 26, 2011).
40 See Government Accountability Office, Proprietary Schools: Stronger Department of
Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student
Aid 5 (Aug 2009), online at http://www.gao.gov/new.items/d09600.pdf (visited Oct 26, 2011).
41 See 11 USC § 523(a)(8).
42 Government Accountability Office, Proprietary Schools at 9, 22–28 (cited in note 40).
2012] Evolving Economic Structure of Higher Education 169

D. A Comparison to Health Care
The evolution of the American health care industry, and
particularly the hospital sector, provides an instructive comparison to
the development of higher education. The growing demand for
hospital care after the Second World War was first met by supplyside
subsidies, such as the federal Hill-Burton grants to public and
nonprofit hospitals.43 The implementation of Medicare and Medicaid
in the mid-1960s altered that approach, providing extensive demandside
subsidies for hospital services that could be used at proprietary
hospitals as well as at nonprofit and public hospitals. The result was
the entry and rapid growth of proprietary hospitals, including
publicly traded hospital chains. The market share of proprietary
hospitals, which had remained constant at 6 percent from 1960 to
1971, doubled over the next 20 years to 12 percent in 1992.44 This
growth came entirely at the expense of the share held by
government-owned hospitals, which declined from 31 percent in 1971
to 24 percent in 1992.45 The proprietary hospitals that proliferated
after 1965 did not, in general, present serious problems concerning
quality of care or exploitation of patients. Although there were some
scandals, they typically involved financial fraud directed at the
governmental Medicare and Medicaid programs rather than
provision of substandard care to patients, or systematic provision of
expensive care for which there was no medical need.46
What accounts for the relative success in expanding the hospital
sector by encouraging the expansion of proprietary institutions
through demand-side subsidies, while the same approach was
accompanied by serious problems in higher education and, instead,
public institutions have been relied upon for increasing the supply of
higher education?
Medical doctors as of 1965 practiced almost universally as sole
practitioners or in partnerships, and hence were essentially in
business for themselves.47 They were generally not employees of the
43 See Department of Health and Human Services, Hill-Burton Free and Reduced-Cost
Health Care, online at http://www.hrsa.gov/gethealthcare/affordable/hillburton/hillburton.pdf
(visited Oct 26, 2011).
44 Hansmann, Changing Roles at 254 (cited in note 14).
45 Id at 256.
46 While there is substantial evidence of excessive care in the sector in general, it seems
to have been induced in large part by the threat of malpractice litigation and to have affected
nonprofit as well as for-profit hospitals. See Office of Technology Assessment, US Congress,
Defensive Medicine and Medicine Malpractice, OTA-H-602, 39–74 (GPO 1994). See also Daniel
Kessler and Mark McClellan, Do Doctors Practice Defensive Medicine?, 111 Q J Econ 353, 356–58,
372–88 (1996) (explaining how tort reforms affect the practice of defensive medicine).
47 Hansmann, Changing Roles at 257 (cited in note 14).
170 The University of Chicago Law Review [79:161
hospitals in which they had admitting privileges but rather billed their
patients separately while at the same time exercising considerable
control over the hospitals’ management.48 As a consequence,
proprietary institutions were perfectly familiar to them, while at the
same time the profession was overtly hostile to the socialization of
medicine.49 College and university professors of that era, in contrast,
were nearly all employees of nonprofit or governmental institutions,
with little experience—and much suspicion—of proprietary
enterprise.
A related reason for the success of proprietary hospitals may be
that, since medical doctors were not employees of the hospitals
where they treated patients, they had an interest in maintaining the
quality of those hospitals and were in a position to police effectively
the services that the hospitals offered. The nonprofit or
governmental form was not needed to blunt the institutions’
incentives to behave opportunistically for their patients.
Yet another reason may be that hospital care is a more
homogeneous service than is higher education, and hence is easier to
monitor and regulate either publicly or privately. An appendectomy
is performed more or less in the same way in all US hospitals,
without major variation among institutions that treat the prosperous
and the poor, the educated and the ignorant, the ambitious and the
lazy. An introductory course in English literature, on the other hand,
may take a very different shape for different types of students.
III. QUALITY ASSURANCE
The account of the evolution of higher education offered above
raises two questions. First, is for-profit higher education just a
hothouse flower, opportunistically taking advantage of poorly
regulated public subsidies—and something that will largely disappear
if and when meaningful consumer-protection regulation can be
implemented? Second, even if there is a permanent place for a
substantial for-profit sector in higher education, will that place
always be at the bottom of the educational hierarchy, largely
providing basic preparation for trades of limited sophistication? To
answer either question, it’s necessary to address the problem of
quality assurance.
