This post has been contributed by Dr Federica Rossi, lecturer in Birkbeck’s Department of Management, and Aldo Geuna, professor of Economics at the University of Torino, Italy. Their new book The University and the Economy: Pathways to Growth and Economic Development is published by Edward Elgar.

With the recent financial and debt crisis, the extent to which the public can afford to fund universities has become increasingly controversial: in the context of tight public budgets and widespread cuts to public spending, even in areas perceived as basic services to support the more vulnerable members of society, what reasons could there possibly be for continuing to fund a “luxury” like higher education?  Dr Federica Rossiand Professor Aldo Geuna consider the viability of publicly funded universities and their alternatives.

Some convincing reasons must exist if, as it emerges from data reported by the European University Association’s Public Funding Observatory a majority of 14 European countries, out of 24 for which data are available, have increased public funding for universities in the period 2008 -2012, right through the latest recession. Investment has increased in, among others, Austria, Germany, Poland, Belgium, the Netherlands and the Scandinavian countries. Ireland and the United Kingdom are the only countries in Northern Europe to have decreased investment, together with debt stricken countries in Southern Europe and some Eastern European ones.

The argument against: higher education generates mainly private benefits

The main argument against the public funding of higher education builds on the view that the benefits of higher education are enjoyed mainly by university graduates, in terms of potentially higher future earnings and lower probability of unemployment, rather than being shared across society. If the benefits of higher education are strictly private, then why should the general public pay for it? The cost of higher education instead should be met by the students who will directly benefit from it.

This argument is reinforced by the fact that information and communication technology makes it easy to disseminate and access knowledge: when students anywhere can access the knowledge produced by the best academics in the world at the click of a button, why should governments fund them to physically attend lectures at a local campus? Using openly disseminated materials provided by prestigious universities could provide a way for poorer students, who would not have the upfront resources to pay for university fees, to access the same or even better knowledge at a fraction of the price.

In reality, however, things are rarely this simple. And indeed several theoretical and practical arguments have been made to support the view that there are still good reasons for providing substantial public funding for higher education even (or maybe especially) at a time of crisis.

But: the private benefits of higher education are risky and with a delayed pay back

The opportunity cost of studying is high over the short term while its private benefits are risky and with a delayed pay-back. Given that young people often have no resources of their own, or are either unwilling to undertake the risk, or they have no access to private credit (as financial markets are imperfect), then without incentives, investment in education would be lower than optimal.

The only students who would invest in undertaking higher education would be those who are rich enough to pay upfront, ramping up social and economic inequality. This is even more undesirable when we consider that the private benefits of university education tend to be higher for those individuals who come from less well-off families who generally do not enrol at university.

So there is a general consensus that some form of government intervention is necessary in order to increase the number of students undertaking higher education, and to do so while preserving some form of equal opportunity of access.

One way to do this is to provide full public funding of higher education in order to make it completely free at the point of delivery. However, this is not the only possible approach, and indeed it is becoming less frequent: it has even been shown that blanket funding irrespective of an individual’s income could have regressive effects on the incomes distribution. In most countries, systems are in place according to which students contribute at least in part to the funding of their education, but grants and loans exist to support those students who lack resources of their own.

Recently, for example, the United Kingdom has introduced a loan-based system where students receive a loan from the government in order to fund their education, and pay the loan back once they benefit from higher salaries in the job market. Here, the government is prepared to sustain the risk of students not paying back their loans if their future income does not meet a minimum threshold or if students are impossible to track down – a risk which has an important systemic component (for example, both types of risk would be systematically increased by a recession, where graduates are less likely to reach the minimum income thresholds and also more likely to emigrate in search of better job opportunities).

If such systemic problems were to occur, the cost to the public purse could actually turn out to be quite high. Moreover, even if we accept that students should in part contribute to the cost of their university education, issues like how much they should contribute and whether this contribution should be linked to their ability to pay it, remain open to debate.

The social benefits of higher education are anything but negligible

It has been shown that both an increase in the share of graduate population and an increase in the growth rate of graduates generate a more than proportional increase in economic growth. This suggests that the broader public who have not attended university also benefit from having colleagues and fellow citizens with a higher level of education, thanks to the latter’s contribution to economic growth, which goes beyond their own individual productivity.

In particular, research has suggested that a more educated workforce:

• has a positive effect on the productivity of colleagues with a lower level of education
• facilitates and accelerates the adoption of existing technologies not yet implemented
• is more likely to introduce product and process innovation and therefore to economically exploit radically new technologies – a particularly important process in economies which already operate on the technological frontier.

There are also important indirect effects. Education can improve citizens’ health, stimulate political participation and encourage a sense of civic duty and interpersonal trust, factors that are important for the competent functioning of economic institutions and their performance.

The presence of these external effects provides arguments in support of the general taxpaying public contributing to the funding of higher education, whose benefits are felt across society at all levels. This is one reason why public university fees are, and should be, quite low when compared to the average cost of a student’s university education.

What education, rather than just how much education, matters

If universities’ sources of funds are entirely private, this introduces incentives for universities to maximize enrolments in the short term by focusing on those disciplines for which demand is greater, in order to swell the number of enrolled students and thus increase revenues. Research has shown that privately funded institutions tend, overall, to focus on the most popular subjects. From the perspective of maximizing the contribution of higher education to economic growth, this is likely to lead to dynamic inefficiencies.

First, there is no linear correspondence between students’ demand for higher education and the actual labour market’s needs for specific competences, since student demand for courses is based upon subjective evaluations and incomplete information. This is the reason why, for example, the United Kingdom continues to pour public funds into the teaching of STEM disciplines which are perceived to have high economic importance even though student demand for STEM courses is low.

Second, there is a real difficulty of foreseeing what academic disciplines will turn out to be important in the future. How to anticipate, for example, which subjects will best support the educational needs of individuals and companies in 15 to 20 years’ time? The skills required by an economic system are the result of events that cannot easily be predicted, such as geopolitical changes or the emergence of new technologies. It is important to allow universities to continue to educate students in a broad variety of fields, keeping the system sufficiently flexible and open and allowing for possible adjustment in the event of unexpected changes – something that can be accomplished only if universities are at least in part free from the compelling need to passively respond to market demand.

And finally…can technology be the answer?

While ICT is certainly helpful in broadening access to knowledge, there are numerous arguments that suggest that simply having access to knowledge does not equate gaining an education into a particular field or topic. Being able to access free university courses online does not substitute for the ability to attend a physical institution, for a number of reasons:

• A certain level of previous education is often required in order to understand advanced knowledge. University institutions can provide the tailored training that weaker students (especially those from disadvantaged backgrounds, who may have the needed qualifications to enter university, but whose quality may not be as good) might need in order to bridge the knowledge gap that separates them from stronger students and allow them to complete their studies
• The transmission of knowledge is enhanced by direct interactions with teachers
• It has been shown that being part of a community of practice, though meeting and interacting with other students, enhances learning and motivation
• Some of the benefits of higher education come from being part of a social community of students and from developing connections that continue after university

While some of these benefits could be re-created virtually (for example virtual communities of practice can be set up), overall it is unlikely that students can derive the same benefits from accessing materials that are openly available online as from attending university courses that are tailor-made for a specific and small group of students. The weaker students in particular are the least likely to have the ability to benefit from this, which invalidates to a large extent the argument that freely available online courses can provide an effective way for school leavers priced out of university to gain the same education as fee paying university students.

Find out more

• Dr Federica Rossi
• Department of Management