A fail grade for market deregulation

The older I get, the more cynical I become about government intervention in the economy.

That statement might appear to be either a recantation of everything I’ve ever argued, or a sign of the usual tale of left-wingers moving to the right, and right-wingers to the left, as life experience tempers youthful exuberance. It’s neither (well, okay, maybe it’s a bit of the latter), because my developing position reflects the complexities of a mixed economy.

The latest real world experience that has pushed me further into cynicism about government is a very personal one: an attempt by the Australian government to increase competition in education via deregulation is the direct cause of the proposal to terminate the economics program at my university. The policy change will actually reduce competition in the education marketplace in Australia: the market was more competitive with the preceding regulations in place.

Is your head spinning yet? Let me clarify the position by explaining why my university (the University of Western Sydney) is proposing to shut down its economics program.

Government regulation used to require universities to set a minimum entry standard to apply for entry to courses based on performance at the final school exam (now known as an "Australian Tertiary Admission Rank” or ATAR). Deregulation of the sector means that this is now optional, and two major universities in my region – the University of NSW and Sydney University – have responded by letting students apply for a course regardless of their anticipated performance at high school.

When a minimum ATAR was indicated, many students who thought they wouldn’t get a good enough high school result to qualify at one of the higher ranked universities would hedge their bets by also applying for entry to some of the lower ranked universities – including UWS. That then meant that at the end of one academic year, there was a reasonable spread of applicants across all universities: the top-ranked universities got the lions’ share, but there were applications too for the lower-ranked universities, from students who also expected to be more lowly ranked.

Now that open slather is permitted, students have responded by applying for courses only at the top-ranked universities. So now, as the current academic year ends, the projected intake into UWS’s economics program is catastrophically low. In previous years we had well over 100 applicants for our first year intake at this point. This year, we have just 19.

UWS management’s reaction to this has been to propose to shut the degree down completely because it is no longer economically viable. As they put it to one of the many ex-students who has complained about the decision:

"Whilst we acknowledge the tremendous achievements of our staff and students in raising the profile of economics at UWS and beyond, unfortunately, at the present time just 19 students are forecast to enter the B.Ec course in 2013, which renders the course economically unsustainable. This is largely attributable to the advent of the open market for undergraduate courses which was implemented this year."

Bravo! An attempt to make education more competitive will actually end up reducing competition.

Since all prospective students are applying to the "Sandstones” (as the prestigious universities in Australia are known), prospective enrolments at other universities have plummeted. Managers then face two options: put the courses on regardless and hope actual numbers improve, or shut them down now. The simple reaction is to shut them down – which is what UWS is proposing to do.

You might argue that this is just a knee-jerk reaction by bureaucrats who lack the nous that entrepreneurial managers of private universities might have. The latter could see through the change in policy, and anticipate that numbers will have to improve: the Sandstones don’t have the capacity to take all applicants, so once the actual high school results are known, they’ll fill their lecture theatres to the rafters with high-achieving students, and send rejection letters to the rest.

The rejects will then have to apply to the lower-ranked universities, and the actual numbers at the beginning of the next academic year will be better than the prospective ones right now. From this perspective, the right response would be to privatise universities and have them run by entrepreneurial capitalists, rather than cautious bureaucrats.

There’s a modicum of truth in that argument, but even if universities were run by far-sighted entrepreneurs rather than cautious bureaucratic bean-counters, this move from a regulated to an unregulated market would still have reduced competition.

Firstly, the Sandstones will increase their share of the market. By squeezing every last available student into their lecture halls, their higher capacity utilisation will reduce the share available to the other universities. Secondly, even a privately run university would be squeezed – especially if its activities were partly debt-financed (as they inevitably would be). Not reacting to a downturn in demand by cutting back on capacity would court bankruptcy.

The best economic model of this conundrum – that a less regulated market can be less competitive and less diverse – was developed by hotelling. Imagine a beach with an even distribution of bathers: where is the best spot for an ice-cream shop to set up business? The simple answer is right in the middle of the beach: that maximises the market (the less people have to walk, the more likely they are to buy an ice-cream) and it suits customers too – they have the shortest possible walk to get an ice-cream.

