January 24, 2004

Education Costs

I was chatting with a client the other day about her daughter applying for college. The kid had to write some kind of essay and jump through some other hoops.

Then it just struck me. The education business is a racket. Can you think of any other business that puts prospective customers through such a hassle?

Today, I happened to overhear Wesley Clark say that tuition costs had increased 28% over the last five years. Since it came out of the mouth of Wesley Clark, there is good reason to doubt its authenticity. But, lets for the moment accept his statement as fact.

Do you see the economic conclusion that can be drawn from my two data points? The first point was the rigmarole colleges put prospective students through. The second point is Clark’s assertion that tuition costs have gone up 28%.

The conclusion is, there are too few colleges and/or too many students going to college. The economic law of supply and demand is immutable.

If a business continues to raise it prices, make it difficult for customers to purchase its products that means that demand is exceeding supply. Prices will only increase if more customers are clamoring for goods than can be delivered. The first rule of business is, if you have to beat customers away with a stick, you’re not charging enough.

If the supply of colleges suddenly increased by 50%, you can bet, prices would decrease. But that’s unlikely to happen for a couple of reasons.

One is the barrier of entry into the market. It is not easy to start up a college or university. There are many fixed costs in getting a school up and running. In addition, the colleges have an accreditation board that can be used to restrict new suppliers into the market. They can help keep out the competition.

The second is what I would call predatory marketing. Some schools that could expand their operations don’t. By restricting their production capabilities, they ensure they will not dilute their market share.

My own frustration with education is how it is done. We put an instructor in front of a bunch of students and teach them. This method of instruction has been used for probably more than 6,000 years. Is it not possible, that technology could present us with a more cost effective method of instruction? Can you imagine if car production had never been improved, how much would a car cost today?

So what can be done? Personally, I think the internet has the potential to overhaul the existing educational structure. But I feel that old industries are the most resistant to new technologies.

Time will tell.

Posted by Ted at January 24, 2004 3:03 PM