HESA

Higher Education Strategy Associates

Category Archives: Policy

August 24

Welcome Back

Morning, all.  August 24th.  Back, as promised.

School starts shortly.  The new crop of frosh were born in 1997, if you can believe that – to them, Princess Diana has never been alive, and Kyoto has always been a synonym for climate change politics (check out the Beloit Mindset List for more of these ).  Stormclouds line the economic horizon.  It’s going to be an interesting year.

In the US, progress on any of the big issues in higher education are likely to be in suspension as the two parties spend months figuring out who their candidates are going to be.  On the Democratic side, the presumptive candidate, Hilary Clinton, has put forward an ambitious plan for higher education, which, barring an absolute sweep at the polls, has almost no chance of passing Congress.  On the Republican side, no one apart from Marco Rubio seems to care much about higher education, except for Scott Walker who seems to want to use higher education as a punching bag, much as his idol Ronald Reagan did fifty years ago.

Overseas, the most consequential potential development is in the UK where – if the government is to be taken at face value – for the first time anywhere, measured quality of teaching might meaningfully affect institutional resources. In the rest of Europe, the ongoing economic slump looks set to create new problems in many countries: in Finland, where GDP contracted for the third year in a row, government funding will be down roughly 8% from where it was last year.  And that’s in one of the countries that thinks of itself as being particularly pro-education.  Germany, Sweden, and (maybe) Poland look like the only countries that might resist the tide.

Here in Canada, the outlook remains that post-secondary education will continue to see below-inflation increases in government funding for the foreseeable future, except in Alberta where the new provincial government intends on giving institutions a big one-time boost, which may or may not be sustainable, depending on how oil and gas prices fare.  This means resources will be scarce, and in-fighting for the spoils will be fierce.  And this, in turn, means a lot of governance, a lot of wailing about “corporatization” (always a good epithet when funding decisions aren’t going your way), and – inevitably, given the recent events at UBC – a lot of arguments about resource allocations, dressed up as arguments about governance.

(In case you’re wondering: I have no idea what happened there, exactly.  I do, however, believe three things: i) in a corporate context, the statements by the Board of Governors and interim President on Gupta’s departure are actually quite easily interpretable, and don’t leave a whole lot to the imagination; ii) if/when the truth comes out, it’ll be a hot mess of grey zones, and some of the wilder conspiracy rhetoric about the departure will seem ludicrous; and, iii) any theory positing that Gupta was fired for a lack of “masculinity” by a Board Chair who not only spent millions of his own dollars to create a dedicated Chair on Diversity in Leadership, but also that replaced said “unmacho” President with Martha Piper of all people, has more than one prima facie credibility problem.)

But behind all this, there’s a broader truth that I think the higher education community is being very slow to acknowledge.  The era of growth is over.  Higher education is not a declining industry, but it is a mature one, and this changes the nature of the game.  In the aughts, Canadian university income increased faster as a proportion of GDP than pretty much any country in the world (Netherlands and Russia aside).  It was a rising tide that raised all boats.   And I mean that literally: as a share of the economy, universities grew by half a percentage point (from 1.4% to 1.9% according to the OECD, which I think is a bit of an underestimate), which is like adding more than the value of the entire fishing industry.

But those boats stopped rising a couple of years ago.  Institutions with smug strategic plans about increasing excellence need to face reality that there’s no new money with which to achieve those goals: funds for new projects are, for the most part, going to have to come out of increased efficiencies, not new money.  It’s tougher sailing from here on out – permanently.  Institutions are going to need to be leaner, better managed, and more focused.  However, the meaning of those terms are hardly uncontested in academia.

This should make for a fun year.  Looking forward to it.

June 05

Random Crazy Thoughts About Funding Formulas

A few days ago, I attended a meeting of an advisory group on the review of the Ontario University Funding Formula. I can’t of course tell you what went on inside the meeting, but I thought I would share with you some of the (creative? crazy?) ideas that I had while inside them.

