Prosperity (part 3)

October 4, 2019

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Here I will summarize Colin Mayer’s ideas about the relationship between the corporation and the government.

Law

The idea that a corporation is more than a profit-making machine requires a new way of thinking about corporate law.

It should not simply be considered as a set of rules that define rights and responsibilities and what firms can and should do, but instead as a way of allowing different parties to commit to the common purposes that the corporation promotes. The remarkable contribution of corporate law has been to provide commitment devices that bind people and organizations together in such a way that they fulfill purposes that would otherwise be infeasible.

The commitments Mayer is talking about are more than contractual obligations. They are “self-imposed restraints” that build trust in such relationships as employer-employee or supplier-customer.

Corporate law affects commitments by “establishing the range of relations a corporation can sustain.” It:

  • Enables corporations to adopt a range of forms for different purposes
  • Empowers various parties, no longer just corporate directors and shareholders
  • Enforces the rights of different parties through such means as “voting within their particular class, voting corporately in conjunction with other classes, initiating class actions, or publicizing the opinions of members of the class in social media.”

If this seems rather abstract, that is typical of the book, which is stronger on general principles than on practical examples. An example of at least the first point is the innovation of the “benefit corporation,” which is allowed by the laws of thirty-five states and the District of Columbia. This B-corporation is similar to a C-corporation, except that it requires its directors to consider the impact of its activities on employees, customers, the community and/or the environment.

Regulation

Mayer sees an inverse relationship between the level of commitment and trust in the economy, and the need for government regulation. The UK, described previously as an economy dominated by widely dispersed corporate owners, is a low-commitment economy. Many other countries, on the other hand, have various ways of building commitment:

Nordic countries confer control on long-term owners, in particular families, who are actively engaged in the oversight of corporations. These long-term owners are able to uphold self-regarding commitments. Central European countries, such as Austria and Germany, confer control rights on stakeholders, in particular employees, as well as shareholders through workers councils and co-determination on supervisory boards. These allow Austrian and German corporations to offer credible communal commitments beyond those that are self-regarding. In the industrial foundations of, in particular, Denmark, founders of corporations relinquish control rights to a board that is responsible for ensuring that the corporations act in trust for the philanthropic benefit of other members of society. The foundations are therefore able to offer social as well as communal and self-regarding commitments.

Where the Friedman doctrine is most influential, in the UK and US, it has tended to erode social commitments and encourage calls for government regulation.

We need to break out of this destructive spiral of declining commitment and intensifying regulation by conceiving what corporate commitment is capable of achieving and creating the context within which it can realize its full potential to perform communal and social as well as self-regarding purposes.

Government regulation is no substitute for corporate cultures with pro-social purposes, self-imposed constraint and trust. External regulation without internal commitment leads corporations to find ways of evading the laws. For example, banking regulations have fostered the rise of financial institutions that perform banking functions without being classified as banks because they don’t take a traditional form (with depositors).

Mayer suggests that regulations be based more on function than on form. Institutions performing similar functions should be regulated in similar ways, or else activities will move from a regulated sector to an informal unregulated sector, like “shadow banking.” “This will potentially be a cause of a systems-wide financial failure that will be more serious than the financial crisis of 2008.”

A second principle is that regulations be based on a clearly defined public purpose. An emerging purpose today is verifying the security of data storage systems.

A third principle is that regulations must address past failures, such as the failure to recognize and manage the risks of highly leveraged hedge funds, or derivative securities like collateralized debt obligations.

Partnership

Conflicts between the private and public sector have gotten in the way of providing many public goods, such as adequate infrastructure. “There is a chronic under-provision of it around the world,” including in some of the wealthiest countries.

Part of the problem, noted in the last post, is an accounting system that excludes many social costs from private accounting, while excluding many social benefits from public accounting, thus exaggerating both private profits and public deficits.