But what if there were two ice-cream vendors? Socially, the best situation would be for one to locate one-third of the way along the beach, and the other two-thirds along it. That way, they each get half the market, and customers only have to walk a maximum of one-sixth of the beach’s length to buy an ice-cream. That’s a great improvement over a maximum walk of half of the beach.

However, if one of the vendors moves closer to the other vendor, he will increase his market share at the other’s expense (if consumers don’t differentiate between them). At the extreme, one vendor can capture 67 per cent of the market by moving right next to the other vendor: he will get 100 per cent of the purchasers from two-thirds of the beach. If left to free competition, both vendors would end up right in the middle of the beach – forcing customers to have to walk up to 50 per cent of the beach to get an ice-cream – and the vendors would still split the customers 50:50.

You’d get a socially and economically better outcome if vendors were regulated, and required to set up some minimum distance apart from each other: people would have to walk less, and ice-cream sales would rise because of the shorter walk to get an ice-cream.

What is happening now to higher education in Australia – and to my department at UWS in particular – is a classic example of this phenomenon.

And therein lies a conundrum. I’ve spent a fair part of my life watching government meddle in education in ways that were ostensibly designed to improve it, but in practice diminished it. Instances range from the abolition of the three-tier system we used to have – of universities teaching intellectually-oriented disciplines and professions, CAEs (Colleges of Advanced Education) teaching skill-oriented occupations and TAFEs (Technical and Further Education) teaching industrial and skilled labour occupations – to the two-tier system today, to the introduction of HECS (the "Higher Education Contribution Scheme”) – which was supposed to make students contribute to the cost of their education, and has instead resulted in a student body more focused on earning money to pay fees than studying and learning (there: I’ve now earned my grumpy old man badge).

The moral in part is that old classic, "if it ain’t broke, don’t fix it”. Governments have "fixed” higher education so many times now that it’s well and truly broken. Rather than attempting to improve complex systems that they clearly don’t understand, politicians and bureaucrats should respect what has evolved over time, and stop devising simple solutions – such as "let’s introduce competition into education” – to complex systems.

