Published by the Center of the Study of Ethics in Society Western Michigan University

Neill, John

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Western Michigan UniversityScholarWorks at WMUCenter for the Study of Ethics in Society Papers Center for the Study of Ethics in Society4-2006Applying a Business Model to the UniversityJohn NeillWestern Michigan UniversityFollow this and additional works at: http://scholarworks.wmich.edu/ethics_papersPart of the Bioethics and Medical Ethics Commons, Business Law, Public Responsibility, andEthics Commons, Ethics and Political Philosophy Commons, Ethics in Religion Commons, and theLegal Ethics and Professional Responsibility CommonsThis Paper is brought to you for free and open access by the Center for theStudy of Ethics in Society at ScholarWorks at WMU. It has been acceptedfor inclusion in Center for the Study of Ethics in Society Papers by anauthorized administrator of ScholarWorks at WMU. For more information,please contact maira.bundza@wmich.edu.WMU ScholarWorks CitationNeill, John, "Applying a Business Model to the University" (2006). Center for the Study of Ethics in Society Papers. Paper 71.http://scholarworks.wmich.edu/ethics_papers/71ApPLYING A BUSINESS MODEL TO THE UNIVERSITYBy John NeillAAUP, Professor of Economics, WMUI often find myself feeling aggravated whenever I hear a candidate for public office say, "I'mgoing to see to it that our government is run like a business." My reaction to statements like thisis invariably: a government is not a business and so why would you want to run it as if it were?Well, when I hear a university president or provost propose running a university as if it were abusiness I feel the same way. A university is not a business. At least up until now universitieshave not been organized and operated on that premise. But if influential people are starting totalk like this, those with an interest in education need to think about whether a university can andmore importantly, should, be operated as a business.It is certainly not clear to me what it would mean to operate a university or college as if it were abusiness. For example, economists begin organizing their thinking about businesses or firms byendowing these enterprises with a psychology, however rudimentary it may be. Specifically, wemake an assumption about what motivates a firm to do what it does. And since the 18th century,that assumption has been, more or less, that the firm seeks to maximize its profit, the differencebetween the monies it receives from the sale of its products and services and the monies it spendson those products and services it buys in order to produce whatever it is that it produces.Whether or not the firms selling us cars, building us houses, arranging vacations for us, -and soon are as single-minded as this is debatable. Nonetheless, it is a reasonable starting point sincethere is good reason to believe that profit-seeking is deeply engrained in the psychology ofprivate enterprise. But it is hard to imagine a university, particularly a public university,adopting this objective, explicitly or implicitly. If profits are made, to whom will they bedistributed? Will universities and colleges sell shares and then declare dividends? That certainlycould be done and in fact, if I'm not mistaken, it is exactly what Phoenix University IS doing. Bethat as it may, I think it is HIGHLY unlikely that Western Michigan University, the University ofMichigan, Kalamazoo College and all the other universities and colleges in the United States aregoing to direct their activities toward bringing the institution the largest possible profit. Ofcourse, even if a college or university could not become a profit maximizing enterprise, it couldadopt similar objections. For example, it could attempt to maximize its revenues as it minimizesthe cost of any initiative it takes.In any case, could the academy let "the market" guide it in making decisions about enrollment,standards, staffing, investment in plant, and so on? Could the academy become moreentrepreneurial in its outlook? I think the answer to these questions is: certainly. And I thinkthat this is what people mean when they talk about managing the university as if it were abusiness, something that to some extent, administrations have been doing for some time.Universities and colleges have grown in size and scope and class sizes have changed over time.Why? Presumably because the "demand" for college education increased and faculty salariesrose in real terms, among other reasons.Obviously the academy is much different today than it was fifty years ago, and the changes thathave occurred are undoubtedly due to structural changes in the economy. An institution couldpossibly ignore these changes. I wonder if Kalamazoo College, Oberlin, and even places like theUniversity of Chicago are today markedly different programmatically than they were 30 yearsago. But will they be the same 30 years into the future as they are now? I think that's impossibleto predict. Be that as it may, there is no reason to suspect that a university is making a mistake9when it develops a program in a field that is brought into existence by scientific discoveries or byany other development outside the academy.Now these observations are largely preliminary. The question that those with the power tomove the academy in one direction or another must ask is: what should universities and collegesbe