48 See Mark Pauly and Michael Redisch, The Not-for-Profit Hospital as a Physicians’
Cooperative, 63 Am Econ Rev 87, 87–88 (1973).
49 See Kim Geiger and Tom Hamburger, AMA Does 180 on Health Care, Chi Trib 42
(Sept 13, 2009).
2012] Evolving Economic Structure of Higher Education 171

American higher education flourished for two hundred years
without a meaningful system of governmental quality regulation. To
be sure, beginning at the end of the nineteenth century, a privatesector
form of quality assurance grew up in the form of the six
regional accrediting associations for colleges and universities.50 But
these associations, which are controlled by the institutions that they
accredit,51 have never succeeded in establishing—or even tried to
establish—clear and objective ratings or even minimum standards
for accreditation. Rather, they have traditionally seen their role as
simply working with each individual institution to help it define and
meet its own internal goals. It may be, however, that there is
relatively little more that can be done. Widely applicable and
objective standards for measuring the quality of education that any
institution provides are difficult to devise without making them
arbitrary and stifling.
Despite the lack of external policing, the overall quality of
American higher education has been high by world standards, and
until recently there have been remarkably few scandals involving the
quality of education offered even by individual institutions. There
seem to be two possible explanations for this: (1) institutional form
and (2) competition.
A. Institutional Form
One reason why quality assurance has not been a major problem
may be that, until recently, nearly all nongovernmental institutions
of higher education were nonprofit. The nonprofit form dulls the
incentives of managers to exploit their consumers, giving them
instead an incentive to provide a level of quality higher than that
which would maximize net revenue.52 If the quality of service offered
by proprietary schools is too difficult for students or their parents to
assess ex ante with much accuracy, then the sector may be poorly
suited to profit-seeking firms, at least until some effective form of
quality regulation can be established. If, moreover, effective forms of
regulation can be established only for simple trade schools, and not
for the elaborate forms of education now offered by the more
50 See Mary Glenn Wiley and Mayer N. Zald, The Growth and Transformation of
Educational Accrediting Agencies: An Exploratory Study in Social Control of Institutions, 41
Sociology Educ 36, 36–37 (1968); California Postsecondary Education Commission, Accrediting
Agencies, online at http://www.cpec.ca.gov/CollegeGuide/AccreditingAgencies.asp?Type=Regional
(visited Oct 26, 2011).
51 See Howard, 7 J L, Econ, & Policy at 505 (cited in note 30); William E. Troutt,
Regional Accreditation Evaluative Criteria and Quality Assurance, 50 J Higher Ed 199, 199–203,
206–09 (1979).
52 See Glaeser and Shleifer, 81 J Pub Econ at 100–02 (cited in note 20).
172 The University of Chicago Law Review [79:161
selective institutions, then the latter institutions evidently must
continue to be organized as either nonprofit or governmental entities.
B. Competition
With the exception of the military academies, the US
government has never itself owned and operated institutions of
higher education.53 Rather, the governmental presence in
administering education, while large, has been at the state and local
level. While the politics behind this development are the same that
produced a highly fragmented and apparently inefficient banking
system for the better part of two centuries,54 the consequences for
higher education have evidently been salutary. Public as well as
private colleges and universities have had to compete in a national
market for both students and faculty. And, although those colleges
and universities have, until recently, been almost exclusively either
governmental or nonprofit, they have evidently responded well to
the pressures of that competition. It is difficult to find any other
reason to explain why American higher education is so strong by
world standards while American primary and secondary education—
commonly a local public monopoly—is so weak.
The constitutional powers of the individual states play an
important role here. The courts have never found higher tuition for
out-of-state students at state universities to be an impermissible
burden on interstate commerce.55 Consequently, state universities
routinely discriminate in this fashion, and therefore have a strong
incentive to attract students from other states. The European
Union—regrettably, and perhaps tragically—seems not to have
taken a lesson from this experience. The creation of a European
common market for higher education held out the promise that
interstate competition would overcome the deleterious effects of the
centralized state control of higher education that has become
characteristic of European nations, and that arguably accounts for
the decline of European universities in the twentieth century after
nearly a millennium of world dominance. But the promise of such
53 See Department of State, A Diverse Educational System, online at http://usinfo.org/enus
/education/overview/ch6.html (visited Oct 21, 2011).
54 See Geoffrey P. Miller, Interstate Banking in the Court, 1985 Sup Ct Rev 179, 181–83,
208–25. See generally Eugene Nelson White, The Political Economy of Banking Regulation
1864–1933, 42 J Econ Hist 33 (1982).
55 The Supreme Court has never explicitly ruled that charging higher tuition to out-ofstate
students at public educational institutions is consistent with the dormant Commerce
Clause. Nonetheless, “[t]here are . . . strong indications that the Court would find no commerce
clause problem if the question were squarely presented.” Dan T. Coenen, State User Fees and
the Dormant Commerce Clause, 50 Vand L Rev 795, 807 n 60, 840–41 (1997).