When the public sector relies on private companies to help provide public goods, the two sectors have a conflict of interest: “Governments and regulators want maximum quality at lowest prices for the largest number of, in particular disadvantaged, consumers. Companies want the highest revenues from the provision of the lowest-cost projects and services.”

Mayer recommends that public obligations be specified in company articles of association, somewhat as they were when monarchs and parliaments granted charters to build canals or railroads. Complete freedom to incorporate and operate “may or may not have been appropriate for private companies that were not supplying public goods, [but] it is most certainly not right for the provision of infrastructure.”

For its part, government needs to engage the private sector in the design and regulation of infrastructure services. Corporate responsibility cuts both ways, conferring some legitimacy as well as obligation.

As I noted in the first post, the Friedman doctrine seems to be based on the assumption that the pursuit of private interest ultimately serves the public interest through the miracle of free-market competition. Mayer views this as naive, overlooking the enormous power of the corporation to enrich its shareholders at the expense of the public good. The profit-making machine rolls on, increasingly out of control, while the democratic state struggles to remain viable. The times require a thorough rethinking of the corporation, so that private gain may be reconciled with the well-being of society and nature.

The corporation is a conscious entity that has values. But when its sphere of operation is public not private, when it interacts with others in fulfilling its function, and when it is collectively part of a bigger whole, its consciousness has to embrace its environment, not just itself. That is the challenge of the twenty-first-century corporation, government, and world, and it is what will make the subject of the corporation one of the most fascinating for many years to come. We await the coming of the [next] age of the corporation as the trusted corporation.

 


Prosperity (part 2)

October 3, 2019

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What would it take to implement Mayer’s vision of a corporation that is more than just a slave to its shareholders’ demand for profit? Here I will describe some of what he has to say about corporate ownership, governance, and the measurement of performance.

Ownership

Henry Ford’s first two corporations, the Detroit Automobile Company and the Henry Ford Company, did not work out very well. In both cases, investors wanted him to bring an automobile to market before he thought it was good enough. He learned his lesson and retained more family control in his third effort, the Ford Motor Company. “This time, with no outside investor interference, Ford transformed his ideas for car design and production into one of the great corporate success stories of all time.”

Here’s the lesson Mayer draws from this: “Where ownership coincides with vision…, vision is supported not extinguished by ownership.” The danger of public stock ownership is “the mundane views of investors stifling and snubbing the spark of creative inspiration.”

Widely dispersed ownership is especially common in Mayer’s United Kingdom. It has the advantage of expanding the available supply of capital, making capital cheaper. It allows small investors to get an average market return on investment without incurring excessive risk, assuming they have a diversified portfolio. But it has the disadvantage of undermining “the ability of entrepreneurs and innovators to pursue idiosyncratic value that the market does not immediately recognize.”

In many parts of the world, such as Asia, South America and continental Europe (especially Germany), family control remains common. In the United States, family businesses have declined but other forms of block ownership are more common than in the UK. Mayer hopes that large institutional investors like pension funds will invest less for short-term financial returns and more for long-term social benefits. Unlike the UK, the US also allows dual-class share structures, where the shares of company founders and top executives carry more voting rights than shares offered publicly. In theory, this also gives visionary leaders some protection from short-term financial demands.

Governance

Mayer sees three main aspects of good governance–“purpose, practice, and performance. You have to want to do it, you have to bring others along in doing it, and you have to demonstrate you have done it.”

Mayer links purpose both with corporate cultural values and with the various types of capital and their constituencies:

One way of determining a company’s purpose is to answer the question what is its value proposition? What value is it seeking to create for whom over what period of time? Is it predominantly looking to enhance or maximize shareholder value, or consumer value, or the human capital of its employees, the social capital of its communities and societies, or the natural capital it owns and in its supply chain?

Mayer’s first principle of management is, “Corporate control should be exercised and value maximized by scarce capitals.” That is, control should be shared with those who represent the kind of capital the corporation is most trying to grow. If a company is dedicated to growing its human capital, then it should share control with its workers.

