Andrés Bernasconi: The Profit Motive in Higher Education

Last year’s student protests in Chile had as one of its main targets the pursuit of profit in education. The argument defended by demonstrators and shared, according to opinion polls, by a large majority of Chileans, was that financial gain from education is morally illegitimate and ought to be legally banned. Most people seemed to believe that education cannot be, under any circumstances, a business enterprise.

At a minimum, if banning for profit education proved to be politically unfeasible, students insisted that the government had an obligation to guarantee that no public financing of education could eventually find its way into the pockets of owners of educational institutions. But money is fungible, so the only failsafe method to prevent private gain from public monies was to avoid public subsidies to for profit schools altogether.

One year later, the admissibility, role, scope, and limits of profits in education remain issues of academic and legislative debate in Chile. The student movement is now a shadow of what it was at its peak in 2011, but thanks to the students, the debate about the relationship between business and education is no longer the barely visible, oblique and muffled deliberation it once was. The possibility and consequences of allowing people to make money for providing education (or healthcare for that matter) had been a somewhat taboo topic in public, a problematic state of affairs given the importance of clarifying whether, when, and how education can be a legitimate business.

I have the impression that it is not only in Chile that this discussion causes discomfort. This awkwardness may result from the novelty represented by for-profit education in national systems where education has been public or private-philanthropic. Or it may stem from the still very small share of educational provision supplied by profit-seeking organizations. In Chile, the unease also reflects the ambiguity of the status of private schools and colleges.  This obscurity comes from two distortions. First,  there is very little publicly-available information about the corporate status of private schools and their finances.  Most parents cannot tell if their children’s school is non-profit or for-profit, and only schools that receive public subsidies are required to publish financial statements. Second, in the higher education sector, in addition to the paucity of information, there is suspicion of foul play.  Although private universities are barred from earning profit, a majority of them allegedly do so, via separate companies owned by the proprietors of the university that, in turn, provide services to the university in return for remuneration. In this case the spirit of the law is undermined by triangulating the flow of money.

An additional complication arises from the claim that illicit profit making also exists in public universities. How is this possible? Proponents of this thesis claim that spin-offs, consulting, and other professorial businesses involve profiteering on the part of the faculty when they use university property or the university workforce (including students) to make money for themselves and not for the university.

Why should there be no opportunity for economic gain in education? One argument is that education is based on a relationship of confidence between the public and educational institutions, a confidence subverted when the goal of the undertaking is not educating people but making money from educating people. Those receiving the education may reasonably ask themselves whether the owners are in fact investing as much as they should or cutting corners to maximize earnings. The counter argument here is that for an educational business to remain in business it has to deliver good quality education or people will take their business elsewhere. This pressure for performance creates an exogenous virtuous effect even where there might not be any virtuous endogenous motives. Evidently, for this beneficial outcome to materialize, as in any other market, there must be good quality information available to consumers.

Proponents of education as a business often point to the efficiency gains derived from a focus on the bottom line. If the enterprise is to obtain a profit for its owners, waste has to be reigned in, downtime minimized, investments carefully measured for their expected returns, and incentives smartly tailored to make everybody in the organization produce their best.  All of which, the claim goes, does not typically take place at non-profit or public institutions. Yet the empirical question arising from this is not just whether it is true that publics and non-profits operate less efficiently, but whether the efficiency advantage allegedly obtained by for profits is larger than the share of income that goes to remunerate the executives and owners and not reinvested in education. In other words, what is the net effect of profit seeking in terms of what part of the additional margin is dedicated towards improving quality? Opponents also stress that organizational mechanisms, individual rewards, and the overall culture of efficiency is deleterious to academic integrity—programs in under-subscribed fields in the humanities may be closed because they have too few students and do not break even, regardless of quality; large class sizes may be good for business but bad for teacher-student contact; expensive faculty may be shirked for less costly and less qualified colleagues who can nonetheless deliver the basics, and the like.

Finally, there’s the freedom of choice argument: why would people be barred from choosing to pursue their education at a profit-seeking provider if they so wish? Regardless of our response to this question, there’s one condition that nobody can negate: information. Customers must know whether the institution they are dealing with is for-profit, and financial performance summaries of all institutions, whatever their corporate status, have to be readily available. The world-wide reluctance of for-profits to advertise their status, however, should give us pause as to the social legitimacy accorded to educational businesses in our societies. 

Andrés Bernasconi is a Professor of Higher Education at the Pontifical Catholic University of Chile.