2012] Evolving Economic Structure of Higher Education 173

competition has seemingly been scotched by EU regulations
prohibiting public universities from admitting students from other
EU member states on different terms than those offered in-state
students.56 The consequence is that the challenge to the United States
for world superiority in higher education may well come from Asia
rather than from Europe.
It remains to ask whether national (or international)
competition will be sufficient to discipline for-profit institutions of
higher education if and as they expand their share of the market.
This is a question that perhaps needs to be addressed separately for
the top end of the market (high-quality undergraduate and graduate
education in the arts and sciences) and for the bottom end of the
market (instruction in basic skills for specific trades).
It seems plausible that competition would be more than
adequate to discipline for-profit institutions at the top end of the
market, if there were any. Institutions at that level quickly develop
national reputations, and there are many publications available to
help develop and spread these reputations among potential
consumers. If for-profit institutions were to seek to enter the top end
of the education market, therefore, there is every reason to believe
that market forces would quickly sort the wheat from the chaff. The
question for elite higher education, instead, is whether proprietary
institutions are for some reason incapable of creating the right
incentives for producing quality equal to the level reached by
prominent public and nonprofit colleges and universities. This is a
question we will return to below.57
It is less obvious that competition alone, absent regulation, can
provide adequate discipline for proprietary schools at the lower end
of the market for higher education, where they are now
concentrated. Experience to date suggests that completion alone will
not suffice.58 But there is reason to be hopeful. For one thing, the
problem has been largely driven by excessively easy credit subsidized
by the federal government—offering a strong parallel, as many have
noted, to the credit-driven housing bubble of the recent past and the
56 See Gravier v City of Liège, Case 293/83, 1985 ECR 593, ¶ 26 (Court of First Instance);
Commission of the European Communities v Austria, Case C-147/03, 2005 ECR I-5969, ¶ 75
(Second Chamber). But see The Queen v London Borough of Ealing, Case C-209/03, 2005 ECR I-2119,
¶¶ 56–57 (Grand Chamber).
57 See Part IV.
58 See, for example, Golden, Veterans Failing Shows Hazards of For-Profit Schools in GI
Bill (cited in note 26); Beaver, 25 Sociological Viewpoints at 55–56 (cited in note 36).
174 The University of Chicago Law Review [79:161
opportunistic transactions it fostered.59 One solution is to make
proprietary institutions ineligible for participation in federal
educational aid programs. But that would throw out the baby with
the bathwater.
Direct regulation of the minimum acceptable quality of
education that can be offered by an institution participating in
federal student aid programs also does not seem a promising
approach. To be sure, it is an approach that looks more feasible for
the types of trade-focused education offered by most proprietary
schools than for education at the top of the market. But directly
measuring the quality of instruction is nonetheless an elusive task.
The private-sector accrediting agencies, as we have noted, have not
been very successful at it.60 And the special agencies that have grown
up to accredit for-profit schools are understandably no better.61
But direct regulation of quality may not be essential. The core
problem presented by opportunistic proprietary schools seems not so
much that they offer an education that is in itself of insufficiently
high quality to be useful to anyone, but rather that it is sold to the
wrong people, and at an excessively high price. In essence, the
abusive schools are not offering their students too little education
but rather too much education, or the wrong kind of education. And
these are easier problems to solve through regulation. Current and
proposed regulatory reforms in fact take this approach, restricting
access to federal student aid for schools that attract little tuition
beyond federal aid funds, or that have disproportionately large
numbers of students who fail to complete their degrees, or fail to find
employment following graduation, or fail to repay their loans.62
There is a parallel here in the experience with proprietary
hospital care. Though there have been a number of financial scandals
involving for-profit hospitals, particularly with respect to abuse of
59 See, for example, Higher Education: The Latest Bubble?, Economist Schumpeter Blog
(Economist Apr 13, 2011), online at http://www.economist.com/blogs/schumpeter/2011/04
/higher_education (visited Oct 21, 2011).
60 See notes 50–51 and accompanying text.
61 See, for example, Kevin Kinser, ASHE Higher Education Report, From Main Street to
Wall Street: The Transformation of For-Profit Higher Education 98–99, 106–08 (Jossey-Bass
2006).
62 See Department of Education, Program Integrity: Gainful Employment-Debt
Measures, 76 Fed Reg 34386, 34413–18 (2011) (amending 34 CFR § 668); Department of
Education, Obama Administration Announces New Steps to Protect Students from Ineffective
Career College Programs (June 2, 2011), online at http://www.ed.gov/news/pressreleases/
gainful-employment-regulations (visited Oct 27, 2011); Johnson, 40 J L & Educ at
238–51 (cited in note 22).
