Differential funding for uni departments

Peter Mandelson wants to revamp British universities to make them more inclusive and have them focus more on job-relevant courses. Proponents of liberal arts schools are predictably outraged. I agree with them that they shouldn’t be discriminated against. A fair system would make people pay for the benefit they receive from their education, and have the government subsidise to the value of any positive externalities from education.

To draw an analogy to university staff pay, the quality of university staff depends in part upon the difference between their university salary and their outside options. As Daniel Hamermesh puts it:

If a university went ahead and paid equally, lowering economists’ pay and raising French professors’ pay, it would have a great French staff and a dreadful bunch of economists.

Of course, Hamermesh is talking from the perspective of a US academic. In the US they pay different salaries for different disciplines. In NZ we do pay all university staff equally and the research bears out the truth of Hamermesh’s conjecture. So paying people with different market values equally is essentially a subsidy on those with low market value.

To come back to the issue of students’ fees, subsidising all students equally is a subsidy on students whose degrees have only private value. Surely, in order to be fair to all departments and all students, the subsidy on education should pay for only the social benefit. The entire private benefit to the student should be paid for by the student. At the very least the subsidy should be proportionate to the social benefit and differ across disciplines.

So who would be the winners and who would be the losers? Speculate away!

  • Market wages fairly approximate the marginal value of another graduate in X and, to the extent that they don’t, the appropriate solution ought to be a subsidy to the wage rather than a subsidy to the education investment, no?

  • What I found quite interesting when I skimmed over a couple of articles on the topic was that they cited non-market benefits as the main positive externality. Things like health benefits, social harmony and democratic engagement are apparently substantial benefits. So perhaps the wages don’t accurately reflect the marginal social value of a grad. Whether there are differences in these benefits across disciplines, I don’t know.

    I’m not sure why you think the wage is the appropriate price to subsidise, though. Schooling is not necessarily vocational so if the benefits accrue through education, rather than being realised through labour, then surely subsidising the education itself is preferable.

  • Tim

    @Eric Crampton

    Well, “no”…

    Firstly, “Market wages fairly approximate the marginal value of another graduate in X”. The marginal social value, not the marginal private value, of education is what this whole post is about. That is, positive externalities from education. For example, if education in discipline X makes individuals more likely to vote for governments who implement better policies, then there is a social value to discipline X education that is not captured in the market wage of the graduate.

    Secondly, “the appropriate solution ought to be a subsidy to the wage rather than a subsidy to the education investment”. Could be, but equally the positive externalities we’re talking about here could arise from the education itself, not from the conduct of a particular productive activity usually undertaken by graduates with that education. The democracy example above is of the former type. Spillover benefits from R+D activities are of the latter type, and yes, could be internalised either by a subsidy to the education or by a subsidy to the job.

    By the way, nice post – I’ve always had much the same thoughts about educational subsidies. The million-dollar question is whether an economics education should be subsidised… or taxed (we’ve all heard of the studies showing that an econ education encourages conformity of the graduate to the self-interested rational actor stereotype… surely we want to discourage that? On the other hand, the economist authors of this blog are providing a public good at their own expense, and whether or not they’re doing it for altruistic reasons is irrelevant…. dispute unresolved).

  • It will lower the quality of science in my opinion (unlike Mandelson says). If all the sectors of universtities focus on industry based education, then it will harm science. Also I don’t agree with the plan of “mature” and part-time students. Sure, it would be better to build industry based education only on economy related sectors (or sectors directly related with employement) of universities.

  • @Rauparaha: health benefits seem internalized; the others seem far too ephemeral to warrant real money subsidies. Ought my students be taxed because exposure to public choice promotes “democratic disengagement”?

    @Tim: 1. Yes, it’s true that education correlates with thinking like an economist. That’s about the only positive externality argument I can reasonably buy, in fact. I wonder about the magnitude though. How much education spending would be needed to move the median voter sufficiently to generate a noticeable change in policy? Would it pass cost-benefit? I’m doubtful.
    2. Yes, where the positive externality comes from education –> voting rather than woolly (shonky) “markets underappreciate social workers” arguments. But again, passes cost-benefit?
    3. Principles-level micro should be in every university graduate’s portfolio. But so too should be intro philosophy, bit of history, some stats, intro pols. Unfortunately, our new BCom Core makes sure that students are almost completely unable to take anything outside of the commerce schedule — here’s hoping our students flip over to Arts or Sciences degrees instead.

  • Tim

    @Eric Crampton

    Agree heartily on point 3. In fact, I’d love to see Economics withdrawn from commerce faculties altogether, but I assume that the $ from the 1st year courses will ever prevent that.

    Setting up the framework for the kind of cost-benefit analysis you mention would be a fascinating research project… some broad-minded PhD student should take that on one day.