One issue which has popped up both in Ontario and in some meetings I had in DC last week, was the problems created by having money automatically fund enrolments. Now obviously money has to track enrolments to some degree – big universities need more money than little ones, expensive programs need more money than cheap programs, etc, etc. But on the other hand making the relationship direct creates an institutional incentive to deal with every cost problem by just chasing more students, which may not be socially optimal. Indeed, it leaves institutions open to the charge (not always entirely fairly) that they care more about getting people in the door than making sure they graduate.

So here’s an idea: since tuition fees rise directly with enrolment, institutions already have an incentive to chase bodies. Why not switch the funding formula incentive entirely to completion as Denmark does with its “taximeter” system? Completions are probably correlated about .75 or .8 with enrolments, which means that it wouldn’t cause a massive dislocation; you could probably up that to .9 or so if you funded based on an “expected completion metric” which took into account the quality of the incoming students (so, for instance, Queen’s would have to show much higher completion rates than Algoma to get the same money because the entrance averages of its students is higher).

Compounding the money-follows-enrolment problem is the fact that no formula I’ve ever been able to locate ever makes a distinction between the cost of an average student and the cost of a marginal student. This is on the face of it ridiculous: the 15,000th student at any institution is a heck of a lot cheaper to educate than the first or even the 5000th. And while yes, actually calculating marginal costs is a mug’s game and you certainly wouldn’t want to try to work that out in a funding formula, it’s not impossible to include a taper in the funding mechanism. That is, the first 100 in a particular field of study might be worth X, the next 100 might be worth .9x, the next 100 .8x, and so on and so forth. Easy enough. Why not do it?

One other interesting discussion to be had around funding models is the extent to which they can make systems “sustainable” (by which government means “not cost too much”). The Government of Ontario is very keen on the idea of using the funding formula to promote “sustainability” in Ontario universities. My first thought was that this was kind of nutty since a) the funding formula discussion is entirely allocative (ie. it is about how to divide the money not how much to give) and b) as I understand it, this funding formula review is not allowed to touch i) tuition, ii) collective agreements and iii) pensions. Frankly it’s pretty difficult to address sustainability if the formula can’t really take into account the largest components of revenue or costs. And yet, the central problem in institutions is getting cost increases back in line with revenue increases (see here and here).

As I’ve argued previously, there are good reasons why we might want to link total compensation to a particular percentage of total income, in much the same way that teams in professional sports do: it keeps the lid on costs when times are tight and it gives everyone in the institution an incentive to raise net revenues. Now, this particular provincial government won’t countenance doing that by interfering with collective bargaining (a problem since universities on their own don’t seem to be able to control costs very well) or by implementing the “BC solution”  where the government sets out sector-wide guidelines about the extent to which aggregate pay can rise.

But then I thought of a way around this: what if the funding formula actually fixed the proportion of compensation costs to non-compensation costs? What if the formula contained a dollar-for-dollar clawback as compensation rises above 75% of total income? Of course, there’d be all sorts of screaming, and the devil would be in the details as to how to define compensation (circumventing the limit by hiring people as contractors would be the obvious loophole to close), but I think it might actually be a very effective tool for to help institutions become more sustainable.

Food for thought, anyway.

June 02

Funding Formulas 201

The last time we  talked about funding formulas, we discussed the difference between determinative and allocative formulas.  When we talk about Ontario, which is currently undergoing a funding formula review, we’re definitely talking about the latter.  The formula isn’t going to drive total spending (this remains the legislature’s prerogative), what it is going to do is decide how the total amount will be split up.

The question is: how best to do this?

At this point, it’s worth going into some history about funding formulas.  Back in the day – say, the 1960s – universities would come cap-in-hand to government asking for money for various sundry purposes (usually, there were a couple of new “wow” proposals in there to justify a big increase), and government, in-turn, would cut cheques to individual institutions for any old amount.  Eventually, governments got tired of that shtick, and decided to come up with a way to allocate funds automatically – but fairly – to avoid going through that rigamarole every year.

Over time, however, global thinking about funding formulas changed – due mainly to work done at the OECD.  It’s now no longer just about divvying up money, it’s about using money to create a set of incentives to steer the system.  Now, admittedly, when the OECD talks about using money to steer a system, it does so because it thinks it’s better for governments to set goals for institutions, and then get out of the way.  In other words, governments “should steer, not row”.