2012] Evolving Economic Structure of Higher Education 175

public subsidies under Medicare and Medicaid,63 scandals involving
the quality of hospital care seem to be rare. The large proprietary
hospital chains perhaps understand that a scandal involving poorquality
care in any part of their system could severely damage the
reputation of the enterprise as a whole, cutting revenues badly,
whereas defrauding a public insurance program does not pose a
threat to anybody’s life, including the lives of the individuals covered
by the program. The regulatory response has been more careful
audits of proprietary hospitals. More generally, empirical studies
have had to look hard to find systematic differences in the quality of
care offered by nonprofit and for-profit hospitals.64 And the quality
of instruction offered by an institution of higher education, it would
seem, is no harder for consumers to evaluate than is the quality of
the medical care offered by a hospital.
Ongoing changes in the lower end of the education market may
also permit competition to discipline proprietary institutions more
effectively in the future, with decreasing reliance on public
regulation. The tendency toward consolidation of proprietary
schools into a smaller number of large firms makes reputation more
effective as a constraint on firm behavior. New information
technologies, such as online learning, may further foster
consolidation, both nationally and internationally.
However difficult it may be to assure reasonable quality and
pricing in proprietary postsecondary education, there may be little
choice but to undertake the task. The evidence suggests that public
schools, such as community colleges, are insufficiently flexible to
provide the variety and quantity of vocational and trade school
programs, or the adjustment of those programs to the practical needs
of students, that proprietary institutions can offer.65 And nonprofit
institutions, as we have noted,66 tend to have a high-quality bias that
causes them to refrain from serving the low end of the market in
service industries. Thus, whether the service is nursing care, day care,
63 See Dan Ackman, Disaster of the Day: HCA, Forbes (Dec 15, 2000), online at
http://www.forbes.com/2000/12/15/1215disaster.html (visited Oct 21, 2011).
64 See, for example, Catherine Plate, The Differentiation between For-Profit and
Nonprofit Hospitals: Another Look, 12 Rsrch Healthcare Fin Mgmt 7 (2008). But see Pauline
Vaillancourt Rosenau and Stephen H. Linder, Two Decades of Research Comparing For-Profit
and Nonprofit Health Provider Performance in the United States, 84 Soc Sci Q 219, 220–29
(2003); Pervaiz Alam, Essam Elshafie, and David Jarjoura, The Effect of Ownership Structure
on Performance of Hospitals, 12 Acad of Acct 37, 47 (2008).
65 See Regina Deil-Amen, James E. Rosenbaum, and Ann E. Person, Illusions of
Opportunity? From College Access to Job Access at Two-Year Colleges, in Gary Orfield,
Patricia Marin, and Catherine L. Horn, eds, Higher Education and the Color Line: College
Access, Racial Equity, and Social Change 107, 116–25 (Harvard 2005).
66 See note 20 and accompanying text.
176 The University of Chicago Law Review [79:161
or primary and secondary education, nonprofit institutions are
common in the top end of the market but generally do not provide
the low quality but essential services that are all that the poor and
disadvantaged can pay for.67
In sum, there seems good reason to believe that proprietary
institutions will continue to expand their role in the lower end of the
market for postsecondary education, at least if appropriate
regulation is adopted to enhance the effectiveness of competition
(although the initial effect of such regulation may be to shrink the
proprietary sector—perhaps radically—by squeezing out the more
opportunistic of the current schools).
But can proprietary institutions also ultimately succeed at the
higher end of the education market? We turn to that issue next.
IV. CHARACTERISTICS OF NONPROFIT AND PUBLIC INSTITUTIONS
We noted above that competition may well be an effective
source of discipline for high-end proprietary schools.68 But are there
important characteristics of the best nonprofit and governmental
colleges and universities that cannot be replicated by proprietary
firms? In approaching the latter question, we’ll focus on three central
and related issues: research, academic tenure, and faculty selfgovernance.
A. Research
Faculties at major nonprofit and public universities are generally
expected to engage in academic research as well as teaching. Might it
be difficult for proprietary institutions to produce research of similar
quantity and quality, given that research, unlike education, is
commonly a public good?
Even if the answer to this question is no, this need not be a bar
to an important role for proprietary institutions in higher-quality
higher education. Many of the nation’s best undergraduate
colleges—such as Amherst, Smith, and Williams—provide no
substantial amount of graduate education and have faculties that are
principally focused on undergraduate teaching rather than research.
It is with institutions such as these that proprietary schools might
first be expected to compete.
