THE BLOG
01/26/2015 12:24 pm ET Updated Mar 27, 2015

Cost Disease

I previous mentioned that the book Why Does College Cost So Much? by Robert B. Achibald and David H. Feldman provides two explanations for the inflation in higher education that buck conventional wisdom.

Their first point (mentioned last time) is that tuition discounting means that we should only be talking about average prices when we discuss the rising price of getting a college education (vs. the mind-boggling sticker prices that usually get thrown around in discussion of the high cost of college).

But, as it happens, it is these average prices that have been shooting up at 2-3 times the rate of inflation. And Archibald and Feldman's explanation for this phenomenon is not incompetent administrators, greedy and lazy professors, or irrational consumers (i.e., students and families willing to pay whatever schools charge) but a more general set of economic principles.

Their analysis begins with an observation that while the cost of college has risen dramatically when compared to almost every other good and service sold in the US, the tuition-price curve is strikingly similar to ones found in other industries such as dentistry and legal services.

The nearly identical cost curves for these three industries (all of which rose gradually from the '40s through the '70s, flattened out in the '70s, then began their steep ascent in the 1980s) would imply that something similar about these fields (which are all services vs. products, delivered by highly-trained professionals to individuals or small groups) is behind their common pricing behavior.

A comparison between the cost of college and the cost of goods (like food and clothing - which has generally gone down during this same period), and the cost of services delivered by unskilled labor (such as haircuts, which have gone up but not nearly as steeply as have college and dentistry) provide important evidence that colleges belong in a certain category when analyzing cost and pricing.

But if higher education (like dentistry) are craft services where the efficiencies we've seen in factory production over the last century are not easily applied, what can explain the rapid rise in costs of these boutique industries since the 1980s?

The answer the authors provide is technology, notably the computer technology that has revolutionized every field since the 80s. For while digital technology focused on manufacturing (in the form or robotics or the automated processes required for just-in-time manufacturing) tend to drive down the cost of producing goods, technologies specific to fields like medicine and education tends to increase, rather than reduce costs.

"Cost disease" is the term the authors use to describe the lag in efficiency between product- and service-based industries generally. In fields like medicine, for example, the invention of a new and expensive treatment or device that can detect or cure a disease is likely to be made part of a doctor's repertoire, regardless of cost. In fact, a medical professional would be hugely irresponsible if he or she did not make such an expensive device, test or treatment available to their clients (i.e., patients). Similarly, new technologies tend to drive up the cost of higher education by adding new teaching techniques and research capabilities that schools use to expand their offerings and improve their service - not increase the efficiency of the teaching process.

An exception to their model - financial services - provides an interesting illustration of what technology-based efficiency improvements to higher education might look like. For financial services are also provided by highly skilled professionals (which should make them subject to "cost disease"). But unlike dentistry and higher ed, technology has remade the offerings of this industry, replacing one-on-one relationships with brokers and financial advisors with robust (and efficient with regard to the number of professionals required per customer) online-trading services.

For education to experience these same efficiencies, we would need to create new models that would similarly replace one-to-one or one-to-few relationships you see in classrooms with one-to-many relationships one sees in things like MOOCs. But as the authors point out in their pre-MOOC manifesto (anticipating the general reaction to MOOCs among educators), current online experiences designed to increase efficiency tend to decrease quality. And until that changes (assuming it ever does or can), technology will continue to be a driver of increased, vs. decreased, cost in higher education.