(An interesting question in Ontario, of course, is how formula spending power can be made to steer the system, when the government of the day has a predilection not just to row, but to flail around like a five year-old on a boogie board.  Should be interesting.)

Anyhow, the idea is that you can get universities to do stuff by rewarding them via the funding formula.  The question then, from a practical point of view, is: how big a carrot do you need to get an institution to do something it may not want to do (e.g. pay more attention to teaching, get research institutions to reach out more to poorer kids, etc.)?  The answer here is: “nobody knows”.  And this is a bit of a problem, especially if you’re trying to incentivize something.  Thanks to the work of Nicholas Hillman and David Tandberg, we can be pretty sure that small nudges – say, nudges that account for 2-3% of the budget, or so – aren’t going to work.  If you’re going to try something like this, you need to go big.  As in, “at least 10% of an institutional budget” big.

Now, here’s the thing: in Ontario, the government only accounts for about 40% of university funding, with the rest coming from tuition or commercial activities.  So something that puts 10% of the institutional budget at risk actually has to put 25% of government funding at risk.  And logically speaking, this means you probably can only pick one, or at most two goals for your funding formula to target.   So what should the government pick: completion rates?  Research commercialization?

It’s hard, in fact, to see how you can steer competently in a way that makes sense for all institutions, in a jurisdiction where so little institutional funding comes from government.  There is the possibility of creating individual goals for each institution based on individual missions, but now you’re getting a long way from the idea of a “formula”, something where everyone pumps the same numbers into the system, and a global result for all institutions pops out.

Basically, system steering gets a lot tougher for governments if they’ve already allowed institutions to become mostly student-funded.  This is something Ontario is about to discover in a big way.

May 25

Free Tuition: A Rocky Rollout in Chile

So the big news last week in Santiago was the announcement of the start of the “free tuition” plan, which was part of President Michelle Bachelet’s election platform in 2013.  Only it’s not quite free tuition, and it’s still not clear how it will be paid for.

I’ve written previously (back here) about the Bachelet promise, and the potential difficulties with implementing it in a country where most higher education is provided by private institutions, and forced nationalization is expressly prohibited in the constitution.  To those difficulties have been added the fact that the big tax hike the government thought would finance its reforms to compulsory and post-secondary education isn’t in fact going to raise quite as much money as previously expected, due mostly to a slump in the price of Chile’s main export, copper.   Not to mention the fact that the President herself has seen her approval ratings crater due to corruption allegations regarding her son.

The announcement last week left a lot of questions unanswered.  Free education, the President said, would now be available to “el 60% de los estudiantes más vulnerables”, which sounds like 60% of students, but based on the number of students estimated to benefit – roughly 250,000 students, or a quarter of the total – actually seems to mean “students from the poorest three income quartiles”.  There was no explanation of how institutions would be compensated for taking students.  And the President added a curious phrase, saying that students would be able to “accedan a la gratuidad completa y efectiva, sin beca ni crédito”. One hoped that the intention here was to underline that she meant free tuition and not just free net tuition (i.e. where grants offset the cost of fees).  However, some – including the academic and former Minister Jos Joaquin Brunner – have wondered whether it might mean that those who receive free tuition will lose eligibility for student aid.

Weirder by far is the President’s decision to simply exclude some institutions from the process.  Universities that are members of CRUCH (an acronym meaning “Council of Rectors”) – 16 public and 9 private universities that make-up the older (pre-1973) higher education system – were included, as were a selection of the country’s Institutions Professional (basically, Polytechnics), and its Centros de Formacion Tecnica (basically, community colleges).   But the country’s 35 private post-1973 universities were pointedly left out of the program.  No reason for this was forthcoming; and in case you’re wondering, it’s not solely because they are private, as all the IPs and CFTs are private, and they were included in the scheme.  One senses that some decades-old animosity between university sectors is playing-out here.  Whatever the reason, it puts Chile in the weird position of giving free tuition to median-income students attending a CRUCH university, and giving nothing beyond loans to students from the bottom of the income scale studying in the same program at a private university.