67 See, for example, Niccie L. McKay, The Effect of Chain Ownership on Nursing Home
Costs, 26 Health Servs Rsrch 109, 109–10 (1991) (noting that nonprofit nursing homes serve
disproportionately the high-quality high-cost end of the market).
68 See Part III.B.
2012] Evolving Economic Structure of Higher Education 177

Moreover, proprietary institutions may well be able to
undertake research as well as teaching. A large fraction of research
in the sciences is funded by governmental or private grants69 that
presumably could be administered by proprietary as well as
nonproprietary institutions. Many specialized proprietary research
firms already get the bulk of their income from governmental
research grants and contracts.70 And some of the nation’s largest
university-affiliated hospitals, which undertake substantial research
and teaching, are administered by for-profit hospital chains under
contracts that at most leave the hospitals nonprofit in name (and tax
status) only.71
B. Tenure
Lifetime tenure for faculty is one of the most striking features
that distinguishes the internal organization of public and nonprofit
institutions of higher education from typical investor-owned firms,
whether in higher education or in industry in general.
Although the tenure system has roots at least as far back as
Harvard’s adoption in the 1820s of an “up or out” system for electing
tutors to endowed professorships, it is largely a twentieth century
phenomenon. The principal moving force behind its adoption was
the American Association of University Professors (AAUP), formed
as a guild of sorts in 1913,72 and the principal characteristics of the
tenure system were established in agreements negotiated between
the AAUP and the America Association of Colleges (a grouping of
university presidents).73 The second and stronger of these
agreements, adopted in 1940, essentially followed the Harvard “up
or out” model. The model embodied in this agreement spread
rapidly; by 1970 it had been adopted by virtually every substantial
institution of higher education in the country.74
In recent decades, however, the tide has turned. From 1975 to
2009, the proportion of faculty on the tenure track in US colleges fell
69 See Becky Oskin, The Road Less Traveled, New Scientist 54, 54 (August 27, 2011).
70 See Congressional Budget Office, Federal Support for Research and Development
(June 2007), online at http://www.cbo.gov/ftpdocs/82xx/doc8221/06-18-Research.pdf (visited Oct
31, 2011).
71 See John A. Kastor, Selling Teaching Hospitals and Practice Plans: George Washington
and Georgetown Universities 1, 183–91 (Johns Hopkins 2008).
72 See Walter P. Metzger, Academic Tenure in America: A Historical Essay, in William
R. Keast and John W. Macy Jr, eds, Faculty Tenure: A Report and Recommendations by the
Commission on Academic Tenure in Higher Education 93, 135–36 (Jossey-Bass 1973).
73 See id at 148–56.
74 See id at 152–55.
178 The University of Chicago Law Review [79:161
by nearly half, from 57 to 30 percent.75 The common alternative to a
tenure track appointment is a contract for a term of one year or
longer, either full-time or, increasingly, part-time.76 Colleges and
universities are making the shift from tenured to nontenured faculty
in several ways. Some are keeping the tenure system for selected
faculty but are hiring an increasing percentage of faculty off the
tenure track; some are abolishing tenure for all future hires, while
grandfathering faculty who already have tenure; and some new
institutions are being founded without tenure from the beginning.77
Proprietary schools generally do not grant tenure, while institutions
at the top of the market—the elite schools and colleges—have been
the slowest to move away from tenure.78
What accounts for this dramatic rise and ebb in the tenure
system during the latter half of the twentieth century, and what is
likely to happen to tenure in the future? Changes in demand and
supply of professorial talent may explain much of the recent past.
The enormous postwar demand for faculty gave the profession
substantial bargaining power, and it must have been tempting for
university administrators to bid for faculty by offering employment
benefits, such as tenure, many of whose costs would be incurred by
the university only far in the future, while the benefits would be
immediate. Since the early 1970s, however, the supply of new PhDs
has substantially exceeded the demand for academic faculty,79 and
bargaining power has shifted. Yet these market shifts do not tell us
clearly whether social welfare might be best served by retaining
tenure in at least the upper ranges of the higher education market.
75 Laura G. Knapp, Janice E. Kelley-Reid, and Scott A. Ginder, Employees in
Postsecondary Institutions, Fall 2009, and Salaries of Full-Time Instructional Staff, 2009–10 3
(National Center for Education Statistics 2010), online at http://nces.ed.gov/pubs2011/2011150.pdf
(visited Oct 31, 2011) (“Of the approximately 1.4 million full-time professionals reported to be
employed at degree-granting institutions and administrative offices (excluding medical
schools) . . . 21 percent [have] tenure, 9 percent [are] on tenure track.”); Robin Wilson, Tenure,
RIP: What the Vanishing Status Means for the Future of Education, Chron Higher Ed (July 4,
2010), online at http://chronicle.com/article/Tenure-RIP/66114/ (visited Oct 31, 2011).