More from Business Spectator

Comments

Please login or register to post comments

Comments Policy »
Deregulation will almost always increase inequality, because it increases the opportunity for profit-seeker plunder (A fail grade for market deregulation, November 12).
Government is never neutral, as Karl Marx pointed out. Both Liberal parties – both dominant conservative parties – have abandoned any commitment to the public good and the public interest. They serve Big Business, and beyond that transnational capitalism.
In the health system, funder-purchaser-provider increases inequity within the system, and encourages poorer health care for the less glamorous - as is intended. Naturally the payment levels of the casemix/ABF/voucher will be either reduced or increased more slowly than costs.
DFAT's website admits that like other FTAs, a Trans-Pacific Partnership unfair-trade agreement "will also deal with behind-the-border impediments to trade and investment", thus making effective industry policy difficult if not impossible.
Flogging-out public tertiary education funding has led to the usual entirely predictable consequences – managerialism, marginalisation of staff as well as clients, exploitation and neglect of students, and an obsessive money focus that always damages standards.
No mention about the quality of the course or the attempt by certain lecturers to try and force economic anarchy by trashing Australian house prices? (A fail grade for market deregulation, November 12)
Steve, your maths on Ice cream marketing is wrong... and maybe on 2 counts (A fail grade for market deregulation, November 12).
If the vendors are at thirds of the beach the longest walk is one third (by anyone at either end), so I'd suggest that the most efficient location is at the first/second and third/fourth quarter boundaries.
Even with the best of intentions people can be wrong (including me now!) on both sides of the spectrum.
My philosophy has evolved to "no good turn goes unpunished", which I guess is a sub or super set of grumpy old man-ness.
Learning how to learn is the first step to self funding (A fail grade for market deregulation, November 12)
What still confuses me about deregulation is that there are only a certain number of jobs available in any area. Tripling the number of lawyers isn't going to result in three times as many jobs for lawyers. It may well result in over servicing and more court cases. (A fail grade for market deregulation, November 9)
Currently there are significant issues with a lack of places for Medical Interns, which will only grow worse as the number of doctors graduating increases.
It would be interesting to compare sporting achievement with academic achievement. The sporting elite receive priority training and funding from an early age, but in academic circles a more egalitarian approach is taken.
Most people would agree with that old classic, “if it ain’t broke, don’t fix it”, but then again most people think they are much smarter than they actually are, so they assume the rule does not apply to them as they can clearly improve the existing system for being smarter than others who established the old system. (A fail grade for market deregulation, November 12)
Also change is always good fun for people who are implementing the change, never mind the troops who were subjected to endless changes or reorganisations, causing so much disruption and providing no apparent benefit.
Finally people expect their governments to be active, otherwise their popularity decrease. Just look at criticism of the Victorian government for being cautious. So governments are always on the lookout to do things; anything that would make them look proactive. They will move to some other turf long before the bad outcome is apparent.
I was in unis before the Dawkins 'revolution' (making me a grumpy old woman to the max, on both counts - old and grumpy), so saw it all happening. Standard issue slow motion train wreck. (A fail grade for market deregulation, November 12)
As it all became about competition (driven by ideology rather than a sound understanding of reality) unis turned into PR machines. As managerialism bit they filled up with managers and the service providers to managers and the academics became a despised underclass who had to be supervised (ethics committees anyone?), target driven and performance managed.
Yes, Steve, I watched as UWS hired its first round of DVCs, followed by PVCS, etc etc etc.
Last job I left I had a research role. When I went the managers got together and decided not to replace me with another researcher but an assistant to the uber spin meister.
Says it all, really.
Work for myself now, and am a great deal less grumpy as a consequence.
A good example of the failure of deregulation to create competition is the deregulation of the banking industry since the 1980's. The industry is now more concentrated, offering the same products with a different badge, and has simply resulted in higher home prices with bigger mortgages and fatter profits to the big guys who could take advantage of the deregulated market place. (A fail grade for market deregulation, November 12)
The same will happen in higher education, which means less diversity and the production of a graduate robots who have all learned exactly the same thing.
Steve, I suggest you visit the Coursera website (www.coursera.org).
Still early days, although I'd venture that over the longer term it's this type of tertiary education model that has the potential to cause much greater disruption to both UWS and The Sandstones. (A fail grade for market deregulation, November 12)
You describe a failed outcome. Is the cause of the problem specifically deregulation or contradictory policies in general? A highly regulated economy is great risk of policy conflict and policy resistance. Infamously, the Stalinist example produced many examples of failure that had to be glossed over as "for the greater good". (A fail grade for market deregulation, November 12)
You forgot to mention external/online enrolements once internal capacity has been filled.
Re ice creams shops. Maybe one should spend a little more time on the assumptions. firstly, you are assuming that all ice cream shops open their stores at the same time and are not assuming any further competition but more importantly that all the universities are serving a similar ice cream (economics course). (A fail grade for market deregulation, November 12)