In theory, the government is committed to implementing full, across-the-board free tuition at some later date.  But it’s unclear exactly when this will happen and, given the situation in the private universities, whether it will in fact cover all forms of education.  Will it, for instance, cover graduate studies?   Will it cover 7 or 8 years of undergraduate education (currently the norm), or only the first 4 or 5?  Most importantly: how are institutions going to be compensated for taking all these students for free?

Hopefully, all of these questions will be resolved expeditiously.  But with only seven months remaining until the implementation date, Chileans are still in the dark about a lot of important details.

May 07

Funding Formulas 101

So I’ve been asked to act as a member of the “reference group” (that is, a group of individuals from whom advice may be sought, but which is not technically an advisory group – yeah, I know, it’s a bit odd) for the government of Ontario’s funding formula review.  Since everyone’s about open government these days, I thought I’d make public some of my views on the subject of funding formulae so you can get a sense of what I’m contributing to the discussion behind the scenes.

So, first off: does Ontario actually need a change to its funding formula?  For purely housekeeping reasons, yes.  It’s been about 40 years since the formula was last re-written, and it looks increasingly jerry-rigged (I can’t find a completely up-to-date version of the Ontario formula online, but here’s an ungated 2009 version that, minus some jiggery-pokery around education students, is still pretty much what’s in the system today).

But we need to be clear about what a funding formula amendment can achieve.  The government seems to be under the impression that a new funding system can help institutions better contain costs (it can’t), or support differentiation (it can, but only if you stretch the term “formula” to include a lot of stuff that isn’t particularly algebraic).  Other stakeholders seem to think that a funding formula change might improve financing for institutions.  This it can do in theory, but not – in Ontario at least – in practice.

At a very broad level, funding formulas come in two types: determinative and allocative.  In a determinative formula, the government plugs all the relevant numbers into a formula, and out the other end comes a number that tells the government how much to spend.  These are pretty rare: Australia has a system like this, as does the United Arab Emirates.  Governments tend to dislike these formulas because they hand control of overall spending to bodies outside of government: as long as universities keep admitting people, governments have to keep spending (in the UAE’s case, it also led to Treasury trying to meddle in the admissions process as a way to keep expenditures under control). Instead, most formulas are allocative: government determines how much it wants to spend, and then uses a formula to divide that amount between all the institutions.  That’s very definitely how Ontario’s formula works right now, and I think it is safe to say the current review isn’t going to change that.

Tinkering with an allocative formula will certainly make some universities better off, but by definition it can’t make them all better off.  Indeed, winners and losers tend to be more or less equally balanced.  You can tweak the formula to help institutions that are more research-focused, but small institutions will pay; you can put more money to fund Fine Arts programs, but other fields of study will have to lose money to balance it out.

Another thing about funding formulas: the amount of difference they make to institutional behaviour is basically proportional to the percentage of the total bill that government foots.  In Quebec, where institutions are dependent on government for 80% of their money, changes to funding formulas matter a heck of a lot more than they do in Ontario, where the government share of operating expenditures is closer to 40%.

All of which is to say: let’s not kid ourselves that this funding formula review is going to change very much.  This is a risk-averse government, which dislikes seeing too many losers.  For some reason, they have initiated a process that has the potential to create a lot of losers.  My best guess is there will be a lot of interesting ideas thrown around, which will cause a lot of angst; in the end we’ll have a model that may have a very different set of indicators and coefficients, but will leave the actual distribution of money across institutions more or less unchanged.  Think of it as a policy process as written by Giueseppi de Lampedusa: everything will change, so that everything may stay the same

Regardless, I’m looking forward to the process, and to writing more about funding formulas.  More later.

April 30

An Alberta Election PSE Primer

As long-time readers know, when there are important elections looming, I like to do analyses of party platforms.  There is such an election in Alberta next Monday.  It has never before occurred to me to write about Alberta election platforms because never before has it seemed like the Alberta PCs, who have been in power since Nixon’s first term, ever seemed likely to lose their majority (for the record, I never bought the polls in 2012).  And yet here we are, just a few days out, with the Conservatives in third, and the NDP running first in rural Alberta in some polls.

