The Business School Tuition Bubble

 

Michael Ryall, Harvard Business Review | May 6, 2011 | Business Insider

Following the collapse of housing prices, a growing number of people have voiced concerns over a looming collapse of higher education tuition.

Initial apprehensions were expressed at least as early as 2009 in places like The Economist and The Chronicle of Higher Education. Today, there is a wikipedia page devoted to the topic and, in the last week alone, articles about this issue appeared herehere, and here.

As Glenn Reynolds, a faculty member at the University of Tennessee law school, points out, higher education shares some salient features with the pre-collapse housing market. (And Mark Perry, a professor of economics and finance at the University of Michigan, puts it in perspective with a handy chart.)

The doom-and-gloom scenarios always struck me as overly pessimistic. Last week, though, a number of things happened that caused me to reassess.

First, I learned that the cost of an MBA in the flagship, 2-year program where I teach is roughly $100,000, not counting lost earnings during full-time enrollment. Second, I discovered that the financial projections supporting the construction of our shiny new building assume significant enrollment and tuition rate increases into the foreseeable future. My colleagues refer to this as the Growth Model (although it seems more an aspiration than a plan). Third, I heard that two of our graduates are presently working in low-skill jobs.

These three points are emblematic of wider problems within the research-based MBA-granting community. While some will rightly point out that, jaw-droppingly expensive or not, as long as the education provides a decent return on investment to students, larger enrollments and tuition hikes into the foreseeable future may well be achievable. But do research-based MBA programs provide that return?

There’s some evidence that the answer is, “Not for everyone.” Though anecdotal, the two alums mentioned above are troubling indicators. And what happens if a substantial share of students at fancy-priced MBA programs are not landing fancy-paying jobs? In the parlance of economics, this is not an “equilibrium” and, hence, the concern about bursting bubbles.

If there is a bubble and it does burst, it stands to reason that the schools that weather the crisis relatively well will be those that provide considerable educational value. While the excess administrative costs that have accompanied the Growth Model can be shed quickly in the event of a downturn, less easily fixed is an institution’s educational program.

The essential question, therefore, is: What is the logic for having world-class academic researchers (who, for the most part, have never managed a business themselves) teach business classes to MBA students? The topics covered in many first-year microeconomics MBA courses, for instance, are a subset of those contained in Section III of Economics for Dummies. There may be good reasons for someone to pay $3,000 for a class taught by a researcher that covers the same topics in this $12 book — greater clarity and/or depth, for instance — but still, at a 250:1 cost ratio, students had better be getting something more for their money. It’s not clear that they are.

This raises a related but distinct issue. In an earlier age, professors took their knowledge certification role seriously (with the fail rates to prove it). Today, many faculty view their role as educating everyone admitted to the program, passing them through, and leaving it to the recruiters to sort things out on the back end. Incentives encourage faculty to conform to this behavior as administrators naturally prefer more tuition revenue to less. Yet, with the earlier check on quality removed, the low end of the student distribution gets fatter as less qualified students are admitted under the Growth Model, professors of required courses struggle to get everyone through by adjusting the material downward, everyone learns less, and over time the knowledge value of the MBA is significantly diminished.

Feeling some anxiety about all of this, I mentioned “bubble” articles to several colleagues and asked them how an MBA program justifies its cost. Some said students get a lot out of the extracurricular networking opportunities. Others mentioned signaling value. One said foreign students are paying for a gateway to immigration. Another said we provide a lottery for a small number of plum jobs in consulting and finance.

While there is surely some truth in all of these answers, none require the involvement of research-active faculty. Moreover, all but one of my colleagues expressed net satisfaction with the status quo: it may have its downsides, but it provides the funds needed to maintain a world class research community. In other words, the present system is a necessary evil.

I don’t buy it. I received an MBA from the University of Chicago in 1981. That curriculum was unabashedly academic. Reading lists typically consisted of 30 to 40 academic journal articles. The program was, essentially, the front-end of a PhD program (i.e., the classes minus the dissertation). This education increased our human capital in the following ways: 1) we understood state-of-the-art general principles in each field which, as such, were as relevant in our last jobs as they were in our first; 2) our analytical thinking skills were highly refined by being forced to comprehend the subtle give-and-take of academic discourse; 3) we could access new ideas directly from academic sources, 10 to 15 years ahead of widespread adoption.

I credit that human capital bump for a wide-ranging and successful business career, one that included stints as CFO, GM, entrepreneur, and consultant. To be clear, I am not asserting that such a program is either necessary or sufficient for success in business. There are many successful business people with no formal education, just as there are many failures with top-ranked MBAs. The Chicago program was valuable because it gave us a particular edge over our rivals that, properly employed, was very powerful. Equally important in the context of this discussion: it was obvious why one would want such a program taught by research faculty.

To my knowledge, no equivalent program presently exists. Even though such an education is as valuable today as was 30 years ago, it requires careful selection of students and certification that they actually know their stuff — both of which run counter to the Growth Model. Perhaps the silver lining of a bursting bubble might be its forcing the industry to reevaluate the value proposition behind its MBA degree.

This post originally appeared at Harvard Business Review.

Michael Ryall is an associate professor of strategy at the Rotman School of Management at the University of Toronto.

 
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