Paul Hanly is correct on the arithmetic regarding distance walked but if my overriding concern was price I would want both vendors next to each other so I could make a quick comparison (A fail grade for market deregulation, November 12). Otherwise I would walk to one, check to prices then walk to the other and if it was less buy there and if the prices were higher I would return to the first. Ultimately it will depend on the value of time versus value of what is being bought - and this will vary from person to person. Which is why the internet has made such a huge difference when one is able to make price comparisons without taking a step.
My wife is an alumnus of both UWS and Macquarie (not in economics). During her time at UWS she was frustrated by such things as courses moving campus ( by over 40 km) double booked rooms, paperwork not being entered. "Get me back to a real University!" was the cry.
I have a science based degree from UNSW and talking to one of my former lecturers, found him decrying the selection process. It seems pre requisites have been abandoned so the innumerate are left to battle with physics. Not pretty.
The failure of competition is evident in many industries. Adelaide has one metropolitan newspaper as anti competitive laws prevented News limited from owning both the Advertiser and the News, or financing a management buyout. Having only one paper is much better.
On aggregation. If it's such a bad thing, how come we have food courts, car dealers aggregating (Parramatta rd, Auto alley etc), and all the fashion shops together? It must work. (A fail grade for market deregulation, November 13)
The scenario could well be worse for students hoping to go to the sandstone universities than proposed by Steve Keen (A fail grade for market deregulation, November 12). Imagine that these students are accepted and begin their chosen course. Will these universities have the desire or need to do the hard yards required to support the weaker students they have taken on? Having received the extra income for a while will these students then be failed so as not to "spoil" the reputation of the university. And then where do these students go?
seems to me that those pesky policy makers in education have borrowed the models of those pesky neoclassical economists...great in theory, ridiculous in reality (A fail grade for market deregulation, November 13).
Yes Paul (November 12, 9:47 AM), you're correct: it should have been 25% and 75%.
In some good news, UWS has decided to maintain a major in Economics within the Bachelor of Business. However the fate of the Bachelor of Economics, our flagship course, is still undecided. Some public feedback to UWS on the merits of maintaining this program, which is the only one in Australia committed to a pluralist approach to economics, would be appreciated.
Steve,
Start teaching economics through Open Uni so anyone all around the world can enroll in your courses and learn your style. I am in my last semester at the moment through Open Uni and every unit I have completed had a large amount of students enrolled... (A fail grade for market deregulation, November 13)
Looks like things changed a lot. UNSW 1994 BE (Comp) was my first undergrad year. (A fail grade for market deregulation, November 12)
I wonder, can you actually PAY FULL fee and get a place now? - wow.
I'm also annoyed by UNSW undergrad telemarketers calling me.
So what you object to, Mr. Keen, is not government intervention, but its intervention to seemingly eliminate govt. intervention (A fail grade for market deregulation, November 12). But since institutions are belly-up financially because of poor government funding and mass enrolment to hide the underlying unemployment, they have to 'improve', which is overhead-expensive plus results in worse outcomes than previously. I did not know that Australia was suffering from the same silliness as the rest of the West, but why not? The only certain outcome is that the Sandstones will lose prestige and their quality deteriorate. Unfortunately it will only mire them even more in neoclassical dogma. But look at the bright side: without teaching you can tour the world and give high-priced lectures in your writing, which is enjoyable and clever. In Denmark we need just one professor of your ilk in Economics or Finance. Greetings from Hamletville.
This idea that "deregulation" will ultimately solve all the worlds problems is complete drivel. (A fail grade for market deregulation, November 12)
Of course, removal of red tape is a good thing. Removal of pointless obstacles to trade is a good thing. But the mantra of "deregulate for the good of all" is false.
If this really were the truth, why not deregulate traffic? Sure, there would be a rough period while things settle down... but at the end of the day, the traffic will move more quickly.
Or maybe, it wouldn't!
The number of applications now stands at at least 20 (A fail grade for market deregulation. November 13).
Having been exposed to various economic schools of thought through my own research over the last year, and having experienced the rigidity of a couple of intro level econ classes at USyd (through an arts degree I will not be continuing), it has become apparent to me that the pluralist approach offered by UWS is where I want to learn. It seems to be a place where conflicting ideas are more likely to be engaged with and contested on relevant grounds, rather than shunned for non-conformity to the accepted concepts. I gotta say, I love a little bit of intellectual dissent.
I will be writing to UWS in the next day or two, as time permits, however, in the hope of maximising the possible impact of a single voice, I have a couple of quick follow up questions. Firstly, the most relevant email address to send my views to seems to be business.courses@uws.edu.au, is there a more appropriate way to get in touch with the relevant people(study@uws.edu.au, maybe?)? Secondly, as UNSW and USYD are unlikely to be able to accept all applicants, what are the views at UWS on the possibility of an increase in applicants as students alter their preferences for the 2nd and 3rd of offers? Is an arguement in that vein likely to be persuasive? Lastly, with applications at about 20 at the moment, any idea what a realistic number of new applicants would be needed to ensure the course stays open?
It looks like some improvements have been made, so hopefully the trend will continue.