These are strange times.  Like, Book of Revelations strange times.  (“And when he opened the seventh seal, there was a silence about the space of half an hour, until the first polls began to trickle in” – Rev 8:1.)

And so, without further ado, here’s what the parties have to say:

The “Prentice Plan” (apparently the words Progressive Conservative don’t focus test well, despite the Party having been in power since Prohibition) promises a “world-class education system”.  Most of it is about K-12, but PSE does receive three vague-to-the-point-of-meaninglessness bullet-points.  These are: i) enhance financial aid and student awards; ii) develop a plan to ensure stable funding for institutions; and, iii) ensure apprenticeship training is more inline with labour-market demands.  For anyone who’s been awake for the last four years, this is baffling: the Tories slashed grants in 2010, and have yo-yoed institutional funding since 2008 (it’s 5% up!  It’s 7% down! Whee!).  Given the collapse in oil sands production, the most obvious way to “align apprenticeships with workforce needs” is probably to simply stop doing them for a year or two (see here for more on the link between commodity prices and apprenticeships).  So their platform seems to be mostly about running against their own recent record, with a little fantasy thrown in. Oh, and no commitment to more money for institutions, so far as I can tell.

The Wildrose Alliance Party, of course, does not have a record on which to run.  No one does, because the Tories have been in power since the late 17th century.  And that lack of familiarity with power shows in the party’s PSE platform, which is called – wait for it – “World-Class Post-Secondary, Trades & Skills Training” (imaginative, huh?).  They have an affordability and accessibility portfolio, which is pure Glen Murray (better transfer credit, more online delivery), a research policy that is nothing of the sort (more collaboration with industry, more tax credits for undergraduate students – yes really), and a trades/skills policy that is a mix of the good (more dual credit programs in trades in secondary schools), the banal (better information in high schools), the already-being-done (collaborate with other provinces to make trades certifications more portable), and the slightly weird (allow trades completers to choose between an oral and a written exam).  Note, however: no new public money for institutions.

The New Democrats, or rather, “Alberta’s New Democrats”, presumably to distinguish them from the ravening socialists who periodically run their neighbouring provinces, make only three PSE-related commitments in their platform.  One is with respect to re-installing the Summer Temporary Employment Program for youth ($10 million).  The second is “stable funding for universities and colleges” – in practice, a set of guaranteed annual increases of about 5% per year, which is quite substantial.  The third is to impose a total freeze on tuition, which undoes about 50% of the good of promise number two.

So if you’re in Alberta and you’re voting education in this election, the NDP would seem to be the obvious choice. That said: even if they are elected, and even if they are competent enough in government to deliver on their promises (a challenge for any non-incumbent party in a province where the government has been in power since the latter part of the Tang Dynasty), the net increase in money for institutions will still be below the rate of increase in universities’ underlying costs.  Cutbacks will still happen.  Sorry.

April 28

Trust, Transparency, and Need-Based Aid

If you look around the world at the kinds of subsidies made available to students, you’ll be struck by the fact that there are two very large chunks of the world where need-based aid isn’t the dominant form: post-Socialist Europe and Africa.  The reasons for this boil down to a simple issue: trust.

In the post-socialist countries, the preference for merit-based aid over need-based aid is a relatively recent affair.  Prior to 1990, access to university was restricted both in absolute numbers and on ideological grounds: in order to attend university one had to have correct “origins”.  This was another way of saying that if your family was considered too bourgeois, you weren’t allowed to attend (Vaclav Havel, for instance, was denied entrance to university on these grounds).  Though regimes eased up on this somewhat as the 70s and 80s progressed, class origins continued to play a role in admissions up to the end of the regime.

So when it came time for new, post-socialist regimes to come up with student aid policies, there was considerable suspicion about anything that looked like it discriminated based on something like class.  Preferences based on parental characteristics, quite simply, were too tainted by communism to be a viable political project: nobody trusted government to discriminate between students based on something like income.  Merit-based aid, on the other hand, was not so burdened by history, and gave the appearance of being “objective” in the sense that exam results were measured in a consistent way across the country, and could easily be used to differentiate between students.  The results, in a word, were trustworthy.

