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AINSWORTH Peter

Peter Ainsworth is the Managing Director of EM Applications.

Were he alive to read Jo Johnson’s white paper, “Success as a Knowledge Economy”, Friedrich Hayek might wonder whether his life’s work had been worth the bother.

Published as “The Road to Serfdom”, his analysis of emerging state socialism demonstrated how, in a complex economy, the application by officials of “expertise” in a well-intentioned attempt to produce a desirable outcome instead leads to gross inefficiency and harmful unintended consequences.

Given its fame as the book Mrs Thatcher kept in her handbag, he might have expected that it would carry some weight with successive generations of Conservative politicians. But no, the government’s proposals for higher education deny the free market and rely on a quango of “experts” to now determine the financial fortunes of each university, a policy that will be severely detrimental to the sector.

There are three fallacies at the heart of Johnson’s proposals.

First is the idea that the state should control the price of higher education. When Ed Miliband said that he would control energy prices he was ridiculed and, in due course, the oil price tumbled, proving the error in his logic.

Johnson’s proposed continuation of price fixing will similarly be undone by market forces. The £9,000 tuition fee is already draining away a growing proportion of internationally minded students who are choosing to study abroad and it’s deterring “working class” white males. Technological change in the form of ever-improving online courses is the shale oil of higher education and will gradually erode demand for what, for many, is an over-priced luxury.

The IFS recently studied a new database which links SLC and HMRC records, giving it an unparalleled size and quality of data. It was able to assess the earnings of graduates ten years after leaving university. It found that half of the male graduates of 23 universities were earning less than men who did not go to university. Johnson wants to get more “working class” men into higher education, but perhaps their low participation rate shows that they understand the price and value of a degree better than he does.

The second error is the notion that “information” is the key to a better working system. It always sounds good to have “more information” but, as Hayek explained, in a complex system the relevant information is unavailable and the measures the officials in a state (or quango) directed system have access to would better be characterised as mis-information. For example, in higher education, the key fact is the value of the “graduate premium” for each individual student. While we know that it is significantly positive for the system as a whole, the IFS study showed that for many students at many universities the “premium” is negative. Across the board they observed that it is highly uncertain: “What is perhaps most interesting is the sheer quantity of variation in graduates’ earnings within an institution.”

This is hardly surprising. Future earnings are driven not just by level of education but also by inherent ability, hard work and luck. Consequently, while higher education can shift the average earnings of a population upwards over time, essentially nothing is known about the effect on any given individual. This means that measurements of historic outcomes, whether at the individual, subject or institutional level, are potentially mis-leading. It is similar to the situation in the investment markets, where what happened in the past is not necessarily a guide to the future.

The proposal to use past graduate earnings outcomes, among a panoply of similarly mis-directed metrics, both to “inform” prospective students and determine allowed fee levels could be especially damaging to universities in the north. They would be expected to suffer a drop in applications from students misled into thinking the institutions are doing a poor job when in fact earnings are lower simply because their alumni live predominantly in the north where the cost of living and incomes generally are below the more expensive south. Given the north’s cost advantage it would be better to expand provision there, whereas the effect of the white paper proposals will be to shift demand to the south.

In relation to the other metrics the white paper accepts that institutions will seek to “game” their scores against these measures but then does not comprehend why that tendency is proof of the impossibility of management by target.

Finally, the white paper blames the sector’s deficiencies on a lack of competition, assuming this to have been absent. But a dearth of competition is normally only a problem where there are only a few providers. With over 150 offering degree-level courses, this cannot be the cause of any shortcomings.

The reason for the failure of the sector to innovate to improve employment outcomes is that the government controls, through rigid regulation, both the price and the design of the degree product. As Professor Wolf, author of the Wolf report into vocational education, explained: “In post-19 education, we are producing vanishingly small numbers of higher technician level qualifications, while massively increasing the output of generalist bachelor’s degrees and low-level vocational qualifications. We are doing so because of the financial incentives and administrative structures that governments themselves have created, not because of labour market demand, and the imbalance looks set to worsen yet further.“

Johnson’s “Success as a Knowledge Economy” is a missed opportunity to introduce risk-sharing into the provision of higher education; where universities’ fortunes are tied to the future earnings of their graduates. This would align the interests of institution and student for the long term, embedding the desired and necessary incentives into the system. Instead, the white paper proposals will only deepen the dead hand of regulatory control and direction that has been stifling innovation for years. It will hurt the sector and reduce its ability to play a part in rebalancing the economy and enhancing national competitiveness.

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