Natural capital poses a special problem for governance, since its human representatives are not obvious, but some people may represent it better than others:

There are therefore two possible solutions to the protection of natural capital. The first is to allocate control rights predominantly to younger generations of owners and require them to relinquish control to their successors as they age. The second is to put natural capital ownership in trust of older generations whose concern about their reputation will make them take their role as custodians seriously….

Measuring performance

“The long-run growth of the firm requires the balanced growth of all its capitals not just material and financial capital.” If a company cares about its impact on other forms of capital, it must find ways to measure that impact in its profit-loss accounting.

To take an obvious example, corporations should not just cut down a forest or pay wages too low to live on, and then count their financial gains as profits while leaving the societal costs to be borne by someone else. Technically, sustainable corporate activity must address the problem of “externalities,” which are “benefits [or costs] that accrue to one party from activities undertaken by another without the latter being rewarded [or penalized] for the former.”

The theoretical solution is to internalize the externalities. The corporation should shoulder the costs of depleting natural capital or human capital, and receive some benefit from growing them. It should count all forms of capital investment as costs, and subtract all those costs when calculating profits. Failure to do so makes corporations seem more profitable than they are. Oil companies aren’t actually worth as much as they would be if their activities were sustainable. It also leads corporations to misallocate resources, devoting too many to the kinds of capital growth–material and financial–that are customarily accounted for.

National accounting is similarly distorted. National accounts overstate national income and growth by ignoring the deterioration of natural capital. The nation also misallocates resources by counting money spent on education, infrastructure and the environment as a cost, but having no comprehensive system for measuring the benefits. Thus public spending appears more wasteful than it is, while a corporate tax cut appears more profitable than it is.

Mayer acknowledges that “it is much harder to measure such nebulous concepts as human well-being, social capital, and natural capital, or at least to attach monetary values to them with the same precision as profit.” Nevertheless, some progress is being made. Several international agencies have cooperated to produce the System of Environmental-Economic Accounting (SEEA), which has provided measures of natural capital for twenty countries.

Individual corporations do not have to put a monetary value on their environments, but just reckon the costs of both acquiring and replenishing natural resources before claiming a profit. They need a similar approach for growing and sustaining other forms of wealth.

Continued


Prosperity

September 30, 2019

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Colin Mayer. Prosperity: Better Business Makes the Greater Good. Oxford: Oxford University Press, 2018.

“What are companies for?” says the cover of the August 24-30 issue of The Economist. The cover story reports:

…[T]he Business Roundtable has either seen the light or caved in, depending on whom you ask. On August 19th the great and good of CEO-land announced a change of heart about what public companies are for. They now believe that firms should indeed serve stakeholders as well as shareholders. They should offer good value to customers; support their workers with training; be inclusive in matters of gender and race; deal fairly and ethically with all their suppliers; support the communities in which they work; and protect the environment.

This change of heart is applauded by some but criticized by others, including the editorial board of The Economist itself. It goes against the dominant view of the corporation that was proclaimed by Milton Friedman in Capitalism and Freedom (1962):

[T]here is one and only one social responsibility of business––to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Corporations are the instruments of individuals, their shareholders, and “business” as such cannot have responsibilities…only people can have responsibilities.”

Colin Mayer, professor of management at Oxford, has written Prosperity in opposition to this “Friedman doctrine”:

The message of this book is that the Friedman doctrine is not a law of nature. On the contrary, it is unnatural; nature abhors it, if only because it has been the seed of nature’s destruction. If it ever deserved to have its time, the Friedman doctrine has had it. It is not the business paradigm of the twenty-first century, and as long as we continue to believe it to be so, the greater will be the damage it inflicts on our societies, the natural environment, and ourselves. Few social science theories are both so significant and misconceived as to threaten our existence but that is precisely what the Friedman doctrine is doing in the twenty-first century.