In Africa, the trust problem is slightly more complex, and less tractable.  There, the state lacks the ability to monitor individuals’ income and consumption through the tax system.  Trying to run a need-based system of aid without means of income verification is difficult, to say the least (in bits of Eastern Europe – especially Russia – income verification poses the opposite problem in that people are reticent about providing documentation that would help the government verify income).  Without income verification, need-based systems tend to rely on proxies like ownership of land or livestock, which is either very complicated or impossible to verify.  These systems quickly fall into disrepute: because it is possible to cheat them, everyone comes to assume that those who receive need-based aid have cheated.  And so again, something simple and transparent – like merit as measured through examination results – becomes the de facto standard.  Everybody knows it’s ludicrously regressive, because the awards inevitably go to students from families rich enough to pay many multiples of university tuition to attend the best secondary schools, but at least it’s transparent and not corrupt.

Japan has a similar issue: it has no need-based grants, because no one trusts that the tax system accurately captures parental income.  It does, however, have a need-based loan system.  When I asked someone senior there about why they trusted need-testing for one and not the other, he simply said “because people pay back the loans”.

All of which is to say that need-based aid requires that students and families trust that state institutions will deal with them fairly, and state institutions need to trust that families won’t try to lie to them (or, at least, have reasonably robust measures of discovering lies).  In Canada, we take this for granted, but we shouldn’t.   Without trust, and the transparency that tax-based verification tools provide, need-based aid simply wouldn’t exist.

April 24

A Fascinating Student Aid Experiment

One incredibly cool thing about this week’s budget is that it creates a policy experiment that may settle some age-old questions about financial barriers to education.  I speak of course of the abolition of the in-study income clawback.

When people talk about “financial barriers” to education, they are usually conflating two separate phenomena.  The first has to do with return on investment: if prices rise too high, students will say they are not interested because it’s more money than it’s worth.  Usually this is phrased as a matter of “I’ll to take on too much debt”, though the problem actually isn’t debt-related (borrowers and non-borrowers alike pay the same amount – a bad deal is no less crummy if you’re paying it out of pocket rather than resorting to loans).  The second has to do with liquidity: students might like to take a course, even if its expensive, but they simply can’t scrape together enough cash to pay the fees and keep body and soul together.  The solution to the first problem is to lower tuition and/or provide more grants.  The solution to the second problem could also be to provide more grants, but loans could probably achieve the same thing a whole lot more cheaply.

The thing is, when we talk about students having “financial barriers”, we never really specify which of these two phenomena is the main issue for students.  And this is a problem because it means we may not be getting the policy response right.  If a student has $20,000 in debt, and you have $1,000 to give them, does it make more sense to hand them the $1,000 and let them spend it how they like, or should you use it to reduce their debt?

The abolition of the in-study income clawback actually gives us a heaven-sent chance to understand how all of this works in practice.  The way the threshold currently works is that students get to pocket $100 a week with no clawback.  Everything above that amount is clawed-back at a rate of 100%.  In this way, up until now, work and loans have been perfect substitutes – working more doesn’t increase the amount of money you have to spend, it just means you have less debt.

But now, suddenly, work and loans are no longer substitutes.  Students who work just got handed a whole bunch more money in the form of larger eligibility for aid, which will usually be met through loans (though some will find their extra need met by remissible loans, which are essentially grants).  How they use it will tell us a lot about what students actually care about. If they keep all that new money – that is, if they maintain their work hours, take all the new loan money, and spend it – we can infer that the main issue for students is not debt, not return on investment, but liquidity.  On the other hand, if they choose not to borrow the extra money, it tells you that, in fact, debt and rate of return are the bigger issues.  Similarly, we can test sensitivity to borrowing by comparing the behaviour of students whose extra aid is made up of repayable loans vs. those whose loans will be forgiven: if there is no difference between the two, it’ll be a pretty good indication that students prioritize liquidity over lower debt.