doing? Well, let's think about an educational system that is entrepreneurial and highlyresponsive to market forces. Such universities would in all likelihood be quick to react tochanges in the number of applicants, and the prices of those goods and services used by auniversity to reach its objectives. As these variables change, they would be ready, perhaps evenquick to change their objectives as well as the way in which they go about reaching theirobjectives. The university would possibly be a more vibrant, dynamic institution that it is today.But the important question, the question that the people in Lansing, Springfield, Harrisburg,Columbus, and Washington D.C. must ask is: in taking a more entrepreneurial approach to theiroperations, will universities be maximizing their contribution to "social welfare?" Now, socialwelfare is a very arcane concept that economists have a very peculiar view of, peculiar in thesense that our perspective here is not the perspective that others take. I haven't the time, anddon't believe that this is the place to expound on this view. Suffice it to say that economistsargue that public policy should induce firms, households, and all other participants in theeconomy to act in a way that will maximize social welfare.And so when we are considering a reorientation of the academy, we need to think about whetheror not that reorientation will increase social welfare. If people are thinking about runninguniversities like businesses, we should be asking: is this going to increase the contribution of theuniversity system to social welfare? Well, let's confine our attention to the application of marketprinciples to university management. Would this increase social welfare or not?If you've listened much to what economists say, you may have the impression that economistshave a great deal of faith in the power of markets. You may have that impression because theydo. But what "power?" And the answer to this question is: power to allocate resources and setthe prices of goods and services so that social welfare is maximized. However, in that mysticalrapture that they often fall into when contemplating this power, economists often forget that notall markets are capable of doing this! Only what is known as a "competitive" market will dothis, and then only if certain conditions are met.But I think that the undeniable truth is this: competition is nothing more than a theoreticalconstruct. So, if the market for education is not competitive - and it is unlikely that it is and everwill be - adopting market principles to chart the course of the academy is not necessarily going toresult in an increase in social welfare. It may, but it could very well cause social welfare todecrease.This then, in operational terms, is the question that policy makers need to ask: will restructuringhigher education - giving university presidents the freedom to tum their universities into"businesses" whatever that may mean and entail - will this initiative produce benefitsoutweighing the costs that will have to be incurred to bring about that restructuring? There is noreason to believe that a system of state colleges and universities, each pursuing self-interesthowever defined; each competing with the others for students and scarce resources; and eachmechanically reacting to the markets which relate to its operations, will produce a greater netbenefit to society than a system comprised of colleges and universities whose programs and10initiatives are coordinated for the explicit purpose of maximizing the net social benefit fromhigher education.The challenge that those concerned about the new perspectives being considered by universityadministrators is to convince those able to influence the direction in which higher education willmove to adopt this criterion. And though the sort of analysis that I'm promoting here is easierdescribed and defended than done, I would maintain that rough estimates of social benefits andcosts can be made and will at least help to inform and frame our thinking about this importantsubject.Now, having addressed the normative question that any restructuring of the academy raises, Iwant to tum to a positive question. Namely, what impact would a market orientation of theacademy have on the economic status of the professoriate? I'm afraid that any prediction of theeffect of such a change in outlook would be little more than speculation. But I think that noharm can come from thinking about possibilities.11The possibilities that I intend to concentrate on are those which we would have to confront ifadministrators began looking at faculty in the same way that profit seeking businesses look attheir employees. The story that economists like to tell is this. A prospective employer would bewilling to bid a prospective employee's salary and benefit package up to the point where theemployer is indifferent to hiring the individual or not. As an illustration consider a law firm thatcould bill an additional 2000 hours in the upcoming fiscal year at the rate of $100 an hour if itadded a lawyer. Let's suppose that the expenditure on support - secretarial and clerical help andso forth - for a lawyer billing that many hours would be $40,000. What is the maximum amountthat this firm would pay a lawyer in salary and benefits to do this work? The answer is obvious:no more than $160,000. Hence, if the firm has to bid on prospective employees, it would notenter a bid over $160,000. This