I’m going to side with Mayer right from the outset. Sociologists like myself are generally suspicious of a doctrine that defines social responsibility so narrowly and individualistically. Having taught family sociology for many years, I don’t know a sociologist who would claim that the family exists only to serve its own members. It is a social institution with many responsibilities to society, such as acting as an “agency of socialization” to transmit the culture to a new generation. Why should economic institutions be so different?

The classical answer is that the economy is the realm of free-market competition. The pursuit of economic self-interest motivates people to produce something they can exchange for what they want. The “invisible hand” of the competitive market reconciles competing wants and produces the greatest good for the greatest number. So except for a few “institutional” economists and other minority views, economists have viewed the economy as an aggregation of competing individuals rather than a sociocultural organization of cooperating social actors.

Does this individualistic view make much sense in the era of giant corporations? Surely the corporation is a social institution, and as such must have responsibilities to society at large. If its only responsibility is to make profits for its shareholders, then it is primarily an instrument of the wealthy, since the richest 10% of the population owns over 80% of the corporate shares. Unfortunately, there are a lot of ways for powerful corporations to serve shareholders while performing disservices to others, such as workers, consumers, or future generations hurt by a degraded environment. The only defense against a self-serving, potentially sociopathic corporation is the law. But American corporations are also defined as legal persons in law, with the right to spend unlimited amounts on political campaigns (although not by contributing directly to candidates). They have considerable power to block regulations they don’t like. The Friedman doctrine plus Citizens United is a formula for plutocracy, not service to the common good.

Is a corporation just a machine?

Mayer’s critique of the Friedman doctrine is more than just a common complaint about corporate misbehavior and a call for more government regulation. What I found exciting about this book is its intellectual depth, as Mayer draws on fields as diverse as history, biology and philosophy to challenge the conventional view of the corporation. He doesn’t just want to regulate it; he wants to redefine it by understanding it in a larger context:

The release of the corporation from the rule of shareholder rights [will] presage a new age of enquiry into the role of the corporation in contemporary society that extends beyond the current confines of economics and finance to embrace all of the humanities, sciences, and social sciences.

First, Mayer points to the variety of corporate forms and functions that have emerged over the course of history: the “merchant trading company established by royal charter to undertake voyages of discovery,” the “public corporation created by Acts of Parliament to engage in major public works,” the private manufacturing corporation, the service firms and financial institutions, and the transnational corporation. Recently he sees the rise of the “mindful corporation” that runs less on traditional forms of capital and more on information and ideas. More on that later.

The entity described by Friedman is not what corporations have always been, but what they have become in modern times. “[W]e find the corporation progressively losing its public sense of purpose as its investment tail increasingly wags the administrative dog and the corporation becomes a rudderless vessel, not well suited for voyages into uncharted seas to eternity.”

Mayer calls Friedman’s view a “property view of the firm–shareholders are owners of the firm in the same way as they possess a home or a washing machine.” And the firm they own is also a kind of machine:

The traditional analogy of firms is with engineering not biological processes. A firm is a form of production in which different inputs—capital, labour, land, materials—are combined to produce an output of a good or service. It is a mechanical process that continues so long as the inputs are fed into the corporate machine and it stops when the inputs are no longer available.

Just as a machine can have a best design to achieve its fixed purpose, a corporation can have an optimal system of ownership and governance. “That optimal structure has often been associated with the Anglo-American system of shareholder ownership and control, and there has, until recently, been a widely held view that the world was converging on it.”

Another implication of mechanistic thinking is that corporations, like machines, have no purposes of their own. Once my watch is designed and engineered to tell time, it can’t do anything else. Questions of purpose disappear from analysis and discussion if corporations are just doing what they must do, which is maximize profits for their owners.

This machine-like conception of the corporation is not dynamic enough to account for corporate innovation and evolution, which could include re-purposing.

[I]n a world of creation rather than consumption where companies and individuals are innovating not just implementing then this mechanistic view of institutions and individuals as automatons guided by unobservable forces cannot apply….Once economics strays from the confines of markets and contracts then it has little to say about processes that involve the creation of products and processes, which previously had not even been contemplated.