For what it’s worth, my money’s on students caring more about the short-term than the long term: I predict they’ll take the extra money and spend it.  That will make life tougher for advocates of tuition reduction over greater loan remission: if the evidence suggests that students prefer to consume more in the short-term rather than save for the long-term, why should governments do anything other than provide greater liquidity through loans?

Though it probably isn’t what students had in mind when they lobbied for this measure, the learning opportunity afforded by this policy experiment is a golden one.  Let’s hope a research plan exists that will help us monitor the results so as to better understand students’ preferences.

April 23

The State is not Entrepreneurial

If you’re interested in innovation policy, and haven’t spent time under a rock for the last couple of years, you’ve probably heard of Mariana Mazzucato.  She’s the professor economics at the University of Sussex who wrote The Entrepreneurial State, which is rapidly becoming the source of an enormous number of errors as far as science and economic policy are concerned.

Mazzucato’s work got a fair bit of publicity when it was released for pointing out that a lot of private sector tech is an outgrowth of public sector-sponsored research.  She has a nice chapter, for instance, outlining how various components of the iPhone – the touchscreen, the GPS, the clickwheels, the batteries… hell, the internet itself – are based on research done by the US government.  This is absolutely bleeding obvious if you’re in science policy, but apparently people out there need to be reminded once in awhile, so Mazzucato found an audience.

Where Mazzucato goes wrong, however, is when she begins to draw inferences; for instance, she suggests that because the state funds “risky” research (i.e. research that no one else wold fund), it’s role in R&D is that of a “risk-taking” entity.  She also argues that since the state takes a leading position in the scientific development of some industries (e.g. biotech), it is therefore an “entrepreneurial” entity.  From this, Mazzucato concludes that the state deserves a share of whatever profits private companies make when they use technology developed with public science.

There are two problems here.  The first is that Mazzucato is rather foolishly conflating risk and uncertainty (risk is tangible and calculable, uncertainty is not).  Governments are not a risk-takers in any meaningful sense: they are not in any danger of folding if investments come to naught, because they can use taxing power (or in extremis, the ability to print money) to stay afloat.  What they do via funding of basic research is to reduce uncertainty: to shed light on areas that were previously unknowable.  Individual companies do very little of this, not just because it’s difficult and expensive (if a company is big enough, that’s not a problem – see Bell Labs or indeed some of the quite amazing stuff Google is doing these days), but because the spillover from such research might allow competitors to reap much of its value (a point Kenneth Arrow made over fifty years ago).

The second issue is that nearly all of the examples Mazzucato offers of public research leading to technological innovation and profit are American, and a fairly high percentage of these examples were funded by the Defense Advanced Research Projects Agency (DARPA).  To put it mildly, these examples are sui generis.  It’s not at all clear that what works in terms of government investment in the US, with its massive defense infrastructure, huge pools of venture capital, and deep wells of entrepreneurial talent, hold very many lessons for countries like Canada, which are not similarly endowed.  Yet Mazzucato more or less acts as if her recommendations are universal.

The book’s recommendations amount to: government should own a share of young innovative companies by gaining shares in return for use of publicly-funded knowledge.  But this is pretty tricky: first, there are very few cases where you can draw a straight line from a specific piece of publicly-funded IP to a specific product, and even where you can, there’s no guarantee that the piece of IP was publicly-funded by your local government (Canadian start-ups benefit from knowledge that has been created through public subsidies in many different countries, not just Canada).  And while there’s a case for greater government investment in emerging companies (economist Dani Rodrik makes it here for instance), the case is not in any way predicated on government investments in R&D.  In Canada, the CPP could adopt such a policy right now if it wanted – there’s no reason why it needs to be linked to anything Industry Canada is doing in science funding.  To the contrary, as Stian Westlake points out, countries that have been most successful in converting public science investments into private hi-tech businesses eschew the idea of equity in return for scientific subsidies.

