Last week, I mentioned how the competition for academic superstars was skewing institutional priorities to the detriment of undergraduate education.  This week, I thought it would be useful to take a look at the other factors that are influencing institutional priorities. 

Incentives, as economists never tire of saying, matter quite a bit - they condition the way that individuals or institutions will choose to spend their resources.  In the private sector, incentives are pretty clear - either you satisfy consumer tastes and demands or you go under.  But in higher education, things are somewhat more complicated: Governments control most of the income stream and institutions need to respond to a variety of stakeholders beyond the most obvious "customer" (i.e. students).  

To understand the incentives facing Canadian universities one needs to focus on government policy. This is because even though governments only contribute about half of all funds to institutions, they actually control about 90% of institutional income.  The reason for this is tuition fees; although institutions collect this income from non-government sources, governments of all stripes in Canada are very careful to control the amount that institutions can receive from this source through tuition fee freezes, caps, etc.  

What this means is that although institutions may look like they are under market discipline when "competing" for domestic students, in strict financial terms this is a mirage because institutions do not have the freedom to alter their prices.  Imagine what the cellular phone industry would look like if the government, in the name of greater communications access, limited the price of handsets to $50.  There would be no Blackberry, no iPhone - and probably not a whole lot of innovation, either.  

And so it is with undergraduate students.  Institutions cannot get more money out of individual undergraduates through higher fees for specialized programming, so they have no incentive to innovate in undergraduate education.  Instead, they are restricted to a flat amount of income per student, comprised of tuition plus the per-student grant received from the provincial government.  The economic incentive here is therefore for institutions to increase income by packing in as many students as possible while at the same time lowering marginal costs.  This, in turn, is what has been fuelling the long-term shift towards an increasing casualization of the academic work force; tenured profs are simply too expensive to "waste" on undergraduate teaching, given the incentives currently in place.

But wait, you say.  Why would institutions reduce marginal costs like this?  Surely that kind of search for net income is the behaviour of a profit-making enterprise, not a non-profit.  Well, yes and no.  If universities were only in the business of teaching, then this would be puzzling behaviour.  But they're not.  They're also in the business of research.

Research is much more attractive to universities than teaching.  But it's not really because of the money. Yes, individual researchers might make a lot of money off research (either through commercialization or future work/consulting opportunities which arise because of knowledge gained), but institutions as a whole actually lose money on research.  Research overhead is expensive, and no government in the world funds overhead properly.  So institutions have to use the surpluses earned off undergraduates to subsidize the research.

Anyone versed in economics is by this point scratching their heads.  Why do institutions go through all this trouble just to subsidize a money-losing activity?  The answer is that extrinsic incentives like money are only part of the story.  One also needs to think about the intrinsic motivations in academia.

Academics like research - it's what they are trained to do.  The PhD (a non-negotiable prerequisite to employment in most faculties) is everywhere focused on building research skills, not on building teaching skills.  So institutions as a rule only hire as teachers a group of people who have been taught to think that teaching is a second-rate activity.   Within academia, those institutions that can attract "great professors" (i.e. great researchers, or the "HQPs," or Highly Qualified Personnel, of last week's column) will gain prestige.  Those that can't will be considered a second- or even third-rate institution. 

Now, if you think of universities not as revenue-maximizing institutions but as prestige-maximizing institutions, it all starts to fall into place.  Government policies offering money to universities to develop and attract HQPs is like offering crack to an addict - they are so hard-wired to favour research to begin with that there is almost nothing they won't do to get it.  And yes, this skews institutional priorities.

Though at the margins there are a couple of other incentives in the system (mostly small bonuses here and there favouring higher graduation rates), this is essentially it; the only two incentives in the system are to perform more research and to take in more undergraduate students.  Educational quality simply doesn't enter into it.  If it happens, great.  If it doesn't, it's no skin off anyone's nose.

So it comes as no surprise that Canada increasingly has a monoculture in higher education.  Instead of having dozens of institutions trying out different models and offering different programs and services, we have dozens of institutions trying to be identical miniature, for instance, McGills.  To some extent institutional isomorphism is inevitable because of the norms of the academic profession and the way institutions compete for prestige.  But governments aren't obliged to aid and abet them; with only a little wit, they could create incentives that would create a more diverse system. 

Just imagine what would happen, for instance, if the Government of Ontario set aside $50-million each year to be given to the institution that got the best ranking in a teaching satisfaction survey.  Or for one that had the best demonstrated ability to improve student engagement, or for receiving the highest satisfaction ratings from local employers with respect to graduate quality. 

Imagine what institutions would do to get hold of these prizes, and how they would change their internal processes and curricula to compete for those funds.  What kinds of exciting innovations in teaching and educational delivery might occur?  What kinds of new educational choices would students have?

As long as Canadian governments remain too witless to incentivize anything other than growth and research, we'll never know.  But if even one government began experimenting with a more sophisticated use of incentives - or even a program of gradually liberalizing tuition fees in at least a few areas to fuel innovation - it could be the start of a whole new age in education. 

Governments that want to achieve something more than the "same old, same old" in higher education, take note.  Something better is possible, if you pay attention to incentives.