This is a problem that goes well beyond corporations. Our understanding of society and nature is enhanced if we acknowledge a creative process of self-organization operating at multiple levels–individual, institutional, societal and beyond.

A more organic view

Organic metaphors have played a larger role in sociology than in economics, so Mayer’s conception of the corporation comes as no great shock to a sociologist. “The corporation is not just a profit-generating machine. It is a living, evolving entity capable of consciousness of its living environment and its potential to contribute to it.”

The corporation represents a distinct level of organization, with its own agency and its own effects on other levels of organization, both lower and higher. The idea that corporations have some of the rights of persons is not unreasonable, as long as they have responsibilities both to their constituent individuals and to the society and natural world of which they are a part. If they only existed to serve their shareholders, then any separation of ownership from management would be a potential problem, since managers might not do what owners wanted. This “agency problem” has been a longstanding preoccupation in economics and business administration. But if corporations can have diverse and multiple purposes, some autonomy of management from ownership is an opportunity. “[T]he very thing that Friedman saw as a deficiency of the corporation is an attribute allowing it to balance the degree of commitment it offers to different parties with the control that it exercises over them.”

Rather than carrying out a fixed purpose, corporations innovate by bringing together and serving many forms of capital, not just financial. These include:

…human capital (employees, suppliers, and purchasers), intellectual capital (knowledge and understanding), material capital (buildings and machinery), natural capital (environment, land, and nature), social capital (public goods, trust, and social infrastructure), and financial capital (equity and debt).

Today financial capital is only a small part of the world’s total capital, and placing it at the center of economic life inhibits needed innovation. The actions of the corporation can either create or destroy capital of any kind. For example, it can create human capital by training workers or destroy it by rendering existing workers useless.

In the organic view, the corporation is not a machine with a fixed purpose, but an active constructor of collective purpose, “a rich mosaic of different purposes and values.” Accordingly, it has the potential to build trust with any combination of the many constituencies associated with the forms of capital listed above. It can contribute to the greater good because it chooses to, not just because it is coerced to do so by government regulation.

Underlying Mayer’s conception of the corporation is a broader philosophy of life, one that reverses “the question from what should one expect of life to what should life expect of us.” Individuals do not participate in institutions just to get things for themselves, but to lead meaningful lives by identifying with purposes beyond themselves.

The mindful corporation

Notice that Mayer described the corporation as “capable of consciousness.” That’s a bold claim, considering that more mechanistic thinkers minimize the role of consciousness even at the individual level, let alone at the collective level.

The Machine Age has been heavily influenced by a philosophy of mechanistic reductionist materialism. The mechanistic part says that everything is some kind of machine. The reductionist part says that the way to study the machines is to break them down into their mechanical parts and show how the interactions of the parts explain the whole. For example, the discovery of the structure of the DNA molecule, which occurred around the time computers were being developed, encouraged biologists to think of living organisms as chemical machines running a genetic “program”.

To the extent that the mechanistic metaphor holds, it’s rather convenient for science, since human understanding of the machines we invent gives us a leg up in understanding nature. But the price we pay for that apparent understanding is to render illusory or irrelevant some treasured aspects of our subjective lives–consciousness, experience, free will, meaning, purpose and value. For example, what we call “mind” may be seen as nothing but the software that runs on the hardware of the brain, and that makes us no more than a sophisticated robot. We are conscious of what we’re doing, but the real causes of our behavior are not our conscious intentions, but mechanical processes that normally lie beneath our awareness.