is the way that economists believe that profit-seeking businesseslook at employment decisions. Well, what if a college or university looks at it the same way?The first question that would have to be addressed is: what would the dollar value of the outputfrom a prospective faculty member be? This is certainly not a number that is easy to calculate. Aprofessor teaches, helps in the administration of her department and the university, and engagesin research. In my opinion, it is impossible to place a dollar value on some of the tasks thatfaculty perform. However, I emphasize the word "some," since it is quite easy to place a dollarvalue on part of the work that faculty do.After all, while a law firm bills clients for hours that its staff devotes to their cases, the universitybills students for the hours that professors spend teaching them. Therefore, in my opinion,placing a lower bound on the value of a particular faculty's output is a straightforward andsimply job: add up the tuition and fees that his students pay . You can admit students, registerthem, organize entertainment for them, and do all the other things that the administration doesfor students. But you can only collect tuition from them if they are taught.I think it is only somewhat more challenging to determine the value of the administrative workdone by faculty. In this case, we merely need to figure out how much would have to be spent tohave administrators to perform the administrative duties being performed by faculty. And so byadding this amount to tuition and fees, we have accounted for much of what faculty do.Of course, faculty also engage in research. However, this research is not bought and sold.Faculty do not carry out research projects which the university administration then shops around.Even funded research is not bought and sold. The funding agency merely agrees to pay the costof carrying out the funded project. There simply is no market for this output and consequently, itis very hard to place a dollar value on any research conducted by university and college faculty.This is not to say that it is impossible to do this. It is just extremely difficult. And certainlysubstantially more difficult to do than it is to place a dollar value on the number of hours afaculty member spends teaching classes.Now, with these observations before us, let's think about how faculty salaries might be affected ifadministrations based personnel decisions on the impact of those decisions on revenues andcosts. I think that in all likelihood, there would be winners and losers from such an orientation.That is, this would lead to higher salaries and more perquisites for some faculty and lowersalaries and fewer perquisites for others. More specifically, it would seem that those willing toteach more and bigger classes would be likely to earn more if university administrations beginthinking about personnel like profit-oriented organizations think about personnel. Likewise,those who are willing and able to do supported research would see their salaries rise. Everyoneelse would be likely to suffer some financial loss.Whatever the impact of a more entrepreneurial approach to university administration on facultysalaries and benefits, the important question is still the normative question raised by such achange in outlook. By themselves, these changes in compensation are neither necessarily goodnor necessarily bad. If because of changes in the way in which their university is managed, oneprofessor's income falls while that of another rises, it is impossible to say if the change inmanagement is for better or worse. Personally, I think that it would be a good thing to rewardpeople more generously for teaching. After all, teaching is the foundation of academia andsometimes it seems that universities are more inclined to reward mediocre research than goodteaching.In any event, there is the likelihood that good and important research would come to meanexternally funded research. And this bothers me. Undoubtedly faculty would change theirresearch agendas if they are rewarded for doing funded research. But this could very well makethe academy a much less creative place than it historically has been. Certainly, this would be agreat loss, since as a center of creative thinking, the academy has few rivals. Thus, the de-emphasis of creative thinking that could possibly follow a change in thinking about how auniversity should be managed is perhaps the greatest cost that this change would impose onsociety. Of course it is difficult to quantify that loss. Nonetheless, an inability to determine whatthat loss amounts to does not mean that it should be ignored in any thoughtful, objectiveevaluation of alternative paradigms.There is no fault in keeping an eye on how university revenues and costs are changing over time;or in thinking about how new revenues could be generated and costs curtailed. But there is adanger in making expanded revenues and lower costs ends in themselves. There may bebenefits from a more fiscally sound academy, but there would also be costs. Both need to beweighed to determine if an entrepreneurial approach to university management andadministration should be encouraged, however difficult that may be to do. Thank you.12

Applying a Business Model to the University

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Applying a Business Model to the University

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