76 See Jack Stripling, Most Presidents Prefer No Tenure for Majority of Faculty, Chron
Higher Ed A12 (May 15, 2011); Robin Wilson, Contracts Replace the Tenure Track for a
Growing Number of Professors, Chron Higher Ed A12 (June 12, 1998).
77 See Wilson, Contracts Replace the Tenure Track, Chron Higher Ed at A12 (cited in
note 76); Observations on Creating a New Paradigm for Undergraduate Education in Engineering,
Hearings before the Secretary of Education’s Commission on the Future of Higher Education *5–7
(Mar 20, 2006) (testimony of Richard K. Miller, founding president, Franklin W. Olin College of
Engineering), online at http://www2.ed.gov/about/bdscomm/list/hiedfuture/2nd-hearing/miller2.pdf
(visited Oct 31, 2011).
78 See Stripling, Most Presidents, Chron Higher Ed at A12 (cited in note 76); Wilson,
Tenure, RIP, Chron Higher Ed at A12 (cited in note 75).
79 See Supply-Side Academics, 10 Nature Neuroscience 1337, 1337 (2007).
2012] Evolving Economic Structure of Higher Education 179

To approach that question, it makes sense to start with costs and
benefits.
The conventional argument for tenure in higher education is
that it provides the protection needed for faculty members to
address controversial topics in both teaching and research.80 As
others have pointed out, however, this is not a particularly
persuasive justification. Lifetime tenure is neither necessary nor
sufficient to protect intellectual freedom in colleges and universities,
including in particular the freedom to express socially or politically
unpopular views.81 The strongest justification that has been offered
for tenure, rather, is that it facilitates hiring competent faculty.82
Knowledge in academic disciplines has become so specialized and
esoteric, it is argued, that the choice of whom to hire in a given field
must be delegated to the school’s current faculty who specialize in
that field. If those faculty lack tenure, however, they may not choose
the most qualified candidates for fear of hiring their own
replacements.83 Against this benefit must be set off the familiar
disadvantages of extreme job security, including institutional rigidity,
poor incentives for productivity, discouragement of institutional risk
taking, and the paradoxical pressure on young untenured faculty not
to offend their elder colleagues.
We can get some helpful perspective on the evolving trade-offs
among these considerations by looking at large corporate law firms
in the United States, which for the first three quarters of the
twentieth century almost uniformly adhered to a rigid up-or-out
system of employment, combined with an expectation that
promotion to partner meant lifetime employment with the firm—
precisely like academic tenure.84 Since the legal market was
reasonably competitive and the lawyers involved owned their own
firms, there is every reason to believe that the long survival of this
80 See Richard T. De George, Academic Freedom and Tenure: Ethical Issues 13–14
(Rowman & Littlefield 1997).
81 See Stephen J. Ceci, Wendy M. Williams, and Katrin Mueller-Johnson, Is Tenure
Justified? An Experimental Study of Faculty Beliefs about Tenure, Promotion, and Academic
Freedom, 29 Behav & Brain Sci 553, 567–68 (2006); Richard Posner, Tenured Employment,
Becker-Posner Blog (Jan 15, 2006), online at http://www.becker-posner-blog.com/2006/01
/tenured-employment--posner.html (visited Oct 31, 2011) (“If a university wishes to offer its
faculty protection against political retaliation for unpopular views, it can do that by writing into
the employment contract that politics is an impermissible ground for termination.”).
82 See H. Lorne Carmichael, Incentives in Academics: Why Is There Tenure?, 96 J Pol
Econ 453, 454–63, 471 (1988).
83 See id at 454–63, 471. For other arguments, see Michael S. McPherson and Gordon C.
Winston, The Economics of Academic Tenure: A Relational Perspective, in Matthew W. Finkin,
ed, The Case for Tenure 99, 106–21 (Cornell 1996).
84 See Mark Galanter and Thomas Palay, Tournament of Lawyers: The Transformation
of the Big Law Firm 26–32 (Chicago 1991).
180 The University of Chicago Law Review [79:161
pattern of employment was a strong indication of its efficiency. And
the principal purpose it served, arguably, was the same as in higher
education: it provided the senior members of the firm with an
incentive to hire the best young talent they could find, without
worrying that they were thereby putting their own employment at
risk.