In the twentieth century, that kind of extreme materialism was adopted by many philosophers and scientists in preference to a discredited mind-body dualism, which thought of mind as a ghostly, immaterial thing inside the material body. An alternative to both views is to regard mind as a creative process enabled by physical mechanisms without being determined by them. Some philosophers (and here I go beyond Mayer) associate that creative process with a certain kind of complexity, the complexity of a higher-level individual as opposed to a mere aggregation of parts. Both a living cell and a puddle of water consist of molecules, but only the cell would be considered an individual. Similarly, both a multi-celled organism and an aggregation of bacteria consist of cells, but only the multi-celled organism would be considered an individual. In humans and other animals, a multitude of cells cooperate to create a special kind of individual event, an experience. We have no formulas or algorithms to deduce how a unique experience is synthesized from a multitude of inputs. Yet a novel experience can change the subsequent course of events throughout the body–a decision about what to eat, for example–so that consciousness matters after all. The life of a high-level individual is enabled from the bottom up, but also organized from the top down. It harnesses lower-level mechanisms to serve emergent, higher-level purposes.

If what we mean by “mind” is such a creative process, then the objection to using that term at multiple levels of complex organization is less cogent. One can distinguish a highly-organized group of people from a mere aggregate such as a crowd. People in a crowd interact, but people in an organization cooperate to create higher-level events such as policy decisions. They don’t just obey laws of nature; they create new rules that cannot be deduced from those laws. The corporation is a higher-level individual in its own right, and the corporate “mind” is the cooperative process of defining corporate reality (that is, creating the corporate culture).

For Mayer, this is not just a description of what humans do but an insight into how nature works. That’s why he cites Thomas Nagel’s Mind and Cosmos: Why the Materialist Neo-Darwinian Conception of Nature Is Almost Certainly False. Nagel is a philosopher, but a number of distinguished scientists have also been questioning the twentieth-century understanding of genetics and evolution. The issues are complicated, but they involve how much causal weight to assign to the molecular level (DNA) alone, and how seriously to take the organism as an active user of both genetic and acquired information, whose decisions affect its own quality of life as well as the survival of its genes. (See, for example, Jablonka and Lamb’s Evolution in Four Dimensions and Jesper Hoffmeyer’s Biosemiotics.) The conception of an organism as a slave to its “selfish genes” (Dawkins) may be just as much an oversimplification as the conception of a corporation as a slave to its selfish shareholders!

Thinking of the corporation as a higher-level individual rather than a machine helps us see how it can have such subjective qualities as values, purposes of its own, integrity, and even kindness. Idealistic to be sure, but no more than we expect of other institutions, such as families and churches.

To summarize, while Milton Friedman conceives of the corporation as a single-purpose machine serving its owners, Colin Mayer sees it as a more organic and evolving entity within an organic and evolving social and natural world. I find Mayer’s view eminently more sociological, as well as consistent with the most coherent philosophical position I have studied.

Continued


Technology and the Disruption of Higher Education (part 2)

September 17, 2019

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Henry C. Lucas, Jr. introduces himself as “a business school faculty member who has taught full time in the business schools at Stanford University, New York University, and the University of Maryland.” In the latter institution, he played a leading role in the development of an online MBA program.

Lucas believes that new technology “will prove transformational for universities that adopt it and disruptive for those that resist.” He believes especially in the transformational potential of two educational innovations: blended classes and online classes.

Blended classes

A blended class has two parts. The “synchronous” part consists of the time students spend together in class, but that time is less than in a traditional class. Class time is reduced in order to make up for the time students spend online watching videos and exploring other online materials. That’s the “asynchronous” part, since individual students can do that on their own.

Experience has shown that several short videos can be at least as effective as a traditional lecture. Much of the material normally covered in lecture moves online, and class time can be devoted to discussion and other interactive activities that students hopefully find more engaging. (This is similar to the “flipped classroom,” but there the class time remains the same.)

Lucas would like to see the traditional classroom lecture disappear, but not the direct interaction between professor and student. “I feel strongly that interaction between faculty and students in a live setting, which may be a videoconferencing system or a physical meeting place, is an essential part of a high-quality education.”

A good blended class can help promote problem-solving and critical thinking, as opposed to mere retention of lecture material. But it also places more responsibility on students to be active learners, which not all students appreciate.

