How do you run a business when profit is meaningless?

This is a key question confronting every university administration. Our PSE institutes are businesses – complex organizations which require enormous amounts of money, from diverse sources, in order to succeed. For many reasons, it is a blessing that they are not oriented towards profit. But without a clear bottom line, how do you actually know when to spend, and when not to spend? What replaces the discipline of the market, come budget time?

At one level, the answer is the same as it is for every other non-profit: priorities are governed partly by mission, and partly by the availability of funds. But universities’ mandates are unbelievably broad – almost limitless, actually. Take “meeting students’ needs”, which is a common enough mandate. What could that encompass? Better seating in the cafeteria? A new gym, or hockey arena? What about an international airport? Similarly, consider a university’s mission to, “advance the frontiers of knowledge”. Does that just entail upgrading computer labs, or could it also include, say, purchasing a space flight simulator? What about an actual space station?

Here’s the problem. The only bar universities set for themselves is “quality”, and virtually anything can be justified in the name of “quality”, so long as the money is available to pay for it. So if you give universities money – any amount of money at all – they will spend it, because they have no instinct to tell themselves not to. The polite term for this is, “the revenue theory of expenditures”. However, another way to think about this is to consider that universities – like beagles and hamsters –lack a brain mechanism that tells them to stop eating.

Basically, universities are good at growing, but terrible at shrinking. The answer to every problem is always “more”. If more comes from government, great. If it comes from alumni or business, great. If it comes from students, great. Universities are agnostic about sources of money, but fundamentalist about aggregate incomes.

But we seem to be entering a phase in which governments aren’t in a position to provide more money, and students and parents seem more reluctant than usual to pay or donate more. And if more revenue is out of the question, then diets are the order of the day. How will universities react? Nick Rowe has painted one particularly nasty, but plausible, scenario, which bears pondering. His specifics are a bit different than mine would be, but the basic point – that universities on a diet are incredibly difficult to manage – deserves a lot more attention that it currently receives.

University income has been flying upward for most of the last decade; when these beagles land, it will be with a heck of a thud.