But the tenure system in law firms began breaking down in the
last quarter of the twentieth century. The principal reason seems to
be that the market for corporate legal services shifted from being a
market for law firms to a market for individual lawyers. As legal
services became an increasing expense to corporations, those
corporations created larger and more sophisticated in-house legal
staffs.85 At first those in-house lawyers used their expertise to hire
different law firms for different types of legal problems rather than
getting all their services from a single firm, as had previously been
common.86 Then they moved on to shopping for the services of
individual lawyers who appeared specially qualified.87 Those lawyers
then came to have personal reputations apart from that of the firm
with which they were affiliated. The result was that highly productive
lawyers could and did insist on higher remuneration than their
colleagues received, breaking up the lockstep pay schemes of the
past and producing substantial lateral mobility across firms, as well
as more frequent divisions and mergers of firms.88 Retaining lowproductivity
partners became expensive, cutting into the revenues
available to hire or retain more productive colleagues, and
generating frictions among partners in allocating earnings.
Partnership has, as a consequence, become something much less than
a guarantee of lifetime employment, as partners still in midcareer are
expelled from their firms.89 At the same time, law firms are
increasingly hiring new lawyers on a non-partner-track basis, with no
guarantee of ongoing employment.
Arguably much the same thing is now happening in American
colleges and universities. The quality of individual faculty members
85 See Sung Hui Kim, The Banality of Fraud: Re-situating the Inside Counsel as
Gatekeeper, 74 Fordham L Rev 983, 999 (2005).
86 See Abram Chayes and Antonia H. Chayes, Corporate Counsel and the Elite Law
Firm, 37 Stan L Rev 277, 289–99 (1985).
87 See Ted Schneyer, Reputational Bonding, Ethics Rules, and Law Firm Structure: The
Economist as Storyteller, 84 Va L Rev 1777, 1786–87 (1998).
88 See Robert William Hillman, Hillman on Lawyer Mobility: The Law and Ethics of
Partner Withdrawals and Law Firm Breakups 6–9 (Aspen 2d ed 1998).
89 See Elizabeth Goldberg, The Departed, Am Law 144, 145 (May 2007) (discussing the
restructuring of a variety of law firms, and noting that many top law firms are “unabashedly
pursuing growth strategies that entail orchestrated exits of partners who are deemed to be
underperformers”).
2012] Evolving Economic Structure of Higher Education 181

is becoming increasingly apparent to persons outside the individual’s
own faculty. An individual’s scholarship can be evaluated not just by
reading the publications and working papers that are now so easily
available electronically, but also by the increasing capacity for
objective comparative criteria such as citation counts. And the near
ubiquity of student teaching evaluations now makes the quality of
teaching much easier to assess from outside the teacher’s own
institution as well.
One consequence of these increasingly public reputations for
individual teachers and scholars not just at the top, but throughout
the academic hierarchy, is that it is less obvious that an institution
must rely heavily on its own faculty to hire their new colleagues. This
means that it is less important to grant them tenure. Moreover, the
thicker market for academic reputation seems to be leading to much
greater dispersion in faculty salaries, with superstars bringing in far
more than their less conspicuous colleagues.90 This means that, if a
faculty decides to hire someone of great prominence or even great
promise, they may be deciding to reduce the amount of funds
available for their own salaries. Perhaps more seriously, it increases
heterogeneity among members of a faculty with respect to their
terms of employment. And, as I have argued at length elsewhere,
strong homogeneity in this respect seems essential to effective selfgovernance.
91 The more informationally efficient that the national—
or, increasingly, international—market for individual faculty
becomes, therefore, the less discretion we can expect to be delegated
to university faculties to choose their own colleagues, and
consequently the less need there will be for academic tenure.
C. Governance
For similar reasons, we can reasonably expect that faculty selfgovernance
in all respects—not just with respect to hiring but also
with respect to setting the curriculum and allocating teaching
responsibilities and research opportunities among the faculty—will
decline. When a faculty—or any group—must decide collectively to
allocate benefits and burdens among themselves, it is difficult to
settle on any rule other than equality. Hence, all members of a given
university department are generally expected to do roughly the same
amount of teaching and committee work regardless of their relative
skills as scholars and as teachers. In general, then, the future is likely
90 Linda A. Bell, More Good News, So Why the Blues? The Annual Report on the
Economic Status of the Profession, 1999–2000, 86 Academe 11, 15–17 (March–April 2000).
91 This is a central theme of Hansmann, The Ownership of Enterprise (cited in note 4).
182 The University of Chicago Law Review [79:161
to bring greater centralization of authority within American
universities, which means an administrative model much closer to
that found in conventional proprietary firms.