Worst of all – though this is not entirely Mazzucato’s fault – her argument is being picked up and distorted by the usual suspects on the left.  These distortions are usually variations on: “Someone said the state is entrepreneurial?  That means the state must know how to run businesses!  Let’s get the state more involved in the direction of the economy/shaping how technology is used!”  This way disaster lies.

So, Mazzucato did everyone a service by forcefully reminding people about the importance of publicly-funded R&D to any innovation system.  But her policy prescriptions are much less impressive.  Treat with care.

April 17

Spring 2015 Reading List

Some notes on books recently read:

University Leadership and Public Policy in the Twenty-First Century, by Peter MacKinnon.  I really wanted to like this book before I started it.  Since I started working in this field, few university Presidents have had such a profound positive effect on their institution as Peter McKinnon did at the University of Saskatchewan.  And how can you not love someone who says stuff like: “weak academic departments tend to perpetuate themselves because of their reluctance to apply standards higher than they see reflected in themselves”?

That said, the book is a bit uneven.  Where he has real passion and a good story to tell from his time at the University of Saskatchewan (e.g. chapters on collective bargaining and tenure), he’s flat-out great.  Where he has less passion, and the narrative is mostly stitched together from things like AUCC reports, it’s much less compelling.  And I’m not 100% sure he needed to take such a shot as his successor, Ilene Busch-Vishniac, over the Buckingham affair.  Still, worth a read.  Buy it.

Designing the New American University, by Michael Crow and William Dabars.  As with MacKinnon’s work, I really wanted to like this book before I started it.  The re-think of the relationships between department and faculties at Arizona State under Crow’s watch is quite intriguing (see this Change article from 2009), and is that rare thing in higher education: a genuinely innovative model.  And how can you not love an American university President who thinks the main problem of elite American universities is that they aren’t enough like elite Canadian universities (i.e. large)?

The problem is, this book – co-authored with University of Arizona historian William Dabars – is a tedious slog.  Very little of it is actually about ASU; far, far too many pages are devoted to a history of higher education, which breaks little new ground and is written in a plodding, name-dropping style that repeatedly had me wishing to hurl the book across the room.  There are a few interesting bits in chapters 5 and 7 on ASU, but even then Crow talks a lot about the fabulous results ASU has achieved, while saying very little about the practical tactics of how ASU achieved a re-conceptualization  (which is what any sane editor would have told them was the interesting bit).  Anyways, save your money, skip this book, and read this free download of articles about ASU instead.

Locus of Authority, by William Bowen and E.M Tobin.  I had no particular reason to think I would like this book, because I find former Princeton President William Bowen’s writing style to be that of a tedious blowhard.  That said, it actually ended up being a light and interesting history of governance in American universities, combined with an argument that governance today is in not bad shape, except that professors should on no account have any control over whether the courses they offer are in-person or online.  If this seems like an oddly specific preoccupation, you need to know Bowen’s consultancy outfit is really big on online delivery.  Buy it if you’re a governance freak, don’t if you’re not.

Crisis in Higher Education: A Plan to Save Small Liberal Arts Colleges in Americaby Jeffrey Docking with Carman Curton.  I had no idea what to think of this book, because I’d never heard of Jeffrey Docking of Adrian College, the small liberal arts school in Michigan where he is President.  Since I work with some small institutions, the book’s subtitle is what attracted me.  According to Docking, the answer to saving small liberal arts colleges is “more Div III football”.

I was a bit befuddled by this, but this article actually makes the case pretty simply: kids in the US will pay a lot of money to be part of a sports team, and since Div III sports are cheap (no scholarships), this actually works out pretty well for institutions  What Docking is really saying, of course, is that the answer to shortages of funds is: more students.  At almost any cost, you need more students.  In other words, the way to save small liberal arts colleges is to make them somewhat larger liberal arts colleges.  This would not come as a surprise to any of our U4 universities (Bishop’s, Mount Allison, Acadia, St. FX); they’ve been doing this for years, only without the benefit of the $25,000 tuitions US Liberal Arts colleges can demand.  Buy this book if you for some reason are proposing an Athletics-led strategic enrolment plan; otherwise, just know that there is a literature on Athletics-led strategic enrolment plans.

Have a good weekend.

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