Online classes

Lucas was originally opposed to fully online classes because many of the earliest ones seemed to put profit before quality. They suffered from two problems:

The first was the lack of interaction between faculty and students. For the most part, any interaction had to occur on discussion boards or via e-mail. (I talked to one student in an online program who had never seen her instructor even on a video.) The second problem with online education is that it has long been associated with for-profit colleges like the University of Phoenix or Strayer University.

Lucas is especially critical of for-profit schools that charge higher tuition than public colleges and enroll mainly low-income students who can attend only by running up excessive debt. He reports that their students are only 13% of the college population but account for almost half of the student loan defaults.

More recently, Lucas has become receptive to incorporating online instruction into regular academic programs, especially at the graduate level. Some of the need for student-faculty interaction can be met through videoconferencing, for which specialized software now exists. If the number of participants is reasonably small at any one time, the instructor and each student can have a live window on the screen. Lucas says that each time he teaches an online MBA course using the Adobe Connect software, “the class comes closer to what happens in a physical, in-person class.”

When he wrote this book, published in 2016, few good online courses were available for undergraduate credit. However, Arizona State University had just announced an online freshman-year curriculum with courses designed by ASU faculty.  Students who completed it could then apply for admission as sophomores.

For students, online classes offer the flexibility of completing a college requirement without being physically present on campus. Lucas doesn’t deny the benefits of the traditional campus experience, but he doesn’t think that it works for students of all ages and situations. For institutions, online classes enable them to reach new markets (but also to lose market share if other colleges can do them better).

Different colleges may choose to be producers of online courses, consumers of online courses produced by others, or both. Private companies can also create courses or assist in their creation. When the University of Maryland developed its online MBA, it “partnered with a firm that helps schools develop online programs, [which] offered to market the program, help applicants complete their application, provide instructional design and multimedia support, provide student counseling, and ensure that 24-7 technical support would be available to faculty and students.”

Another possible use of online courses is to help provide specific skills for the non-college population. “It should be possible to combine step-by-step instructions, as YouTube does, with an overview and concepts provided by a MOOC [Massive Open Online Course] to prepare people for skilled-labor positions rather than college.”

A company called Coursera is the leading developer of online courses, in partnership with a number of universities and businesses. A quick look at their website turned up a number of master’s programs and certificate programs, but only one bachelor’s degree program, in computer science.

In general, Lucas is optimistic about the impact of new technologies on the quality and availability of education:

Now, after I’ve had some experience with MOOCs and blended and online classes, I am even more convinced that these new approaches to instruction will produce a high-quality outcome that equals or exceeds traditional approaches to education. Furthermore, the technology makes a high-quality education available to many more people than the traditional approach, which requires a physical presence on campus.

Lower costs?

Assuming that new technologies can help deliver higher education to more students, can they also help make such an expansion of higher education more affordable? This is a secondary concern for Lucas, but it could be an important consideration for public policy.

For blended classes, any cost savings for students or colleges should be small. Students still have to live on campus or commute to classes. Faculty spend less time preparing lectures, but more time planning other class activities, creating online materials, or at least organizing their use. Shorter classes mean that the same building can be used for more classes, but not necessarily that the same instructor can be used for more courses.

Large online courses have greater potential for cost savings:

[T]hey are highly scalable and offer the possibility for thousands of people who could never attend a major university to take a course offered by a highly regarded professor. Supporters of MOOCs view them as a way to raise educational levels around the world. Second, there are those who believe that MOOCs may be a first step at reducing college costs because so many students can access the work of a single faculty member; the marginal cost of adding one more student is very low.

Since a course can reach additional students with little added cost, programs can be priced below on-campus tuition. Students can more easily avoid on-campus living expenses and reconcile further study with current employment.

However, these advantages have to be weighed against the initial costs of creating high-quality online materials, which can be substantial. Colleges will need either to create the course content themselves, or else purchase or license them from others. (Colleges that do neither may be at a disadvantage in the competitive marketplace.) In theory, the production of more materials and the low marginal cost of streaming them to more learners ought to bring costs down over time, but Lucas thinks it’s too early to tell.