V. A TOTALLY PROPRIETARY SECTOR?
Should we therefore expect that American higher education will
eventually be populated entirely with for-profit firms? That seems
unlikely. A more plausible scenario is that proprietary institutions
will continue to increase their market share, but that public and
private nonprofit institutions will continue to have a substantial
presence. Proprietary firms may displace or acquire many of the less
well-established nonprofit colleges, but the elite institutions will
continue to thrive. Indeed, there is evidence that nonprofit firms,
once established, can compete with proprietary firms in a variety of
industrial settings. Nonprofit institutions, moreover, are slow to exit
markets whether they are thriving or not.92 (Perhaps the huge
endowments that some universities have accumulated, seemingly
without a persuasive rationale,93 will ultimately be spent to keep
these institutions in business, for better or for worse, much beyond
the time when they would otherwise become unsustainable.) State
colleges and universities, meanwhile, will continue raising the tuition
they charge until they are effectively offering the same terms as
nonprofit and proprietary institutions, and will come increasingly to
resemble private nonprofits—more like the University of
Pennsylvania than the University of California.
CONCLUSION
In the early 1970s, it was reasonable to expect that the future
would bring increasing socialization of both health care and higher
education in the United States. In health care, it seemed likely that
insurance covering both physician and hospital care would be largely
nationalized. Although hospitals might remain largely private
nonprofit or local governmental institutions, their performance, and
that of individual physicians, would effectively be governed by the
incentives created by the national insurance scheme. In higher
education, state and local universities and colleges would continue to
expand their domination not just in terms of market share, but also
92 See Deloitte, Trends in Hospital Ownership Type and Capacity: A Decomposition
Analysis 14 (2009), online at http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets
/Documents/us_ps_FinancingHumanServicesReport_080709.pdf (visited Oct 21, 2011).
93 See Henry Hansmann, Why Do Universities Have Endowments?, 19 J Legal Stud 3, 4,
13, 39–40 (1990).
2012] Evolving Economic Structure of Higher Education 183

in terms of quality. After all, the University of California at Berkeley
had become the finest university in the world. Private nonprofit
colleges and universities would continue to serve a generally
prosperous elite seeking an education accompanied with substantial
amenities, but would become increasingly marginal for higher
education as a whole.
Of course, it hasn’t worked out that way. Health care took a
strong turn toward capitalism, with large investor-owned
corporations rapidly expanding their presence in hospital care,
health insurance, and physician practices (via for-profit health
maintenance organizations). Higher education has moved more
slowly in this respect, but the pace seems to be increasing. The public
presence in the industry is retreating, the proprietary presence is
expanding, and both public and nonprofit institutions are coming
increasingly to resemble proprietary firms as public institutions
charge ever higher tuition and the nonprofit institutions centralize
authority and treat faculty more and more like ordinary employees.
In the long run, in fact, it seems reasonable to expect that the
market will play a much larger role in higher education than it will in
health care. Individuals need insurance against bad health, but it is
not obvious that there is any effective way to provide efficient health
insurance in a competitive market. An effective health insurance
policy should presumably be lifelong, but the rate of change in health
care is so great that it is difficult to write an efficient contract for
even a year or two. Government may for now be able to force the
construction of subnational pools for which private insurers can bid,
but with high residential and employment mobility it seems quite
possible that this approach will ultimately fail and full nationalization
of health insurance will be required, leaving it to the national
government rather than the market to make basic decisions about
the type of health care to be provided, and its distribution across the
society.
Higher education, meanwhile, seems to be going in the reverse
direction. The unit of consumption will probably continue to shrink,
as students increasingly shop across institutions for individual
courses rather than looking for a single vendor of a four-year
experience. And online learning should expand radically the range of
institutions and courses available. The national government will play
an increasing role in financing, which will come largely on the
demand side through relatively unrestricted grants and loans to
students that are tenable at well-regulated proprietary schools as
well as at nonprofit and public institutions. Subject to this broad
subsidy, market forces will continue to determine the quantity and
184 The University of Chicago Law Review [79:161
character of education provided. Proprietary institutions will come to
dominate the lower end of the education market and will make
inroads in the top end as well, while public colleges and universities
retreat relatively rapidly and nonprofit institutions retreat rather
more slowly.
Capitalist higher education may be a bit unnerving for some of
us. I’ve spent most of my life teaching at an institution whose neo-
Gothic architecture makes it look very much like a monastery. It
even has a cloister in the courtyard. For the present, that appearance
isn’t entirely misleading as to the atmosphere within. But after a few
more decades the architecture may be the only remnant of medieval
higher education that survives.
2012] Evolving Economic Structure of Higher Education 185

TABLE 1. ENROLLMENT IN DEGREE-GRANTING INSTITUTIONS BY
OWNERSHIP FORM, 1949–2009
* Degree-credit enrollment only.
Source: National Center for Education Statistics, Digest of Education Statistics:
Total Fall Enrollment in Degree-Granting Institutions, by Attendance Status, Sex
of Student, and Control of Institution: Selected Years, 1947 through 2009 (2010),
online at http://nces.ed.gov/programs/digest/d10/tables/dt10_197.asp (visited Jan
15, 2012).