A number of colleges and universities have announced steep tuition increases for next year—much steeper than the current, very low, rate of inflation. They say the increases are needed because of a loss in value of university endowments heavily invested in common stock. I am skeptical. A business firm chooses the price that maximizes its net revenues, irrespective of fluctuations in income; and increasingly the outlook of universities in the United States is indistinguishable from that of business firms. The rise in tuitions may reflect the fact that economic uncertainty increases the demand for education. The biggest cost of being in school is forgoing income from a job (this is primarily a factor in graduate-and professional-school tuition); the poorer one's job prospects, the more sense it makes to reallocate time from the job market to education, in order to make oneself more marketable.
The close economic similarities between the business and university sectors are often obscured by the fact that university faculties are dense with critics of capitalism. Further, enterprises that operate in the not-for-profit form are supposed to have motivations fundamentally different from those of for-profit enterprises, to justify their tax exemptions. But how realistic is that?
The American university sector is distinctive in being largely private in structure and even more so in behavior; in contrast, almost all foreign universities are public. Even our state universities compete vigorously with one another and with private universities; moreover, increasingly they are only quasi-public. For example, the University of Illinois at Urbana-Champaign—Illinois's flagship public university—receives only 30 percent of its funding from the state.
What "not for profit" means in the university world is simply that a university's surplus of revenue over expenses does not go to shareholders but is instead added to endowment or invested in new projects, much as at a for-profit firm that doesn't pay dividends. Not-for-profit enterprises often compete just as fiercely as business firms do. Consider the universities' competition for students. It might seem that a profit-maximizing university would simply charge the highest tuition the market would bear and then admit anyone willing to pay it. Actually that would not be profit-maximizing. Faculty members would have to be paid more to teach slow students; and for students the market value of higher education depends significantly on the quality of their peers—as a signal of worth to potential employers and because students learn from one another and make valuable contacts for the future.
To increase the perceived quality of the education and the prestige of the institution (things valued by alumni and other potential donors, and by grantors of research contracts), universities compete to attract professorial stars. The result is a great variance in faculty salaries both among and within universities—indeed, often within departments. One thing the stars negotiate for is a reduced teaching load. The slack is picked up by poorly paid graduate students and by non-tenure-track adjuncts with low salaries and no fringe benefits. Some of the stars do little teaching, and some do little research as well, instead moonlighting as "public intellectuals" commenting in the popular media on the events of the day. This commentary is often uninformed, so one might think that a university would fear damage to its trademark; but most universities treasure their celebrity academics. Celebrity advertises the university. And students go to college not merely to learn but also to have a good time. The celebrity professor is an entertainer (though purists will question the appropriateness of tax exemptions for universities that double as entertainment companies).