“The bottom line is that technology-enhanced teaching can produce higher-quality instruction, but it is not going to dramatically reduce the cost of college or generate considerable new revenue in the next three to five years for high-quality programs.” Three to five years is a very short run, of course, especially when three years have already elapsed since he wrote that. The longer-run outlook is uncertain, but I think more promising.

 


Technology and the Disruption of Higher Education

September 13, 2019

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Henry C. Lucas, Jr. Technology and the Disruption of Higher Education. Hackensack, New Jersey: World Scientific, 2016.

My interest in this book grew out of my reflections on the previous book, Frey’s The Technology TrapSeveral of my conclusions were particularly relevant to education:

  1. The jobs that are most vulnerable to being replaced by new technologies are manufacturing and low-wage service jobs.
  2. The jobs most likely to be created or enhanced by technology will be in skilled services.
  3. The economic importance of education is increasing, as the pay gap widens between workers with different levels of education.
  4. Public investments in education can contribute to a thriving economy in several ways: creating good jobs in education, qualifying workers for good jobs generally, and strengthening democracy because successful workers are more politically active and less alienated.

These conclusions lead to the next question: Is an expansion of education feasible? Can we do all these things at once–provide more education to more people, maintain and even improve educational quality, and keep the costs from becoming prohibitive?

Problems of higher education

The story of higher education in the United States is a story of many successes but also many challenges. One third of the adult population now has a bachelor’s degree or higher. That’s better than ever before, but still only a minority.

The most obvious problem is the high cost of college, which has been rising much faster than the general rate of inflation. “The Bureau of Labor Statistics reports that from 1978 to 2014, the price index for college tuition rose nearly 1200%, whereas consumer prices rose less than 300%.” David Brooks has just written a column criticizing the “exclusive meritocracy” of “super-elite” universities, and warning that “if the country doesn’t radically expand its institutions and open access to its bounty, the U.S. will continue to rip apart.”

Higher education exists in a kind of gray area between a luxury and a necessity. Going to college is more common than buying a yacht, but less common than buying an automobile or obtaining health insurance. State support for higher education has been falling for some time, especially since the last recession. Lucas reports, “At an aggregate level, in 2013 states were spending 28% less per student on higher education than in 2008.”

Many colleges are in a financial squeeze, experiencing pressure to cut costs, but also under pressure to compete for the students who can afford to pay a high cost. Often they attract them by building fancier buildings and offering new amenities and support services that keep costs high. Lucas found that in nonprofit colleges, “non-faculty professional staff grew at sixteen times the rate of tenured and tenure-track faculty from 1975 to 2011!”

Those who do go to college graduate with more debt than ever before. “Some economists worry that it is a drag on the economy because they fear that recent graduates are not buying things like houses because they are too concerned with paying down their college debts.” Lucas sees an even bigger problem in the college dropouts who take on debt without finishing their degrees. They usually end up earning no more than other high school grads.

In addition to cost concerns, critics complain that undergraduates are being educationally shortchanged, as colleges save money by increasing the size of classes and relying on more part-time instructors and non-PhDs to teach them. According to Robert Samuels in Why Public Education Should Be Free, only about one-third of undergraduate classes are taught by traditional tenure-track faculty. Another common complaint is that too many classes place higher value on student recall of lecture material than on critical thinking skills. According to Lucas, “The Internet has not eliminated the need for people to have a knowledge base of facts, but it may have changed the nature of what is in that base and the amount of factual information that is necessary to recall on demand.”

The technological potential

Lucas sees several positive potentials of new technologies:

  • to get students “more actively engaged in their education rather than passively watching an instructor lecture”
  • to “reach students who are unable to a come to a physical campus”
  • to provide “instruction for underserved populations and countries”

Lucas is hardly a naive technology enthusiast, however. He devotes considerable attention to the challenges involved in maintaining quality and controlling costs as the technological revolution proceeds. Those will be the subjects of the next post.

Continued